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The Missouri
Property and Casualty Insurance
Guaranty Association
2014
Annual
Report
ANNUAL REPORT OF THE
MISSOURI PROPERTY AND CASUALTY INSURANCE
GUARANTY ASSOCIATION
FOR FISCAL YEAR ENDING DECEMBER 31.2014
Prepared for
The Director of the Missouri Department of Insurance,
Financial Institutions and Professional Registration
Prepared by
Charles F. Renn, Executive Director
Missouri Property & Casualty Insurance Guaranty Association
M I S S O U R I
Property & Casualty
I N S U R
A N C E
GUARANTY ASSOCIAIION
994 DIAMOND RIDGE, SUITE 102
JEFFERSON CITY, MISSOURI 65109
March 31, 2015
Honorable John M . Huff, Director
Missouri Department of Insurance, Financial Institutions &
Professional Registration
301 W. High St.
P.O. Box 690
Jefferson City, MO 65101
Dear Director Huff:
On behalf of the Missouri Property and Casualty Insurance Guaranty Association (the Association"),
it is a pleasure to submit the Association's Annual Report for the year ending December 31, 2014. This
report has been prepared in accordance with the provisions of Section 375.775 of the Revised Statutes of
Missouri.
The Association is focused on the issue of large deductible workers' compensation coverage and how
that coverage is being utilized by Professional Employee Organizations ("PEO"). When an msolvency
occurs where PEO's are involved, it is a challenge to identify what involved entity has the responsibility
to protect the employee who has been injured on their job. This situation is complicated further where the
PEO is insured under a workers' compensation policy that has a large deductible and requires the insured
to provide compensating collateral. The Association has recommended legislation to help protect
consumers by clarifying the legal rights to such collateral.
The Association is committed to staying abreast of the changes that are taking place both in the
property and casualty insurance industry and the regulation of that industry. The Board of Directors of
the Association continues to support the National Conference oflnsurance Guaranty Funds as part of the
effort to remain informed and to be prepared to meet the challenges arising from those changes.
The Missouri Department oflnsurance, Financial Institutions and Professional Registration is the
Association's source of financial and premium information relating to our membership. In every instance
our requests have been met with courteous and professional cooperation. Along with the other members
ofthe Board of Directors and the staff of the Association, I look forward to the continued positive
working relationship that exists with the Department.
Sincerely,
Michael P. Voiles, Board Chair
Farm Bureau Town & Country
Insurance Company of Missouri
Missouri Property and Casualty Insurance
Guaranty Association
TABLE OF CONTENTS
BOARD OF DIRECTORS
IV
GENERAL
2014 MEETINGS
1
,
1
OFFICE OF THE EXECUTIVE DIRECTOR
2
FINANCIAL REPORTS
3
2014 INSOLVENCY ASSESSMENT
3
INSOLVENCIES
3
Loss AND Loss ADJUSTMENT EXPENSE RESERVE ACTIVITY
Loss AND Loss ADJUSTMENT EXPENSE PAYMENTS
4
OPEN INSOLVENCIES
5
SUMMARY COMMENTS ON ESTATES WITH SIGNIFICANT AND MATERIAL ACTIVITY
4
6
CASUALTY RECIPROCAL EXCHANGE/EQUITY MUTUAL INSURANCE COMPANY
6
CREDIT GENERAL INSURANCE COMPANY
6
FREESTONE INSURANCE COMPANY
6
HOME INSURANCE COMPANY
7
INTEGRITY INSURANCE COMPANY
7
LEGION/VILLANOVA INSURANCE COMPANIES
8
P H I C O INSURANCE COMPANY
8
PROFESSIONAL LIABILITY INSURANCE COMPANY OF AMERICA
8
RECIPROCAL OF AMERICA ( R O A )
9
RED ROCK INSURANCE COMPANY.
10
LITIGATION
10
FINANCIAL REPORTING AND AUDIT AS OF DECEMBER 31,2014
11
INDEPENDENT AUDITORS' REPORT
II
FINANCIAL STATEMENTS
12
NOTES TO FINANCIAL STATEMENTS
15
iii
Board of Directors
ofthe
Missouri Property and Casualty Insurance
Guaranty Association
COMPANY
REPRESENTATIVE
American Family Mutual Insurance Company
David A. Monaghan
Automobile Club Inter-Insurance Exchange
Steve Schone
Cornerstone National Insurance Company
D. Scott Forrest
Farm Bureau Town & Country Insurance Company
of Missouri
Michael P. Voiles
Liberty Mutual Insurance Company
Charles H. Burhan
MAMIC Mutual Insurance Company
Ron Borders
Missouri Employers Mutual
James Owen
Shelter Mutual Insurance Company
Brian Waller
State Farm Mutual Automobile Insurance Company
Debra G. Wozniak
iv
ANNUAL REPORT OF THE
MISSOURI PROPERTY AND CASUALTY INSURANCE
GUARANTY ASSOCIATION
F O R Y E A R E N D I N G D E C E M B E R 31,2014
The Annual Report of the Missouri Property and Casualty Insurance Guaranty
Association (the "Association") for the year ending December 31, 2014 is herewith submitted
to the Director of the Missouri Department of Insurance, Financial Institutions & Professional
Registration ("DIFP") and the Board of Directors.
GENERAL
As of December 31, 2014, there were 918 companies licensed to sell property and
casualty insurance coverage and by the terms of sections 375.771 to 375.779, Revised Statutes
of Missouri, all were deemed to be members of the Association. Lines of coverage written by
the authorized member insurers are identified on the State Supplemental Page to the Armual
Statement. The Association does not cover all of the lines of coverage identified on the State
Supplemental Page.
