Wisconsin Physicians Service Insurance Corporation by WinstonVenable

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									                     Report

                      of the

                 Examination of

Wisconsin Physicians Service Insurance Corporation

               Madison, Wisconsin

            As of December 31, 2006
                                               TABLE OF CONTENTS


                                                                                                                              Page

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

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

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

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

  V. REINSURANCE............................................................................................................... 11

 VI. FINANCIAL DATA ........................................................................................................... 12

VII. SUMMARY OF EXAMINATION RESULTS..................................................................... 20

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

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

  X. ACKNOWLEDGMENT..................................................................................................... 30

 XI. SUBSEQUENT EVENTS................................................................................................. 31
                     State of Wisconsin / OFFICE OF THE COMMISSIONER OF INSURANCE
                                                                                          125 South Webster Street • P.O. Box 7873
Jim Doyle, Governor                                                                                 Madison, Wisconsin 53707-7873
Sean Dilweg, Commissioner                                                               Phone: (608) 266-3585 • Fax: (608) 266-9935
                                                   February 19, 2008                           E-Mail: ociinformation@wisconsin.gov
Wisconsin.gov                                                                                                Web Address: oci.wi.gov




           Honorable Sean Dilweg
           Commissioner of Insurance
           State of Wisconsin
           125 South Webster Street
           Madison, Wisconsin 53703

           Commissioner:

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

           affairs and financial condition of:

                            WISCONSIN PHYSICIANS SERVICE INSURANCE COPORATION
                                              Madison, Wisconsin
           and this report is respectfully submitted.


                                                    I. INTRODUCTION

                        The previous examination of Wisconsin Physicians Service Insurance Corporation

           (WPS or the company) was conducted in 2002 and 2003 as of December 31, 2001. The current

           examination covered the intervening period ending December 31, 2006, and included a review of

           such 2007 transactions as deemed necessary to complete the examination. The company’s

           two insurance subsidiaries, The EPIC Life Insurance Company and WPS Health Plan, Inc., were

           examined concurrently with this 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 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 aggregate life and annuity

reserves, aggregate accident and health reserves, dividends to policyholders, asset adequacy

analysis, and deferred life insurance premiums. 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

            Wisconsin Physicians Service was created as a division of the State Medical Society

in 1946 under the authority of ch. 148, Wis. Stat. Wisconsin Physicians Service Insurance

Corporation (WPS or the company), a successor non-profit service insurance corporation, was

incorporated on April 27, 1977, and commenced business the same day.

            The company writes direct premium in the state of Wisconsin only. The direct

premium written by the company for 2006 is $476,726,300.

            The company is licensed in two states, Wisconsin and Ohio. The company currently

writes health insurance in Wisconsin only and assumes health business written in other states by

its subsidiary, The EPIC Life Insurance Company (EPIC). The majority of the company’s health

insurance business involves Preferred Provider Organization (PPO) type managed care products.

The company also continues to write indemnity health policies and provide claims administration

services for self-insured employers.

            In addition to the direct business written, business assumed, and the administration of

self-insured groups by an Administrative Services Contract (ASC), revenues are also generated

through administrative contracts with the federal government for TRICARE (formerly known as

CHAMPUS) and the Medicare Part B and D programs.

            The following table is a summary of premiums written by the company in 2006 as well

as the revenues generated by the company’s participation in the TRICARE and Medicare

programs (see descriptions of the programs below).

                                       2006 Premium Revenue

                        Direct premium written           $476,726,300
                        Assumed premium                     5,327,003
                        ASC revenue:*
                          TRICARE                          208,740,349
                          Medicare                          93,243,161
                          Private groups                    26,917,239

                        Total                            $810,954,052

* This revenue consists of expense reimbursements for the administering of claims under these
  programs.




                                                 3
TRICARE

             WPS provides administrative services under subcontracts, in total or partially, for

three regions of the federal TRICARE plan, which is approximately 20% of the entire program.

TRICARE is the United States military's health care plan for military personnel, military retirees,

and their dependents. WPS pays benefit dollars for claims using a federal government letter of

credit and receives an administrative fee per claim. The company administered $4.4 billion of

TRICARE claims in 2006. The TRICARE line of business resulted in net income of $20 million for

calendar year 2006.

Medicare

             WPS administers the Wisconsin, Illinois, Michigan, and Minnesota Part B Medicare

claims through a cost-reimbursement contract directly with Centers for Medicare and Medicaid

Services (CMS). WPS is reimbursed for administrative fees based on a budget set by Medicare

each fiscal year. WPS administered $8.1 billion of Medicare claims in 2006. Generally, there is no

profit or loss reported by the company for Medicare because it is a cost-reimbursement contract.

However, an accounting loss of $2.4 million was recorded for 2006 because Medicare does not

allow the company to recover certain allocated expenses. In addition, pension expenses are

recovered using the government’s cost accounting standards which create timing differences.

ASC Business

             WPS also provides administrative services for private self-insured groups. WPS

administered $607 million of claims for non-government groups in 2006. This line of business

resulted in a loss of $6.2 million for 2006.




