REPORT OF EXAMINATION OF THE BLUE SHIELD OF CALIFORNIA LIFE by gabyion

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									        REPORT OF EXAMINATION
                OF THE

BLUE SHIELD OF CALIFORNIA LIFE & HEALTH
         INSURANCE COMPANY

                AS OF
           DECEMBER 31, 2004




                                     Filed June 16, 2006
                                                   TABLE OF CONTENTS

                                                                                                                                    Page

SCOPE OF EXAMINATION .........................................................................................................1

COMPANY HISTORY...................................................................................................................2

MANAGEMENT AND CONTROL:..............................................................................................2
    Intercompany Agreements...................................................................................................4

CORPORATE RECORDS..............................................................................................................4

TERRITORY AND PLAN OF OPERATION................................................................................5

REINSURANCE: ............................................................................................................................6
     Assumed ..............................................................................................................................6
     Ceded...................................................................................................................................6

ACCOUNTS AND RECORDS: .....................................................................................................8
    Information System Controls ..............................................................................................8

FINANCIAL STATEMENTS: .......................................................................................................9
     Statement of Financial Condition as of December 31, 2004.............................................10
     Summary of Operations and Capital and Surplus Account for the Year Ended
       December 31, 2004........................................................................................................11
     Reconciliation of Capital and Surplus from December 31, 2000 through
       December 31, 2004........................................................................................................12

COMMENTS ON FINANCIAL STATEMENT ITEMS: ............................................................13
    Aggregate Reserve for Life Contracts...............................................................................13
    Aggregate Reserve for Accident and Health Contracts.....................................................13
    Contract Claims: Life ........................................................................................................13
    Contract Claims: Accident and Health ..............................................................................13

SUMMARY OF COMMENTS AND RECOMMENDATIONS: ................................................14
    Current Report of Examination .........................................................................................14
    Prior Report of Examination: ............................................................................................14

ACKNOWLEDGEMENT.............................................................................................................15
                                                                      San Francisco, California
                                                                       April 27, 2006


Honorable John Garamendi
Insurance Commissioner
California Department of Insurance
Sacramento, California


Dear Commissioner:


Pursuant to your instructions, an examination was made of the


      BLUE SHIELD OF CALIFORNIA LIFE & HEALTH INSURANCE COMPANY
                    (Formerly CPIC Life Insurance Company)


(hereinafter also referred to as the Company) at its home office located at 50 Beale Street, San
Francisco, California 94105.


                                  SCOPE OF EXAMINATION


The previous examination of the Company was made as of December 31, 2000.                  This
examination covers the period from January 1, 2001 through December 31, 2004. The present
examination included a review of the Company's practices and procedures, an examination of
management records, tests and analyses of detailed transactions, an evaluation of assets, and a
determination of liabilities as of December 31, 2004, as deemed necessary under the
circumstances.


In addition to the items specifically commented upon in this report, other phases of the
Company's operations were reviewed including the following areas which require no further
comments: fidelity bonds and other insurance; growth of company; business in force by states;
mortality experience; and sales and advertising.
                                            COMPANY HISTORY


Effective August 26, 2003, the Company changed its name from CPIC Life Insurance
Company to Blue Shield of California Life & Health Insurance Company.


                                     MANAGEMENT AND CONTROL


The Company is a member of an insurance holding company system of which California
Physicians' Service (d.b.a. Blue Shield of California) is the ultimate controlling entity. The
following organizational chart depicts the interrelationship of the companies within the holding
company system. All ownership is 100%:



                                             California Physicians' Service
                                            (dba Blue Shield of California)
                                                          (CA)




  Blue Shield of California Life & Health                                     CareAmerica Life Insurance Company
             Insurance Company
                      (CA)                                                                    (CA)




Members of the board of directors and principal officers serving at December 31, 2004 were as
follows:


                                               Board of Directors


Name and Residence                                               Principal Business Affiliations

Ron P. Bangasser, MD                                             Physician, Medical Director
Redlands, California                                             Beaver Medical Group



                                                          2
                            Board of Directors (cont.)

Name and Residence                           Principal Business Affiliations

Bruce G. Bodaken                             Chairman, President and Chief Executive
Mill Valley, California                        Officer
                                             Blue Shield of California

Ezra C. Davidson, MD                         Associate Dean of Primary Care
Los Angeles, California                      Drew University of Medicine & Science

Teresa A. Dial                               Retired
San Francisco, California

Robert W. Hauck                              President
Sacramento, California                       California Business Roundtable

