Rural Mutual Insurance Company by WinstonVenable

VIEWS: 195 PAGES: 34

									           Report

            of the

        Examination of

Rural Mutual Insurance Company

      Madison, Wisconsin

   As of December 31, 2004
                                                 TABLE OF CONTENTS


                                                                                                                                  Page

   I. INTRODUCTION .................................................................................................................... 1

   II. HISTORY AND PLAN OF OPERATION ................................................................................ 3

  III. MANAGEMENT AND CONTROL .......................................................................................... 5

 IV. AFFILIATED COMPANIES .................................................................................................... 7

  V. REINSURANCE ................................................................................................................... 10

 VI. FINANCIAL DATA ................................................................................................................ 16

VII. SUMMARY OF EXAMINATION RESULTS ......................................................................... 25

VIII. CONCLUSION...................................................................................................................... 30

 IX. SUMMARY OF COMMENTS AND RECOMMENDATIONS................................................ 31

  X. ACKNOWLEDGMENT ......................................................................................................... 32
                         State of Wisconsin / OFFICE OF THE COMMISSIONER OF INSURANCE
                                                                                               125 South Webster Street • P.O. Box 7873
Jim Doyle, Governor                                                                                      Madison, Wisconsin 53707-7873
Jorge Gomez, Commissioner                                                                    Phone: (608) 266-3585 • Fax: (608) 266-9935
                                                             January 27, 2006                          E-Mail: information@oci.state.wi.us
Wisconsin.gov                                                                                                     Web Address: oci.wi.gov




                Honorable Jorge Gomez
                Commissioner of Insurance
                State of Wisconsin
                125 South Webster Street
                Madison, Wisconsin 53702



                Commissioner:

                             In accordance with your instructions, a compliance examination has been made of

                the affairs and financial condition of:

                                             RURAL MUTUAL INSURANCE COMPANY
                                                     Madison, Wisconsin

                and this report is respectfully submitted.



                                                          I. INTRODUCTION

                             The previous examination of Rural Mutual Insurance Company (the company or

                RMIC) was conducted in 2000 as of December 31, 1999. The current examination covered the

                intervening period ending December 31, 2004, and included a review of such 2005 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
            Emphasis was placed on the audit of those areas of the company's operations

accorded a high priority by the examiner-in-charge when planning the examination. Special

attention was given to the action taken by the company to satisfy the recommendations and

comments made in the previous examination report.

            The section of this report titled "Summary of Examination Results” contains

comments and elaboration on those 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.

            The company is annually audited by an independent public accounting firm as

prescribed by s. Ins 50.05, Wis. Adm. Code. An integral part of this compliance examination was

the review of the independent accountant's work papers. Based on the results of the review of

these work papers, alternative or additional examination steps deemed necessary for the

completion of this examination were performed. The examination work papers contain

documentation with respect to the alternative or additional examination steps performed during

the course of the examination.

Independent Actuary's Review

            An independent actuarial firm was engaged under a contract with the Office of the

Commissioner of Insurance. The actuary reviewed the adequacy of the company’s loss and loss

adjustment expense reserves. The actuary’s results were reported to the examiner-in-charge.

As deemed appropriate, reference is made in this report to the actuary’s conclusion.




                                                2
                             II. HISTORY AND PLAN OF OPERATION

             The company was organized in 1934, as the Farm Bureau Mutual Insurance

Company of Wisconsin. In 1947 the name was changed to Rural Mutual Casualty Insurance

Company of Wisconsin. The Rural Mutual Fire Insurance Company was incorporated in 1947. In

July 1957 it was merged with Rural Mutual Casualty Insurance Company of Wisconsin to form

Rural Mutual Insurance Company. Rural Casualty Insurance Company was incorporated in

September 1961 and was merged into Rural Mutual Insurance Company in 1970.

             RMIC limits its direct business to the state of Wisconsin. In 2004 direct premiums

written were $138,127,499. The company is exposed to some risk outside of Wisconsin, on a net

basis, through reinsurance pools that are currently in run-off. The company does have a

certificate of authority in Illinois, but has not written any direct business in that state. The Illinois

Certificate of Authority was obtained in order to enable the company to file Uniform Motor Carrier

Certificate of Insurance forms for insureds that travel into Illinois.

             The major products marketed by the company include commercial multiple peril,

farmowners, worker’s compensation, and private passenger auto. The products are marketed

through a system of agents, and five agency managers (who are RMIC employees). For the first

three years agents are considered employees of the company. After that, an agent’s status

changes to an independent contractor, authorized through contract to handle RMIC products and

products of other RMIC “approved” companies. Examples of these “approved” companies and

the lines of business marketed include Farm Bureau Life Insurance Company for life insurance,

Blue Cross Blue Shield United of Wisconsin Insurance Company for health insurance and

Dairyland Insurance Company for nonstandard auto coverage. As of December 31, 2004, there

were 161 agents.




                                                    3
            The following table is a summary of the net insurance premiums written by the

company in 2004. The growth of the company is discussed in the “Financial Data” section of this

report.