                                                  4
                              III. MANAGEMENT AND CONTROL

Board of Directors

            The board of directors consists of 14 members. Four directors are elected annually

to serve a three-year term and two are ex-officio members as long as they hold their positions with

the company. The company President and the Executive Vice President-Chief Operating Officer

are the ex-officio members of the board of directors. Officers are elected at the board's annual

meeting. Members of the company's board of directors may also be members of other boards of

directors in the holding company group. The board members currently receive $1,000 per

meeting with committee chairs receiving $1,100 per meeting for serving on the board with an

additional $500 if two or more meetings are on the same day. The chairman of the board

receives a $30,000 annual retainer. Employees on the board are not paid director’s fees.

            Currently the board of directors consists of the following persons:



    Name and Residence                       Principal Occupation                    Term Expires

Marla Ahlgrimm, R.Ph.             Founder and Chairman                                    2009
Madison, Wisconsin                Madison Pharmacy Associates, Inc.

Jeffrey Allen, M.D.               Physician                                               2009
Rubicon, Wisconsin                Aurora Health Center

Brad Anderson                     Human Resources Consultant                              2009
Lake Mills, Wisconsin             Partnerships in Human Resources

William Bathke                    Executive Vice President and Chief                   Ex-Officio
Madison, Wisconsin                  Operating Officer
                                  Wisconsin Physicians Service Ins. Corp.

John J. Brandabur, M.D.           Retired Physician                                       2010
Madison, Wisconsin

Timothy T. Flaherty, M.D.         Retired Physician                                       2010
Neenah, Wisconsin

Edwin Hill, Jr.                   Assistant Treasurer and                                 2010
Madison, Wisconsin                Retired Bank Vice President

Leland Kauth                      Retired Financial Consultant                            2009
Wisconsin Rapids, Wisconsin

James A. Lord, D.D.S.             Private Practice Dentist                                2008
Middleton, Wisconsin




                                                 5
    Name and Residence                       Principal Occupation                      Term Expires

John Matthews                     Executive Director                                       2008
Madison, Wisconsin                Madison Teachers Inc.

John McGloin, M.D.                Retired Surgeon                                          2010
Treasure Island, Florida

Eugene J. Nordby, M.D., COB       Retired Surgeon                                          2008
Madison, Wisconsin

James Riordan                     President and Chief Executive Officer                  Ex-Officio
Madison, Wisconsin                Wisconsin Physicians Service Ins. Corp.

David L. Vogel, Secretary         Civil Engineer and President                             2008
Madison, Wisconsin                Vogel Bros. Building Co.

Officers of the Company

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

                                                                                      2006
      Name                                    Office                               Compensation

James Riordan                 President and Chief Executive                          $667,435*
                                  Officer
William Bathke                Exec. Vice President and Chief                          509,877*
                                  Operating Officer
William Beisenstein           Senior Vice President and Treasurer                     309,776*
David Vogel                   Secretary                                                15,100**

 * Compensation is total salary and is allocated between affiliates.
** Compensation is all directors’ fees paid by the company.

Committees of the Board

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

directors. The committees at the time of the examination are listed below:

        Executive Committee                               Audit Committee
        Eugene Nordby, M.D., Chair                        Leland Kauth, Chair
        James Riordan                                     Jeffery Allen, M.D.
        David Vogel                                       Edwin Hill, Jr.
        William Bathke                                    Eugene Nordby, M.D.
        Edwin Hill, Jr.                                   James Lord, D.D.S.
        Brad Anderson
        Leland Kauth
        John Matthews
        Timothy Flaherty, M.D.




                                                 6
Finance Committee            Planning Committee
Edwin Hill, Jr., Chair       David Vogel, Chair
Leland Kauth                 John McGloin, M.D.
Brad Anderson                John Matthews
William Bathke               Brad Anderson
James Riordan                Eugene Nordby, M.D.
Eugene Nordby, M.D.          Timothy Flaherty, M.D.
Marla Ahlgrimm, R.Ph.
John Brandabur, M.D.
Timothy Flaherty, M.D.




                         7
                                   IV. AFFILIATED COMPANIES

            Wisconsin Physicians Service Insurance Corporation is the ultimate parent in the

holding company system. The organizational chart below depicts the relationships among the

affiliates in the holding company system. A brief description of the significant affiliates of the

company follows the organizational chart.

                                      Holding Company Chart
                                      As of December 31, 2006



                                     Wisconsin Physicians Service
                                        Insurance Corporation




     The EPIC Life Insurance              WPS Health Plan,             Administrative and Technical
           Company                             Inc.                           Services, Inc.




                         The Westwood                    South Towne Office
                     Conference Center, LLC                  Park, LLC
                        30.1288% Share




The EPIC Life Insurance Company (EPIC)

            EPIC is a wholly owned stock subsidiary which provides group life, dental, vision, and

disability insurance as well as voluntary insurance (coverages such as life, dental, vision and

disability made available to group employees without employer participation in the cost) on the

same products. EPIC was established in 1984 primarily to write business in other states. As of

December 31, 2006, the audited financial statements of EPIC reported assets of $40,375,112,

liabilities of $18,065,371, and capital and surplus of $22,309,741. Operations for 2006 produced

net income of $606,287.

