United Heartland Life Insurance Company by WinstonVenable

VIEWS: 87 PAGES: 31

									                Report

                of the

            Examination of

United Heartland Life Insurance Company

         New Berlin, Wisconsin

       As of December 31, 2000
                                                 TABLE OF CONTENTS



                                                                                                                                  Page

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

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

  III. MANAGEMENT AND CONTROL ........................................................................................ 6

 IV. AFFILIATED COMPANIES .................................................................................................. 8

  V. REINSURANCE ................................................................................................................. 13

 VI. FINANCIAL DATA .............................................................................................................. 14

VII. SUMMARY OF EXAMINATION RESULTS ....................................................................... 24

VIII. CONCLUSION.................................................................................................................... 27

 IX. SUMMARY OF COMMENTS AND RECOMMENDATIONS.............................................. 28

  X. ACKNOWLEDGMENT ....................................................................................................... 29
                       State of Wisconsin                / OFFICE OF THE COMMISSIONER OF INSURANCE
                                                                                               121 East Wilson Street • P.O. Box 7873
Scott McCallum, Governor                                                                              Madison, Wisconsin 53707-7873
Connie L. O'Connell, Commissioner                                                         Phone: (608) 266-3585 • Fax: (608) 266-9935
                                                                                                    E-Mail: information@oci.state.wi.us
Wisconsin.gov                                                                                                  Web Address: oci.wi.gov



                                                     September 16, 2001




           Honorable Sally McCarty
           Secretary, Midwestern Zone III, NAIC
           Commissioner of Insurance
           State of Indiana
           311 West Washington Street, Suite 300
           Indianapolis, IN 46204-2787

           Honorable Connie L. O’Connell
           Commissioner of Insurance
           State of Wisconsin
           121 East Wilson Street
           Madison, WI 53702

           Commissioners:

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

           the affairs and financial condition of:

                                    UNITED HEARTLAND LIFE INSURANCE COMPANY
                                               New Berlin, Wisconsin

           and this report is respectfully submitted.

                                                     I. INTRODUCTION

                         The previous examination of the company was conducted in 1998 as of

           December 31, 1997. The current examination covered the intervening period ending

           December 31, 2000, and included a review of such 2001 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

            Independent actuaries were engaged under a contract with the Office of the

Commissioner of Insurance. They reviewed the adequacy of aggregate life and accident and

health reserves, dividends to policyholders, cash flow testing, deferred and uncollected premiums

for life insurance, due and uncollected premiums for health insurance, and in force testing. The

results of their work were reported to the examiner-in-charge. As deemed appropriate, reference

is made in this report to the actuaries' conclusion.




                                                  2
                           II. HISTORY AND PLAN OF OPERATION

            The company was incorporated on August 23, 1990, as National Benefit Life

Assurance Company under the Ohio laws applicable to life insurance companies. The company

subsequently changed its name on November 20, 1990, to American Benefit Life Assurance

Company (ABL). On March 1, 1993, all the outstanding stock of ABL was acquired by American

Medical Security Insurance Company (AMSIC) from Benefits International, Inc. On June 28,

1993, the company changed its name to American Medical Security Insurance Company of Ohio

(AMSICO).

            During 1996, United Wisconsin Services, Inc. (UWSI) merged with American Medical

Security Holdings, Inc., the parent of AMSIC, and thereby obtained ownership of AMSICO.

Effective January 1, 1997, the company redomiciled from Ohio to Wisconsin and changed its

name to United Heartland Life Insurance Company (UHLIC). In late 1998, the UWSI specialty

products and HMO business segment was spun off to a new holding company, which took the

UWSI name. The original UWSI, the holding company for the remaining small group health

insurance segment, was renamed American Medical Security Group, Inc. (AMSG). Effective

December 29, 2000, UWSI contributed all issued and outstanding shares of UHLIC to Compcare

Health Services Insurance Corporation (Compcare). At December 31, 2000, Compcare was, in

turn, owned by UWSI, a publicly traded holding company, which was 46.6% owned by Blue Cross

& Blue Shield United of Wisconsin (BCBSUW).