                                 Direct       Reinsurance       Reinsurance           Net
 Line of Business               Premium        Assumed             Ceded            Premium

Allied lines                $    2,528,668      $786,446        $    978,027    $    2,337,087
Farmowners multiple
  peril                         31,586,514                          7,828,526       23,757,988
Homeowners multiple
  peril                         13,123,075                          3,144,616        9,978,459
Commercial multiple
  peril                         17,685,926                          4,184,647       13,501,279
Other accident and
  health                           643,836                                             643,836
Worker’s compensation           21,155,854                          4,465,862       16,689,992
Private passenger auto
  liability                     20,643,044                          4,146,669       16,496,375
Commercial auto liability        5,828,950         48,087           1,148,775        4,728,262
Auto physical damage            24,931,632                            770,195       24,161,437
Reinsurance -
  non-proportional
  assumed property                                 70,914                               70,914

Total All Lines             $138,127,499        $905,447        $26,667,317      $112,365,629




                                               4
                              III. MANAGEMENT AND CONTROL

Board of Directors

            The board of directors consists of nine members. Three directors are elected

annually to serve a three-year term. 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 associated group. The board members currently receive $150 per day for the president

and first vice president and $80 per day for the other board members for attending board

meetings. Board members also receive $.25 per mile, up to a maximum of $50 per day, for

traveling to and from meetings.

            Currently the board of directors consists of the following persons:

Name and Residence                       Principal Occupation                      Term Expires

William C. Bruins                 Farmer and President                                     2006
Waupun, WI                        of the WI Farm Bureau Federation

Dave E. Daniels                   Farmer                                                   2006
Union Grove, WI

Richard L. Gorder                 Farmer                                                   2006
Mineral Point, WI

James A. Holte                    Farmer                                                   2007
Elk Mound, WI

Donald D. Radtke                  Farmer                                                   2007
Merrill, WI

Wayne L. Staidl                   Farmer                                                   2007
Peshtigo, WI

Gerald J. Bradley                 Farmer                                                   2008
Sun Prairie, WI

Lloyd R. DeRuyter                 Farmer                                                   2008
Cedar Grove, WI

F. Gary Steiner                   Farmer                                                   2008
Mondovi, WI




                                                 5
Officers of the Company

           The officers serving at the time of this examination are as follows:

                                                                                     2005
     Name                         Office                                          Compensation

William C. Bruins *        President                                                 $ 72,356
Richard L. Gorder **       First Vice President                                         1,350
Roger A. Cliff *           Secretary                                                  129,423
Peter J. Pelizza***        Executive Vice President and CEO                           290,338
David G. Diercks           Vice President-Legal and Strategic Alliances               229,400
                               and Treasurer
Todd D. Argall             Vice President-Information Systems                         202,570
Rylan W. Falkenstein       Vice President-Claims                                      132,413
Michael J. Ruder           Vice President-Underwriting                                133,711
Linda B. Schopen           Vice President-Sales and Marketing                         199,152
Mary S. Vena               Vice President-Finance and Assistant Secretary             224,928

  * Individual is compensated by the Wisconsin Farm Service Board Inc.
 ** Individual is compensated at a rate of $150 per meeting attended.
*** Elected to office on September 13, 2005, previously Vice President-Marketing &
Underwriting.

Committees of the Board

           There were no formal committees of the board at the time of this examination.




                                                6
                                   IV. AFFILIATED COMPANIES

             RMIC is associated with the Wisconsin Farm Bureau Federation, Cooperative,

(WFBF) group of companies. Each director for the company also serves as a member of the

WFBF board of directors. In addition, membership in the WFBF is required in order to purchase

farmowner, crop hail, or auto coverages from RMIC. The relationship between RMIC and WFBF

is further discussed in the section entitled “Summary of Current Examination Results.”

             The organizational chart below depicts the relationships among the affiliates in the

group. A brief description of the significant affiliates follows the organizational chart.

                                      Organizational Chart
                                     As of December 31, 2004


    Rural Mutual Insurance                    Wisconsin Farm                   WFBF Cooperative
    Company                                   Service Board Inc.




    Statewide Services Inc.




Wisconsin Farm Bureau Federation, Cooperative

             Wisconsin Farm Bureau Federation, Cooperative, is referred to as the parent

company of the Farm Bureau Organization. WFBF is an organization run by farmers to work with

political parties and government agencies to communicate farmers’ views on issues affecting the

agricultural community. In addition to insurance, WFBF also has associations with companies in

the farm services businesses.

             WFBF was organized on May 27, 1920, and incorporated in December of that year

as a nonstock, nonprofit cooperative. WFBF is financed and controlled by its members, who

elect a board of directors consisting of 11 members. There are 61 County Farm Bureaus

affiliated with the WFBF. The cooperative’s fiscal year is from November 1 to October 31. As of

October 31, 2005, the audited financial statements of WFBF reported assets of $2,242,613,




                                                   7
liabilities of $569,888, and net worth, of $1,672,725. Operations for 2004 produced net income of

$8,458.

Wisconsin Farm Service Board, Inc.

            The Wisconsin Farm Service Board, Inc., (WFSB) was incorporated on March 8,

1943. It is a not-for-profit service corporation. WFSB exists to coordinate the activities of all the

other WFBF-associated companies. By agreement, WFSB reviews all proposals submitted to it

by RMIC’s management and makes recommendations on those proposals to RMIC’s board of

directors. Membership of the WFSB includes officers of the WFBF-associated companies and is

composed of William Bruins, Richard Gorder, Roger Cliff, and Dale Peterson (who is WFBF’s

outside counsel). WFSB receives management fees from WFBF-affiliated companies and

royalties from some other insurance companies that write products endorsed by the WFBF for

Farm Bureau members.

Statewide Services, Inc.

            Statewide Services, Inc., (SSI) was incorporated in April of 1973 to provide

brokerage services for RMIC by placing business written by RMIC agents with outside insurers

as necessary, and to place business for the WFBF and its affiliates with RMIC when possible and

with outside companies as necessary. SSI is 100% owned by RMIC. The board of directors

consists of nine directors, all of whom are members of both the WFBF board of directors and

RMIC’s board of directors.