Robert Lee                                   Retired
Moraga, California

Thomas L. Lee                                Retired
Newhall, California

Aliza A. Lifshitz, MD                        Physician
Los Angeles, California                      Cedars-Sinai Medical Towers

Thomas V. McKernan, Jr.                      President and Chief Executive Officer
Arcadia, California                          Automobile Club of Southern California

Leon E. Panetta                              Co-founder
Carmel Valley, California                    Leon & Sylvia Panetta Institute of Public
                                               Policy

Robert A. Reid, MD                           Physician, Director of Medical Affairs
Santa Barbara, California                    Cottage Hospital

Paul R. Torrens, MD, MPH                     Professor of Health Services
Santa Monica, California                     University of California, Los Angeles

Donald K. West                               Consultant
Granite Bay, California




                                        3
                                        Principal Officers

Name                                                 Title

Debra Eunice Bowles*                                 President and Chief Executive Officer
Robert D. Clifton                                    Vice President and General Manager
Seth A. Jacobs                                       Secretary
Steven B. Sturman                                    Treasurer
Emmalee Noble                                        Controller
Steven C. Schneider, FSA                             Actuary

*Replaced by Robert D. Clifton effective October 1, 2005.


Intercompany Agreements


Effective October 1, 2003, the Company entered into an administrative services agreement with
its parent, Blue Shield of California (BSC). Under the terms of the agreement, BSC provides
the Company with personnel, facilities, information systems, administrative and operations
support. Operations support includes, but is not limited to, actuarial, underwriting, premium
billing and collection, claim processing, sales and marketing and various other services. The
California Department of Insurance approved this agreement by a letter dated September 13,
2004. The agreement was revised twice since inception, with each revision submitted to and
approved by the California Department of Insurance in accordance with the California
Insurance Code Section 1215.5 (b)(4).


Effective January 1, 1987, the Company entered into a tax allocation agreement with its parent,
BSC for the purpose of filing a consolidated federal income tax return. Under the terms of the
agreement, each company’s regular or alternative minimum tax liability is calculated separately
and adjusted for its share of specified consolidated items of income and deductions.


                                   CORPORATE RECORDS


The articles of incorporation were amended effective July 2, 2003 to reflect the name change
from CPIC Life Insurance Company to Blue Shield of California Life & Health Insurance



                                                4
Company. The amendment was filed with the California Secretary of State on July 2, 2003.
The Company received its amended Certificate of Authority reflecting the name change from
the California Department of Insurance in August of 2003.


                          TERRITORY AND PLAN OF OPERATION


Due to the name change, the Company must now abide by the Blue Cross Blue Shield
Association rules and regulations. One of the requirements was for the Company to surrender
its certificates of authority in all states other than California; the Company has complied with
this requirement. Consequently, effective January 1, 2003, the Company ceased writing short-
term health insurance in the State of Arizona.          CareAmerica Life Insurance Company
(CareAmerica Life), an affiliate, agreed to write this coverage effective January 1, 2003,
thereby providing the insureds with uninterrupted insurance coverage. Effective October 1,
2003, CareAmerica Life, agreed to “rewrite” the Company’s group term life insurance policies
written in North Dakota. Also, effective October 1, 2003, the Company agreed to enter an
“assumption of risk” agreement with CareAmerica Life for individual term life insurance
policies written by the Company in Arizona. The California Department of Insurance gave its
consent on December 16, 2004 pursuant to the California Insurance Code Section 1011(c) for
the policy rewrite and assumption of risk agreements.


As of December 31, 2004, the Company was licensed to transact business in the states of
Arizona (certificate of authority was not surrendered until 2005) and California. In 2004, direct
written premiums, which were all written in California, totaled $109 million. Of the $109
million in direct written premiums, group accident and health accounted for 48.5%, other
accident and health 41.7%, group life 9.0% and ordinary life 0.8%.


The Company has no direct employees. Blue Shield of California employees manage the
affairs of the Company.


Business is produced through approximately 12,000 independent agents and brokers, who are
also sales representatives for Blue Shield of California, its parent. These agents and brokers are



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paid commissions ranging from .375% to 15% for group coverage, and 15% to 20% for new
individual life policies and 7% to 10% for renewals. The Company also sells its individual
products through Blue Shield’s telemarketing direct sales unit and the internet.