            On June 14, 1999, BCBSUW filed an application with the Office of the Commissioner

of Insurance (OCI) to convert from a nonprofit service insurance corporation to a stock

corporation. On March 28, 2000, Commissioner O’Connell approved the plan of conversion

subject to a detailed list of conditions. On March 19, 2001, the Commissioner recognized

BCBSUW’s application as complete and approved the conversion pursuant to her order of March

28, 2000. The conversion was consummated on March 23, 2001, and BCBSUW thereby became

a stock corporation. As part of BCBSUW’s conversion to a stock insurance company, UWSI

changed its name to Cobalt Corporation.




                                                3
            Effective December 31, 2000, Cobalt Corporation contributed all issued and

outstanding shares of UHLIC to Compcare. UHLIC was examined concurrently with Blue Cross

& Blue Shield United of Wisconsin, as of December 31, 2000. Further discussion on the

conversion and combination is included in that report. UHLIC’s affiliates are further discussed in

the section of this report captioned “Affiliated Companies.”

            UHLIC is licensed in Illinois, Indiana, Kentucky, Michigan, Nebraska, North Dakota,

Ohio, South Dakota, and Wisconsin. The company assumes, on a 100% quota share basis, all

group and associated individual conversion non-AMSG life business written by United Wisconsin

Life Insurance Company, an affiliate. During 2000, the company sold its first direct group life

policy in Ohio. Prior to that time all revenues were from assumed business.




                                                 4
            The following chart is a summary of the net insurance premiums written by the

company in 2000. 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

Universal life                       $0           $134,250            $29,049         $105,201
Group Life                          761         27,448,849          2,329,628       25,119,982
Group A&H                            87          1,443,291             94,480        1,348,898
Total All Lines                    $848        $29,026,390         $2,453,157      $26,574,081




                                               5
                               III. MANAGEMENT AND CONTROL

Board of Directors

            The board of directors consists of four members. Officers are elected at the board's

annual meeting. Each director holds office until the next annual meeting of shareholders for the

remainder of the term for which the director has been elected and until the director’s successor

shall have been elected or there is a decrease in the number of directors, or until the director’s

prior death, resignation, or removal. Members of the company's board of directors may also be

members of other boards of directors in the holding company group. The board members

currently receive no compensation for serving on the board.

            At December 31, 2000, board of directors consisted of the following persons:

Name and Residence                                    Principal Occupation

Thomas R. Hefty                           Chairman and CEO
Elm Grove, Wisconsin                      Cobalt Corporation

Michael E. Bernstein                      Sr. Vice President, Acquisitions & Strategic Planning
Milwaukee, Wisconsin                      Cobalt Corporation

Thomas E. Liechty                         President and COO
Mequon, Wisconsin                         United Wisconsin Group

Gail L. Hanson                            Sr. Vice President, CFO, and Treasurer
Delafield, Wisconsin                      Cobalt Corporation




                                                  6
Officers of the Company

          Name                          Office                                  2000 Compensation

       Thomas R. Hefty                   Chairman and CEO                            $652,011*
       Thomas E. Liechty                 President and COO                            171,153
       Michael E. Bernstein              Vice President and Secretary                 249,679*
       Gail L. Hanson                    Vice President and Treasurer                 265,136*


* Compensation is paid by Cobalt Corporation, and includes amounts allocated to all affiliates.
  UHLIC does not pay any salaries directly.


Committees of the Board

            The company's bylaws allow for the formation of certain committees by the board of

directors. Individuals serving as committee members for Cobalt Corporation, also serve in that

capacity for UHLIC. The committees at December 31, 2000, are:.


        Executive Committee                           Audit Committee
        James L. Forbes, Chair                        Eugene A. Menden, Chair
        Richard A. Abdoo                              Richard A. Abdoo
        Thomas R. Hefty                               Michael D. Dunham
        James C. Hickman                              James C. Hickman


        Finance Committee                             Management Review Committee
        William C. Rupp M.D., Chair                   James L. Forbes, Chair
        Michael D. Dunham                             Richard A. Abdoo
        Thomas R. Hefty                               Barry K. Allen
        Carol N. Skornicka                            James C. Hickman




                                                 7
                                   IV. AFFILIATED COMPANIES

             UHLIC is a member of a holding company system. Below is a brief description of the

significant affiliates of UHLIC. The organizational chart, which depicts the relationships among

the affiliates in the group, as March 31, 2001, follows the descriptions.