            As of December 31, 2004, the financial statements of Statewide Services, Inc.,

reported assets of $415,827, liabilities of $370,654, and stockholders’ equity of $45,173.

Operations for 2004 produced net income of $40,923.

Agreements with Affiliates

            A services agreement exists between RMIC and WFSB. The purpose of the

agreement is to coordinate the activities of RMIC with the other companies related to WFBF.

Similar agreements exist between WFSB and the other WFBF-affiliated companies. The

agreement requires RMIC to employ WFSB to provide coordination services and to pay WFSB a




                                                  8
“reasonable compensation for the services rendered.” WFSB does not have the authority to

make the final decisions affecting RMIC unless specifically authorized by RMIC’s board.

               An operational agreement between RMIC and SSI provides for RMIC to furnish the

services of employees and operating expenses for SSI. The company’s compensation for

providing these services is 80% of all net retained commissions of SSI. A consolidated income

tax return agreement is also in effect for the purpose of establishing an equitable distribution of

the tax savings resultant from filing consolidated returns. Both agreements between RMIC and

SSI are effective until either amended or terminated by the parties.

               A royalty agreement exists between RMIC and WFBF which permits RMIC to

exclusively use the “Farm Bureau” name or “FB” logo in Wisconsin for marketing property and

casualty insurance in exchange for an annual royalty payment to WFBF. This agreement

between RMIC and WFBF is effective until amended or terminated by the mutual agreement of

the parties.




                                                  9
                                        V. REINSURANCE

              The company's reinsurance portfolio and strategy is described below. A list of the

companies that have a significant amount of reinsurance in force at the time of the examination

follows. The contracts contained proper insolvency provisions. Excess of loss coverages are

ceded to multiple reinsurance companies through a broker. Compliance with the Reinsurance

Intermediary Act was noted. In addition, RMIC assumes reinsurance for crop hail through a

mandatory pool in order to obtain crop hail coverage from AAIC.

Nonaffiliated Ceding Contracts

1.   Type:                        Multiple Line Excess of Loss

     Reinsurer:                   GE Reinsurance Corporation                                 40%
                                  Motors Insurance Corporation through GMAC RE               35
                                  Platinum Underwriters Reinsurance Inc.                     25
                                                                                            100%
     Scope:                       All property and casualty business except crop hail and
                                  automobile physical damage

     Retention:                   Property business: $250,000
                                  Casualty business: $300,000

     Coverage:                    First Layer:
                                  Property business: $250,000 excess of $250,000 each risk
                                  subject to $750,000 per occurrence
                                  Casualty business: $200,000 excess of $300,000 each
                                  occurrence and/or claim made and in aggregate where
                                  applicable per policy

                                  Second Layer:
                                  Property business: $1,500,000 excess of $500,000 each risk
                                  subject to $4,500,000 per occurrence
                                  Casualty business: $1,500,000 excess of $500,000 each
                                  occurrence and/or claim made and in aggregate where
                                  applicable per policy

                                  Third Layer:
                                  Property business: $3,000,000 excess of $2,000,000 each risk
                                  subject to $6,000,000 per occurrence
                                  Casualty business: $3,000,000 excess of $2,000,000 each
                                  occurrence and/or claim made and in aggregate where
                                  applicable per policy

                                  Fourth Layer:
                                  Property business: $2,500,000 excess of $5,000,000 each risk
                                  subject to $5,000,000 per occurrence
                                  Casualty business: $5,000,000 excess of $5,000,000 each
                                  occurrence and/or claim made and in aggregate where
                                  applicable per policy




                                                 10
     Premium:            First Layer:
                         Annual deposit premium of $4,600,000 (net of ceding
                         commission) to be adjusted against 6% (gross rate) of net
                         earned premium; minimum premium of $3,686,000

                         Second Layer:
                         Annual deposit premium of $5,480,000 (net of ceding
                         commission) to be adjusted against 7.15% (gross rate) of net
                         earned premium; minimum premium of $4,384,000

                         Third Layer:
                         Annual deposit premium of $1,035,000 (net of ceding
                         commission) to be adjusted against 1.35% (gross rate) of net
                         earned premium; minimum premium of $828,000

                         Fourth Layer:
                         Annual deposit premium of $690,000 (net of ceding commission)
                         to be adjusted against .9% (gross rate) of net earned premium;
                         minimum premium of $552,000

     Commission:         Flat rate of 30% on each layer

     Profit commission   First Layer:
                         35% of net profit; 20% reinsurance charge

     Effective date:     January 1, 2005

     Termination:        January 1, 2006, or by giving 30 days’ prior written notice upon
                         the happening of special circumstances as defined in the
                         contract

2.   Type:               Worker’s Compensation Excess of Loss

     Reinsurer:          Midwest Employers Casualty Company

     Scope:              All business classified by the company as worker’s
                         compensation and employers liability

     Retention:          $10,000,000

     Coverage:           $5,000,000 ultimate net loss each occurrence excess of
                         $10,000,000 ultimate net loss each occurrence
                         Employers liability limited to $1,000,000 on underlying policies

     Premium:            Minimum and deposit premium of $250,000 payable in equal
                         installments in advance; to be adjusted at agreement expiration
                         against 1.19% of net earned premium for classes of business as
                         specified

     Effective date:     January 1, 2005

     Termination:        January 1, 2006, or by giving 30 days’ prior written notice upon
                         the happening of special circumstances as defined in the
                         contract