                                        REINSURANCE


Assumed


The Company has quota share reinsurance agreements with United HealthCare Insurance
Company effective January 1, 2003. Under these agreements, the Company assumes 90%
quota share of the insured amount for group term life and accidental death and dismemberment
policies and 100% quota share of the insured amount for specific and aggregate stop loss
policies issued to regional trusts associated with the Printers’ Industries Consolidated Trust.
These agreements were terminated effective September 30, 2005 because of Blue Cross Blue
Shield Association rules and regulations that prohibit the Company from transacting business in
other states. Business covered by these agreements was transferred to CareAmerica Life
Insurance Company, an affiliate.


Ceded

The following is a summary of the principal ceded reinsurance treaties inforce as of December
31, 2004:


 Type of Contract          Reinsurer’s Name              Company’s              Reinsurer’s
                                                         Retention            Maximum Limits

 LIFE REINSURANCE
  Excess Life and Swiss Re Life & Health               For Group Life:      For Group Life: 100%
 AD&D Automatic        America Inc.                     $150,000 per        excess of $150,000 up
      Group                                                person             to a maximum of
                                                      For Group AD&D:       $1,000,000 per person
                                                        $150,000 per         For Group AD&D:
                                                           person              100% excess of
                                                                              $150,000 up to a
                                                                                maximum of
                                                                            $1,000,000 per person


                                                6
Type of Contract      Reinsurer’s Name         Company’s               Reinsurer’s
                                                Retention          Maximum Limits
   Catastrophe      Swiss Re Life & Health    $1,000,000 per      Up to a maximum of
   Life/AD&D             America Inc.            accident            $10,000,000 per
                                                                 accident; $20,000,000
                                                                 in any agreement year,
                                                                      subject to one
                                                                      reinstatement
Voluntary AD&D      Swiss Re Life & Health   25% of $250,000      75% of $250,000 any
                         America Inc.          any one life              one life

ACCIDENT AND HEALTH REINSURANCE
  Quota Share      Standard Security Life     20% of first            80% of first
Specific Stop Loss Insurance Company of   $1,000,000 net loss     $1,000,000 net loss
                         New York         per covered person     per covered person per
                                          per policy period in   policy period in excess
                                             excess of the           of the specific
                                          specific deductible      deductible amount
                                                amount
  Quota Share      Standard Security Life     20% of first             80% of first
 Aggregate Stop    Insurance Company of   $1,000,000 net loss     $1,000,000 net loss in
       Loss              New York          in aggregate, any       aggregate, any one
                                           one original plan,       original plan, per
                                           per policy period          policy period
 Excess Specific   Standard Security Life      $1 million        100% of all liability
    Stop Loss      Insurance Company of                          $4,000,000 in excess
                         New York                                of $1,000,000 up to a
                                                                 maximum issue limit
                                                                 of $5,000,000 per
                                                                 covered person per
                                                                 policy period in excess
                                                                 of the specific
                                                                 deductible amount
Excess Aggregate    Standard Security Life                       Liability for aggregate
   Stop Loss        Insurance Company of                         policy limits in excess
                          New York                               of $1,000,000 any one
                                                                 original plan per
                                                                 policy period is priced
                                                                 and underwritten
                                                                 facultatively by the
                                                                 reinsurer
  Quota Share        Lincoln National Life   50% of long term    50% of long term care
                      Insurance Company       care insurance     insurance benefits
                                                 benefits




                                         7
The insolvency clause and/or offset clause in the above ceded reinsurance agreements with
Swiss Re Life & Health America Inc., Standard Security Life Insurance Company of New York
and Lincoln National Life Insurance Company do not meet the requirements of California
Insurance Code Section (CICS) 922.2. It is the position of the California Department of
Insurance not to permit the offset clause to mention insolvency, nor an insolvency clause to
mention offset in the reinsurance agreement.

It was noted that the Voluntary AD&D reinsurance agreement with Swiss Re Life & Health
America Inc. contains an insolvency clause which terminates the agreement automatically,
effective as of the date of the Company’s insolvency. It is the position of the California
Department of Insurance that reinsurance agreements should not contain termination language,
which terminates the agreement on the basis of the ceding company’s insolvency or
conservation.


It is recommended that the above ceded reinsurance agreements be amended to comply with
CICS 922.2 in order for the Company to receive reinsurance credit in its future Annual
Statements. For the purpose of this examination report, the reinsurance credits taken by the
Company under these reinsurance agreements were not disallowed due to immateriality.


                               ACCOUNTS AND RECORDS


Certain pages of the 2004 Annual Statement had discrepancies, which the Company partly
amended and filed with the California Department of Insurance on December 2, 2005. Also,
the Company is not in compliance with the National Association of Insurance Commissioners’
Annual Statement instructions because it did not disclose in the Notes to Financial Statements,
Item 10, the amounts due from its parent and the settlement date. It is recommended that the
Company comply with said instructions.