Cobalt Corporation

             Cobalt Corporation (Cobalt), formerly known as United Wisconsin Services,

Inc.(UWSI), operates as an insurance holding company for the group. UWSI was incorporated in

1998 and organized pursuant to ch. 180, Wis. Stat. UWSI was publicly traded over the New York

Stock Exchange under the symbol UWZ until March of 2001. Effective March 23, 2001, UWSI

changed its name to Cobalt Corporation upon completion of the conversion of Blue Cross & Blue

Shield United of Wisconsin (BCBSUW) and the combination of BCBSUW and UWSI. Currently,

Cobalt is traded on the New York Stock Exchange under the symbol CBZ.

             Subsequent to the conversion and combination, the majority of Cobalt’s common

stock is owned by the Wisconsin United for Health Foundation (the foundation). The foundation’s

ownership percentage is dependent on whether the 16.4% of Cobalt common stock owned by

BCBSUW is treated as treasury stock or not. If BCBSUW owned Cobalt stock it is considered

treasury stock the foundation owns 77.5% of Cobalt. See the organizational chart, following this

section for more detail.

             The December 31, 2000 audited consolidated financial statements for UWSI reported

assets of $366 million, liabilities of $349 million, and shareholders' equity of $17 million.

Operations for 2000 produced net losses of $16 million on revenues of $761 million.

Blue Cross & Blue Shield United of Wisconsin

             Blue Cross & Blue Shield United of Wisconsin (BCBSUW) was a nonstock, service

insurance corporation, incorporated in 1939, and organized pursuant to ch. 613, Wis. Stat. In

June 1999, the BCBSUW Board of Directors announced its intention to convert BCBSUW from a

nonprofit service insurance corporation to a stock corporation. An application for a Plan of

Conversion was filed with the commissioner on June 14, 1999. On March 28, 2000,

Commissioner O’Connell approved a plan of conversion subject to a detailed list of conditions.




                                                   8
On March 19, 2001, the Commissioner recognized BCBSUW’s application as complete and the

conversion under the order of March 28, 2000 was approved. Effective March 23, 2001,

BCBSUW converted to stock insurance corporation and organized pursuant to ch. 611, Wis. Stat.

In addition to the conversion, BCBSUW became a wholly owned subsidiary of Cobalt through a

combination of BCBSUW and Cobalt on March 23, 2001.

            As of December 31, 2000, BCBSUW's statutory financial statements reported assets

of $259 million, liabilities of $155 million, and unassigned funds of $104 million. Operations for

2000 produced a net loss of $28 million on revenues of $534 million.

Compcare Health Services Insurance Corporation

            Compcare Health Services Insurance Corporation (Compcare) is a Wisconsin stock

insurance corporation incorporated January 1, 1984, under the provisions of ch. 611, Wis. Stat. It

operates as a health maintenance organization in the state of Wisconsin. Compcare's 2000

statutory annual statement reported assets of $143 [MCM14]million, liabilities of $94 million, and

net worth of $49 million. Operations for 2000 produced a net loss of $10 million on total revenues

of $392 million.

Unity Health Plans Insurance Corporation

            Unity Health Plans Insurance Corporation (Unity) is a Wisconsin stock insurance

corporation incorporated on October 1, 1983, and organized pursuant to ch. 611, Wis. Stat. It

operates as a health maintenance organization in the state of Wisconsin. Unity's 2000 statutory

annual statement reported assets of $39 million, liabilities of $28 million, and net worth of $11

million. Operations for 2000 produced a net loss of $2.6 million on total revenues of $160 million.

United Wisconsin Insurance Company

            United Wisconsin Insurance Company (UWIC) is a Wisconsin stock insurance

corporation, incorporated in 1957, and organized pursuant to ch. 611, Wis. Stat. UWIC, a wholly

owned subsidiary of Compcare, has established, maintained, and operated accident, sickness,

long-term disability, and other health care insurance plans. As of December 31, 2000, the

company's statutory annual statement reported assets of $86 million, liabilities of $48 million, and




                                                  9
capital and surplus of $38 million. Operations for 2000 a produced net loss of $2 million on

revenues of $70 million.

Valley Health Plan, Inc.

            Valley Health Plan, Inc. (Valley), is a Wisconsin stock insurance corporation

incorporated on June 1, 1988, and organized pursuant to ch. 611, Wis. Stat. It operates as a

health maintenance organization in the state of Wisconsin. Valley's 2000 statutory annual

statement reported assets of $19 million, liabilities of $12 million, and net worth of $7 million.