                                        11
3.   Type:             Multi-line Aggregate Stop Loss

     Reinsurer:        Hannover Re

     Scope:            All property and casualty business except crop hail

     Retention:        January 1, 2005, to January 1, 2006 (Experience Period 1):
                       Losses plus DCC expenses (losses) until aggregate loss ratio
                       reaches 67.5%
                       January 1, 2006, to January 1, 2007, (Experience Period 2) and
                       January 1, 2007, to January 1, 2008 (Experience Period 3):
                       Losses until aggregate ratio exceeds 77.5%

     Coverage:         Experience Period 1: Losses when aggregate loss ratio exceeds
                       67.5% up to 7.5% loss ratio and a maximum of $9,000,000
                       Experience Periods 2 and 3: Losses when aggregate loss ratio
                       exceeds 77.5% up to a 10% loss ratio and a maximum of
                       $12,000,000
                       An aggregate limit of $24,000,000 over all experience periods

     Premium:          Experience Period 1: 2.8% of subject net earned premium
                       subject to a minimum of $3,250,000 and a maximum of
                       $4,250,000
                       Experience Periods 2 and 3: 4% of subject net earned premium
                       subject to a minimum of $4,500,000 and a maximum of
                       $5,500,000
                       An additional premium equal to 35% of ceded incurred losses in
                       excess of $17,000,000

     Effective date:   January 1, 2005

     Termination:      January 1, 2008, or at any January 1 by mutual consent of the
                       parties

4.   Type:             Property and Auto Catastrophe

     Reinsurer:        American Agricultural Insurance Company

     Scope:            All property except crop hail

     Retention:        $1,250,000, (optional auto only retention $250,000) plus 5% of
                       ultimate net losses in excess of retention up to $10,526,315 per
                       occurrence and an aggregate limit of 5% of $31,578,945

     Coverage:         95% of ultimate net losses in excess of company’s retention up
                       to $10,526,315 per occurrence and an aggregate limit of
                       $31,578,945

     Premium:          5.033% of net earned premiums for the applicable lines of
                       business; minimum premium of $1,520,000

     Effective date:   January 1, 2005

     Termination:      By the reinsurer, within 30 days of the receipt of notice of a
                       change in the ownership, management, or control of RMIC




                                      12
5.   Type:                     Aggregate Property Catastrophe Excess of Loss

     Reinsurer:                Parkwood Reinsurance Company Ltd.                      90%
                               American Agricultural Insurance Company                10
                                                                                     100%

     Scope:                    All property and casualty business except crop hail

     Retention:                $3,000,000 of subject losses
                               Subject losses are the sum of:
                               (1) Ultimate net loss for each occurrence between $500,000 and
                               $1,250,000
                               (2) Ultimate net loss in excess of the $31,578,948 of the
                               company’s property and auto occurrence catastrophe
                               reinsurance program
                               (3) Ultimate net loss for each loss occurrence between
                               $1,250,000 and $31,578,948 but only if the company has
                               exhausted all reinstatements of limits under its property and auto
                               catastrophe reinsurance program

     Coverage:                 $1,500,000 aggregate limit

     Premium:                  $500,000

     Effective date:           January 1, 2005

     Termination:              December 31, 2005

6.   Type:                     Proportional Excess of Loss

     Reinsurer:                American Agricultural Insurance Company

     Scope:                    Crop hail

     Retention and Coverage:   RMIC will be reimbursed on a proportional basis for the amount
                               of ultimate net loss on any one risk subject to the different
                               cession percentages for each layer as follows:

                               Layer                        Limit         Retention      Cession

                               Basic                  $ 500,000              25%             75%
                               1st Surplus             1,500,000             10              90
                               2nd Surplus             2,500,000              0             100
                               3rd Surplus             4,000,000              0             100

     Premium:                  Premiums are calculated using a formula which factors in the
                               anticipated loss ratio, experience factor, and profit and expense
                               load

     Effective date:           January 1, 2005

     Termination:              At the end of any calendar year by either party with written notice
                               60 days prior to year-end to the other by certified or registered
                               mail




                                              13
7.   Type:                  Aggregate Excess of Loss

     Reinsurer:             American Agricultural Insurance Company

     Scope:                 Crop hail

     Retention:             200% of retained loss costs (estimated to be $286,734)

     Coverage:              100% of losses in excess of the company’s retention up to 180%
                            of retained loss costs

     Premium:               At the beginning of the coverage year AAIC will calculate an
                            estimated retained loss cost which is multiplied by 5.15% to
                            obtain an estimated annual premium. The final annual premium
                            is computed March 31 in the subsequent year. A deposit
                            premium of $13,300 is required

     Effective date:        January 1, 2005

     Termination:           At the end of any calendar year by either party with written notice
                            90 days prior to year-end to the other by certified or registered
                            mail

Nonaffiliated Assuming Contracts

1.   Type:                  Proportional Crop Hail Pool

     Reinsured:             American Agricultural Insurance Company

     Scope:                 Crop hail

     Coverage:              Rural assumes 6.35% of the quota share pool, 2% of the first,
                            second, and third surplus shares of the proportional crop hail
                            pools, and 4% of the first surplus share of the Special Illinois
                            Pool. Coverage is 100% above a 150% loss ratio retention

     Premium:               Pro rata share of subject pool premiums based on the above
                            participation percentage subject to a 1.5% service fee

     Effective date:        January 1, 2005

     Termination:           At the end of any calendar year by either party with written notice
                            60 days prior to year-end to the other by certified or registered
                            mail

2.   Type:                  Aggregate Excess Crop Hail Pool

     Reinsured:             American Agricultural Insurance Company

     Scope:                 Crop hail

     Coverage:              4% of the aggregate excess crop hail pool experience. 3% of
                            each of the first and second layer of the Illinois crop hail pool
                            experience




                                           14
Premium:          Pro rata share of subject pool premiums based on the above
                  participation percentage subject to a 2% service fee

Effective date:   January 1, 2005

Termination:      At the end of any calendar year by either party with written notice
                  60 days prior to year-end to the other by certified or registered
                  mail




                                 15
                                      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, 2004, 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."




