Nationwide Insurance Company of America

Report of the Examination of Nationwide Insurance Company of America Des Moines, Iowa As of December 31, 2006 TABLE OF CONTENTS Page I. INTRODUCTION .................................................................................................................... 2 II. HISTORY AND PLAN OF OPERATION ................................................................................ 4 III. MANAGEMENT AND CONTROL .......................................................................................... 6 IV. AFFILIATED COMPANIES .................................................................................................... 8 V. REINSURANCE ................................................................................................................... 12 VI. FINANCIAL DATA ................................................................................................................ 13 VII. SUMMARY OF EXAMINATION RESULTS ......................................................................... 21 VIII. CONCLUSION...................................................................................................................... 26 IX. SUMMARY OF COMMENTS AND RECOMMENDATIONS................................................ 27 X. ACKNOWLEDGMENT ......................................................................................................... 28 State of Wisconsin / OFFICE OF THE COMMISSIONER OF INSURANCE Jim Doyle, Governor Sean Dilweg, Commissioner Wisconsin.gov February 29, 2008 125 South Webster Street • P.O. Box 7873 Madison, Wisconsin 53707-7873 Phone: (608) 266-3585 • Fax: (608) 266-9935 E-Mail: ociinformation@wisconsin.gov Web Address: oci.wi.gov Honorable Sean Dilweg Commissioner of Insurance State of Wisconsin 125 South Webster Street Madison, Wisconsin 53703 Honorable Alfred W. Gross Chair, Financial Condition (E) Committee, NAIC Commissioner of Insurance Commonwealth of Virginia 1300 East Main Street Richmond, Virginia 23219 Honorable Merle Scheiber Secretary, Midwestern Zone, NAIC Director of Insurance State of South Dakota 445 East Capitol Avenue Pierre, South Dakota 57501-3185 Honorable Thomas R. Sullivan Secretary, Northeastern Zone, NAIC Commissioner of Insurance State of Connecticut 153 Market Street Hartford, Connecticut 06103 Honorable Scott H. Richardson Secretary, Southeastern Zone, NAIC Director, Department of Insurance State of South Carolina 1201 Main Street, Suite 1000 Columbia, South Carolina 29201 Honorable Morris J. Chavez Secretary, Western Zone, NAIC Superintendent of Insurance State of New Mexico 1120 Paseo de Paralta Santa Fe, New Mexico 87504 Commissioners: In accordance with your instructions, a compliance examination has been made of the affairs and financial condition of: NATIONWIDE INSURANCE COMPANY OF AMERICA Des Moines, Iowa and this report is respectfully submitted. I. INTRODUCTION The previous examination of Nationwide Insurance Company of America (the company) was conducted in 2002 as of December 31, 2001. The current examination covered the intervening period ending December 31, 2006, and included a review of such 2007 transactions as deemed necessary to complete the examination. The examination consisted of a review of all major phases of the company's operations and included the following areas: History Management and Control Corporate Records Conflict of Interest Fidelity Bonds and Other Insurance Employees' Welfare and Pension Plans Territory and Plan of Operations Affiliated Companies Growth of Company Reinsurance Financial Statements Accounts and Records Data Processing The examination approach for Nationwide Insurance Company of America was based on the coordinated examination of the Nationwide Group of property and casualty insurance companies performed by the lead state Ohio Department of Insurance for the five-year period ended December 31, 2006. An integral part of this risk-based compliance examination was the review and overall reliance placed on the Ohio Department of Insurance work papers, which encompassed assessment of corporate organization and culture, risk analysis assessment of inherent risks and risk mitigation controls, examination planning questionnaires, Sarbanes-Oxley documentation, external audit work review and retesting, internal control evaluations, trial balance reconciliations to the annual statement and fluctuation analysis of balance reasonableness. The company is annually audited by an independent public accounting firm as prescribed by s. Ins 50.05, Wis. Adm. Code. The above Ohio Department of Insurance work papers incorporated a review of the independent accountant’s work papers. Based on the results of the review of these combined work papers, additional validation steps deemed necessary to supplement this examination approach were performed. The examination work papers contain 2 documentation with respect to the additional steps performed during the course of the examination. Attention was also given to the action taken by the company to satisfy the recommendations and comments made in the previous examination report. Independent Actuary's Review The Ohio Department of Insurance actuary reviewed the loss and loss adjustment expense reserves of the Nationwide Group for adequacy. The actuary’s results were reported to the Ohio Department of Insurance examiner-in-charge. As deemed appropriate, reference is made in this report to the actuary’s conclusion. 