Information System Controls

A review was made of the Company’s general controls over its information systems. As a
result of the review, control deficiencies were noted in areas such as user access, change


                                               8
management, Statement of Accounting Standards (SAS) 70 report, and logical security. The
control deficiencies noted were presented to the Company along with recommendations to
strengthen its controls in these areas. The Company should evaluate the recommendations and
make appropriate changes to strengthen its information system controls.


                                FINANCIAL STATEMENTS


The financial statements prepared for this examination report include:


       Statement of Financial Condition as of December 31, 2004

       Summary of Operations and Capital and Surplus Account for the Year Ended
         December 31, 2004

       Reconciliation of Capital and Surplus from December 31, 2000 through
         December 31, 2004




                                               9
                                         Statement of Financial Condition
                                             as of December 31, 2004



                                                       Ledger and                        Net
                                                       Nonledger            Assets Not   Admitted
Assets                                                 Assets               Admitted     Assets         Note

Bonds                                                 $143,784,952          $            $143,784,952
Cash and cash equivalents                               17,323,934                         17,323,934
Contract loans                                               7,559                              7,559
Investment income due and accrued                        1,404,756                          1,404,756
Uncollected premiums and agents’ balances in the
  course of collection                                   2,044,786              33,377      2,011,409
Deferred premiums and agents’ balances and installments
  booked but deferred and not yet due                        4,899                              4,899
Amounts recoverable from reinsurers                        309,833                            309,833
Net deferred tax asset                                      38,637                             38,637
Receivables from parent, subsidiaries and affiliates     1,203,288                          1,203,288
Aggregate write-ins for other than invested assets          52,400                             52,400

Total assets                                           $166,175,044         $ 33,377     $166,141,667


Liabilities, Surplus and Other Funds

Aggregate reserve for life contracts                                                     $ 6,928,469    (1)
Aggregate reserve for accident and health contracts                                        7,093,446    (1)
Contracts claims:
  Life                                                                                      2,033,585   (1)
  Accident and health                                                                      17,701,436   (1)
Premiums and annuity considerations for life and accident and health
  contracts received in advance                                                             3,854,017
Contract liabilities not included elsewhere:
  Provision for experience rating refunds                                                     784,028
  Other amounts payable on reinsurance ceded                                                   45,705
  Interest maintenance reserve                                                              3,067,414
Commissions to agents due or accrued                                                          389,361
Commissions and expense allowances payable on reinsurance assumed                              43,332
General expenses due or accrued                                                             2,083,167
Taxes, licenses and fees due or accrued                                                     2,021,647
Current federal and foreign income taxes                                                       99,615
Remittances and items not allocated                                                            17,707
Asset valuation reserve                                                                       217,185
Escheat claims liability                                                                      179,359

      Total liabilities                                                                    46,559,473

Common capital stock                                                   $ 2,500,000
Gross paid-in and contributed surplus                                     1,910,000
Unassigned funds (surplus)                                              115,172,194

      Capital and surplus                                                                 119,582,194

Total liabilities, capital and surplus                                                   $166,141,667


                                                      10
                              Summary of Operations and Capital and Surplus Account
                                     for the Year Ended December 31, 2004


                                                 Summary of Operations


Premiums and annuity considerations                                                   $106,848,886
Net investment income                                                                    6,032,691
Amortization of interest maintenance reserve                                               570,728
Commissions and expenses allowances on reinsurance ceded                                   110,909
Charges and fees for deposit-type contracts                                                 91,034
Aggregate write-ins for miscellaneous income                                                 6,993

  Total                                                                                113,661,241

Death benefits                                                                           5,147,301
Disability benefits and benefits under accident and health contracts                    65,653,333
Surrender benefits and withdrawals for life contracts                                        4,707
Increase in aggregate reserves for life and accident and health contracts                4,882,489
Commissions on premiums, annuity considerations and deposit-type contract funds          9,000,516
Commissions and expense allowances on reinsurance assumed                                  234,031
General insurance expenses                                                              19,916,046
Insurance taxes, licenses and fees, excluding federal income taxes                       2,396,085
Increase in loading on deferred and uncollected premiums                                       (40)

  Total                                                                                107,234,468

Net gain from operations before federal income taxes                                     6,426,773
Federal income taxes incurred                                                              736,547

Net income                                                                            $ 5,690,226



                                           Capital and Surplus Account


Capital and surplus, December 31, 2003                                                $113,998,697