2014 M E E T I N G S
The Armual Meeting of the Membership was held on September 23, 2014. As a course
of business for this meeting, three members were elected to serve on the Board of Directors
for a term that will expire in 2017. Those members are:
Automobile Club Inter-Insurance Exchange
Representative: Steve Schone
Cornerstone National Insurance Company
Representative: D. Scott Forrest
Missouri Employers Mutual Insurance Company
Representative: James Owen
On the same date, the Board of Directors elected the following officers to serve for a
term of one year, or until ia successor is duly elected:
NAME
COMPANY
Michael P. Voiles, Chair
Farm Bureau Town & Country Insurance
Company of Missouri
Debra G. Wozniak, Vice- Chair
State Farm Mutual Automobile Insurance
Company
David A. Monaghan, Secretary/Treasurer
American Family Mutual Insurance
Company
1
During 2014, the Board of Directors continued the practice of meeting regularly on
a quarterly basis. The Board employs this practice to facilitate involvement with the
ongoing functions and the administrative duties of the Association. Minutes of all
meetings of the Member Insurers, the Board of Directors, and other Board appointed
committees are on file at the office of the Association in Jefferson City, Missouri.
OFFICE OF THE EXECUTIVE DIRECTOR
Two insolvencies that occurred during 2014 resulted in the Association becoming
obligated for covered claims. As has been the case in recent years, the challenge of these
new insolvencies has been with workers' compensation coverage. Increasingly, workers'
compensation coverage with a large deductible provisions have been in the center of
employee leasing arrangements that are complex and involve inter-related entities. The
Association's experiences with these programs has led to a determination that in the least,
it is necessary to preserve the contractual protections for the exposure within the
deductibles. To address the issue of who has the rights to any contractually required
collateral supporting the large deductibles, the Association suggested the passage of the
model large deductible legislation prepared by the National Conference of Insurance
Guaranty Funds. It is hoped that this model legislation will be passed during the 2015
session of the Missouri General Assembly.
In 2013, the 97* General Assembly of the Missouri Legislature passed Senate Bill
59. Among other things, the legislation provided for an increase in the number of board
members from seven to nine. At the 2014 Armual Meeting of the Membership of the
Association, the vacant ninth position on the board of directors was filled with the
election of Missouri Employers Mutual Insurance Company.
The company is
represented by its Chief Executive Officer, James Owen.
The Association has continued its role of being a leader in guaranty association
preparedness by monitoring industry standards and correspondingly upgrading its
automated claims administration system. Increasingly, companies are migrating to
operations based on imaged data. In the event of an insolvency, the assimilation of the
claims data from such companies is both a convenience and a challenge. The Association
continues to evaluate the most efficient and economical method to accept, update and
store large amounts of electronically imaged documents and records. Further, the
Association has stayed involve with national efforts to accumulate and report aggregate
claims and financial data. This effort has allowed the national guaranty association
system to present an increasingly complete picture of the effectiveness of state-based
property and casualty guaranty association network.
The Association continues to be active in the National Conference of Insurance
Guaranty Funds (the "NCIGF").
2
The Association is active in several committees of the NCIGF. The Executive
Director represents the Association by serving on the following committees of the
national organization:
N C I G F Board of Directors
Board Finance Committee - Chair
The Accounting Issues Committee - Vice Chair
The Casualty Reciprocal Exchange/Equity Mutual Coordinating Committee - Chair
The Reciprocal of America Coordinating Committee
Red Rock Insurance Company Coordinating Committee
FINANCIAL REPORTS
The Association's financial records are the subject of an annual independent audit.
Interim financial reports and transactions are reviewed by the Board of Directors and
conxmittees of the Board. The audited financial statements as of and for the year ending
December 31, 2014 are included with this report. Further, the notes to the financial
statements are also included as an integral part of the report. The accounting firm of
Williams-Keepers, LLC, Jefferson City, Missouri, conducted the independent audit of the
financial records of the Association.
2014 I N S O L V E N C Y A S S E S S M E N T
The Association is authorized under section 375.775, Revised Statutes of Missouri,
to assess its membership for the purpose of providing the funding necessary to meet the
Association's requirements with respect to insolvent member insurers. At the September
23, 2014 meeting of the Board of Directors, it was determined that no assessment would
be made in 2014.
INSOLVENCIES
As of December 31, 2014, the Association administered 46 open insolvencies.
Included in this total are 23 insolvencies which have no open claims. There were two
new insolvencies in 2014 and three estates were closed.
3
Loss and Loss Adjustment Expense Reserve Activity
During 2014 the open claims count for the Association decreased by 125. Reflected
below is a summary of ending reserves and reserve changes for 2014:
Totals
Open
Claims
128
Loss
Reserves
36,006,110
Expense
Reserves
4,114,480
Change
In Open
Claims
(125)
Change in
Loss
Reserves
(556,378)
Change in
LAE
Reserves
349,157
Loss and Loss Adjustment Expense Payments
Payment Activity for 2014:
Company
AMLICO
Atlantic Mutual
Barton Mutual
Califomia Compensation
Centennial IC
Commercial Compensation
Commonwealth
CRE
Credit General
Employers Casualty
Employers National
Freestone
Fremont
Frontier
Gramercy
Home
Legion
Lumbermens
PLICA
Pride
Red Rock
Reliance
Reciprocal of America
Shelby Casualty
Statewide
UUico
Villanova
Totals
Losses
Paid
66,902
5,220
0
14,211
0
94,267
0
95,602
252,024
1,019
39,578
43,000
171,819
0
104,703
16,667
236,231
362,133
175,000
146,995
0
252,831
241,144
0
0
249,019
44,417
2,612,783
4
ALAE
Salvage &
Subrogation
Paid
6,215
0
2,154
0
0
0
1,170
0
0
0
6,885
0
0
0
4,212
0
10,229
0
0
0
3,695
0
0
0
10,019
0
0
0
17,775
0
2,493
0
20,324
0
72,606
0
7,086
0
0
90,309
0
0
0
40,479
11,777
0
0
109
0
0
36,018
0
141
0
343,698
0
Open Insolvencies
Section 375.775.1(6), Revised Statutes of Missouri, requires that a financial report
for the preceding year be submitted to the Director of the Missouri Department of
Insurance, Financial Institutions & Professional Registration.