3 II. HISTORY AND PLAN OF OPERATION The company was organized in 1926 as Wolverine Insurance Company. It was incorporated on June 30, 1960, under the laws of California as Spartan Insurance Company and began business on August 31, 1960. The company was purchased by Transamerica Insurance Company in 1962. The name was changed to Countrywide Insurance Company in 1968, to Transamerica Countrywide Insurance Company in 1981, and back to Countrywide Insurance Company in 1985. In 1990, the company name was again changed back to its former name, Transamerica Countrywide Insurance Company. The company was purchased and taken public by TIG Holdings, Inc., through public offerings in April and December of 1993. The name was changed to TIG Countrywide Insurance Company on December 31, 1993, after the second public offering, which reduced Transamerica’s ownership to zero. Nationwide Mutual Insurance Company acquired TIG Countrywide as a shell from TIG Holdings, Inc., on December 31, 1997, concurrent with its acquisition of TIG Holdings’ independent agency personal lines business, which TIG Countrywide assumed. The company redomiciled from California to Wisconsin in 1999 and adopted the current name of Nationwide Insurance Company of America. Nationwide Mutual Insurance Company contributed all of the company’s issued and outstanding stock to the Allied Group, Inc., in 1999. In 2006, the company wrote direct premium in the following states: Pennsylvania Ohio New York Maryland Arizona California Utah Colorado Georgia All others Total $143,798,067 57,632,759 36,743,114 32,063,479 22,436,076 17,869,255 15,232,008 12,800,406 10,095,033 54,435,586 $403,105,783 35.7% 14.3 9.1 7.9 5.6 4.4 3.8 3.2 2.5 13.5 100.0% The company is licensed in the District of Columbia and all states except Hawaii, Louisiana, New Hampshire, North Carolina and Vermont. 4 The major products marketed by the company include private passenger auto liability, auto physical damage and homeowner’s multiple peril. The major products are marketed through the Nationwide Mutual Insurance Company independent and exclusive agency channels. The following table is a summary of the net insurance premiums written by the company in 2006. The growth of the company is discussed in the “Financial Data” section of this report. Direct Premium $ 910,680 705,003 42,609 21,907,358 855,680 535,633 639,219 604,912 9,087 235,797,798 160,968 140,906,190 3,992 26,654 $403,105,783 Reinsurance Assumed $0 0 0 0 0 0 0 0 0 0 0 0 0 0 $0 Reinsurance Ceded $ 910,680 705,003 42,609 21,907,358 855,680 535,633 639,219 614,912 9,087 235,797,798 160,968 140,906,190 3,992 26,654 $403,105,783 Net Premium $0 0 0 0 0 0 0 0 0 0 0 0 0 0 $0 Line of Business Fire Allied lines Farmowner’s multiple peril Homeowner’s multiple peril Commercial multiple peril Inland marine Earthquake Other liability – occurrence Products liability – occurrence Private passenger auto liability Commercial auto liability Auto physical damage Burglary and theft Boiler and machinery Total All Lines 5 III. MANAGEMENT AND CONTROL Board of Directors Nationwide Insurance Company of America’s bylaws provide that the board of directors shall consist of not less than seven, provided a quorum is at least five, and not greater than ten members. The current board of directors consists of eight members. The directors are elected annually to serve a one-year term. All directors hold office until their respective successors are elected and qualified. Board vacancies may be filled for the unexpired term by a vote of the majority of the board members present if they constitute a quorum. Officers are elected at the board's annual meeting. Members of the company's board of directors may also be members of other boards of directors in the holding company group. As executive employees of the holding company system, the directors receive no compensation specific to their service on the company’s board. Currently the board of directors consists of the following persons: Name and Residence Stephen S. Rasmussen Columbus, Ohio Judith L. Greenstein Westerville, Ohio David R. Jahn Westerville, Ohio Gale V. King Gahanna, Ohio Michael A. Lex Dublin, Ohio Eileen A. Mallesch Gahanna, Ohio Richard M. Waggoner Westerville, Ohio Kirt A. Walker New Albany, Ohio Principal Occupation Chairman of the Board Term Expires 2008 Senior Vice President Property & Casualty Personal Lines Pricing Senior Vice President Property and Casualty Claims Senior Vice President Property & Casualty Human Resources Senior Vice President Sales Support Senior Vice President 2008 