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The Missouri
Life and Health Insurance
Guaranty Association
2014
Annual
Report
ANNUAL REPORT OF THE
MISSOURI LIFE AND H E A L T H INSURANCE
GUARANTY ASSOCIATION
F O R F I S C A L Y E A R E N D I N G D E C E M B E R 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 Life and Health Insurance Guaranty Association
A p r i l 30,2015
M I S S 0 tr R I
Life & Health
I N S U R A N C E
GUARANTY ASSOaATlON
994 DIAMOND RIDGE, SUITE 102
JEFFERSON CITY, MISSOURI 65109
/_J
PHONB; 573-634-8455
FAX;
PAX; 573-634-8488
573-
Apia30,2015
• Honoiable John M, Huff, Director
Missotiri Department of Insurance, Financial Institutions
and Professional Registration
301W. High St.
P.O. Box 690
Jefferson City^ MO 65101
Dear Director Huff:
On hehalf of the Missouri Life and Health Insuiance Guaranty Association (Ihe
"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 witti the provisions of Section
376,760.1, of the Revised Statutes of Missouri.
During 2014, the Association has continued to provide frontline consumer service to
those individuals that have been disenfranchised by the insolvency of their life and health
insurance companies. The Association is currently providing adininistrationfor assessment life
insurance and long term care insurance as well as providing consumer assistance in the
handling of claims related to life insurance supporting pre-need funeral contracts.
ha addition, the Association spent 2014 being heavily engaged in the civil Htigation
seeking recoveries from defendants involved with the insolvency of the Lincoln Memorial Life
Insurance Company and its affiliate company, National Prearranged Services, Inc. Shortly after
the beginning of 2015, the trial concluded with si jtiry verdict finding in favor of the Association
and the other plaintiffs.
The Association continues to support.the National Organization of Life and Health
Guaranty Associations ("NOLHGA"). As a member of NOLHGA, the Association serves on
various committees and insolvency task forces, This participation provides for an exchange of
expertise among individual state guaranty associations and facilitates meeting the challenges of
a multi-state insolvency.
We would like to express our appreciation to the staff of the Missouri Department of
Insurance for their cooperative, professional support. Along with the other members of the
Board and the staff of the Association, we look forward to the continued positive working
relationship tiiat exists with the Department.
Sincerely,
Missouri Life and Health Insurance
Guaranty Association
TABLE OF CONTENTS
BOARD O FDIRECTORS
iv
GENERAL
1
2014 M E E T I N G S
1
O F F I C E O F T H E E X E C U T I V ED I R E C T O R
2
FINANCIAL REPORTS
3
2014 C L A S S A A S S E S S M E N T
3
2014 C L A S S B I N S O L V E N C Y A S S E S S M E N T
3
OPEN INSOLVENCIES
4
INSOLVENCIES LISTING
4
SUMMARY COMMENTS
ON ESTATES WITH SIGNIFICANT AND MATERIAL
ACTIVITY
5
Continental Security (Peoples Mutual Assessment Business)
5
Lincoln Memorial Life Insurance Company
5
Penn Treaty/American Network
6
LITIGATION
6
F I N A N C I A L R E P O R T I N G A N D A U D I T A S O F D E C E M B E R 31,2014
7
INDEPENDENT AUDITORS' REPORT
7
FINANCIAL STATEMENTS
8
NOTES TO FINANCIAL STATEMENTS
11
iii
Board of Directors
of the
Missouri Life and Health Insurance
Guaranty Association
REPRESENTATIVE
COMPANY
Allstate Life Insurance Company
Sonya Ekart
American Family Life Insurance Company
David Monaghan
Assurant Employee Benefits, Union Security Insurance Co.
Melonie Jones
Blue Cross/Blue Shield of Kansas City
Coni Fries
Farm Bureau Life Insurance Company of Missouri
Carol Gilmore
General American Life Insurance Company
John Iwanicki
Kansas City Life Insurance Company
Timothy Langland
Ozark National Life Insurance Company
David R. Melton
Shelter Life Insurance Company
Teresa Magruder
iv
ANNUAL REPORT OF THE
MISSOURI LIFE AND HEALTH INSURANCE
GUARANTY ASSOCIATION
FOR THE YEAR ENDING DECEMBER 31,2014
The Annual Report of the Missouri Life and Health 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
and Professional Registration ("DIFP") and the Board of Directors.