                                                16
                             Rural Mutual Insurance Company
                                          Assets
                                 As of December 31, 2004

                                                                            Net
                                                        Nonadmitted       Admitted
                                           Assets         Assets           Assets

Bonds                                   $147,070,719     $              $147,070,719
Stocks:
  Common stocks                            8,317,041                       8,317,041
Mortgage loans on real estate:
  First liens                               305,426                         305,426
Real estate:
  Occupied by the company                    206,945                         206,945
Cash                                       3,380,851                       3,380,851
Short-term investments                     3,529,121                       3,529,121
Receivable for securities                     61,500                          61,500
Investment income due and accrued          2,052,970                       2,052,970
Premiums and considerations:
  Uncollected premiums and agents'
    balances in course of collection       6,371,931          558,738      5,813,193
  Deferred premiums, agents'
    balances, and installments booked
    but deferred and not yet due          25,322,593           19,777     25,302,816
Reinsurance:
  Amounts recoverable from reinsurers      1,371,012                       1,371,012
Net deferred tax asset                     5,492,575          330,725      5,161,850
Electronic data processing equipment
  and software                              287,949                         287,949
Furniture and equipment, including
  health care delivery assets                  60,258          60,258
Receivable from parent, subsidiaries,
  and affiliates                            151,112                         151,112
Other assets nonadmitted:                    70,743            70,743
Write-ins for other than invested
  assets:
  Accounts receivable-other                 629,588           357,958       271,630
  Contingent commissions                     95,700                          95,700

Total Assets                            $204,778,034    $1,398,199      $203,379,835




                                          17
                              Rural Mutual Insurance Company
                            Liabilities, Surplus, and Other Funds
                                   As of December 31, 2004

Losses                                                                   $ 57,210,481
Loss adjustment expenses                                                    8,742,310
Commissions payable, contingent commissions, and
  other similar charges                                                     1,599,938
Other expenses (excluding taxes, licenses, and fees)                        2,126,924
Taxes, licenses, and fees (excluding federal and
  foreign income taxes)                                                     1,625,403
Current federal and foreign income taxes                                    1,562,283
Unearned premiums                                                          52,130,723
Advance premium                                                             5,363,241
Dividends declared and unpaid:
   Policyholders                                                             681,969
Ceded reinsurance premiums payable (net of ceding
  commissions)                                                              3,345,103
Amounts withheld or retained by company for account
  of others                                                                  136,683
Remittances and items not allocated                                          136,564
Payable to parent, subsidiaries, and affiliates                               16,221
Write-ins for liabilities:
   Reserve for agent’s retirement                                           4,879,784
   Escheat payable                                                            359,077
   Non-expense payable                                                            173

Total Liabilities                                                         139,916,877

Write-ins for other than special surplus funds:
  Deposit for policyholders                                $ 1,500,000
Unassigned funds (surplus)                                  61,962,958

Surplus as regards policyholders                                           63,462,958

Total Liabilities and Surplus                                            $203,379,835




                                                  18
                                Rural Mutual Insurance Company
                                    Summary of Operations
                                       For the Year 2004

Underwriting Income
Premiums earned                                                               $109,998,709

Deductions:
   Losses incurred                                          $55,733,780
   Loss expenses incurred                                     7,876,969
   Other underwriting expenses incurred                      30,700,600
Total underwriting deductions                                                   94,311,349
Net underwriting gain or (loss)                                                 15,687,360

Investment Income
Net investment income earned                                     6,897,799
Net realized capital gains or (losses)                             230,595
Net investment gain or (loss)                                                    7,128,394

Other Income
Net gain or (loss) from agents’ or premium balances
  charged off                                                     (145,165)
Finance and service charges not included in premiums               748,272
Write-ins for miscellaneous income:
   Miscellaneous income                                              8,858
   Gain (loss) on disposal of equipment                             (6,931)
Total other income                                                                605,034

Net income (loss) before dividends to policyholders and
  before federal and foreign income taxes                                       23,420,788
Dividends to policyholders                                                       2,642,847

Net income (loss) after dividends to policyholders but
  before federal and foreign income taxes                                       20,777,941
Federal and foreign income taxes incurred                                        6,819,023

Net Income (Loss)                                                             $ 13,958,918




                                                19
                            Rural Mutual Insurance Company
                                      Cash Flow
                                   For the Year 2004

Premiums collected net of reinsurance                                     $112,383,957
Net investment income                                                        7,125,458
Miscellaneous income                                                           605,034
Total                                                                      120,114,449
Benefit- and loss-related payments                       $55,775,426
Commissions, expenses paid, and
 aggregate write-ins for deductions                          37,236,078
Dividends paid to policyholders                               2,481,002
Federal and foreign income taxes paid
 (recovered)                                                  6,211,740
Total deductions                                                           101,704,246
Net cash from operations                                                    18,410,203

Proceeds from investments sold,
 matured, or repaid:
   Bonds                                  $18,849,581
   Mortgage loans                              16,635
   Miscellaneous proceeds                      61,500
   Total investment proceeds                                 18,927,716
Cost of investments acquired (long-term
 only):
   Bonds                                   35,237,433
   Miscellaneous applications                  61,500
   Total investments acquired                                35,298,933
Net cash from investments                                                     (16,371,217)