Administrative and Technical Services, Inc. (ADTEC)

            ADTEC is a wholly owned corporation incorporated in 1979 and provides staffing

services and contract programming services. As of December 31, 2006, the audited financial




                                                   8
statements of ADTEC reported assets of $3,552,696, liabilities of $335,984, and stockholders’

equity of $3,216,712. Operations for 2006 produced a net loss of $97,187.

The Westwood Conference Center, LLC (Westwood)

            Westwood is a Wisconsin limited liability company operating the Westwood

Conference facility in Wausau, Wisconsin. Westwood was established in 2004 and the

company’s ownership share is 30.1288%. As of December 31, 2006, the company’s share of the

unaudited financial statements of Westwood reported total assets of $2,913,736, total liabilities of

$1,675,280, and partners’ equity of $1,238,456. WPS’s share of operations for 2006 produced

net income of $133,529.

South Towne Office Park, LLC

            South Towne Office Park, LLC, is a Delaware limited liability company which leases

commercial office space on property adjacent to the WPS home office. WPS is the sole partner

of the limited liability company which was established in 2005. As of December 31, 2006, the

unaudited financial statements of South Towne Office Park, LLC, reported assets of $4,039,453,

liabilities of $1,713,369, and owner equity of $2,326,084. Operations for 2006 produced net

income of $46,595.

WPS Health Plan, Inc.

            WPS Health Plan, Inc., is described as a for-profit mixed model health maintenance

organization (HMO) insurer, which markets both group and individual products. The HMO also

markets an individual Medicare supplement product. The company uses a mixed distribution

force consisting of selected agencies in the northeastern and north central Wisconsin areas. For

the company’s Medicare supplement products a managing general agent is used, Informed

Choice. As of December 31, 2006, the audited financial statements of WPS Health Plan, Inc.,

reported assets of $19,478,151, liabilities of $12,755,044, and surplus of $6,723,107. Operations

for 2006 produced net income of $962,280.

Agreements with Affiliates

            WPS has a Service and Supplies Agreement with EPIC, ADTEC and WPS Health

Plan, Inc., under which WPS provides management, investment, administrative, and other




                                                  9
services and supplies. EPIC, ADTEC, and WPS Health Plan, Inc., reimburse WPS for the actual

cost of the services and supplies provided, including a reasonable allocation of overhead

expenses. Settlement is to be made within 20 days after the invoice billing is exchanged but no

less often than quarterly.

            WPS has tax allocation agreements with EPIC, ADTEC and WPS Health Plan, Inc.

EPIC, ADTEC and WPS Health Plan, Inc., either pay or receive refunds based on calculations

performed by WPS at the end of every month. Payments are to be made within 30 days or no

later than each quarterly due date of the taxes.




                                                   10
                                          V. REINSURANCE

             The company’s major reinsurance treaties in force at the time of the exam are

summarized below. The contracts contained proper insolvency provisions.

Affiliated Assuming Contracts

             The company assumes under a quota share agreement from EPIC accident and

health coverages administered by the home office and defined as CORE business. CORE

business is medical and dental business. WPS assumes and pays 100% of the losses on this

business

Non-Affiliated Assuming Contracts

             The company has a joint venture agreement with Delta Dental Plan of Wisconsin

(Delta). Part of this agreement is a reinsurance contract whereby WPS covers 100% of the old

group dental business issued by WPS and then transferred to Delta policy forms with initial

effective dates of January 1, 1996 or after. WPS also covers 50% of the new group dental plans

solicited by WPS and written on Delta policy forms.

Non-Affiliated Ceding Contracts

             The company has two excess of loss contracts with Allianz Life Insurance Company

of North America. One contract covers all health business, excluding Medicare supplement but

including employee group coverages. The other contract covers medical stop-loss policies issued

to self-funded groups. Each contract contains three coverage layers as follows: 1) First layer is

90% of $800,000 in excess of $200,000 of any single loss. 2) Second layer covers 100% of

$1 million excess of $1 million of any single loss. 3) Third layer covers $3 million excess of

$2 million of any single loss. The limit on the contracts is the greater of $5 million or policy limit

per covered person per contract year. Both contracts contain some form of a profit-sharing

arrangement.




                                                   11
                                      VI. FINANCIAL DATA

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

reported to the Commissioner of Insurance in the December 31, 2006, annual statement. Also

included in this section are schedules 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 Surplus per

Examination."