GENERAL
As of December 31, 2014, there were 850 companies licensed to sell life, health, or
annuity contracts and by the terms of sections 376.715 to 376.758, Revised Statutes of
Missouri, are deemed to be members of the Association. Of the member companies, 466
had authority to sell life insurance, 442 had authority to sell health insurance, and there
was one health service corporation.
2014 M E E T I N G S
The Annual Meeting of the Membership was held on May 20,2014. As a course of
business for this meeting, three members were elected to serve on the Board of Directors
for a term that w i l l expire i n 2017. Those members are:
Assurant Employee Benefits/Union Security Insurance Company
Melonie Jones
Kansas City Life Insurance Company
Timothy J. Langland
Ozark National Life Insurance Company
David R. Melton
On the same date, the Board of Directors elected the following officers to serve for
a term of one year, or until a successor is duly elected:
NAME
COMPANY
Sonya Ekart, Chair
Allstate Life Insurance Company
David Monaghan, Vice-Chair
American Family Life Insurance Company
Carol Gilmore, Secretary-Treasurer
Farm Bureau Life Insurance Co. of Missouri
I n accordance w i t h Article I I I , B, 2, of the Plan of Operation (the "Plan"), the officers
of the Association constitute the Executive Committee. A f u l l roster of the Board of
Directors accompanies this report.
1
Also during 2014, the Executive Committee continued the practice of meeting
regularly on a quarterly basis. Under Article I I I , B, 2, of the Plan, it is contemplated that
the Executive Committee w i l l be involved w i t h the ongoing functions and the
administrative duties of the Association as may occur between meetings of the Board of
Directors. Minutes of all meetings of the Member Insurers, the Board of Directors, and
the Executive Committee are on file at the office of the Association i n Jefferson City,
Missouri.
OFFICE OF THE EXECUTIVE DIRECTOR
I n 2013, a jury i n federal court convicted five individuals for their criminal activity
that led to the insolvency of Lincoln Memorial Life Insurance Company, Memorial
Services Life Insurance Company and National Prearranged Services, Inc. W i t h the
conclusion of the criminal trial, the civil law suit filed by the Special Deputy Receiver of
the insolvent entities and the affected guaranty associations was allowed to move
forward. Throughout 2014, the Association has been actively engaged w i t h other states'
life and health insurance guaranty associations i n preparing f o r the civil trial i n federal
court. The trial was set for February of 2015.
Initially, the civil suit was brought against over f i f t y defendants. The named
defendants included the owners, officers and consultants associated w i t h the defunct
entities as well as a number of banks that served as trustee f o r the preneed funeral trusts.
As 2014 ended, the number of defendants had been reduced to two.
As of the w r i t i n g of this report, the civil litigation has concluded. The trial lasted
for over five weeks. The jury returned a verdict i n favor of the guaranty associations and
the Special Deputy Receiver. The jury found that the successor trustee had breached their
fiduciary duties and was negligent i n their handling of the preneed trust. The jury
awarded the plaintiffs a total of over $490 million i n compensable and punitive damages
against the remaining defendants. The verdict and the award are subject to appeal.
The Association also assumed responsibility for the claims administration of a
defunct long term care insurance provider. The administration for the remaining active
policies relating to the Missouri policyholders of the Life and Health Insurance Company
of America is now handled by Association staff. This process was facilitated by the
development of a policy administration system. This effort assures that Missouri consumers
are given personal handling of their claims and other policy services.
The Association is an active member of National Organization of Life and Health
Insurance Guaranty Associations and the Executive Director has represented the
Association by serving on the following technical task forces and committees:
Accounting Issues Committee
Assessment Data Task Force (Chair)
MFC Executive Committee
2
I n addition to these groups, the Association has also been active on the following
task forces that are dealing w i t h specific insolvencies:
Benicorp Insurance Company (Chair)
Lincoln Memorial Life Insurance Company
National States Insurance Company
Thunor Trust Companies
Universe Life Insurance Company
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
committees of the Board. The audited financial statements as of and for the year ending
December 31, 2014 are included w i t h this report. Further, the notes to the financial
statements are also included as an integral part of the report. The accounting f i r m of
Williams-Keepers, LLC, Jefferson City, Missouri, conducted the independent audit of the
financial records of the Association.