Operations for 2000 produced a net loss of $576 thousand on total revenues of $79 million.

American Medical Security Group, Inc.

            American Medical Security Group, Inc. (AMSG), operates as an insurance holding

company for the individual and small employer group health care benefits segments of the group.

AMSG was incorporated in 1983 and organized pursuant to ch. 180, Wis. Stat.. The December

31, 2000, audited consolidated financial statements for AMSG reported assets of $472 million,

liabilities of $251 million, and shareholders' equity of $221 million. Operations for 2000 produced

net income of $2.7 million on revenues of $990 million. AMSG is publicly traded over the New

York Stock Exchange under the symbol AMZ.

United Wisconsin Life Insurance Company

            United Wisconsin Life Insurance Company (UWLIC), is a Wisconsin stock insurance

corporation incorporated in 1982 and organized pursuant to Chapter 611 of the Wisconsin

Statutes. UWLIC is a wholly-owned subsidiary of American Medical Security Holdings, Inc. and

provides life and health insurance and related coverages. UWLIC’s 2000 annual statement

reported assets of $315 million, liabilities of $168 million, and capital and surplus of $147 million.

Operations for 2000 produced a net income of $7 million on revenues of $952 million.




Affiliated Agreements

            Effective January 1, 1997, UWIC and UHLIC entered into an administrative service

agreement whereby, UWIC shall provide the majority of administrative and management services




                                                  10
necessary for the continued operations of UHLIC. Under the terms of this agreement UWIC

provides services such as marketing, underwriting, policy services, and claims supervision, and

payments. For its services, the agreement calls for UWIC to receive an administrative fee based

upon actual costs and monthly earned premium.

            UHLIC also has reinsurance agreements in place with UWLIC, which are further

outlined in the “Reinsurance” section of this report.




                                                 11
                                                                        Organizational Chart
                                                                        As of March 31, 2001
                   Wisconsin United for
                  Health Foundation, Inc.
                                                                            100%
                                                                                                 Blue Cross & Blue Shield
                                77.5% (see note)                                    16.4%                                                  United Government Services, LLC
                                                                                                    United of Wisconsin

                                                    Cobalt Corporation (formerly
                                                   United Wisconsin Services, Inc.)
                                                                                                  44.8%
                                                                                                                                             American Medical Security
                                                                                                   American Medical Security
                                                                                                          Group, Inc.   *                         Holdings, Inc   *
Unity Health Plans Insurance
                                                                                                                                                  100%
        Corporation

                                                        HMO-W, Inc.
    Hometown Insurance                                                                                                                      United Wisconsin Life Insurance
       Services, Inc                                                                                                                                  Company


                                                      Valley Health Plan, Inc
Heartland Dental Plan, Inc.
                                                                                               Meridian Marketing Services,
                                                                                                          Inc.

United Wisconsin Proservices,                       Compcare Health Services
            Inc.                                      Insurance Corporation                        United Heartland, Inc.


 Meridian Resource Company,                                       50%
             LLC
                                                          Family Health Systems,                Innovative Resource Group,
                                                                   Inc.                                    LLC.
United Heartland Life Insurance
          Company

                                                                                                          CNR Partners, Inc.
  United Wisconsin Insurance
          Company


            50%
                                                                                Note: If the common stock of Cobalt owned by BCBSUW is treated as Cobalt treasury stock, the
  United Heartland Illinois, Inc.                                               Foundation’s control percentage is 77.5%. If the common stock of Cobalt owned by BCBSUW is
                                                                                not treated as treasury stock, the ownership by BCBSUW is 16.44% and by the Foundation is
                                                                                64.75%.
 Comprehensive Receivables                                                       * The subsidiaries of AMSG, except for United Wisconsin Life Insurance Company, have been
           Group, Inc.                                                          omitted from this chart.



Michigan Healthcare Collections, Inc.
                                                                                      12
                                        V. REINSURANCE

            The company's reinsurance portfolio and strategy is described below. The company

had three assuming and three ceding contracts in force at the time of the examination. The

examination reviewed the most significant ceding reinsurance contract, which accounted for 98%

of all ceded premiums, and the most significant assuming contract, which accounted for 94% of

all assumed premium. The examination noted that these contracts contained proper insolvency

provisions. A summary of the major contracts is given below.