Net income                                                                               5,690,226
Change in net deferred income tax                                                            8,436
Change in nonadmitted assets and related items                                             (28,295)
Change in asset valuation reserve                                                          (86,870)

Net change in capital and surplus for the year                                           5,583,497

Capital and surplus, December 31, 2004                                                $119,582,194




                                                         11
                                       Reconciliation of Capital and Surplus
                                from December 31, 2000 through December 31, 2004


Capital and surplus, December 31, 2000,
  per Examination                                                                     $ 79,100,488

                                                         Gain in        Loss in
                                                         Surplus        Surplus

Net income                                               $40,373,719    $
Change in net deferred income tax                                           541,885
Change in nonadmitted assets and related items                               25,253
Change in asset valuation reserve                                            12,703
Cumulative effect of changes in accounting principles        687,828              0

Total gains and losses in surplus                        $41,061,547    $ 579,841

Net increase in surplus                                                                 40,481,706

Capital and surplus, December 31, 2004
  per Examination                                                                     $119,582,194




                                                        12
                    COMMENTS ON FINANCIAL STATEMENT ITEMS


(1) Aggregate Reserve for Life Contracts
    Aggregate Reserve for Accident and Health Contracts
    Contract Claims: Life
    Contract Claims: Accident and Health

The California Department of Insurance (CDI), pursuant to California Insurance Code (CIC)
Section 733 (g), retained an independent actuary for the purpose of providing an actuarial
evaluation of the aggregate reserves for life contracts, aggregate reserve for accident and health
contracts, contract claims - life, and contract claims - accident and health. Based on the
evaluation, the reserves for the above liability accounts were found to be reasonably stated and
have been accepted for purposes of this examination.


The following comments and recommendations apply:


   1. The original actuarial work papers provided by the Company indicated that the Incurred
      But Not Reported (IBNR) waiver of premium reserve was computed using actuarial
      modeling. However, as of December 31, 2004, no actuarial modeling was performed.

   2. The Company did not have a process in place to determine and document whether a
      premium deficiency reserve was required under Statements of Statutory Accounting
      Principles (SSAP) No. 54, Paragraph 18 was needed as of December 31, 2004. It is
      recommended that a formal process be put in place to ascertain the need for a premium
      deficiency reserve.

   3. The examiners were unable to perform completeness testing on the stop loss policies
      because the Company was unable to provide support documentation for losses paid by
      the insured which did not exceed their deductible amounts. It is recommended the
      Company maintain complete and accurate record on losses paid by the insured which
      did not exceed their deductible amounts.




                                               13
                 SUMMARY OF COMMENTS AND RECOMMENDATIONS


Current Report of Examination


Reinsurance - Ceded (Page 6): It is recommended that the insolvency and/or offset clause of the
ceded reinsurance agreements with Swiss Re Life & Health America Inc. and Standard Security
Life Insurance Company of New York be amended to comply with the requirements of
California Insurance Code Section 922.2 in order for the Company to receive reinsurance credit
in its future Annual Statements.


Accounts and Records (Page 8): It is recommended that the Company comply with the
National Association of Insurance Commissioners’ Annual Statement instructions. It is also
recommended the Company evaluate the recommendations from the information systems
review and make appropriate changes to strengthen its information system controls.


Comments on Financial Statement Items-Aggregate Reserve for Life Contracts, Aggregate
Reserve for Accident and Health Contracts, Contract Claims: Life and Accident and Health
(Page 13): It is recommended that the Company (1) refine its method of computing its IBNR
waiver of premium reserve more frequently in the future, (2) put in place a more formal process
to ascertain the need for a premium deficiency reserve, (3) maintain complete and accurate
records on losses paid by the insured on stop loss policies that do not exceed their deductible
amounts.


Prior Report of Examination:


Reinsurance - Ceded (Page 7): It was recommended that the termination clause in the short
term health excess medical reinsurance agreement with American National Insurance Company
be amended to omit the provision which cancels the agreement automatically, effective as of
the date of the Company’s insolvency. The agreement has been terminated.




                                              14
Comments on Financial Statement Items – Drafts Outstanding (Page 14): It was recommended
that the Company offset the outstanding checks against the cash account consistently in
compliance with statutory accounting principles. The Company has complied.


                                ACKNOWLEDGEMENT


The assistance and cooperation extended by the Company’s officers and employees is
acknowledged.


                                          Respectfully submitted,




                                         Susan Bernard, CFE
                                         Examiner-In-Charge
                                         Senior Insurance Examiner
                                         Department of Insurance
                                         State of California




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