2014 CLASS A ASSESSMENT
The Board is authorized under section 376.735 to make either a pro-rata or a nonpro-rata Class A assessment of the membership for the purpose of providing the f u n d i n g
to cover administrative expenses. The Association allocates administrative expenses
among all insolvencies. I t was not necessary to levy a Class A assessment d u r i n g 2014.
2014 CLASS B INSOLVENCY ASSESSMENT
During 2014 there was one assessment made i n accordance w i t h section 376.735,
Revised Statutes of Missouri, for the purpose of f u n d i n g the Association's requirements
w i t h respect to insolvent member insurers. The following information is a breakdown of
the amounts assessed by insolvent estate and by account.
COMPANY N A M E
Lincoln Memorial Life Ins. Co.
Totals
ANNUITY
HEALTH
LIFE
TOTAL
$0
$0
$12,000,000
$12,000,000
$0
$0
$12,000,000
$12,000,000
3
OPEN INSOLVENCIES
Article V, C, of the Plan, requires that the Annual Report contain a review of the
activities of the Association during the preceding year. The following vignettes are
intended to f u l f i l l that requirement and to update the membership w i t h regard to the
status of each estate that had significant and material activity during the calendar year
2014. Also, a listing of all open estates is included for the memberships' reference.
INSOLVENCIES LISTING
1988
First Columbia Life Ins. Co. (LA)
2000
American Chambers Life Ins. Co. (OH)
1989
2001
American Mutual Liability Ins. Co. (MA)
Reliance Insurance Co. (PA)
1991
2003
Executive Life Ins. Co. (CA)
Midwest Life Ins. Co. (LA)
1992
Legion Insurance Co. (FA)
2006
Fidelity Bankers Life Ins. Co. (VA)
Shelby Casualty Insurance Company (TX)
1994
2007
Consumers United Life Ins. Co. (DE)
Benicorp Insurance Company (IN)
1995
2008
National Heritage Life Ins. Co. (DE)
Lincoln Memorial Life Insurance Co. (TX)
1996
2009
Confederation Life Ins. Co., U.S. (MI)
Medical Savings Insurance Company (IN)
1998
2010
Centennial Life Ins. Co. (KS)
Universe Life Ins. Co. (ID)
1999
First National Life Ins. Co. of America (MS)
International Financial Services Life Ins. Co. (MO)
Imerica Life and Health Insurance Co. (AR)
National States Insurance Company (MO)
Universal Life Insurance Company (AL)
2013
Lumbermens Mutual Casualty Co. (IL)
4
SUMMARY COMMENTS ON ESTATES WITH SIGNIFICANT
AND MATERIAL ACTIVITY
Continental Security (Peoples Mutual Assessment Business)
The Association continues to handle all the administration of this block of
business. As of the end of 2014, there were 277 active policies that represented
approximately 464 insured lives. The total number of death claims paid was 30. The
block of life association business continues to decline. Administrative expenses f o r
handling this block of business exceed the policy holder assessments.
Lincoln Memorial Life Insurance Company
Lincoln Memorial Life Insurance Company ("Lincoln Memorial") along w i t h the
affiliated Memorial Services Life Insurance Company and National Prearranged Services,
Inc. ("NPS") were ordered liquidated by the Travis County, Texas Circuit Court i n 2008.
The insurance companies were part of a holding company system and had a direct
relationship w i t h the affiliate NPS, that sold pre-need funeral plans.
The nature of the liquidation plan is one of a compromise and settlement that
addresses regulatory concerns and orders issued against the company during late 2007
and early 2008. The special deputy receiver entered into an administrative service
agreement w i t h the affected guaranty associations to handle the claims processing.
The Association is participating w i t h other affected guaranty associations i n a civil
suit against the numerous defendants involved w i t h defunct companies. This action has
been a major focus of this insolvency. The civil litigation has been filed i n the Eastern
Federal District Court i n St. Louis, Missouri.
There were criminal indictments issued against six of the defendants w h o are also
named i n the civil litigation. Because of this fact, there was a partial stay i n effect for the
civil litigation. The criminal litigation ended i n 2013. This allowed the civil litigation to
proceed.