Further, Section
375.776.5(3), Revised Statutes of Missouri, requires the Association to prepare a summary
report describing the history and causes of individual insolvencies. This Annual Report
contains a review of the activities of the Association during the preceding year. The
following vignettes are intended to fulfill the requirement for a summary report, and to
update the membership about the status of each estate that had significant and material
activity during the calendar year 2014. A listing of all open estates and their state of
domicile is included for the memberships' reference.
1985
Union Indemnity Ins. Co. - NY
Ideal Mutual Ins. Co. - N Y
2003
Fremont Insurance Co. - CA
Home Insurance Co. - N H
Legion Ins. Co. - PA
Villanova Ins. Co. - PA
Reciprocal of America - VA
1986
American Fidelity Fire Ins. Co, - NY
Midland Ins. Co. - N Y
2004
Casualty Reciprocal Exchange - MO
Equity Mutual Insurance Co. - MO
IGF Insurance Co. - I N
Security Indemnity - NJ
Statewide Insurance Co. - IL
1987
Integrity Insurance Company - NJ
1989
American Mutual Ins. Co. of Boston - M A
American Mutual Liability Ins. Co. - M A
1991
American Universal Ins. Co. - RI
Rockwood Ins. Co. - PA
Western Employers Ins. Co. - CA
2005
Consolidated American Ins. Co. - SC
West General Ins. Co. - KS
2006
Shelby Casualty Ins. Co. - TX
Vesta Fke Ins. Co. - TX
2008
1993
LawrencevUle P&C (MUX) - NJ
Bel-Aire Ins. Co. - MO
2009
1994
Park Avenue P&C Ins. Co.-OK
Employers Casualty Company. -TX
2010
1995
Imperial Casualty Insurance Co. - OK
United Community Ins. Co. - NY
2011
Atlantic Mutual Ins. Co. - NY
Centermial Insurance Co. - NY
2012
1992
1996
Lutheran Benevolent Ins. Exchange - MO
United Southern Assurance Co. - FL
2000
California Compensation Ins. Co. - CA
Commercial Compensation Casualty Co. - CA
H I H America Compensation & Liability - CA
2001
Far West Insurance Co. - NE
Reliance Ins. Co. - PA
Frontier Insurance Co. - NY
2013
Gramercy Ins. Co. - TX
Lumbermens Mutual Casualty Co. - IL
Pride National Insurance Co. - OK
UUico Casualty Co. - DE
2014
Freestone Insurance Co. - DE
Red Rock Insurance Co. - OK
5
SUMMARY COMMENTS ON ESTATES W I T H SIGNIFICANT AND MATERIAL
ACTIVITY
Casualty Reciprocal Exchange/Equity Mutual Insurance Company
During 2014, the receiver for the estate pursued a commutation on an outstanding
reinsurance contract. The receiver has been actively engaging the affected guaranty
associations in this effort. As part of the negotiations, the guaranty associations were
asked to analyze their reserves for accuracy. The result of this process affirmed the
reserve levels that the receiver was reporting to the reinsurer. However, the reinsurer
has expressed a desire to evaluate several claims that represent large reserves. The
affected states administering those claims have been contacted and arrangements are
being made to move this phase of the process along.
Further, in working toward the closing of the estate, the receiver has noted that claims
information on closed claims and terminated policies will be unavailable. To provide the
guaranty associations with the necessary data to evaluate any inquiries regarding the
reopening of a claim or the potential filing of a new claim, the receiver is making
arrangements to have legacy data converted and provide the affected guaranty
associations in standard format.
In December of 2014, the receiver obtained approval of a court order authorizing the
second partial distribution to all Class 2 - Policyholder Level claimants. This distribution
equaled eight percent of the approved claim. The Association received $109,995 as its
proportionate share of the distribution.
Credit General Insurance Company
This company was ordered liquidated by the court in Ohio in 2001. The claims of
this insolvency were almost exclusively for workers' compensation. In October of 2014,
the estate made final distribution of assets to all claimants. The Association received
$6,800 as reimbursement for its Class 1 - Administrative Expense claim and $3.2 million
for its approved Class 2 - Policyholder Level claim.
On November 12, 2014, the Court of Common Pleas of Franklin County, Ohio
issued a Final Closing Order. This terminated the liquidation proceedings of this estate
and discharged the receiver. The estate in now closed.
Freestone Insurance Company
On July 22, 2014, the Court of Chancery of the State of Delaware issued a
Liquidation and Injunction Order naming Freestone Insurance Company ("Freestone")
and finding it insolvent. This after being in rehabilitation since April 28,2014. Freestone
was formerly known as Dallas National Insurance Company. It changed domiciles from
Texas to Delaware. The order also set December 15,2015 as the final date for filing claims
against the estate.
6
The Delaware Department of Insurance determined that it was necessary to writedown certain assets of the company. This act resulted in the company having a negative
surplus of $180 million. Freestone's cash assets had been sent to an upstream investment
company and replaced with closed end mutual funds.
The assets' stated value on the company's books was $205 million, but the
receiver's asset valuation specialist assigned them a value of between $69-150 million.
The receiver is exercising statutory authority in seeking to reverse the transfer and sale
of the assets.
This company appears to have operated in a fashion similar to other recent
insolvencies. The insureds are all Professional Employee Organizations ("PEO's") and
the policies have been written with deductible levels of $l-$2 million. All claims were
handled by third party administrators. With regard to the workers' compensation claims
that originated under large deductible policies, the receiver presumed that collateral was
being held to support the large deductible obligations. As of this date, the receiver does
not have detailed information available regarding the value or the viability of the
collateral.