            Virtually all of the company’s business is assumed from an affiliate, United Wisconsin

Life Insurance Company (UWLIC). Group life insurance policies, group accident insurance

policies, and whole life policies are assumed on a 100% quota share basis.

            To limit its exposure for any one risk, the company entered into an excess of loss

reinsurance agreement with Hartford Life and Accident Insurance Company. UHLIC retains

$75,000 per person for group life and group accidental and dismemberment policies. The

maximum reinsurance provided on any one life under group policies may not exceed the

guaranteed issue limits indicated in the contract. These limits range from $100,000 for groups

with premium volume less than $750,000 and a $500,000 limit for group volume of $20 million

and up. If UHLIC issues or reinsures from UWLIC any risks in excess of those limits, then UHLIC

can submit the risk for consideration on a facultative basis.




                                                 13
                                     VI. FINANCIAL DATA

            The following financial statements reflect the financial condition of the company as

reported in the December 31, 2000, annual statement to the Commissioner of Insurance. Also

included in this section are schedules which 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 Members' Surplus per

Examination."




                                                14
                            United Heartland Insurance Company
                                           Assets
                                  As of December 31, 2000

                                  Ledger            Nonledger    Nonadmitted    Admitted
                                  Assets             Assets        Assets        Assets

Bonds                           $17,043,686             $           $           $17,043,686
Policy loans                          1,589                                           1,589
Cash                               (788,416)                                       (788,416)
Short-term investments            3,357,626                                       3,357,626
Reinsurance ceded:
    Amounts recoverable
      from reinsurers                30,323                                          30,323
    Experience rating and
      other refunds due              95,641                                          95,641
Life premiums and
 annuity considerations
 deferred and uncollected           625,348                          42,725        582,623
Accident and health
 premiums due and unpaid              5,535                             5,535
Investment income due
 and accrued                        220,119                                        220,119


Total Assets                    $20,591,451             $           $48,260     $20,543,191




                                               15
                          United Heartland Life Insurance Company
                            Liabilities, Surplus, and Other Funds
                                   As of December 31, 2000

Aggregate reserve for life policies and contracts                          $ 4,244,535
Aggregate reserve for accident and health policies                              10,185
Policy and contract claims:
   Life                                                                      1,851,200
   Accident and health                                                         212,500
Premiums and annuity considerations received in advance                        269,779
Policy and contract liabilities not included elsewhere:
Provision for experience rating refunds                                      3,414,662
Interest maintenance reserve                                                    64,020
Commissions and expense allowances payable on reinsurance assumed              104,293
General expenses due or accrued                                                 32,837
Taxes, licenses, and fees due or accrued, excluding federal income taxes        42,460
Federal income taxes due or accrued                                            163,805
Amounts withheld or retained by company as agent or trustee                     19,020
Miscellaneous liabilities:
   Asset valuation reserve                                                     46,324
   Payable to parent, subsidiaries and affiliates                             356,698
Write-ins for liabilities:
   Accounts Payable Ceded Reinsurance                                         205,097

Total Liabilities                                                           11,037,415

Common capital stock                                                         2,500,000
Gross paid in and contributed surplus                                        6,000,000
Unassigned funds (surplus)                                                   1,005,776

Surplus                                                                      9,505,776

Total Liabilities, Surplus, and Other Funds                                $20,543,191




                                              16
                           United Heartland Life Insurance Company
                                   Summary of Operations
                                      For the Year 2000

Premiums and annuity considerations                                       $26,574,079
Net investment income                                                       1,128,852
Amortization of interest maintenance reserve                                   15,460
Miscellaneous income:
  Write-ins for miscellaneous income:
   Other interest                                                             29,654

Total income items                                                         27,748,045

Death benefits                                                             19,258,193
Disability benefits and benefits under accident and health policies           929,963
Surrender benefits and other fund withdrawals                                     568
Interest on policy or contract funds                                          146,929
Increase in aggregate reserve for life and accident and health policies
 and contracts                                                               859,029
Increase in reserve for supplementary contracts without life                 (15,553)
 contingencies and for dividend and coupon accumulations
Commissions on premiums, annuity considerations, and deposit type funds           131
Commissions and expense allowances on reinsurance assumed                   1,265,415
General insurance expenses                                                  3,462,193
Insurance taxes, licenses, and fees excluding federal income taxes            475,843
Increase in loading on and cost of collection in excess
 of loading on deferred and uncollected premiums                               10,969
Total deductions                                                           26,393,680