Throughout 2014, the Association was engaged i n helping develop litigation
strategy. W i t h forty-five original defendants i n the civil litigation, the main focus was to
develop a consensus regarding the value of each defendant and how to best utilize that
defendant for the development of the case. By the end of 2014, the number of defendants
remaining i n the case had been significantly reduced. The trial was set for the February
of 2015.
5
As of the w r i t i n g of this report, the civil trial has concluded. It was a j u r y trial held
i n the Eastern District Federal Court i n St. Louis, Missouri. The trial lasted over five
weeks beginning i n the first week of February i n 2015. A t the end, the jury found that the
successor trustee had breached their fiduciary duties and were negligent i n their handling
of the preneed trust. The jury awarded the plaintiffs a total of over $490 million i n
compensable and punitive damages. The verdict and the award are subject to appeal.
The Association has paid over $65.5 m i l l i o n relating to over 18,600 claims. Total
reserves for unpaid claims are over $113 million.
Penn Treaty/American Network
The Pennsylvania Commissioner of Insurance first filed petitions for liquidation
against both of these entities on October 2, 2009. Hearings on the liquidation petition
were convened and adjourned over the entire year of 2011. I n 2012, after the conclusion
of the protracted hearing, the Pennsylvania Commonwealth Court denied the petitions
for liquidation and ordered the rehabilitator to file a plan of rehabilitation that addresses
and eliminates the inadequate and discriminatory premium rates for the pre-2002
business. O n October 26, 2012, the rehabilitator filed a notice of appeal of the
Commonwealth Court's order denying the liquidation petitions. I n A p r i l of 2013, the
rehabilitator filed an application w i t h the court seeking approval of revised Plans of
Rehabilitation for Penn Treaty and American Network. The court held t w o pre-hearing
conferences on the proposed Rehabilitation Plans. A t the conclusion of the pre-hearing
conferences, the court ordered the rehabilitator and other parties of interest to negotiate
for a period of 30-60 days to determine if an agreement could be reached w i t h respect to
the initial phases of the proposed Rehabilitation Plans. The court also authorized the
establishment of a policyholder committee.
A t the end of 2014 the schedule of the court is to commence hearings on the revised
rehabilitation plan i n July of 2015. I n the interim, there w i l l be opportunity for revisions
and modification to the Rehabilitation Plan. It is uncertain to what extent a consensus
can be reached among the parties affected by the rehabilitation or ultimate liquidation of
these companies.
LITIGATION
As of December 31, 2014, there was no active litigation where the Association is a
defendant. The Association is a plaintiff along w i t h other guaranty associations affected
by the insolvency of Lincoln Memorial Life Insurance Company, Memorial Services Life
Insurance Company and National Pre-Arranged Services, Inc. The Special Deputy
Receiver for this insolvency is also a joint plaintiff. As of the end of 2014, the litigation
was pending i n the United States District Court for the Eastern District of Missouri.
6
Financial Reporting
and Audit
for the year ending
December 31,2014
.-•WILLIAMS
KEEPERS LLC
2 0 0 5 W e s t B r o a d w a y , Suite 1 0 0 , C o l u m b i a , M O 6 5 2 0 3
OFFICE
(573) 442-6171
FAX
(573) 777-7800
3 2 2 0 W e s t E d g e w o o d , Suite E, Jefferson City, M O 6 5 1 0 9
OFFICE
CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS
(573) 635-6196 FAX(573) 644-7240
www.williamskeepers.com
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of the
Missouri Life and Health Insurance
Guaranty Association
We have audited the accompanying financial statements of the Missouri Life and Health Insurance Guaranty
Association (the "Association"), which comprise the statements of financial 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 financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial 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 financial statements based on our audit. 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 financial statements are free
from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor's judgment, including the assessment of
the risks of material misstatement of the financial statements, whether due to fraud or error. In making those
risk assessments, the auditor considers internal control relevant to the Association's preparation and fair
presentation of the financial 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 of the 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 that the audit 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 of the Missouri Life and Health 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
A m e r i c a n Institute o f Certified Public A c c o u n t a n t s
M i s s o u r i Society o f Certified Public A c c o u n t a n t s
Superior service. Creative s o l u t i o n s . Exceptional clients.