Cash from financing and miscellaneous
 sources:
  Other cash provided (applied)                               1,202,232
Net cash from financing and
 miscellaneous sources                                                         1,202,232

Reconciliation
Net change in cash and short-term
 investments                                                                   3,241,218
Cash and short-term investments,
 December 31, 2003                                                             3,668,754
Cash and short-term investments,
 December 31, 2004                                                        $    6,909,972




                                          20
                             Rural Mutual Insurance Company
                         Compulsory and Security Surplus Calculation

Assets                                                                    $203,379,835
Less liabilities                                                           139,916,877

Adjusted surplus                                                            63,462,958

Annual premium:
  Individual accident and health          $      643,836
  Factor                                              15%
  Total                                                      $   96,575

   Lines other than accident and health       113,261,793
   Less dividends                               2,642,847
   Subtotal                                   110,618,946
   Factor                                              20%
   Total                                                     22,123,789

Compulsory surplus (subject to
 a minimum of $2 million)                                                   22,220,364

Compulsory surplus excess (or deficit)                                    $ 41,242,594


Adjusted surplus (from above)                                             $ 63,462,958

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%)                                                           30,441,899

Security surplus excess (or deficit)                                      $ 33,021,059




                                               21
                                Rural Mutual Insurance Company
                             Reconciliation and Analysis of Surplus
                       For the Five-Year Period Ending December 31, 2004

             The following schedule is a reconciliation of total surplus during the period under

examination as reported by the company in its filed annual statements:

                                  2004           2003                2002             2001           2000

Surplus, beginning of year     $46,062,051   $39,680,043      $42,471,973          $37,923,212    $34,421,680
Net income                      13,958,918     5,458,295       (2,378,737)            (825,595)     1,216,143
Net unrealized capital gains
 or (losses)                      619,777        558,906            (530,583)         258,868        (220,766)
Change in net deferred
 income tax                       512,299      1,027,483           1,120,325          606,305
Change in nonadmitted
 assets                          1,368,712      (662,676)          (1,002,935)            (205)     1,042,503
Cumulative effect of
 changes in accounting
 principles                                                                          4,509,388
 Correction of error              941,201
 Change in excess of
    statutory reserve over
    statement reserves                                                                               (105,000)
 Settlement Agreement                                                                               1,218,652
 Change in valuation
    reserve                                                                                             350,000

Surplus, end of year           $63,462,958   $46,062,051      $39,680,043          $42,471,973    $37,923,212

                                Rural Mutual Insurance Company
                            Insurance Regulatory Information System
                       For the Five-Year Period Ending December 31, 2004

             The company’s NAIC Insurance Regulatory Information System (IRIS) results for the

period under examination are summarized below. There were no unusual results.

       Ratio                                  2004          2003            2002       2001       2000

 #1 Gross Premium to Surplus                 219%          286%          305%         243%        245%
 #2 Net Premium to Surplus                   177           236           259          203         203
 #3 Change in Net Writings                     3             6            19           12           6
 #4 Surplus Aid to Surplus                     0             0             0            0           0
 #5 Two-Year Overall Operating
     Ratio                                    85             95              99         99        92
#6 Investment Yield                           4.6           5.2             5.8        5.9        6.0
#7 Change in Surplus                          32             11              (2)        12          9
#8 Liabilities to Liquid Assets               70             81              81         80        80
#9 Agents’ Balances to Surplus                  9            24              24         18        18
#10 One-Year Reserve
     Development to Surplus                    (7)           4                7        (12)       (16)
#11 Two-Year Reserve Development
     to Surplus                                 2            5              (12)       (29)       (32)
#12 Estimated Current Reserve
     Deficiency to Surplus                     (2)           (7)              9         (2)        (9)




                                                 22
                            Growth of Rural Mutual Insurance Company

                                                             Surplus As
                         Admitted                             Regards                 Net
       Year               Assets           Liabilities      Policyholders           Income

       2004         $203,379,835          $139,916,877      $63,462,958         $13,958,918
       2003          178,901,176           132,839,125       46,062,051           5,458,295
       2002          157,253,359           117,573,316       39,680,043          (2,378,737)
       2001          145,853,359           103,381,962       42,471,973            (825,595)
       2000          132,705,024            94,781,812       37,923,212           1,216,143
       1999          123,612,066            89,190,386       34,421,680           4,970,269



               Gross             Net                         Loss
              Premium          Premium         Premium      And LAE    Expense       Combined
Year           Written          Written         Earned       Ratio      Ratio          Ratio

2004     $139,032,946       $112,365,629     $109,998,709      57.8%        26.8%       84.6%
2003      131,643,452        108,857,100      104,866,048      68.3         25.7        94.0
2002      121,118,156        102,919,523       96,385,482      76.0         28.6       104.6
2001      103,024,417         86,175,619       81,299,555      75.3         29.1       104.4
2000       92,936,481         77,119,635       74,598,714      72.3         30.2       102.5
1999       88,102,120         72,829,362       69,792,196      61.2         33.3        94.5


               The company has shown consistent growth throughout the period under

examination. Written premium has increased 58% while assets and surplus have increased 64%

and 84%, respectively. Net losses in 2001 and 2002 were primarily the result of catastrophic

storms in Wisconsin. Losses and LAE declined in 2003 and 2004 due to both favorable

conditions and stricter underwriting standards. The company had an exceptional year in 2004,

increasing surplus by over $17 million.