                                                 12
                    Wisconsin Physicians Service Insurance Corporation
                                         Assets
                                As of December 31, 2006

                                                                                 Net
                                                              Nonadmitted      Admitted
                                                 Assets         Assets          Assets

Bonds                                         $ 54,272,152    $               $ 54,272,152
Stocks:
   Common stocks                                71,710,641                      71,710,641
Real estate:
   Properties occupied by the company           31,590,261                      31,590,261
Cash, cash equivalents and short-term           23,283,802                      23,283,802
   investments
Other invested assets                            3,384,415        3,384,415              0
Investment income due and accrued                  677,159                         677,159
Uncollected premiums and agents'                 2,527,520          67,710       2,459,810
   balances in the course of collection
Amounts recoverable from reinsurers              2,516,785                       2,516,785
Amounts receivable relating to uninsured        51,699,053          21,985      51,677,068
   plans
Current federal and foreign income tax              525,819                       525,819
   recoverable and interest thereon
Electronic data processing equipment and        23,999,577     22,363,142        1,636,435
   software
Furniture and equipment, including health        4,220,868        4,220,868               0
   care delivery assets
Health care and other amounts receivable        10,767,246        3,387,596      7,379,650
Aggregate write-ins for other than invested
   assets:
   Deferred charges                              5,024,367      5,024,367                0
   Prepaid expenses                              1,325,764      1,325,764                0
   Prepaid pension                              25,397,336     25,397,336                0
   Leasehold improvements                        2,141,661      2,141,661                0
   SSAP #89 intangible asset                        94,863              0           94,863

Total assets                                  $315,159,289    $67,334,844     $247,824,445




                                               13
                    Wisconsin Physicians Service Insurance Corporation
                           Liabilities, Surplus, and Other Funds
                                  As of December 31, 2006


Claims unpaid                                                            $ 44,437,369
Accrued medical incentive pool and bonus payments                             552,116
Unpaid claims adjustment expenses                                           2,387,648
Aggregate health policy reserves                                            9,343,810
Premiums received in advance                                               13,826,389
General expenses due or accrued                                            41,869,395
Net deferred tax liability                                                  6,520,396
Ceded reinsurance premiums payable                                            654,981
Amounts withheld or retained for the account of others                        298,097
Remittance and items not allocated                                          3,316,540
Amounts due to parent, subsidiaries and affiliates                            791,162
Funds held under reinsurance treaties with reinsurers                       1,952,877
Liability for amounts held under uninsured accident and health plans        4,223,112
Total liabilities                                                         130,173,892

Unassigned funds (surplus)                                                117,650,553

Total liabilities, Capital and Surplus                                   $247,824,445




                                              14
                     Wisconsin Physicians Service Insurance Corporation
                            Statement of Revenue and Expense
                                     For the Year 2006

Member months                                                      2,459,641

Net premium income                                                             $471,449,291
Change in unearned premium reserves and reserve for rate credits                   (825,543)

Total revenues                                                                  470,623,748

Medical and hospital
Hospital/medical benefits                                                       215,550,842
Other professional services                                                       3,388,315
Emergency room and out-of-area                                                   87,443,817
Prescription drugs                                                               80,942,406
Incentive pool and withhold adjustments                                             600,879

Subtotal                                                                        387,926,259

Less:

Net reinsurance recoveries                                                        4,941,996
Total medical and hospital                                                      382,984,263

Claims adjustment expense                                                        34,052,796
General administrative expenses                                                  64,714,823

Total underwriting deductions                                                   481,751,882

Net underwriting gain or (loss)                                                 (11,128,134)

Net investment income earned                                                      8,055,381
Net realized capital gains or (losses)                                              669,367

Net investment gains or (losses)                                                  8,724,748

Aggregate write-ins for other income or expense
Loss on sale of fixed assets                                                         (5,725)
Miscellaneous expense                                                              (549,718)
External technology solutions net margin                                          1,239,022
Government lines                                                                 17,503,515

Subtotal                                                                         18,187,094

Net income or (loss) before federal income taxes                                 15,783,708

Federal and foreign income taxes incurred                                         4,202,912

Net Income                                                                     $ 11,580,796




                                               15
                  Wisconsin Physicians Service Insurance Corporation
                                     Cash Flow
                              As of December 31, 2006

Premiums collected net of reinsurance                                  $471,032,522
Net investment income                                                     8,544,611
Total                                                                   479,577,133
Benefit- and loss-related payments                      $392,743,573
Commissions, expenses paid, and
 aggregate write-ins for deductions                       80,921,664
Federal and foreign income taxes paid
 (recovered)                                               4,457,718
Total deductions                                                        478,122,955
Net cash from operations                                                  1,454,178

Proceeds from investments sold,
 matured, or repaid:
   Bonds                                  $40,859,033
   Stocks                                  20,939,645
   Total investment proceeds                              61,798,678
Cost of investments acquired (long-term
 only):
   Bonds                                   36,602,735
   Stocks                                  28,914,644
   Real estate                                743,164
   Total investments acquired                             66,260,543
Net cash from investments                                                (4,461,865)

Cash from financing and miscellaneous
 sources:
  Other cash provided (applied)                                           3,583,877

Reconciliation:
Net change in cash, cash equivalents,
 and short-term investments                                                576,190
Cash, cash equivalents, and short-term
 investments:
   Beginning of year                                                     22,707,612

  End of Year                                                          $ 23,283,802




                                          16
                     Wisconsin Physicians Service Insurance Corporation
                        Compulsory and Security Surplus Calculation
                                    December 31, 2006