PKF N o r t h A m e r i c a
7
M I S S O U R I L I F E AND H E A L T H I N S U R A N C E G U A R A N T Y A S S O C I A T I O N
STATEMENT OF FINANCIAL POSITION
December 31,2014
(with comparative totals for December 31, 2013)
2014
Class B
Class A
Total
2013
(Memorandum
Only)
ASSETS
Cash and cash equivalents
Investments
Accounts receivable
Interclass receivable (payable)
Unbilled assessments
Other assets
$
84,392
47,818
79,503
Total assets
$
215,029
$
14,972
99,706
-
$
3,316
2,765,686
16,496,825
8,890,062
(79,503)
107,233,348
16
$ 135,306,434
$
2,850,078
16,496,825
8,937,880
107,233,348
3,332
$
1,180,598
14,539,012
135,412
128,879,223
7,209
$ 135,521,463
$ 144,741,454
$
$
L I A B I L I T I E S AND NET ASSETS
LIABILITIES
Accounts payable
Accrued liabilities
Reserves for claims payable
Total liabilities and net assets
125,021,256
17,035
74,148
134,508,659
125,021,256
125,135,934
134,599,842
-
100,351
10,285,178
10,385,529
10,141,612
$
215,029
$ 135,306,434
$ 135,521,463
$ 144,741,454
The notes to financial statements are an integral part of these statements.
8
14,972
99,706
125,021,256
114,678
Total liabilities
NET ASSETS - UNRESTRICTED
$
IVIISSOURI LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION
STATEMENT OF ACTIVITIES
For the Year Ended December 31, 2014
(with comparative totals for the year ended December 31, 2013)
2013
2014
Class A
Class B
Total
(Memorandum
Only)
1,173,060
$
SUPPORT A N D REVENUES
$
$
Liquidation distributions
26
Net investment return (loss)
1,173,060
$
86,330
86,356
4,087,239
(12,768)
Allocations to the Missouri Property and
Casualty Insurance Guaranty Association
Assessment income
Litigation recoveries
Premium income
Miscellaneous income
Total support and revenues
220,520
-
220,520
190,437
-
11,998,530
11,998,530
3,996,880
12,354,865
12,354,865
-
910,529
910,529
1,224,185
219
-
219
471
220,765
26,523,314
26,744,079
9,486,444
(21,645,876)
(21,645,876)
(5,045,853)
_
C H A N G E I N U N B I L L E D ASSESSMENTS
EXPENSES
-
Claims benefits and processing, net o f changes in reserves
Assumption reinsurance ceding costs
General and administration
2,825,905
1,254,795
1,254,795
52,597
2,916,496
52,597
193,650
220,765
3,137,261
1,453,247
-
409,631
409,631
325,321
220,765
4,633,519
4,854,284
4,798,123
243,919
243,919
100,351
10,041,259
10,141,610
10,499,144
100,351
$ 10,285,178
$ 10,385,529
$ 10,141,612
National Organization o f Life and Health
Insurance Guaranty Associations
Total expenses, net o f changes in reserves
Change in unrestricted net assets
Unrestricted net assets, beginning o f year
$
Unrestricted net assets, end of year
The notes to financial statements are an integral part o f these statements.
9
(357,532)
MISSOURI L I F E AND H E A L T H INSURANCE G U A R A N T Y A S S O C I A T I O N
STATEMENT OF CASH F L O W
For the Year Ended December 31, 2014
(with comparative totals for the year ended December 31, 2013)
2014
Class B
Class A
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 (gain) loss on investments, net of change in unrealized gain/loss
Change in accounts receivable
Change in unbilled assessments
Change in other assets
Change in interclass receivable and payable
Change in accounts payable
Change in accrued liabilities
Change in reserves for claims payable
$
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of investments
Purchases of investments
Net cash provided (used) by investing activities
Net change in cash and cash equivalents
Cash and cash equivalents, begirming of year
$
Cash and cash equivalents, end of year
-
(3,463)
-
3,425
(4,815)
(85)
25,558
-
243,919
$
(357,532)
354
148,857
(41,592)
5,045,853
(4,034)
-
(141)
(8,802,468)
21,645,875
3,877
-
-
(9,487,403)
(2,063)
25,558
(9,487,403)
2,493
14,201
(8,254,705)
3,606,534
3,627,154
(3,446,105)
-
14,249,998
(16,207,672)
14,249,998
(16,207,672)
20,700,000
(18,117,692)
-
(1,957,674)
(1,957,674)
2,582,308
20,620
1,648,860
1,669,480
63,772
1,116,826
1,180,598
-
84,392
$
2,765,686
The notes tofinancialstatements are an integral part of these statements.