2008 2008 2008 2008 Division President Property & Casualty Specialty Products Division President NI Eastern Operations 2008 2008 6 Officers of the Company The officers serving at the time of this examination are as follows: 2006 Compensatio n $48,695 Not Allocated Not Allocated Not Allocated 79,429 Not Allocated Not Allocated Not Allocated Not Allocated Not Allocated Not Allocated Not Allocated Not Allocated Name Stephen S. Rasmussen Katherine A. Mabe Patricia R. Halter Terri L. Hill Robert A. Rosholt Wesley K. Austen Pamela A. Biesecker James R. Burke David R. Jahn Judith L. Greenstein Gail G. Synder Wendell P Crosser Robert W. Horner Office Chairman of the Board President and Chief Operating Officer EVP – Chief Legal and Governance Officer EVP – Chief Administrative Officer EVP – CFO, Finance, Investments, Strategy SVP SVP – Head of Taxation SVP – Commercial / Farm Product Pricing SVP – Property & Casualty Claims SVP – Personal Lines Product Pricing SVP – Chief Investment Officer VP – Finance and Treasurer Associate VP and Secretary Compensation listed is allocated based on employee estimates of time spent on Nationwide Insurance Company of America. Committees of the Board Although the company’s bylaws allow for the formation of certain committees by the board of directors, all committees at the time of the examination are organized at the corporate enterprise level. 7 IV. AFFILIATED COMPANIES Nationwide Insurance Company of America is a member of a holding company system. The organizational chart below depicts the relationships among the affiliates in the group that control Nationwide Insurance Company of America or with which the company has reinsurance or service agreements. The Nationwide Group is ultimately controlled by two mutual insurers, Nationwide Mutual Insurance Company and Nationwide Mutual Fire Insurance Company. The above entities are sister companies under the same management control which operate in tandem as the ultimate controlling entity for all subsidiaries. A brief description of the significant affiliates follows the simplified organizational chart. Organizational Chart As of December 31, 2006 Nationwide Mutual Insurance Company (Casualty) Nationwide Mutual Fire Insurance Company (Fire) Allied Group, Inc. Nationwide Cash Management Company Nationwide Insurance Company of America AMCO Insurance Company 8 Nationwide Mutual Insurance Company (NMIC) Nationwide Mutual Insurance Company provides personal automobile, property and commercial insurance products and services through exclusive and independent agents in all states except New Jersey, the District of Columbia, U.S. Virgin Islands and Canada. NMIC is the administrator of the Nationwide Pooling Agreement with a pool sharing percentage of 83.7%. As of December 31, 2006, the audited financial statements of Nationwide Mutual Insurance Company reported assets of $28,374,752,730, liabilities of $17,568,790,436, and surplus as regards policyholders of $10,805,962,294. Operations for 2006 produced net income of $1,080,505,147. Nationwide Mutual Fire Insurance Company (NMFIC) Nationwide Mutual Fire Insurance Company provides private passenger auto, homeowner’s multiple peril and commercial multiple peril coverage in all states as well as the District of Columbia and the U.S. Virgin Islands. Nationwide Mutual Fire Insurance Company shares in the Nationwide Pooling Agreement with a pooling percentage of 11.3%. As of December 31, 2006, the audited financial statements of Nationwide Mutual Fire Insurance Company reported assets of $4,219,131,799, liabilities of $2,306,661,456, and surplus as regards policyholders of $1,912,470,343. Operations for 2006 produced net income of $243,579,345. Nationwide Cash Management Company (NCMC) Nationwide Cash Management Company is a non-insurance, wholly owned subsidiary of Nationwide Mutual Insurance Company. NCMC is a stock corporation incorporated under the laws of the State of Ohio. The company acts in the capacity of an in-house money market fund through the purchase and sale of investment securities of a short-term nature as the agent for other corporations, foundations and insurance company separate accounts, including Nationwide Insurance Company of America. As of December 31, 2006, the unaudited financial statements of Nationwide Cash Management Company reported assets of $3,328,297,105, liabilities of $3,328,305,903 and shareholders’ equity (deficit) of $(8,798). Operations for 2006 produced net income of $0. 