Further, it was determined that Freestone acted as a managing general agent for
another company. Companion Insurance Company. It has also become apparent that
there are situations where coverage could be in place by both companies on the same
insured for the same coverage period. This was done if the insured required a higher
rated insurer. Because of this practice, it will be imperative that the affected guaranty
associations review the active claim files to verify that the policies giving rise to the claims
were actually written through Freestone. Companion Insurance Company has filed suit
seeking to avoid liability for the duplicate workers' compensation claims and asking the
court to determine rightful ownership of the collateral held to compensate for the large
deductible exposure.
Home Insurance Company
On November 12, 2014, the receiver of the insolvent Home Insurance Company
received approval from the Superior Court of New Hampshire to make a 15% interim
distribution on Class 2 creditor claims allowed through November 30, 2014. The
Association had already received Early Access funds exceeding 15% of its
claim. However, even though the Association did not receive a distribution check it did
receive a letter advising it that an equivalent portion of the Early Access was converted
to a permanent liquidation distribution.
Integrity Insurance Company
On March 4, 2014 the Superior Court of New Jersey, Chancery Division: Bergen
County, issued an order closing the estate of Integrity Insurance Company. In 2015, the
New Jersey Supreme Court refused to hear the appeal on the estate's closing. This company has
been in liquidation since March of 1987.
7
At the end of 2013, the receiver for this estate issued a communication advising all
creditors that the estate would be in a position to make a final distribution of assets in the
first half of 2014. The Association received $1.2 million as its share of the final
distribution. The total amount of asset received from the estate is approximately 70% of
the Association's paid claims.
LegionA^illanova Insurance Companies
On August 7, 2014, the Court approved the Liquidator's Ninth Proposal to
Distribute Assets ($130.0 million) to the State Guaranty Associations ("Liquidator's Ninth
Proposal") bringing the total authorized by the Court to $1. 7 billion for early access
distributions. Legion has distributed via cash payments and reductions of statutory
deposits all of these funds, except for $68.1 million which is currently being held. The
Association received its proportionate share of this distribution on October 3. 2014. That
amount was $365,556.
P H I C O Insurance Company
This Pennsylvania domiciled company was ordered liquidated on February 1,
2002. PHICO wrote medical malpractice coverage in 50 states, the District of Columbia
and Puerto Rico.
On January 22, 2014 the Commonwealth Court of Pennsylvania issued an order
authorizing the liquidator to make a final distribution of assets, discharge the receiver of
any further responsibility and close the estate. The estate has distributed assets equal to
100% of all administrative expenses and 60% of the Class B - Policyholder level claims.
This estate is now closed.
Professional Liability Insurance Company of America
Professional Liability Insurance Company of America (PLICA) is a New York
domiciled insurer that wrote professional medical liability insurance. The company was
placed into rehabilitation in April 2010 by the New York Liquidation Bureau. The Bureau
filed papers seeking to convert the rehabilitation into a liquidation. The return date on
the petition was February 5, 2013. In May of 2013, the rehabilitator of the company filed
a complaint with the court seeking a jury trial on matters of alleged fraudulent and illegal
actions involving the ownership and operations of the company. The complaint was
against the officers and directors of the Company.
On December 27, 2013 the Supreme Court of the State of New York, issued an
Order of Liquidation against the company. The order stated that PLICA was insolvent.
The order was final in January of 2014. At that time, the company held licenses in 31
jurisdictions but was not writing business. The Association had two claims. The
remainder of the business was in the State of Illinois.
8
This company is part of a large holding company arrangement that is involved in
the insolvency of two life insurance companies and a pre-need funeral provider. The
insolvency of Lincoln Memorial Life Insurance Company and National Prearranged
Services is estimated to cost over $450 million.
Reciprocal of America (ROA)
On August 2, 2013, the Deputy Receiver filed with the State Corporation
Commission of the Commonwealth of Virginia (the "Commission"), an Application for
Orders Setting Hearing, Approving Notice Procedures, Establishing Response Date, and
Approving Increased Payment Percentage, Proposed Loss Portfolio Transfer, and Related
Matters. A hearing on this filing was held before the Commission on December 4, 2013.
On June 16,2014, the Commission entered its Final Order granting the application
and approving the increased payment percentage and the Loss Portfolio Transfer
Agreement ("LPTA") between ROA and Providence Washington Insurance Company
("PWIC"). The Final Order was briefly challenged by appeal before the Supreme Court
of Virginia - the appeal was withdrawn by the challenging party on December 19, 2014.
Pursuant to this Final Order, ROA is hereby transferring all responsibility for paying,
administering, processing, or otherwise handling of certain workers' compensation direct
claims to PWIC, effective January 15, 2015.
The Final Order also provided that all guaranty associations and policyholders, or
their third-party administrators who have possession or control of any records or files
related to the transferred workers' compensation book, must transfer or return these
records to the Deputy Receiver no later than thirty (30) days after the Deputy Receiver
makes a written request for any records or files.
The order issued by the Commission stated that the failure to return the records
within thirty (30) days could potentially result in the forfeiture and waiver by the
guaranty association, policyholder, or third-party administrator of any right to coverage,
payment, or reimbursement by ROA and PWIC for such claims related to those records.
This transaction was consummated without precedent and involved only workers'
compensation claims. The funding of the loss portfolio transfer was provided by asset
recoveries generated by the efforts of the receiver. The affected guaranty associations
were reimbursed at a rate of 100% for all loss and expense payments made on behalf of
the ROA workers' compensation claims.
The Association has taken all necessary steps to advise the involved state and
federal regulators of this transfer. The claims will be administered by Seabright
Insurance Company. This Illinois domiciled insurance company is a licensed company
in Missouri under the appropriate statutes to handle this line of business. It is part of the
Enstar Group Limited.
9
Red Rock Insurance Company
Red Rock Insurance Company ("Red Rock") is an Oklahoma domiciled insurer. It
was placed into liquidation by the District Court of Oklahoma County, Oklahoma on
August 21, 2014. The company had been operating under an Order of Supervision since
May 2014 and was placed under Conservation on July 1, 2014.