10
$
(141)
(8,799,005)
21,645,875
452
4,815
(1,978)
-
20,620
Net cash provided (used) by operating activities:
Total
243,919
-
Total 2013
(Memorandum
Only)
$
2.850,078
(863,797)
2,044,395
$
1,180,598
MISSOURI L I F E AND HEALTH INSURANCE GUARANTY ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: The Missouri Life and Health Insurance Guaranty Association Act ("Act") was passed by the
Missouri Legislature in 1988 to protect policy owners, beneficiaries, annuitants, payees and assignees of life
insurance policies, health insurance policies, annuity contracts and supplemental contracts, subject to certain
limitations, against failure in the performance of contractual obligations due to the impairment or insolvency
of the insurer issuing such policies or contracts. To provide this protection, the Missouri Life and Health
Insurance Guaranty Association (the "Association") was created by Missouri Revised Statute 376.715 to
guarantee payment of benefits and continuation of coverage. Any insurer or health services corporation
licensed or holding a certificate of authority to transact in Missouri any kind of insurance for which coverage
is provided under Missouri Revised Statute 376.727 is a member insurer of the Association. A l l member
insurers are and must remain members of the Association as a condition of their authority to transact business
in Missouri. Members of the Association are subject to assessments to provide funds to carry out the purpose
of the Act,
The Association performs its functions under a plan of operation approved by the Missouri Director of
Insurance and exercises its powers through a Board of Directors. The Association is subject to the immediate
supervision of the Missouri Director of Insurance and the insurance laws of the 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. 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.
Summarized comparative total: The financial statements include prior year summarized comparative
information in total, but not by fund. Such information does not include sufficient detail to constitute a
presentation in conformity with U.S. generally accepted accounting principles. Accordingly, it should be
read in conjunction with the Association's financial statements for the year ended December 31, 2013, from
which the summarized information was derived.
Use of estimates: Management uses estimates and assumptions in preparing these financial 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 resuhs could vary
from the estimates that were used.
Cash and cash equivalents: Cash and cash equivalents include certain interest bearing bank 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
maintained no balances in excess of FDIC coverage at December 31, 2014 or 2013. The Association held an
11
overnight repurchase agreement balance of approximately $2,800,000 at December 31, 2014 and $1,161,000
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% of the 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.
Accounts receivable: Accounts receivable consists of litigation recoveries due from the National
Organization of Life and Health Guaranty Associations ("NOLHGA"), amounts due from Missouri Property
and Casualty Insurance Guaranty Association, and investment interest receivable. The Association considers
all receivables at December 31, 2014 and 2013 to be fully collectible and has not recorded an allowance for
doubtful accounts.
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, as changes occur to estimated claims and loss adjustment
expenses, or when an insolvency is purchased by a third party.
Furniture and equipment: Purchases of furniture and equipment 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 to ten years. Fumiture
and equipment of $32,685 was fully depreciated as of December 31, 2014.
Assessments: For purposes of assessment, the Association maintains three accounts: (1) the accident and
health insurance account; (2) the life insurance account; and (3) the annuity account. In order to provide
funds necessary to cany 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.
Class A assessments are made for the purpose of meeting administrative costs and other general expenses and
examinations not related to a particular impaired or insolvent insurer. The amount of any Class A assessment
is determined by the Board and may be made on either a non-pro rata or pro rata basis. Non-pro rata
assessments may not exceed $150 per member company in any one calendar year. Class A assessments are
made to the extent necessary to cany out the powers and duties of the Association.
Class B assessments against member insurers for each account are in the proportion that the average
premiums received on business in Missouri by each assessed member insurer on policies covered by each
account for the three calendar years preceding the insolvent company's date of insolvency bears to the
average of such premiums received on business in the state for the three calendar years preceding the
insolvent company's date of insolvency by all assessed member insurers.