Assets per annual statement                                               $247,824,445
 Add furniture and fixtures relating to
  TRICARE and Medicare per order                                            13,045,352
Total allowed assets                                                       260,869,797
Less investments in insurance
  subsidiaries                                                              29,275,726
Add security surplus excess of
  insurance subsidiaries                                                    22,433,242
Less liabilities                                                           130,173,892

Adjusted surplus                                                           123,853,421

Annual premium:
  Individual life and health              $103,000,183
  Factor                                            15%
  Total                                                   $15,450,027

   Group life and health                   318,028,347
   Factor                                           10%
   Total                                                   31,802,834

   Stand-alone Medicare Part D              50,420,761
   Factor                                            7%
   Total                                                    3,529,453

Compulsory surplus (subject to a
 $2,000,000 minimum)                                                        50,782,314

Compulsory Surplus Excess or (Deficit)                                    $ 73,071,107


Adjusted surplus (from above)                                             $123,853,421

Security surplus: (125% of compulsory
 surplus)                                                                   63,477,892

Security Surplus Excess or (Deficit)                                      $ 60,375,529




                                              17
                   Wisconsin Physicians Service Insurance Corporation
                         Reconciliation and Analysis of Surplus
                   For the Five-Year Period Ending December 31, 2006

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

                                 2006            2005                 2004           2003             2002

Capital and surplus,
 beginning of year           $ 95,077,441   $91,935,218       $ 99,246,797        $ 74,387,404    $59,117,472
Net income                     11,580,796    20,518,516         21,100,889          34,624,717     20,542,516
Change in net unrealized
 capital gains/losses           2,985,529      (3,567,060)             11,764        7,350,168     (2,411,779)
Change in net deferred
 income tax                     3,106,356      (3,542,049)       (3,805,000)           (86,675)      (136,010)
Change in nonadmitted
 assets and related items       4,900,431   (10,267,184)       (24,619,232)        (17,028,817)    (2,724,795)

Capital and Surplus, End
 of Year                     $117,650,553   $ 95,077,441      $ 91,935,218        $ 99,246,797    $74,387,404




              Growth of Wisconsin Physicians Service Insurance Corporation

       Year            Admitted Assets                  Liabilities             Capital and Surplus

       2006                $247,824,445               $130,173,892                 $117,650,553
       2005                 226,193,170                131,115,729                   95,077,441
       2004                 209,950,815                118,015,597                   91,935,218
       2003                 202,925,217                103,678,420                   99,246,797
       2002                 165,430,091                 91,042,687                   74,387,404
       2001                 150,848,473                 91,731,001                   59,117,472



          Net Premiums               Claims             Net Underwriting                Net
Year         Earned                 Incurred               Gain/Loss                  Income

2006      $470,623,748            $382,984,263            $(11,128,134)             $11,580,796
2005       413,574,557             336,597,466               7,263,563               20,518,516
2004       374,964,107             305,191,126              11,557,658               21,100,889
2003       300,120,396             232,673,469              21,701,161               34,624,717
2002       294,869,860             234,119,304              16,900,915               20,542,516
2001       274,819,954             230,026,424                (673,998)               5,561,907




                                                 18
                      Operating Percentages (Percent of Premiums Earned)

                              Claims
               Year          Incurred           Expenses                Total

              2006            81.4%                 21.0%               102.4%
              2005            81.4                  16.8                 98.2
              2004            81.4                  15.5                 96.9
              2003            77.5                  15.3                 92.8
              2002            79.4                  14.9                 94.3
              2001            83.7                  16.5                100.2


            Since the prior examination the company’s assets have grown from $150,848,473 to

$248,067,316. Liabilities have increased from $91,731,001 to $130,173,892. Surplus has

increased from $59,117,472 to $117,893,424. Net premiums earned increased 71.2% during the

period under examination. The 2006 underwriting loss of $11,128,134 is the largest during the

examination period. The company attributes the larger underwriting loss in 2006 to the loss on

Medicare Part D business. The company had a net income for all years and the 2006 net income

was $11,580,796. The claims incurred percentage remained stable for the last three years and

the expenses increased from 16.5% in 2001 to 21.0% in 2006. The total claims and expense

percentage is at a high of 102.4% in 2006. The company became a Medicare Part D prescription

drug provider in 2006.

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, 2006, is accepted.




                                               19
                         VII. SUMMARY OF EXAMINATION RESULTS

Compliance with Prior Examination Report Recommendations

            There were 11 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.   Accounts and Records—It is recommended that the company retain conflict of interest
     statements and records that support balances pursuant to s. Ins 6.80 (4), Wis. Adm. Code.

     Action—Compliance.

2.   Executive Compensation—It is recommended that the company properly include all
     compensation amounts paid or accrued for when completing the Report on Executive
     Compensation (Form OCI 22-010).

     Action—Compliance.

3.   Bonds—It is recommended that the company correctly state par value as the par amount of
     principal to which the reporting entity has a claim in accordance with the NAIC Annual
     Statement Instructions – Health.

     Action—Compliance.

4.   Bonds—It is recommended that the company comply with SSAP No. 26, paragraph 7, and
     report bonds that are NAIC designations 3 to 6 at the lower of amortized cost or fair value.