                                                  23
Reconciliation of Surplus per Examination

           No adjustments were made to surplus as a result of the examination. The amount of

surplus reported by the company as of December 31, 2004, is accepted.




                                             24
                         VII. SUMMARY OF EXAMINATION RESULTS

Compliance with Prior Examination Report Recommendations

            There were five specific comments and recommendations in the previous

examination report. Comments and recommendations contained in the last examination report

and actions taken by the company are as follows:

1.   Cash Accounts – Outstanding Checks—It is recommended that the company continue with
     its efforts to limit the timing differences such as linking the adjusters directly to the claim
     payment system at the home office.

     Action—Compliance

2.   Cash Accounts – Outstanding Checks—It is recommended that in the future the company
     issue checks in sequential order to ensure proper control over cash disbursements.

     Action—Compliance

3.   Agents Balances or Uncollected Premiums—It is recommended that the company make a
     reasonable effort to estimate what portion of the suspense account relates to advance paid
     premiums, and report that amount as a separate liability in future annual statements.

     Action—Compliance

4.   Amounts Withheld—It is recommended that the company properly classify its miscellaneous
     liability account balances reported as Amounts Withheld, in accordance with NAIC Annual
     Statement Instructions-Property and Casualty.

     Action—Compliance

5.   Contingent Commissions on Reinsurance—It is recommended that the company establish a
     reasonable estimate for the current year’s contingent commissions due the reinsurer on
     ceded multi-line premium.

     Action—Compliance




                                                 25
Summary of Current Examination Results

            This section contains comments and elaboration on those 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.

Management and Control

            Each Wisconsin-domiciled insurer is required to file a State of Wisconsin Report on

Executive Compensation and an NAIC Supplemental Compensation Exhibit. A review of the

forms determined that the company did not make complete disclosure of its director, executive,

and highest paid employee’s compensation during the years under examination. The company

filings reported no director compensation for any of the years under review; although it was

determined during the examination that directors had received compensation. It is recommended

that the company report all remuneration paid to or on behalf of a director, officer, or employee, on

both the State of Wisconsin Report on Executive Compensation and the NAIC Supplemental

Compensation Exhibit, as required by the respective instructions for those forms.

Information Systems

            The company's record retention policy was reviewed. It was noted that the last

update of the policy was in the early 1990s and still included references to entities no longer

owned by the company. The emphasis of the policy appears to be on the retention of hard copy

records and there has been no update to include a section on electronic records. It is

recommended that the company update its record retention policies and procedures.

            The examination noted certain weaknesses in the company’s internet security

system. The details of these weaknesses are not appropriate for discussion in a public report.

However, it is recommended that the company monitor the traffic passing through its firewall and

create a policy to address computer security incidents.

            During the examination it was noted that the company does not have a formal

periodic process for validating that active IDs are authorized and the rights associated with those

IDs are appropriate for access to the network and financially significant applications. The

company should have a process to evidence that IDs are authorized and access is relevant to the




                                                 26
individual’s responsibilities. It is recommended that the company implement a formal periodic

process to validate that all active IDs are authorized and the access rights associated with them

are appropriate.

             Review of the company's password controls over processing applications noted

certain weaknesses that should be addressed. The details of these weaknesses are not

appropriate for discussion in a public report. However, it is recommended that the company

improve its password controls over processing applications.

             Although the company tested the information system portion of its disaster recovery

plan in June 2005, the last test of the functional units’ portion was in 1998. For a disaster

recovery plan to be relevant, it should be tested at least annually to validate whether it can be

executed. In addition, the company has not specifically identified an alternative location in the

event that its building is not available. Testing should include whether there are alternative

locations available which would meet the company’s needs. It is recommended the company

perform a test of the disaster recovery plan at least annually for its functional units and that the

plan identify an alternative location.

Affiliated Transactions

             RMIC is the administrator of the Rural Exclusive Account Plan (REAP), an installment

payment system, on behalf of certain associated entities. The company pays WFBF and SSI in

full at the effective date for subject transactions on behalf of WFBF and SSI and recovers those

payments by billing the appropriate respective WFBF members and SSI customers using the

REAP system.

             As noted in a previous section, membership in the WFBF is required in order to

purchase certain insurance coverages from RMIC. For those members who elect to pay for their

RMIC policy and WFBF membership dues using REAP, the company pays to the Farm Bureau

the respective member's annual membership dues. The company recovers this advance

payment by billing and collecting remittance for those dues in installments along with the policy

installment payments. Some REAP customers terminate their relationship before completing their




                                                  27
payments for the full year’s WFBF membership fee. RMIC does not seek reimbursement from

WFBF for the portion of the membership fees not collected through REAP.

            RMIC performs some human resource functions for WFBF. There is currently no

written agreement between RMIC and WFBF regarding services provided for sharing of costs and

settlement of balances.

            In the case of SSI, the company pays insurance premiums at the inception of an

annual policy period on behalf of SSI on policies brokered by SSI and placed with third-party

insurers. RMIC recovers the amounts paid in advance on behalf of SSI as the respective

policyholder remits policy installment payments to RMIC rather than the third-party insurer. The

company thereby assumes the risk of collection. There is no language in the current agreement

between SSI and RMIC regarding these transactions. It is recommended that the company

execute or modify agreements with related parties to include all services provided and settlement

of balances pursuant to s. 611.61, Wis.Stat.