Net gain from operations before dividends to policyholders
 and federal income taxes                                                   1,354,365



Federal income taxes incurred (excluding tax on capital gains)               (324,435)

Net gain from operations after dividends to policyholders and federal
 income taxes and before realized capital gains or (losses)                 1,678,800

Net realized capital gains or (losses) less capital gains tax and
 amount transferred to the IMR                                                (64,207)

Net Income                                                                $ 1,614,593




                                                 17
                           United Heartland Life Insurance Company
                                          Cash Flow
                                   As of December 31, 2000

Premiums and annuity considerations                       $26,797,184
Net investment income                                       1,131,962
Total                                                                    $27,929,146

Death benefits                                             19,558,840
Disability benefits and benefits under
 accident and health policies                                 747,786
Surrender benefits and other fund withdrawals                     568
Interest on policy or contract funds                          146,929
Subtotal                                                   20,454,123

Commissions on premiums, annuity considerations,
 and deposit type funds                                          131
Commissions and expense allowances on
 reinsurance assumed                                        1,252,112
General insurance expenses                                  3,460,329
Insurance taxes, licenses and fees, excluding federal
 income taxes                                                 479,569
Federal income taxes (excluding tax on capital gains)        (203,705)
Total deductions                                                          25,442,559

Net cash from operations                                                                $2,486,587

Proceeds from investments sold, matured, or repaid:
  Bonds                                                     2,665,834
  Stocks                                                   12,712,059
Total investment proceeds                                                 15,377,893

Cost of investments acquired (long-term only):
  Bonds                                                    (5,218,596)
  Stocks                                                  (11,766,192)
Total investments acquired                                               (16,984,788)

Net cash from investments                                                               (1,606,895)

Cash provided from financing and miscellaneous sources:
  Other sources                                             1,183,376
    Total                                                                  1,183,376
Cash applied for financing and miscellaneous uses:
  Dividends to stockholders paid                             400,000
  Other applications                                         220,591
    Total                                                                   620,591

Net cash from financing and miscellaneous sources                                         562,785

Net change in cash and short-term investments                                            1,442,477




                                                 18
Reconciliation

Cash and short-term investments,
 December 31, 1999                       1,126,734
Cash and short-term investments,
 December 31, 2000                      $2,569,211




                                   19
                           United Heartland Life Insurance Company
                          Compulsory and Security Surplus Calculation
                                   As of December 31, 2000

Assets                                                            $20,543,191
Less liabilities                                                   11,037,415

Adjusted surplus                                                                $9,505,776

Annual premium:
 Individual life and health                            123,904
 Factor                                                     15%
 Total                                                               $ 18,586

  Group life and health                            26,673,280
  Factor                                                   10%
  Total                                                            $2,667,328

Compulsory surplus (subject to a $2,000,000 minimum)                             2,685,914

Compulsory surplus excess                                                       $6,819,862


Adjusted surplus                                                                $9,505,776

Security surplus:
 (140% of compulsory surplus, factor reduced 1% for
 each $33 million in premium written in excess of
 $10 million with a minimum of 110%)                                             3,760,279

Security surplus excess                                                         $5,745,497




                                              20
                                 United Heartland Life Insurance Company
                                  Reconciliation and Analysis of Surplus
                           For the Three-Year Period Ending December 31, 2000

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

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

                                            1998              1999               2000
Surplus, beginning of year               $6,923,969        $7,333,062         $8,085,505
Net income                                  725,047           695,020          1,614,593
Change in net unrealized capital                  0           (99,903)            99,903
gains or (losses)
Change in nonadmitted assets and           (309,434)            148,976         113,003
related items
Change in asset valuation reserve             (6,520)             8,350           (7,231)
Dividends to stockholders                                                       (400,000)
Surplus, end of year                     $7,333,062        $8,085,505         $9,505,773



                                      United Heartland Life Insurance
                                 Insurance Regulatory Information System
                           For the Three-Year Period Ending December 31, 2000

                   The following is a summary of NAIC Insurance Regulatory Information System (IRIS)

       results for the period under examination. Exceptional ratios are denoted with asterisks. A

       discussion of the exceptional ratios may be found after the IRIS ratios.