     Action—Compliance.

5.   Bonds—It is recommended that the company comply with the Purposes and Procedures
     Manual of the NAIC Securities Valuation Office and report correct designations for each
     security on future annual statements.

     Action—Noncompliance; see comments in the “Summary of Current Examination Results.”

6.   Bonds—It is recommended that the company comply with the Purposes and Procedures
     Manual of the NAIC Securities Valuation Office and maintain documentation for provisionally
     exempt designation securities and make sure that any securities that no longer qualify for the
     provisionally exempt designation be filed within 120 days of such failure, as if the securities
     had never been provisionally exempt.

     Action—Compliance.

7.   Bonds—It is recommended that the company comply with NAIC Annual Statement
     Instructions – Health, and report CUSIP numbers that conform to those published by the
     SVO.

     Action—Compliance.




                                                20
8.   Short-Term Investments—It is recommended that the company comply with s. Ins 6.20 (8)
     (k), Wis. Adm. Code, in which foreign investments are limited to 2% of admitted assets.

     Action—The current examination found that the company has excess foreign investments
     that were not deducted in the calculation of compulsory surplus as required by s. Ins 6.20 (8)
     (k), Wis. Adm. Code. See “Summary of Current Examination Results” for further comments.

9.   Derivatives—It is recommended that the company put capital gains or (losses) from
     Schedule DB on Line 7 of the Underwriting and Investment Exhibit Part 4A in accordance
     with the NAIC Annual Statement Instructions – Health.

     Action—Compliance.

10. Unpaid Claim Adjustment Expenses—It is recommended that the actuary opine on the entire
    balance of unpaid claims adjustment expenses according to the NAIC Annual Statement
    Instructions – Health.

     Action—Compliance.

11. Special Deposits—It is recommended that the company correctly fill out Schedule E, Part 2,
    Special Deposits, in accordance with the NAIC Annual Statement Instructions – Health.

     Action—Compliance.




                                                21
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.

Corporate Governance

            During review of the minutes of the board of directors and committees, the examiners

noted that the board did not always reflect discussions or recommendations of committees. It is

recommended that the board include discussions and recommendations of committees. Per the

company, the board began approving committee minutes effective with their December 7, 2007,

meeting and intend on approving committee minutes in the future.

            During review of attendance of board members it was noted that one board member

missed several board and committee meetings. It is recommended that the company establish a

board attendance policy to promote more complete contribution by all board members.

            The conflict of interest disclosure statements for board members were reviewed by

the examiners. It was noted that one board member continually entered the notation “same as

last year.” Potential conflicts should be listed every year on the conflict of interest disclosure

statements even if they are the same as the prior reporting period. It is recommended that the

board members annually disclose potential conflicts on the conflict of interest disclosure

statements and not enter “same as last year.”

            The examiners reviewed the company’s 2007 audit engagement letter. It was noted

that the engagement letter contained an indemnification clause in violation of s. Ins 50.08 (1), Wis.

Adm. Code. Prior to the end of examination field work, the company and the external auditors

amended the engagement letter to eliminate the indemnification clause. It is recommended that

the company not sign engagement letters with indemnification clauses or other limitations on

auditor liability in compliance with s. Ins 50.08 (1), Wis. Adm. Code.

Unclaimed Funds

            The company reported unclaimed funds in the line “amounts withheld or retained on

account of others.” According to the NAIC Annual Statement Instructions – Health, the escheat




                                                   22
liability should be reported as a write-in. It is recommended that the company comply with NAIC

Annual Statement Instructions-Health and report any escheat liability as a write-in. Beginning with

the third quarter 2007 the company began reporting escheatable funds on the correct line.

Cash and Short-Term Investments

            During the examination of Cash and Short-Term Investments, the examination noted

several related material internal control weaknesses. 1) Although the company has a stated

policy of requiring two authorized signatures on checks over an established amount, the

examination found that the policy was circumvented and a large check was issued without

two authorized signatures. 2) Some checks received were not promptly deposited upon receipt.

3) Checks written out of one administrative account were not being properly accounted for when

written. Rather, a separate, alternative accounting process was used for this account, and the

checks were not expensed until they cleared the bank. Also, expenses paid from this account

were not all fully reflected in the appropriate accounting period. 4) The examination noted that

bank reconciliations for this account were performed by the same person that was accounting for

its transactions. It is recommended the company evaluate its internal control procedures for Cash

and Short-Term Investments and implement remedial action to assure that 1) all checks issued

over an established amount contain two authorized signatures, 2) all checks received are

promptly deposited, 3) all transactions from all bank accounts are fully reflected in the appropriate

accounting period, and 4) all bank accounts are reconciled by a person other than the person

accounting for the transactions.

            At year-end 2006, WPS had a balance of $467,664 in a Cayman Island bank account.

Since the company has no business in foreign countries that would require the use of foreign bank

accounts, the company should reevaluate whether the use of foreign bank accounts is warranted.