Red Rock was licensed in 48 states and Washington D.C., with the largest
concentration of business in Oklahoma, Pennsylvania, Iowa, Nebraska, and Texas. The
company issued workers' compensation, general liability, commercial multi-peril, and
fidelity. Coverage was placed through the company for banks and other financial
institutions. The nature of the business does not reflect anything exotic or extraordinary.
However, there are claims where the claimant is listed as the Federal Deposit Insurance
Corporation. The NCIGF Coordinating Committee has formed a subgroup to consider
these claims and determine if there are common statutory provisions that would exclude
these claims from being a covered claim.
Initially, the most significant issue in the Red Rock estate was the difficulty in
obtaining claims data from the various third party administrators. After more than three
months post-liquidation, many associations were still waiting for all or some of their
claims data. Reasons for this included management issues and poor oversight and
control over its administrators, coupled with the absence of pre-liquidation planning
regarding the transfer of data. By the end of 2014, significant progress had been made in
locating, identifying and transferring data to the appropriate guaranty associations. The
Association is still waiting on imaged records relating to open claim files.
LITIGATION
It is part of the statutory responsibility of the Association in assuming the
obligations on covered claims of the insolvent insurer to provide for the defense of
insureds. Consequently, the Association is involved in numerous instances of defense
litigation. This section of the report is not intended to address litigation of this nature. In
contrast, this section of the report is intended to highlight those instances where the
Association is litigating a matter involving an interpretation of the Missouri Property and
Casualty Insurance Guaranty Association Act. There is no such litigation pending as of
December 31,2014.
10
Financial Reporting
and Audit
for the year ending
December 31,2014
.-•WILLIAMS
KEEPERS LLC
2005 West Broadway, Suite 100, Columbia, IMO 65203
OFFICE
( 5 7 3 ) 442-6171
FAX
(573) 777-7800
3220 West Edgewood, Suite E J e f f e r s o n City, M O 6 5 1 0 9
OFFICE(573) 6 3 5 - 6 1 9 6 F A X ( 5 7 3 ) 6 4 4 - 7 2 4 0
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www.wiliiamskeepers.com
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of the
Missouri Property and Casualty Insurance
Guaranty Association
We have audited the accompanying fmancial statements of the Missouri Property and Casualty Insurance
Guaranty Association (the "Association"), which comprise the statements of fmancial position as of
December 31, 2014 and 2013, and the related statements of activities and cash flow for the years then ended,
and the related notes to the fmancial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these fmancial statements in accordance
with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance
of internal control relevant to the preparation and fair presentation of financial statements that are free from
material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these fmancial statements based on our audits. We conducted our
audits in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the fmancial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
fmancial statements. The procedures selected depend on the auditor's judgment, including the assessment of
the risks of material misstatement ofthe fmancial statements, whether due to fraud or error. In making those
risk assessments, the auditor considers intemal control relevant to the Association's preparation and fair
presentation of the fmancial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness ofthe Association's
internal control. Accordingly, we express no such opinion. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the financial statements.
We believe the audh evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position ofthe Missouri Property and Casualty Insurance Guaranty Association as of December 31, 2014 and
2013, and the changes in its net assets and its cash flow for the years then ended, in conformity with U.S.
generally accepted accounting principles.
March 17,2015
American Institute of Certified Public Accountants
Missouri Society of Certified Public Accountants
Superior service. Creative solutions. Exceptional clients.
PKF North America
11
MISSOURI PROPERTY AND CASUALTY INSURANCE GUARANTY ASSOCIATION
STATEMENTS OF FINANCIAL POSITION
As of December 31, 2014 and 2013
ASSETS
2014
Cash and cash equivalents
Investments
Investment interest receivable
Unbilled assessments
Computer software and equipment, net of accumulated depreciation of $232,985
and $195,558, respectively
Total assets
$
1,692,147
91,453,200
221,698
32,946,235
2013
$
2,395,829
80,539,781
372,486
32,946,235
49,749
60,138
$ 126,363,029
$ 116,314,469
$
$
LIABILITIES AND NET ASSETS
LIABILITIES
Accounts payable
Due to Missouri Life and Health Insurance Guaranty Association
Early access liability
Reserves for losses and loss adjustment expenses
41,947
47,818
52,495,583
51,902,137
104,487,485
Total liabilities
NET ASSETS
Board designated
Undesignated (deficit)
Total net assets (deficit)
(6,109,921)
21,875,544
(6,109,921)
The notes to financial statements are an integral part of these statements.
12
122,424,390
15,000,000
6,875,544
$ 126,363,029
Total liabilities and net assets
46,632
44,355
70,283,590
52,049,813
-
$116,314,469
MISSOURI PROPERTY AND CASUALTY INSURANCE GUARANTY ASSOCIATION
STATEMENTS OF ACTIVITIES
For the Years Ended December 31, 2014 and 2013
SUPPORT AND REVENUES
Liquidation distributions
Net investment return (loss)
Total support and revenues (loss)
EXPENSES
Program expenses
Losses and loss adjustment expenses
Increase (decrease) in reserves for losses and loss adjustment expenses
Other, net
2014
2013
$ 25,694,519
5,766,560
$ 2,259,822
(5,121,147)
31,461,079
(2,861,325)
2,956,478
(147,676)
1,781
1,783,033
7,462,638
1,550
2,810,583
9,247,221
665,031
655,403
3,475,614
9,902,624
Change in net assets
27,985,465
(12,763,949)
Net assets (deficit), beginning of year, as restated
(6,109,921)
6,654,028
Program expenses, net
General and administrative expenses
Total expenses
$ 21,875,544
Net assets (deficit), end of year
The notes to financial statements are an integral part of these statements.