                    Ratio                                          1998   1999    2000
       #1    Net change in capital & surplus                        6.0%   10.0%    18.0%
       #1A   Gross change capital & surplus                         6.0    10.0     18.0
       #2    Net income to total income                             3.0     3.0      6.0
       #4    Adequacy of investment income                        999.0 * 926.0 * 941.0 *
       #5    Non-admitted to admitted assets                        2.0     1.0      0.0
       #6    Total real estate & mortgage loans                     0.0     0.0      0.0
              to cash & invested assets
       #7    Total affl investments to capital & surplus             3.0          7.0         0.0
       #8    Surplus relief                                        (13.0)       (16.0)      (13.0)
       #9    Change in premium                                      (4.0)        15.0         2.0
       #10   Change in product mix                                   0.4          0.4         1.2
       #11   Change in asset mix                                     0.2          0.8         0.9
       #12   Change in reserving ratio                             (99.0) *     (37.0) *      0.0


                   Adequacy of investment income is exceptional due to the relationship between investment

       income and lower reported tabular interests on UHLIC’s group life business. The change in reserving

       ratio was exceptional for 1998 and 1999 as a result of a reinsurance transaction whereby UHLIC

       ceded its reserves for individual life business to National Guardian Life Insurance Company.




                                                           21
                      Growth of United Heartland Life Insurance Company

                              Admitted
           Year                Assets                 Liabilities           Surplus

           1998                $17,924,796             $10,591,734           $7,333,062
           1999                 18,398,832              10,313,327            8,085,505
           2000                 20,543,191              11,037,418            9,505,773


                            Life Insurance In Force (in thousands)

                               Gross Direct
               Year            And Assumed               Ceded                  Net

               1998               $11,517,565           $1,538,282            $9,979,283
               1999                12,623,195            2,288,205            10,334,990
               2000                11,370,085            1,605,683             9,764,402


                                      Accident and Health

                                                                                           Combined
                      Net                Net                                Other          Loss and
                   Premiums            Losses         Commissions         Expenses          Expense
    Year            Earned            Incurred          Incurred          Incurred           Ratio

    1998                     $0                $0                 $0               $0            0.0%
    1999                      0                 0                  0                0            0.0
    2000              1,348,897           929,963            131,429          312,280          102.6

            Surplus has increased 37% over the past three years, primarily a result of profitable

operating results. Life insurance in force is the majority of UHLIC’s business, and remained

basically unchanged over the period. During 2000 the company started assuming accident and

health business from UWLIC. This is a minor part of UHLIC’s business.




                                                 22
Reconciliation of Surplus per Examination

           There were no adjustments or reclassifications as a result of the examination.




                                              23
                         VII. SUMMARY OF EXAMINATION RESULTS

Compliance with Prior Examination Report Recommendations

            There were seven 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.   General Interrogatories—It is recommended that the company properly complete General
     Interrogatory 9 on all future annual statement to properly report the company’s capitalization
     structure.

     Action—Compliance.

2.   Investments—It is recommended that the company designate loaned securities with an “LS”
     per the annual statement instructions.

     Action—Compliance.

3. Investments—It is recommended that the company take steps to ensure that proper records
   are maintained concerning its securities lending transactions, pursuant to the requirements of
   s. Ins. 6.80, Wis. Adm. Code.

     Action—Compliance.

4. Schedule Y – Part 2—It is recommended that the company complete a common Schedule Y
   – Part 2 for inclusion in each of the affiliated insurers’ annual statements as required by the
   NAIC Annual Statement Instructions.

     Action—Compliance.

5. Schedule Y – Part 2—It is also recommended that the company report in Schedule Y – Part 2
   all transactions required to be reported by the NAIC Annual Statement Instructions.

     Action—Compliance.

6. Affiliated Balances—It is recommended that the company report the liability for commissions
   due on reinsurance assumed as Commissions and Expense Allowances Payable on
   Reinsurance Assumed.

     Action—Compliance.

7. Affiliated Balances—It is recommended that the company report the liability for premium
   taxes as Taxes, Licenses, and Fees Due or Accrued.

     Action—Compliance.