9 Allied Group, Inc. The Allied Group, Inc., represents the independent agency channel of the Nationwide Mutual Insurance Company. The Allied Group, Inc., is composed of various wholly owned subsidiaries, including AMCO Insurance Company, which provides reinsurance coverage for Nationwide Insurance Company of America products not covered by Nationwide Mutual Insurance Company. As of December 31, 2006, the audited financial statements of the Allied Group, Inc., reported assets of $1,467,979,000, liabilities of $612,669,000, and policyholder surplus of $855,310,000. Operations for 2006 produced a net loss of ($50,685,000). AMCO Insurance Company AMCO Insurance Company is a wholly owned subsidiary of the Allied Group, Inc., which was incorporated on December 31, 1958, in the State of Iowa. As of December 31, 2006, the audited financial statements of AMCO Insurance Company reported assets of $997,504,755, liabilities of $517,934,008, and surplus as regards policyholders of $479,570,747. Operations for 2006 produced net income of $22,582,113. Agreements with Affiliates Nationwide Insurance Company of America has the following affiliate agreements. Cost Sharing Agreement Nationwide Mutual Insurance Company provides various operational and administrative services to the company under an Amended & Restated Cost Sharing Agreement, effective July 1, 2002. Operational services provided under the agreement include functions associated with field acquisition, policy pricing and administration, data processing, accounting, actuarial and investment. Administrative services provided under the agreement include functions associated with payroll, benefits, investment management, legal and human resources. Costs associated with these services are allocated based on various standard cost accounting procedures which are in conformity with NAIC statutory accounting principles. Methods used to allocate costs to respective parties include special cost studies, individual time estimates, claim counts, policies in force, direct premium written or pro rata share. The agreement remains in effect until terminated by either party providing 90 days’ written notice. 10 Investment Agency Cost Allocation Agreement Nationwide Cash Management Company, a subsidiary of NMIC, acts as agent on behalf of Nationwide Insurance Company of America in handling the purchase and sale of shortterm securities under an Investment Agency Cost Allocation Agreement, effective November 14, 2002. Nationwide Cash Management Company’s authority as agent encompasses the purchase, sale or transfer of investments, collection and account credit of all dividends, interest and other investment income as well as the proceeds from the sale, redemption, or other disposition of investments and the maintenance of agent bank accounts to hold funds. The agreement may be terminated at the end of each business day by the company upon written notice to the agent and at any time by the agent upon 30 days’ written notice. Tax Sharing Agreement Nationwide Mutual Insurance Company provides consolidated federal income tax return filing to affiliates, including Nationwide Insurance Company of America, under a revised Tax Sharing Agreement, effective January 1, 2008. NMIC’s consolidated tax return preparation and filing responsibilities under the agreement include consolidated federal, state or local income tax return filing on behalf of the affiliates for eligible years, amended return filing, acting as agent for the affiliate in the event of any tax audit, administrative or judicial proceedings and retention of copies of all tax return related work papers. Subsidiary responsibilities under the Tax Sharing Agreement include payment to NMIC of an amount equal to the income tax liability attributable to such subsidiary within 90 days following the filing of group tax returns, payment to NMIC of tax liabilities which may be incurred related to estimated taxes, tax deficiencies, interest or penalties and providing information required in connection with tax return preparation. 11 V. REINSURANCE The company's major reinsurance agreements in force at the time of the examination are summarized below. The contracts contained proper insolvency provisions. Affiliated Ceding Contracts 1. Type: Reinsurer: Scope: 100% Quota Share Nationwide Mutual Insurance Company All business processed on the Nationwide’s Columbus, Ohio, based systems for the exclusive agency distribution channel 100% of all liabilities, net of existing reinsurance, under policies and contracts of insurance and reinsurance written subsequent to the date of this agreement 100%, net of existing reinsurance, of the liability for all claims sustained whether occurring before, on, or subsequent to the effective date of this agreement Premium: Effective date: Termination: 100% of net premium January 1, 2005 Agreement is entered into for an indefinite period, but may be cancelled at any time upon 90 days’ advance written notice 100% Quota Share AMCO Insurance Company Business processed on Nationwide’s Des Moines, Iowa, based systems for the exclusive agency distribution channel, independent agency distribution channel and the TIG Countrywide Insurance Company runoff 100% of all liabilities, net of existing reinsurance, under policies and contracts of insurance and reinsurance written subsequent to the date of this agreement 100%, net of existing reinsurance, of the liability for all claims sustained whether occurring before, on, or subsequent to the effective date of this agreement Premium: Effective date: Termination: 100% of net premium January 1, 2005 Agreement is entered into for an indefinite period, but may be cancelled at any time upon 90 days’ advance written notice Coverage: 2. Type: Reinsurer: Scope: Coverage: 12 VI. FINANCIAL DATA The following financial statements reflect the financial condition of the company as reported to the Commissioner of Insurance in the December 31, 2006, annual statement. Also included in this section are schedules that reflect the growth of the company, NAIC Insurance Regulatory Information System (IRIS) ratio results for the period under examination, and the compulsory and security surplus calculation. Adjustments made as a result of the examination are noted at the end of this section in the area captioned "Reconciliation of Surplus per Examination." 13 Nationwide Insurance Company of America Assets As of December 31, 2006 Net Admitted Assets $ 65,757,704 3,386,113 27,500 954,843 18,289,161 10,867,412 657,200 1,861,597 13,013,239 Assets Bonds Cash, cash equivalents, and short-term investments Receivables for securities Investment income due and accrued Reinsurance: Amounts recoverable from reinsurers Other amounts receivable under reinsurance contracts Current federal and foreign income tax recoverable and interest thereon Net deferred tax asset Receivable from parent, subsidiaries, and affiliates Write-ins for other than invested assets: Miscellaneous Total Assets $ 65,757,704 3,386,113 27,500 954,843 18,289,161 10,867,412 657,200 10,225,410 13,013,239 Nonadmitted Assets $ 8,363,813 161,472 $123,340,054 $8,363,813 161,472 $114,976,241 Nationwide Insurance Company of America Liabilities, Surplus, and Other Funds As of December 31, 2006 Ceded reinsurance premiums payable (net of ceding commissions) Total liabilities Common capital stock Gross paid in and contributed surplus Unassigned funds (surplus) Surplus as regards policyholders Total Liabilities and Surplus $ 3,375,000 74,591,382 3,586,859 81,553,241 $114,976,241 $ 33,423,000 33,423,000 14 Nationwide Insurance Company of America Summary of Operations For the Year 2006 Investment Income Net investment income earned Net realized capital losses Net investment gain Net income before dividends to policyholders and before federal and foreign income taxes Dividends to policyholders Net income after dividends to policyholders but before federal and foreign income taxes Federal and foreign income taxes incurred Net Income $4,442,491 (60,823) $4,381,668 4,381,668 0 4,381,668 (803,514) $5,185,182 15 Nationwide Insurance Company of America Cash Flow For the Year 2006 Premiums collected net of reinsurance Net investment income Miscellaneous income Total Benefit- and loss-related payments Federal and foreign income taxes (recovered) Total deductions Net cash from operations Proceeds from investments sold, matured, or repaid: Bonds Cost of investments acquired (long-term only): Bonds Miscellaneous applications Total investments acquired Net cash from investments Cash from financing and miscellaneous sources: Other cash applied Reconciliation: Net change in cash, cash equivalents, and short-term investments Cash, cash equivalents, and short-term investments: Beginning of year End of Year $ 33,423,000 4,623,104 10,867,412 48,913,516 $18,289,161 (1,151,138) 17,138,023 31,775,493 8,555,741 $14,708,043 27,500 14,735,543 (6,179,802) (35,166,315) (9,570,624) 12,956,737 $ 3,386,113 16 Nationwide Insurance Company of America Compulsory and Security Surplus Calculation December 31, 2006 Assets Less liabilities Adjusted surplus Compulsory surplus (subject to a minimum of $2 million) Compulsory Surplus Excess $114,976,241 33,423,000 81,553,241 2,000,000 $ 79,553,241 Adjusted surplus (from above) Security surplus: (140% of compulsory surplus, factor reduced 1% for each $33 million in premium written in excess of $10 million, with a minimum factor of 110%) Security Surplus Excess $ 81,553,241 2,800,000 $ 78,753,241 17 Nationwide Insurance Company of America Reconciliation and Analysis of Surplus For the Five-Year Period Ending December 31, 2006 The following schedule is a reconciliation of total surplus during the period under examination as reported by the company in its filed annual statements: 2006 Surplus, beginning of year Net income Change in net unrealized capital gains/losses Change in net deferred income tax Change in nonadmitted assets Write-ins for gains and (losses) in surplus Prior period deferred tax adjustment Rounding Surplus, end of year $76,306,552 5,185,182 39,980 (1,743,439) 1,764,966 2005 $71,764,343 4,770,626 (67,062) (1,816,944) 2,129,256 2004 $66,945,137 3,838,077 63,448 (1,827,422) 2,745,102 2003 $60,236,934 5,493,394 44,883 16,077,475 (14,907,548) 2002 $55,509,657 5,129,850 (166,663) (235,910) (473,667) 1 $81,553,241 $76,306,552 $71,764,343 (1) $66,945,137 $60,236,934 Nationwide Insurance Company of America Insurance Regulatory Information System For the Five-Year Period Ending December 31, 2006 The company’s NAIC Insurance Regulatory