Custodial Agreement

            The company maintains its investments with a bank as an investment custodian. It

was found that the custody agreement was missing the following controls and safeguards:

1. An indemnification clause whereby the bank would indemnify the company for a loss of
   securities in the custodian’s custody due to negligence or dishonesty of the custodian’s
   officers or employees, or burglary, robbery, holdup, theft or mysterious disappearance,
   including loss by damage or destruction.




                                                 23
2. A provision that in event of such a loss the custodian is obligated to promptly replace the
   value of the securities and the value of any loss of rights or privileges resulting from said loss
   of securities.

In addition, it appears that the agreement the company has is for pension type accounts and is not

a custodial agreement normally used for insurers. It is recommended that the company fully

comply with s. 610.23, Wis. Stat., by executing proper custodial agreements containing

satisfactory safeguards and controls in accordance with the NAIC Financial Condition Examiners

Handbook.

Bonds and Stocks

            The prior examination contained a recommendation regarding reporting proper

designations per the Purposes and Procedures Manual of the NAIC Securities Valuation Office.

The examination found two securities with a designation of "2Z," one acquired June 8, 2006, and

the other acquired December 4, 2006. The security acquired on June 8, 2006, was acquired

more than 120 days prior to year-end 2006. The company should have designated the security as

filing exempt (FE) on the annual statement. It is again recommended that the company comply

with the Purposes and Procedures Manual of the NAIC Securities Valuation Office and report

correct designations for each security on future annual statements.

            The examiners found that the company did not appropriately designate many of its

foreign securities on Schedule D as required by the NAIC Annual Statement Instructions-Health.

It is recommended that the company designate foreign securities accurately in Schedule D of

future annual statements as required by the NAIC Annual Statement Instructions-Health.

            Pursuant to s. Ins 6.20 (8) (k), Wis. Adm. Code, there is a 2% of assets limit to

foreign investments that may be counted towards meeting compulsory surplus. It was noted by

the examination that the company’s investment in foreign securities exceeded the 2% limit, but

the company did not reduce assets in its compulsory surplus calculation to remove foreign

investments in excess of the 2% limit. It is recommended that the company monitor its foreign

investments, including foreign bank accounts, to assure that any excess over 2% of admitted

assets are deducted in the calculation of compulsory surplus.




                                                  24
Premiums

            The company reported in the Remittances and Items Not Allocated $440,268.66 for

subrogation of an ASC claim in an ASC Refund Suspense. This amount should have been

entered on Line 20, Liability for Amounts Held under Uninsured Plans. It is recommended that the

company include its ASC Refund Suspense in the Liability for Amounts Held under Uninsured

Plans.

            Included in Remittances and Items Not Allocated were items that dated back to

January 2000. Items from 2005 and prior were $491,203 of the $3.3 million liability. It is

recommended that the company review items not allocated at least quarterly and, for those items

that could not be assigned to the proper income account within one year, report them as

escheatable funds.

            The company did not report the correct amounts on Exhibit 3 of their annual

statement. The company did not report the gross amounts on the exhibit in columns 2 though 5.

It is recommended that Exhibit 3 be reported on the gross basis pursuant to the NAIC Health

NAIC Annual Statement Instructions.

            The company uses a Pharmacy Benefits Manager (PBM) to administer the

distribution of prescription drugs under its policies. The agreement between WPS and the PBM

calls for WPS to receive drug manufacturer’s rebates from the PBM within 180 days following the

end of each quarter. The examination noted that WPS has been offsetting pharmaceutical

rebates against payments owed to the PBM rather than receiving checks as called for in the

agreement. It is recommended that the company follow the procedures noted in the agreement or

amend the agreement to reflect the procedure currently being used.

HIRSP Accrual

            The examination determined that WPS did not properly accrue for the Health

Insurance Risk-Sharing Plan (HIRSP) assessment. The company had received an assessment

based on 2005 premium in August 2006 for the amount of $2,095,459. The company elected to

pay this assessment in four installments resulting in $1,047,730 still due at December 31, 2006.

WPS did not make an accrual for the HIRSP assessment based on its 2006 premium, which




                                                25
would have resulted in an additional $757,038. SSAP No. 35, Guaranty Fund and Other

Assessments, states that an accrual for assessments should be established when information is

available prior to the issuance of the financial statements when it is probable that an asset has

been impaired or a liability has been incurred at the date of the financial statement and the

amount can be reasonably estimated. Although the company did not receive notice of an

assessment based on 2006 premium prior to the issuance of the financial statements, they could

have estimated the assessment by taking the 2006 premium multiplied by the latest factor

received in the last assessment. Since the assessment is based on premium as opposed to

claims, the liability has been incurred once the company has written the premium. The additional

accrual of $757,038 was not considered material. However, it is recommended that the company

accrue for HIRSP assessments in accordance with SSAP No. 35. It should be noted that

beginning with year-end 2007 the company has begun to accrue for this liability in accordance

with SSAP No. 35.




                                                 26
                                       VIII. CONCLUSION

            Wisconsin Physicians Service Insurance Corporation is the ultimate parent in a

holding company system with two other insurance companies that are being examined

concurrently. Surplus increased from $59,117,472 to $117,893,424 since the last examination.