13
$ (6,109,921)
MISSOURI PROPERTY AND CASUALTY INSURANCE GUARANTY ASSOCIATION
STATEMENTS OF CASH FLOW
For the Years Ended December 31,2014 and 2013
CASH FLOWS FROM OPERATING ACTIVITIES
Change in net assets
Adjustments to reconcile change in net assets to
net cash provided (used) by operating activities:
Depreciation
Realized loss (gain) on investments, net of change in unrealized loss (gain)
Change in accounts receivable
Change in accounts payable
Change in due to Missouri Life and Health Insurance Guaranty Association
Change in early access liability
Change in reserves for losses and loss adjustment expenses
2014
2013
$ 27,985,465
$ (12,763,949)
Net cash provided (used) by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of investments
Purchases of investments
Purchase of computer software and equipment
37,427
(4,279,325)
150,788
(4,685)
3,463
(17,788,007)
(147,676)
35,427
6,762,467
7,457
(11,133)
7,516
(2,566,854)
7,462,638
5,957,450
(1,066,431)
29,902,045
(36,536,139)
(27,038)
22,992,840
(21,964,990)
(31,725)
(6,661,132)
Net cash provided (used) by investing activities
996,125
(703,682)
Net change in cash and cash equivalents
(70,306)
2,466,135
2,395,829
Cash and cash equivalents, begiimmg of year
$
Cash and cash equivalents, end of year
1,692,147
The notes to fmancial statements are an integral part of these statements.
14
$
2,395,829
MISSOURI PROPERTY AND CASUALTY INSURANCE GUARANTY ASSOCIATION
NOTES TO F I N A N C I A L STATEMENTS
I.
ORGANIZATION AND S U M M A R Y OF SIGNIFICANT ACCOUNTING POLICIES
Organization: The Missouri Property and Casualty Insurance Guaranty Association (the "Association") is a
nonprofit, unincorporated legal entity established on September 28, 1971 by Missouri Revised Statute 375.775
to be obligated for the payment of covered claims, as that term is defined by statute. To provide this
protection, the Association was created to guarantee payment of benefits and continuation of coverage. A l l
insurers doing business in the State of Missouri are member insurers of the Association and will remain
members of the Association as a condition of their authority to transact business in the State of Missouri. The
Association's functions are primarily to employ and retain individuals to handle claims and perform other
duties related to insolvent insurers.
The Association performs its functions under a plan of operation approved by tbe Missouri Director of
Insurance and exercises its powers through a Board of Directors. The Association is subject to the immediate
supervision ofthe Missouri Director oflnsurance and the insurance laws ofthe State of Missouri.
Basis of accounting: The financial statements of the Association have been prepared on the accrual basis of
accounting. Therefore, revenues are recognized when earned and expenses are recognized when incurred.
Financial statement presentation: The Association uses the American Institute of Certified Public
Accountants' not-for-profit model for accounting and financial reporting. Therefore, the Association reports
information regarding its financial position and activities according to three classes of net assets; unrestricted
net assets, temporarily restricted net assets, and permanently restricted net assets. The Association had only
unrestricted net assets during 2014 and 2013.
Use of estiniates: Management uses estimates and assumptions in preparing these fmancial statements in
accordance with U.S. generally accepted accounting principles. Those estimates and assumptions affect the
reported amount of assets and liabilities and the reported revenues and expenses. Actual results could vary
from the estimates that were used.
Cash and cash equivalents: Cash and cash equivalents include certain interest bearing accounts and overnight
repurchase agreements, which invest in various highly liquid investments. The Association considers all highly
liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Concentration of credit risk: Financial instruments that potentially subject the Association to concentration of
credit risk consist primarily of cash, overnight repurchase agreements and investments. The Association did
not maintain deposit balances in excess of FDIC coverage at December 31, 2014 or 2013. The Association
held an overnight repurchase agreement balance of approximately $1,737,000 at December 31, 2014 and
$2,399,000 at December 31, 2013. Overnight repurchase agreements are not secured. However, the
Association requires that U.S. government and agency securities underlying the repurchase agreements must
have a fair value of at least 100% ofthe cost of the repurchase agreement. The fair values of U.S. government
and agency securities underlying repurchase agreements are determined daily.
Investments: Investments consist primarily of U.S. Government backed securities and are reported on the
statement of financial position at fair value, as described more fully in Note 2.
15
Unbilled assessments: Unbilled assessments represent an accumulation of all future assessments that may be
made in order to cover the estimated claims and loss adjustment expenses of current insolvencies. The potential
future assessment amount is estimated at the beginning of the liquidation of an insurer and is subsequently
reduced as assessments are billed or changes occur to estimated claims and loss adjustment expenses.
Computer software: Purchases of computer software are recorded at cost. The costs of normal maintenance and
repairs are expensed as incurred. Renewals and betterments are capitalized and depreciated over the remaining
useful lives of the related assets on a straight-line basis over three years. Depreciation expense for the years ended
December 31, 2014 and 2013 totaled $37,427 and $35,427, respectively.
Assessments: For assessment purposes, the Association maintains four accounts: (1) the automobile insurance
account; (2) the workers compensation insurance account; (3) the Missouri mutuals account; and (4) the all
other insurance account. In order to provide funds necessary to carry out the powers and duties of the
Association, the Board of Directors (Board) is authorized to assess the member insurers, in a combined
assessment or separately for each account, at such time and for such amounts as the Board deems necessary.
The Board is further authorized to make refunds to member insurers i f the Board determines that assets of the
Association in any account exceed the liabilities of that account as estimated by the Board. To the extent that
any sums to be reflmded have been offset against premium taxes paid by member insurers to the State of
Missouri, the Association distributes the refijnd to the Director of Revenue of the State of Missouri.
Assessments of member insurers of the Association are based on the proportion that the net direct written
premium for specified coverages of each member insurer for the preceding calendar year bears to the total net
direct written premiums for that coverage of all member insurers doing business in the State of Missouri for the
preceding calendar year. The assessments are made at the discretion of the Board of Directors whenever funds
are necessary to pay claims and expenses, but are limited to 2% ofthe net direct written premium ofthe
member insurer. There were no assessments made during 2014 or 2013.