Information System (IRIS) results for the period under examination are summarized below. There were no exceptional IRIS ratios. Ratio #1 #2 #3 #4 #5 #6 #7 #8 #9 #10 #11 #12 #13 Gross Premium to Surplus Net Premium to Surplus Change in Net Premiums Written Surplus Aid to Surplus Two-Year Overall Operating Ratio Investment Yield Gross Change in Surplus Net Change in Adjusted Surplus (established in 2005) Liabilities to Liquid Assets Agents’ Balances to Surplus One-Year Reserve Development to Surplus Two-Year Reserve Development to Surplus Estimated Current Reserve Deficiency to Surplus 2006 494% 0 0 0 0 6.4 7 7 48 0 0 0 0 2005 254% 0 0 0 0 5.2 6 6 0 0 0 0 0 2004 63% 0 0 0 0 5.6 7 2003 2% 0 0 0 0 5.8 11 2002 2% 0 0 0 0 5.8 9 9 0 0 0 0 9 0 0 0 0 10 0 0 0 0 The zero IRIS ratio results reflect the impact of the company’s 100% quota share contracts with no Nationwide Pool sharing. 18 Growth of Nationwide Insurance Company of America Surplus As Regards Policyholders $81,553,241 76,306,552 71,764,343 66,945,137 60,236,934 55,509,657 Loss and LAE Ratio 0.0% 0.0 0.0 0.0 0.0 0.0 Year 2006 2005 2004 2003 2002 2001 Admitted Assets $114,976,241 76,440,459 78,242,646 73,426,257 66,762,071 62,177,191 Gross Premium Written Net Premium Written $0 0 0 0 0 0 Liabilities $33,423,000 133,904 6,478,302 6,481,119 6,525,137 6,667,534 Net Income $5,185,182 4,770,626 3,838,077 5,493,394 5,129,850 4,087,499 Year 2006 2005 2004 2003 2002 2001 Premium Earned $0 0 0 0 0 0 Expense Ratio 0.0% 0.0 0.0 0.0 0.0 0.0 Combined Ratio 0.0% 0.0 0.0 0.0 0.0 0.0 $403,105,783 193,739,146 45,458,412 1,547,161 1,490,924 45,476,220 The admitted assets increase in 2006 is attributed to reclassification of reinsurance balances from the intercompany account for statement reporting under SSAP No. 62 as follows: • • Paid losses of $18.3 million were reclassified as Amounts Recoverable From Reinsurers Underwriting expenses of $10.9 million were reclassified as Other Amounts Receivable The decrease in total liabilities in 2005 is attributed to a $6.4 million quota share settlement, whereby the company assumed activity from TIG Insurance. The increase in total liabilities in 2006 is attributed to the balance sheet reclassification of ceded reinsurance payable balances of $33.4 million from the intercompany account in accordance with SSAP No. 62. The increasing trend in gross premium written is attributed to business growth generated based on several initiatives. Nationwide Insurance Company of America’s parent, Allied, has embarked on an aggressive plan to increase their market share in all existing states as well as entry into four new states. Nationwide Mutual Insurance Company, parent company to Allied, also contributed to this gross premium written increase through entry into various states using Allied paper and their exclusive channels. Net premium written, premium earned and loss ratios of zero reflect the company’s 100% quota share contracts with no Nationwide pool sharing. 19 Reconciliation of Surplus per Examination There were no adjustments to surplus or reclassifications as a result of this examination. The amount of surplus reported by the company as of December 31, 2006, is accepted. 20 VII. SUMMARY OF EXAMINATION RESULTS Compliance with Prior Examination Report Recommendations There was one specific comment and recommendation in the previous examination report. Comments and recommendations contained in the last examination report and actions taken by the company are as follows: 1. Affiliated Agreements—It is recommended that the company submit all affiliated agreements before implementation, pursuant to s. Ins 40.02 (2) Wis. Adm. Code. Action—Compliance. 21 Summary of Current Examination Results This section contains comments and elaboration on the areas where adverse findings were noted or where unusual situations existed. Comment on the remaining areas of the company’s operations is contained in the examination work papers. Shareholder and Board of Directors’ Actions Without a Meeting Nationwide Insurance Company of America bylaw compliance with the intention of formal shareholder and board of directors’ meeting requirements was not evidenced based on the following observations and review of shareholder and board of directors’ meeting compliance with applicable bylaw provisions. Nationwide Insurance Company of America shareholder and board of directors’ minutes reflected a standard practice of issuing “Shareholder and Board of Directors’ Actions in Writing Without a Meeting” during the examination period. Bylaw Article I – Section 2 states that “regular annual meetings of the shareholders shall be held on the first Thursday of April in Columbus, Ohio or at any special meeting of shareholders called.” Bylaw Article II – Section 6 states that “unless otherwise restricted by the articles of incorporation and bylaws, any action required to be taken by the board of directors may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to such action; provided action by written consent be filed with minutes of the proceedings of the board and that any action without a meeting of the board shall be limited to those situations where time is of the essence and not in lieu of a regularly scheduled meeting.” The intent of the company’s bylaws appears to limit shareholder and board actions without a formal meeting to special circumstances requiring prompt action. It is recommended that the company comply with the intention of formal bylaw meeting requirements or amend its bylaws to clarify that ”Action by Unanimous Written Consent Without a Meeting” is an acceptable alternative for all shareholder and board of directors’ meetings. 