Net premiums earned increased 71.2% during the period under examination. The 2006

underwriting loss of $11,128,134 is the largest during the examination period. The company

attributes the larger underwriting loss in 2006 to the loss on Medicare Part D business.

Investment income and other receipts, including those related to administration of government

programs, offset the underwriting loss and the company earned a net income in 2006 of

$11,580,796. The claims incurred percentage remained stable for the last three years and the

expenses ratio increased from 16.5% in 2001 to 21.0% in 2006. The total claims and expense

percentage was at a high of 102.4% in 2006. The company became a Medicare Part D

prescription drug provider in 2006.

            The examination recommendations included a repeat recommendation regarding the

reporting of correct investment designations. Other recommendations were regarding corporate

governance, unclaimed funds, internal controls of cash, custodial agreement language,

investment and premium reporting and the recording of the HIRSP accrual. More detail can be

found in the “Summary of Current Examination Results” and in the next section titled “Summary of

Comments and Recommendations.”




                                                27
               IX. SUMMARY OF COMMENTS AND RECOMMENDATIONS

 1.   Page 22 - Corporate Governance—It is recommended that the board include
                discussions and recommendations of committees.

 2.   Page 22 - Corporate Governance—It is recommended that the company establish a
                board attendance policy to promote more complete contribution by all board
                members.

 3.   Page 22 - Corporate Governance—It is recommended that the board members annually
                disclose potential conflicts on the conflict of interest disclosure statements and
                not enter “same as last year.”

 4.   Page 22 - Corporate Governance—It is recommended that the company not sign
                engagement letters with indemnification clauses or other limitations on auditor
                liability in compliance with s. Ins 50.08 (1), Wis. Adm. Code.

 5.   Page 23 - Unclaimed Funds—It is recommended that the company comply with NAIC
                Annual Statement Instructions-Health and report any escheat liability as a
                write-in.

 6.   Page 23 - Cash and Short-Term Investments—It is recommended the company evaluate
                its internal control procedures for Cash and Short-Term Investments and
                implement remedial action to assure that 1) all checks issued over an
                established amount contain two authorized signatures, 2) all checks received
                are promptly deposited, 3) all transactions from all bank accounts are fully
                reflected in the appropriate accounting period, and 4) all bank accounts are
                reconciled by a person other than the person accounting for the transactions.

 7.   Page 24 - Custodial Agreement—It is recommended that the company fully comply with
                s. 610.23, Wis. Stat., by executing proper custodial agreements containing
                satisfactory safeguards and controls in accordance with the NAIC Financial
                Condition Examiners Handbook.

 8.   Page 24 - Bonds and Stocks—It is again recommended that the company comply with
                the Purposes and Procedures Manual of the NAIC Securities Valuation Office
                and report correct designations for each security on future annual statements.

 9.   Page 24 - Bonds and Stocks—It is recommended that the company designate foreign
                securities accurately in Schedule D of future annual statements as required by
                the NAIC Annual Statement Instructions-Health.

10.   Page 24 - Bonds and Stocks—It is recommended that the company monitor its foreign
                investments, including foreign bank accounts, to assure that any excess over
                2% of admitted assets are deducted in the calculation of compulsory surplus.

11.   Page 25 - Premiums—It is recommended that the company include its ASC Refund
                Suspense in the Liability for Amounts Held under Uninsured Plans.

12.   Page 25 - Premiums—It is recommended that the company review items not allocated at
                least quarterly and, for those items that could not be assigned to the proper
                income account within one year, report them as escheatable funds.

13.   Page 25 - Premiums—It is recommended that Exhibit 3 be reported on the gross basis
                pursuant to the NAIC Health NAIC Annual Statement Instructions.




                                              28
14.   Page 25 - Premiums—It is recommended that the company follow the procedures noted
                in the agreement or amend the agreement to reflect the procedure currently
                being used.

15.   Page 26 - HIRSP Accrual—However, it is recommended that the company accrue for
                HIRSP assessments in accordance with SSAP No. 35.




                                           29
                                    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

                     Eleanor Oppriecht            Insurance Financial Examiner
                     Angela Graff                 Insurance Financial Examiner
                     Andrew Fell                  Insurance Financial Examiner
                     Carmenza Rincon              Insurance Financial Examiner
                     Victoria Chi                 Insurance Financial Examiner—Advanced
                     Jerry DeArmond               Insurance Financial Examiner—Advanced


                                                  Respectfully submitted,



                                                  David A. Grinnell
                                                  Examiner-in-Charge




                                                 30
                                   XI. SUBSEQUENT EVENTS

            On April 3, 2007, WPS and Aurora Health Care of Milwaukee reached a settlement on

a lawsuit. The parties agreed to dismiss all legal claims against each other.

            On January 16, 2008, WPS sued Aurora Health Care and HealthEOS by Multiplan

over WPS participants not having access to Aurora Health Care at discounted rates. On

February 1, 2008, a settlement was reached whereby all legal claims were dismissed and WPS

participants have access at discounted rates to Aurora Health Care through the end of 2008.




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