Designated net assets: The Association elected to designate $15,000,000 in net assets as of December 31,
2014, to provide for expected future insolvencies. As of year end, there are a number of insolvent insurance
companies that have not yet been placed into liquidation. The Association does not become responsible for
paying claims until an order of liquidation is received, at which time a reserve for loss and loss adjustment
expenses will be recorded. However, as it is likely most of these companies will ultimately be placed into
liquidation, the Association elected to designate a portion of net assets for future claim payments for those
potential liquidations.
Income taxes: The Association was created by state statute, Chapter 375 RSMo. In 1975, the Intemal Revenue
Service determined the Association to be an instrumentality of the State of Missouri as described in Section
115 of the Internal Revenue Code and, as such, is not subject to federal or state income tax.
Subsequent events: Events that have occurred subsequent to December 31, 2014 have been evaluated through
March 17, 2015, which represents the date the Association's fmancial statements were approved by
management and, therefore, were available to be issued.
16
2.
INVESTMENTS
Investments consisted ofthe following as of December 31, 2014 and 2013;
Cost
Unrealized
Gain (Loss)
Fair Value
$ 71,429,373
21,496,939
$ (1,476,173)
3,061
$ 69,953,200
21,500,000
$ 92,926,312
$ (1,473,112)
$ 91,453,200
Cost
Unrealized
Gain (Loss)
Fair Value
$ 83,407,485
2,985,000
$ (5,614,444)
(238,260)
$ 77,793,041
2,746,740
$ 86,392,485
$ (5,852,704)
$ 80,539,781
2014
U.S. agency bonds and notes
U.S. treasury bond
Total investment securities
2013
U.S. agency bonds and notes
Collateralized Mortgage Obligation
Total investment securities
Contractual maturities of investment securities as of December 31, 2014, are shown below, based on the
expected call date.
Unrealized
Gain (Loss)
Cost
$ 21,496,939
37,469,370
33,960,003
$
3,061
(778,515)
(697,658)
$ 21,500,000
36,690,855
33,262,345
$
$ (1,473,112)
$ 91,453,200
Due in one year or less
Due in one to five years
Due in six to ten years
Total investment securities
Fair Value
92,926,312
The following table shows the gross unrealized losses and fair value of the Association's investments with
unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category
and length of time that individual securities have been in a continuous unrealized loss position, at December
31, 2014 and 2013.
Greater than 12 months
Fair Value
Unrealized Loss
Less than 12 months
Fair Value
Unrealized Loss
Fair Value
Total
Unrealized Loss
2014
U.S. agency
bonds and notes
$
14,985,040
$
(54,160)
$
52,897,539
$
(1,442,633)
$ 67,882,579
$
(1,496,793)
Total
$
14,985,040
$
(54,160)
$
52,897,539
$
(1,442,633)
$ 67,882,579
$
(1,496,793)
2013
U.S. agency
bonds and notes
Mortgage backed
securities
Total
Fair Value
$ 60,394,860
Unrealized Loss
$
2,746,740
$ 63,141,600
(3,880,267)
Fair Value
$
17,398,181
(4,118,527)
$
17
17,398,181
Fair Value
Unrealized Loss
$
(1,734,177)
(238,260)
$
Total
Greater than 12 months
Less than 12 months
$
(1,734,177)
Unrealized Loss
$ 77,793,041
$
(5,614,444)
$
2,746,740
$
(238,260)
$ 80,539,781
$
(5,852,704)
The above table represents twenty and twenty-six investment securities as of December 31, 2014 and 2013,
respectively, where the current fair value is less than the related cost. Management believes the impairments to
be temporary in all cases. Consideration is given to the length of time and the extent to which the fair value
has been less than cost, the fmancial condition and near-term prospects of the issuer, and the intent and ability
ofthe Association to retain its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
U.S. government agencies - The unrealized losses on the Association's investments in U.S. government
agencies were caused by interest rate increases. The contractual cash flows of these investments are
guaranteed by an agency of the U.S. government. Because the decline in market value is attributable to
changes in interest rates and not credit quality and because the Association has the ability and intent to hold
these investments until a recovery of fair value, which may be maturity, the Association did not consider these
investments to be other-than-temporarily impaired at December 31, 2014 and 2013.
Fair Value Disclosures - Fair value is a market-based measurement, not an entity-specific measurement.
Therefore, a fair value measurement should be determined based on the assumptions that market participants
would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair
value measurements, a fair value hierarchy distinguishes between market participant assumptions based on
market data obtained from sources independent of the reporting entity (observable inputs that are classified
within Levels 1 and 2 ofthe hierarchy) and the reporting entity's own assumptions about market participant
assumptions (unobservable inputs classified within Level 3 of the hierarchy).
The fair value hierarchy is as follows:
Level 1
Valuation is based upon quoted prices (unadjusted) in active markets for identical
assets or liabilities that the Association has the ability to access.
Level 2
Valuation is based upon quoted prices for similar assets and liabilities in active
markets, as well as inputs that are observable for the asset or liability (other than
quoted prices), such as interest rates, foreign exchange rates, and yield curves that are
observable at commonly quoted intervals.
Level 3
Valuation is generated from model-based techniques that use at least one significant
assumption based on unobservable inputs for the asset or liability, which are typically
based on an entity's own assumptions, as there is little, i f any, related market activity.
The following is a description of valuation methodologies used for assets disclosed at fair value.
Fair value measurement is based upon quoted prices, if available. I f quoted prices are not available, fair values
are measured using independent pricing models or other model-based valuation techniques such as the present
value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors
such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the
New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-thecounter markets, and money market funds. Level 2 securhies include mortgage-backed securities issued by
government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3
include asset-backed securities in less liquid markets.