Expense classification: The Association classifies expenses as Class A or Class B based upon the statutory
provisions of the Act. Class A expenses are administrative costs, legal costs and other costs not allocated to
a particular impaired or insolvent insurer. Class B expenses are costs incurred to the extent necessary to
cany out the powers and duties of the Association as it relates to the payment of the obligations of an
impaired or an insolvent insurer.
12
Income taxes: The Association is exempt from income tax under Section 501(c) (6) of the Internal Revenue
Code. The Association's Form 990 and taxable status are subject to examination by the Internal Revenue
Service for open tax years, which as of the date of this report are 2011 - 2014. Interest and penalties
incurred, if any, related to annual Form 990 are reported within general and administration expenses on the
statement of activities.
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 financial statements were approved by
management and, therefore, were available to be issued.
2.
INVESTMENTS
Investments consisted of the following at December 31, 2014 and 2013:
Cost
2014
Class B Fund
U.S. agency bonds and notes
U.S. treasury securities
Total Class B investment securities
10,208,805
6,298,867
$
(41,815)
30,968
$ 10,166,990
6,329,835
$
16,507,672
$
(10,847)
$ 16,496,825
Cost
Total Class B investment securities
Fair Value
$
2013
Class B Fund
U.S. agency bonds and notes
U.S. treasury bond
Unrealized
Gain (Loss)
Umealized
Gain (Loss)
Fair Value
$
8,019,220
6,548,472
$
(85,990)
57,310
$
7,933,230
6,605,782
$
14,567,692
$
(28,680)
$ 14,539,012
Contractual maturities of investment securities at December 31, 2014 are as follows, based on the expected
call date.
Cost
Class B Fund
Due in one year or less
Due in one to five years
Total Class B investment securities
Unrealized
Gain (Loss)
Fair Value
$
5,998,867
10,508,805
$
1,133
(11,980)
$
6,000,000
10,496,825
$
16,507,672
$
(10,847)
$ 16,496,825
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.
13
Less than 12 months
Greater than 12 months
Total
2014
U.S. agency
bonds and notes
$
10,166,990
$
(41,815)
:$
-
$
$
10,166,990
$
(41,815)
Total
$
10,166,990
$
(41,815)
;$
-
$
$
10,166,990
$
(41,815)
Fair Value
Unrealized Loss
Fair Value
Less than 12 months
Unrealized Loss
Fair Value
Greater than 12 months
Unrealized Loss
Total
2013
U.S. agency
bonds and notes
$
7,933,230
$
(85,990)
;$
-
$
$
7,933,230
$
(85,990)
Total
$
7,933,230
$
(85,990)
;S
-
$
$
7,933,230
$
(85,990)
Fair Value
Unrealized Loss
Fair Value
Unrealized Loss
Fair Value
Unrealized Loss
The above table represents two investment securities as of December 31, 2014 and 2013, 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
financial condition and near-term prospects of the issuer, and the intent and ability of the Association to
retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair
value.
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-thantemporarily 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 is used that 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 of the 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 obsei-vable 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, if any, related
market activity.
The following is a description of valuation methodologies used for assets disclosed at fair value.
14
Fair value measurement is based upon quoted prices, i f 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 overthe-counter markets, and money market funds. Level 2 securities 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.
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
Level 1
Assets
Investment securities
Level 2
$
-
Level 3
$ 16,496,825
Total
$ 16,496,825
$
2013
Level 1
Assets
Investment securities
$
Level 3
Level 2
-
$ 14,539,012
Total
$ 14,539,012
$
Net investment return (loss) consisted of the following for the years ended December 31, 2014 and 2013:
26
Class B
17,833
$
(17,692)
141
86,189
26
$
Class A
2014
Change in unrealized gain/loss on investments
Net realized losses on sales
$
-
-
Interest income
$
Net investment return
2013
Class A
Change in unrealized gain/loss on investments
Net realized losses on sales
$
Interest income
Net investment return (loss)
$
15
86,330
25
Class B
$
(75,108)
(73,749)
(148,857)
136,064
25
$
-
(12,793)
$
$
$
$
Total
17,833
(17,692)
141
86,215
86,356
Total
(75,108)
(73,749)
(148,857)
136,089
(12,768)
3.