22 Bylaw Amendment Filing Review of Nationwide Insurance Company of America bylaw amendments since the prior examination indicated that the company did not file changes within 60 days of such change, pursuant to s. 611.12 (4), Wis. Stat., based on the following company documentation and correspondence with T. Barnes, Vice President and Assistant Secretary. Bylaws were amended on May 26, 2005, to change the title of General Counsel to Chief Legal and Governance Officer. Notification was not provided to Wisconsin’s Office of Commissioner of Insurance due to apparent oversight by the corporate secretary. Revised bylaws were subsequently filed with this office on August 8, 2006. The company’s prior recommendation follow-up comments indicated that the Office of Corporate Governance procedures have been enhanced going forward to provide a duplicate check for updates which occurred in the preceding month to ensure appropriate filings have been made. Although the above change is generally non-substantive in nature, compliance with control procedures is essential to ensure timely regulatory notification of bylaw changes and the opportunity to voice concerns. It is recommended that the company file amendments to its bylaws within 60 days of such changes, pursuant to s. 611.12 (4) Wis. Stat. Board of Directors’ Oversight Board of directors’ minutes did not consistently document oversight as it relates to various management-oriented transactions since the prior examination. Investment transaction approval was not evidenced for the period of 2002 through 2006 with the exception of several quarterly approvals in 2003. Subsidiary boards formerly approved investment transactions by resolution. This process was apparently changed in 2003 whereby a memo with the investment summaries is sent to each board of directors with no action required. Board of directors’ minutes review also noted that external auditor appointment was not evidenced for 2002. Section 611.51 (6), Wis. Stat., states, in part, that the board shall manage the business and affairs of the corporation and may not delegate its power or responsibilities to do so. 23 It is recommended that the minutes of the board of directors demonstrate more complete oversight as it relates to annual acknowledgment and acceptance of summary reports of investment transactions as well as auditor appointment. Intercompany Settlement Intercompany settlement procedure review noted that intercompany accounts are reciprocal accounts set up on two or more Nationwide business units for the recognition of transactions which should offset each other. These intercompany accounts are reconciled for each combination of business unit and affiliate. The majority of intercompany transactions are cleared through a cash settlement entry generated by either a wire transfer or book entry. Intercompany account settlements should typically be completed on a monthly basis under the company’s own standards. The intercompany account settlement process also incorporates the settlement for affiliate-related reinsurance receivable and payable balances associated with the company’s 100% quota share contract with Nationwide Mutual Insurance Company. The reinsurance balances are reclassified at quarter-end for annual statement reporting purposes. Nationwide examination work papers indicated that intercompany reconciliation problems existed as of December 31, 2006, related to general ledger system interface conversion issues and timing differences, resulting in various write-offs. Further examination request and review of Wisconsin-domiciled company documentation supporting the December 31, 2006, intercompany account balance breakdown and settlement, incorporating affiliate-related reinsurance balances, was performed. Settlement documentation review indicated that Nationwide Insurance Company of America intercompany balances as of December 31, 2006, were subsequently settled on January 30, 2007, and March 16, 2007. Company follow-up attributed the above timing difference of items not settled on a monthly basis in January 2007 to out-of-balance conditions between companies. Company follow-up also indicated that the above system conversion and interface issues have continued to be worked on during 2007 with process improvements. 