            Pursuant to s. 600.03 (1), Wis. Stat., a corporation is an affiliate of another

corporation, regardless of ownership, if substantially the same group of persons manages the

two corporations. Section 600.03 (5), Wis. Stat., further defines the board of directors as the

group of persons vested with the management of a corporation. According to the NAIC’s

Accounting Practices and Procedures Manual SSAP 25, paragraph 3, the definition of an affiliate

is common control. Although nine of the eleven board members of WFBF also serve as members

of the board of directors of RMIC, WFBF is not identified as an affiliate on the Insurance Holding

Company System Annual Registration Statement required to be filed with this office. It is

recommended that the company complete the Insurance Holding Company System Annual

Registration Statement pursuant to the requirements of s. Ins 40.03, Wis. Adm. Code.

Investments

            Subsequent to year-end 2004 the company entered into a series of agreements to

obtain an ownership interest in Parkwood Reinsurance Company Ltd. (Parkwood Re), a Bermuda-

domiciled reinsurer, in 2019. One of these agreements is a derivative contract on debt securities

from Parkwood Re's parent. It was noted that the company had not filed a derivative use plan




                                                 28
with this office. Section Ins 6.20 (8) (o) 4-6, Wis. Adm. Code, provides that a company may

purchase derivatives as long as the board of directors approves of a written plan for the use of

derivatives and the plan is also approved by the commissioner. It is recommended that the

company file a derivative use plan with this office pursuant to s. Ins 6.20 (8) (o) 4-6, Wis. Adm.

Code.

             The company’s Agency Agreement with its bank was reviewed during the

examination. The Agency Agreement effectively functions as a custodial agreement in that it

contains provisions regarding the safe-keeping of assets. The company updated the agreement

in 2000 to add additional language. Reasonable custodial agreement indemnification provisions

appear to exist via the letter amendment. It is suggested that the company obtain an updated

custodial agreement which consolidates the Agency Agreement and addendum letter documents

to provide a current contract which ensures adequate custodial controls.

Subsequent Event

             During the 2004 financial statement preparation, the company discovered an error in

the compiling and reporting of premiums receivable in prior years. The error was attributed to the

company’s previous computer system and was identified following the final phase of conversion to

a new system. It was determined there was an understatement of assets of $1,572,206, an

understatement of liabilities of $631,005, and an understatement of policyholders’ surplus of

$941,201. The error was disclosed and corrected with a gain to surplus on the 2004 annual

statement.

             During the 2005 financial statement preparation, it was determined the 2004

correction of error was miscalculated and the gain to surplus was overstated. The company

confirmed another correction and disclosure would be forthcoming on the 2005 annual statement.

The extent of the correction could not be determined at the time of this examination. However, it

was estimated that the amount would be below the examination’s tolerable error; therefore, no

adjustment to surplus is considered necessary at this time.




                                                 29
                                       VIII. CONCLUSION

            Rural Mutual Insurance Company has been in business for over 60 years, originating

as the Farm Bureau Mutual Insurance Company of Wisconsin. The company currently writes

business only in Wisconsin. RMIC has experienced steady growth during the period under

examination with writings increasing 58%. Surplus increased by 84% during the same period,

mainly due to the exceptional 2004 results.

            The examination determined company compliance with all five of the prior

examination recommendations. The current examination resulted in nine recommendations and

one suggestion, which are summarized in the “Summary of Comments and Recommendations”

section of this report. There were no adjustments to surplus or reclassifications of balance sheet

accounts as a result of the examination.




                                                30
               IX. SUMMARY OF COMMENTS AND RECOMMENDATIONS

 1.   Page 26 - Management and Control—It is recommended that the company report all
                remuneration paid to or on behalf of a director, officer, or employee, on both
                the State of Wisconsin Report on Executive Compensation and the NAIC
                Supplemental Compensation Exhibit, as required by the respective
                instructions for those forms.

 2.   Page 26 - Information Systems—It is recommended that the company update its record
                retention policies and procedures.

 3.   Page 26 - Information Systems—However, it is recommended that the company
                monitor the traffic passing through its firewall and create a policy to address
                computer security incidents.

 4.   Page 27 - Information Systems—It is recommended that the company implement a
                formal periodic process to validate that all active IDs are authorized and the
                access rights associated with them are appropriate.

 5.   Page 27 - Information Systems—However, it is recommended that the company
                improve its password controls over processing applications.

 6.   Page 27 - Information Systems—It is recommended the company perform a test of the
                disaster recovery plan at least annually for its functional units and that the
                plan identify an alternative location.

 7.   Page 28 - Affiliated Transactions—It is recommended that the company execute or
                modify agreements with related parties to include all services provided and
                settlement of balances pursuant to s. 611.61, Wis.Stat.

 8.   Page 28 - Affiliated Transactions—It is recommended that the company complete the
                Insurance Holding Company System Annual Registration Statement
                pursuant to the requirements of s. Ins 40.03, Wis. Adm. Code.

 9.   Page 29 - Investments—It is recommended that the company file a derivative use plan
                with this office pursuant to s. Ins 6.20 (8) (o) 4-6, Wis. Adm. Code.

10.   Page 29 - Investments—It is suggested that the company obtain an updated custodial
                agreement which consolidates the Agency Agreement and addendum letter
                documents to provide a current contract which ensures adequate custodial
                controls.




                                             31
                                    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                               Title

                        Rick Anderson                Insurance Financial Examiner
                        Bill Genne                   Insurance Financial Examiner
                        Sarah Haeft                  Insurance Financial Examiner
                        Randy Milquet                EDP Specialist


                                                  Respectfully submitted,



                                                  Jean Suchomel
                                                  Examiner-in-Charge




                                                32

								
To top