RESERVES FOR CLAIMS PAYABLE
The Association receives claims expense estimates from NOLHGA and other entities. Management analyzes
the information received from NOLHGA and other entities, industry trends and the effects of Missouri
statute limitations on the estimates prior to arriving at the recorded estimated reserves for claims payable.
The methods for making such estimates and for establishing the resulting liability are continually reviewed,
and any adjustments of estimates are reflected in claims benefits and processing expenses in the statement of
activities.
The total reserves for claims payable were approximately $125,000,000 and $135,000,000 at December 31,
2014 and 2013, respectively. These reserves are based on estimates and, while management presently
believes the estimate of reserves for claims payable at December 31, 2014 is adequate, the actual liability
could vary considerably from the amount presented in these financial statements.
4.
PROGRAM EXPENSES
As explained in Note 1, the Association is statutorily required to account for transactions directly related to
administration of the various insolvencies in one fund (Class B) and general and administrative expenses in
another fund (Class A). By the very nature of the fund, all expenses recorded in Class B are program
expenses, However, management and general expenses initially recorded in Class A are allocated to Class B
based on periodic time and expense studies. Such allocations totaled $220,520 and $190,437 for the years
ended December 31, 2014 and 2013, respectively.
5.
LITIGATION RECOVERIES
Lincoln Memorial Life Insurance Company ("Lincoln Memorial") along with the affiliated Memorial
Services Life Insurance Company and National Prearranged Services, Inc. ("NPS") were ordered liquidated
by the Travis County, Texas Circuit Court in 2008. The insurance companies were part of a holding
company system and had a direct relationship with the affiliate NPS, that sold pre-need funeral plans.
The Association is participating with other affected guaranty associations and the special deputy receiver of
the three companies in a civil suit against numerous defendants involved with the defunct companies. These
defendants include banks, an investment firm, and an accounting firm. The civil litigation has been filed in
the United States District Court for the Eastern District of Missouri in St. Louis. The trial began on
February 2, 2015, and on March 9, 2015, the jury awarded $491 million in damages to the plaintiffs. The
defendants have indicated an intention to appeal the verdict.
As part of this litigation, a number of defendants have settled with the guaranty associations and have been
dismissed from the litigafion. The Association received $12,354,865 and $0 as its proportionate share of
these settlements during the years ended December 31, 2014 and 2013, respectively.
6.
LINE OF CREDIT
The Association maintains a $5,000,000 unsecured revolving line-of-credit which bears interest at the 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 lune 14, 2015.
16
7.
EMPLOYEE BENEFIT PLANS
The Association sponsors a 401(k) Safe Harbor Pension Plan. Employees are eligible to participate in the
plan after completion of twelve consecutive months of employment and 1,000 hours of service. Employees
are vested in the plan immediately. The Association's contribution is based on a percentage of salaries as
approved by the Board of Directors.
Contributions to the plans totaled $27,688 and $25,692, for the years ended December 31, 2014 and 2013,
respectively. Of the totals contributed for 2014 and 2013, the Missouri Property and Casualty Insurance
Guaranty Association (MPCIGA) was allocated $19,389 and $18,338, respectively, pursuant to the
contractual agreement described in Note 7.
The Association also sponsors a 457 Pension Plan. Employees are eligible to participate in the plan
immediately upon hire and are also vested in the plan immediately. The Association is not currently making
contributions to the plan. An investment and corresponding liability of $55,098 at December 31, 2014 and
$30,736 at December 31, 2013 is recorded within accrued liabilities on the accompanying statement of
financial position. The amount represents employee contributions through December 31, 2014 and 2013,
respectively.
8.
CONTRACTS
On May 8, 2001, the Association entered into a joint adminstration agreement with MPCIGA whereby the
Association 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 and the Association is
reimbursed by MPCIGA accordingly. Allocation methods are reviewed periodically based on current
operations and resources utilized by the associations. The Association allocated expenses of $450,237 and
$431,799 to MPCIGA for the years ended December 31, 2014 and 2013, respectively. On occasion,
MPCIGA makes direct payment to the Association's vendors for expenses that are directly related to
MPCIGA operations.
9.
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 of the years ended December 31, 2014 and
2013.
17
10.
CONTINGENCIES
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, i f any, under any pending litigation or administrative
proceeding would not materially affect its financial statements.
.18