18
The table below presents the Association's assets measured at fair value as of December 31, 2014 and 2013,
aggregated by the level in the fair value hierarchy within which those measurements fall:
2014
Assets
Investment securities
2013
Assets
Investment securities
Level 1
Level 2
Level 3
$91,453,200
$
Level 1
$91,453,200
$
Level 2
Level 3
$80,539,781
$
Total
$
Total
_
$80,539,781
Net investment return (loss) for the years ended December 31, 2014 and 2013 consisted of the following:
2014
$ 4,379,592
(100,267)
Change in unrealized gain/loss on investments
Net realized gain (loss) on sales
Interest income
Net investment return (loss)
3.
2013
$ (7,049,774)
287,307
4,279,325
1,487,235
(6,762,467)
1,641,320
$ 5,766,560
$ (5,121,147)
EARLY ACCESS LIABILITY
The Association receives distributions from insolvent insurer estates to be used to offset claims expenses incurred
by the Association on behalf of the insurer. In some instances, such distributions are made to tbe Association
pursuant to an early access agreement prior to the payment of other estate creditors. Early access distributions are
made with the provision that i f equal or higher priority creditors require payment from the estate that the
Association is obligated to repay the funds. The Association accounts for such obligations as a liability at the time
the cash is received. The early access liability is reflected on the accompanying statements of fmancial position and
was $52,495,583 and $70,283,590 at December 31, 2014 and 2013, respectively.
4.
R E S E R V E S F O R L O S S E S AND LOSS ADJUSTMENT E X P E N S E S
The Association receives estimates of losses and loss adjustment expenses from the receivers through the
National Conference oflnsurance Guaranty Funds (NCIGF) and other entities. Management analyzes the
information received from NCIGF and other entities, industry trends and the effects of Missouri statute
limitations on the estimates prior to arriving at the recorded liability. The methods for making such estimates
and for establishing the resuhing liability are continually reviewed by management and any adjustments are
reflected currently. Accordingly, losses and loss adjustment expenses are reported in tbe statement of activities
as incurred.
The total reserves for losses and loss adjustment expenses were approximately $52,000,000 at December 31,
2014 and 2013, respectively. These reserves are based on estimates and, while management presently believes
the estimated reserves for losses and loss adjustment expenses at December 31, 2014 and 2013 are adequate,
the actual liability could vary considerably from the amount presented in these fmancial statements.
19
As a result of changes in estimated losses incurred with respect to prior year events, the reserves for losses and
loss adjustment expenses decreased by $147,676 in 2014 and increased by $7,462,638 in 2013.
5.
LINE OF CREDIT
The Association maintains a $15,000,000 unsecured revolving line-of-credit which bears an interest rate at greater
of .5% plus prime (3.25% at December 31, 2014) or 5%. There were no borrowings under this agreement during
2014 or 2013. The agreement expires on April 5, 2015.
6.
CONTRACT
On May 8, 2001, the Association entered into an agreement with the Missouri Life and Health Insurance
Guaranty Association (MLHIGA) whereby MLHIGA provides common administration and management of
both associations. The agreement is cancelable by either party by giving six months notice and continues in
existence until terminated. Each association is responsible for its proportionate share of employee and
overhead expenses. Such expenses are allocated at cost in proportion to the estimated utilization by each
association. Allocation methods are reviewed periodically based on current operations and resources utilized
by tbe associations. The Association was allocated expenses of $450,237 and $431,799 from MLHIGA for the
years ended December 31, 2014 and 2013, respectively. On occasion, the Association will make direct
payments to MLHIGA's vendors for expenses that are directly related to the Association's operations.
7.
LEASE COMMITMENT
The Association leases office space under a long-term, non-cancelable operating lease. The existing lease
requires monthly rental payments of $1,625 through March 31, 2017. This lease results in the following
commitment:
Year ending December 31,
$
2015
2016
2017
$
19,500
19,500
4,875
43,875
Office lease expense under the above lease was $19,500 for each ofthe years ended December 31, 2014 and
2013.
8.
CONTINGENCIES
During 2011, tbe Missouri Department oflnsurance. Financial Institutions and Professional Registration filed a
petition in the Barton County Circuit Court requesting approval of a rehabilitation plan (the "Plan") for Barton
Mutual Insurance Company and other affiliated entities (collectively, "Barton"). The court approved the Plan
on December 14, 2011. Among other things, the Plan contemplates that the Association enter into an
agreement with the Farm Bureau Town and Country Insurance Company to secure a surplus note loan made to
Barton. The amount for which the Association may be responsible will not exceed the amount ofthe covered
claims that the Association would otherwise have to pay if Barton were liquidated due to being financially
insolvent. Under the agreement, the court ordered the contingent liability of the Association would be treated
as Class 2 - Policyholder Priority Level Claim in the event that Barton is placed into liquidation by the court
20
prior to ttie surplus note being repaid. Until an order of liquidation with a finding of insolvency is issued by
the court against Barton, the Association has no obligation for any covered claim amounts; nor does the
Association have any obligation to assess the companies that are member insurers covered under the account
for Missouri Mutual Companies organized under Statute Chapter 380.
Additionally, the Association is involved in litigation arising in the normal course of its business. In the
opinion of management, the Association's recovery or liability, if any, under any pending litigation or
administrative proceeding would not materially affect its fmancial statements.
9.
RESTATEMENT
Management discovered a reserve for unallocated loss adjustment expenses had not been recorded in previous
years. To correct this error, the amounts presented in the accompanying financial statements as of December
31, 2013 and for the year then ended have been restated from amounts previously reported, as shown below:
Net assets, beginning of year
Reserves for losses and loss adjustment expenses
Increase in reserves for losses and loss adjustment expenses
Change in net assets
Total net assets (deficit)
21
As Originally
Reported
$17,390,021
40,327,913
6,476,731
(11,778,042)
5,611,979
As
Restated
$ 6,654,028
52,049,813
7,462,638
(12,763,949)
(6,109,921)