24 It is recommended that intercompany settlement, which also incorporates affiliated reinsurance account settlement, be completed on a monthly basis going forward to provide for timely settlement and minimize potential write-offs. Custody Agreement Compliance with NAIC Guidelines The company’s custodial agreement with the Bank of New York, as of the examination date, did not incorporate requirements for prompt indemnification in the event of lost or stolen securities as well as compliance with other NAIC guideline requirements outlined in the Examiners Handbook, based on custodial agreement review. Custodial agreement follow-up with the company evidenced an “Amendment and Supplement to the Custody Agreement” as of November 29, 2007, addressing various guidelines, including the custodian’s obligation to: • Indemnify the insurance company for any loss of securities under custody occasioned by the negligence or dishonesty of the custodian’s employees, or burglary, robbery, holdup, theft, or mysterious disappearance, including loss by damage or destruction Provide prompt security replacement, or the value thereof, resulting from loss of securities Identify ownership of securities held under custody on the custodian’s official records Register securities held in register form in the name of the customer or nominee Provide affidavits with respect to securities held upon written request from a regulator Allow the customer or its representative right to examine the custodian’s records Provide written notification of termination or withdrawal to the insurer’s domiciliary commissioner within three business days Maintain records sufficient to determine and verify information relied upon by the insurance company in the preparation of its annual statement Maintain adequate insurance protection • • • • • • • • Accordingly, no further current examination recommendation is being made based on the Custodial Agreement Amendment and Supplement update completed subsequent to the examination date. 25 VIII. CONCLUSION Nationwide Insurance Company of America reported admitted assets of $114,976,241, liabilities of $33,423,000 and surplus as regards policyholders of $81,553,241. The company cedes 100% of its business to Nationwide Mutual Insurance Company, either directly for products covered by its ultimate parent or indirectly through AMCO Insurance for products not covered by its parent. AMCO Insurance is a subsidiary of the company’s parent, Allied Group, Inc. Admitted asset and liability growth was primarily attributed to accounting changes implemented in the third quarter of 2006, which reclassified reinsurance receivable and payable balances previously netted in the intercompany account. The increasing trend in gross premium written is attributed to business growth generated from aggressive plans to increase market share in all existing and new states. Current examination recommendations were limited and primarily related to management and control issues associated with: • Shareholder and board of directors’ meeting compliance with the intent of bylaws or bylaw amendment to clarify that “Action by Unanimous Consent Without a Meeting” is an acceptable alternative for all meetings Bylaw amendment filing on a timely basis Board of directors’ oversight as it relates to consistent evidence of acknowledgement and approval of investment transactions and CPA appointment approval Intercompany settlement on a monthly basis to provide for timely settlement and minimize potential write-offs • • • 26 IX. SUMMARY OF COMMENTS AND RECOMMENDATIONS 1. Page 22 - Shareholder and Board of Directors’ Actions Without a Meeting—It is recommended that the company comply with the intention of formal bylaw meeting requirements or amend its bylaws to clarify that ”Action by Unanimous Written Consent Without a Meeting” is an acceptable alternative for all shareholder and board of directors’ meetings. Page 23 - Bylaw Amendment Filing—It is recommended that the company file amendments to its bylaws within 60 days of such changes, pursuant to s. 611.12 (4) Wis. Stat. Page 24 - Board of Directors’ Oversight—It is recommended that the minutes of the board of directors demonstrate more complete oversight as it relates to annual acknowledgment and acceptance of summary reports of investment transactions as well as auditor appointment. Page 25 - Intercompany Settlement—It is recommended that intercompany settlement, which also incorporates affiliated reinsurance account settlement, be completed on a monthly basis going forward to provide for timely settlement and minimize potential write-offs. 2. 3. 4. 27 X. ACKNOWLEDGMENT The courtesy and cooperation extended during the course of the examination by the officers and employees of the company are acknowledged. In addition to the undersigned, the following representatives of the Office of the Commissioner of Insurance, State of Wisconsin, participated in the examination: Name Fred Thornton Randy Milquet Title Financial Examiner - Advanced Financial Examiner - Advanced Respectfully submitted, Tom M. Janke Examiner-in-Charge 28