                                                24
Summary of Current Examination Results

Aggregate Reserves for Life Policies and Contracts

            The testing of the detail supporting the disabled lives reserve indicated that the

termination ages used by the actuarial department in their reserve estimates did not agree with

the ages reported in the claim files. The examination found that starting in 2001 the accounting

department had been calling the claimants’ employer to verify the termination age. However, the

actuarial department had not been informed of these changes until the examination had

discovered the inconsistency. A few other differences between the claim files and waiver of

premium reserve detail were also noted. The examination informed the independent actuaries

about these discrepancies and had them do a review to determine how the errors effected the

reserve. They concluded that the reserves were redundant. However, it is recommended that

the company establish procedures for periodic review of detail loss reserve records.

           During the review of reserves it was noted that the company had not reported

reserves for the assumed business from UWLIC on Schedule S Part 1 Section 1. Since, all life

business is 100% assumed from UWLIC, the net reserves reported on Exhibit 8 should also be

reported on Schedule S Part 1 Section 1. It is recommended that the company include the

assumed life reserve on Schedule S Part 1 Section 1.

           The independent actuaries noted during their review that UHLIC had a miscellaneous

reserve for non-deduction of deferred fractional premiums from the life insurance business.

UHLIC’s method of calculating the reserve overstated it by approximately $8,000. However,

UHLIC should have calculated an immediate payment of claim (IPC) reserve, as required by

Actuarial Guideline 32, of approximately $6,000. These items offset each other and the actuaries’

concluded that this reserve was fairly stated. It is recommended that UHLIC correct the

calculation of the reserve for non-deduction of fractional premiums of life policies and calculate an

IPC reserve in future valuations, as required by Actuarial Guideline 32.

Executive Compensation

                The examination review of the Report on Executive Compensation (Form OCI-

040) for 2000 noted that the form is not being completed correctly. For example, the company is




                                                 25
required to list any officer or employee whose total annual compensation is in excess of $80,000.

It was noted that one officer was not included in this report and should have been. It is

recommended that the company complete the Report on Executive Compensation (Form OCI-

040) in accordance with its instructions.

            The review of the compensation amounts being reported indicated that amounts

contributed by the company in connection with employee’s 401K benefits were not included on

Form OCI-040 for some employees. It is recommended that the company properly include all

compensation amounts when completing the Report on Executive Compensation (Form OCI-

040).




                                                26
                                        VIII. CONCLUSION

            Effective December 2000 the company changed from being a wholly-owned

subsidiary of Cobalt, to being a wholly owned subsidiary of Compcare Health Services Insurance

Corporation. Also during 2000, the company sold its first direct group life policy in Ohio. Prior to

that time all revenues were from assumed business. During the period under examination,

UHLIC reported profitable operations for all years and an increase in surplus of 37% for the

period under examination.

            The examination resulted in five recommendations and no reclassifications or

adjustments to surplus. Three of those recommendations concerned the area of aggregate life

reserves. None of the recommendations were repeated from the prior examination. The

recommendations are summarized on the next page.




                                                 27
              IX. SUMMARY OF COMMENTS AND RECOMMENDATIONS

1.   Page 25 - Aggregate Life Reserves—It is recommended that the company establish
               procedures for periodic review of detail loss reserve records.

2.   Page 25 - Aggregate Life Reserves—It is recommended that the company include the
               assumed life reserve on Schedule S Part 1 Section 1.

3.   Page 25 - Aggregate Life Reserves—It is recommended that UHLIC correct the
               calculation of the reserve for non-deduction of fractional premiums of life
               policies and calculate an IPC reserve in future valuations, as required by
               Actuarial Guideline 32.

4.   Page 26 - Executive Compensation—It is recommended that the company complete
               the Wisconsin Report on Executive Compensation (OCI 22-040) in
               accordance with its instructions.

5.   Page 26 - Executive Compensation—It is recommended that the company properly
               include all compensation amounts when completing the Wisconsin Report on
               Executive Compensation (OCI 22-040).




                                            28
                                    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

                   Lori Cretney                             Insurance Financial Examiner
                   Tom Janke                                Insurance Financial Examiner
                   Sarah Haeft                              Insurance Financial Examiner


                                                  Respectfully submitted,



                                                  Eleanor Oppriecht
                                                  Examiner-in-Charge




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