Statutory Basis Financial Statements. Florida Automobile Joint Underwriting Association

Transcription

1 Statutory Basis Financial Statements Florida Automobile Joint Underwriting Association Years ended September 30, 2012 and 2011 with Report of Independent Auditors

2 Statutory Basis Financial Statements Years ended September 30, 2012 and 2011 Contents Report of Independent Auditors...1 Statutory Basis Financial Statements Statements of Admitted Assets, Liabilities, and Accountability of Members - Statutory Basis...3 Statements of Operations and Changes in Accountability of Members - Statutory Basis...4 Statements of Cash Flows - Statutory Basis

3 Report of Independent Auditors Board of Governors Florida Automobile Joint Underwriting Association We have audited the accompanying statutory basis statements of admitted assets, liabilities, and accountability of members of the Florida Automobile Joint Underwriting Association (the Association) as of September 30, 2012 and 2011, and the related statutory basis statements of operations and changes in accountability of members and cash flows for the years then ended. These financial statements are the responsibility of the Association's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described more fully in Note 1 to the financial statements, the accompanying statutory basis financial statements have been prepared in conformity with accounting practices prescribed or permitted by the Florida Office of Insurance Regulation, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities and accountability of members of the Florida Automobile Joint Underwriting Association as of September 30, 2012 and 2011, and the results of its operations and its cash flows for the years then ended on the basis of accounting described in Note 1. 1

4 Page Two As further described in Note 10, the Association had an accountability of members of approximately $(9,365,000) and $(1,926,000) at September 30, 2012 and 2011, respectively. The Association has the authority to assess members for anticipated cash needs and has an assessment policy that assesses members when cash and short-term investments fall below its anticipated cash flow requirements. Member company assessments during the years ending September 30, 2012 and 2011, totaled approximately $2,185,000 and $945,000, respectively. This report is intended solely for the information and use of the Board of Governors and management of Florida Automobile Joint Underwriting Association and for filing with the Florida Office of Insurance Regulation and is not intended to be and should not be used by anyone other than these specified parties. Tallahassee, Florida April 22,

5 Statements of Admitted Assets, Liabilities, and Accountability of Members - Statutory Basis September 30, Admitted assets Cash and invested assets: Cash and short-term investments $ 1,680,993 $ 3,772,313 Total cash and invested assets 1,680,993 3,772,313 Accrued investment income 3,058 7,951 Premiums receivable (92,665) 74,710 Other admitted assets 14,276 17,323 Total admitted assets $ 1,605,662 $ 3,872,297 Liabilities and accountability of members Liabilities: Loss and loss adjustment expense reserves $ 4,952,750 $ 2,995,000 Unearned premiums 2,671,863 1,507,062 Premium deficiency reserve 1,586, ,861 Accounts payable and accrued expenses 683, ,274 Commissions due and accrued servicing fees 92,394 40,522 Escheat reserve 190, ,515 Other liabilities 793, ,743 Total liabilities 10,971,033 5,797,977 Accountability of members (9,365,371) (1,925,680) Total liabilities and accountability of members $ 1,605,662 $ 3,872,297 See accompanying notes. 3

6 Statements of Operations and Changes in Accountability of Members - Statutory Basis Years ended September 30, Underwriting income: Premiums earned $ 3,807,155 $ 1,642,545 Underwriting expenses: Losses and loss adjustment expenses incurred 7,164,134 1,338,333 Servicing fees 429, ,689 Increase in premium deficiency reserve 1,307, ,861 Commissions 481, ,917 Total underwriting expenses 9,382,743 2,223,800 Net underwriting loss (5,575,588) (581,255) Net investment income 44,418 54,335 Other income (expense): Member fees 1,535,000 1,542,409 Professional fees (305,414) (174,480) Salaries (280,325) (282,799) Other administrative expenses (731,581) (520,046) Miscellaneous income 117, ,623 Total other income 334, ,707 Net (loss) income (5,196,199) 281,787 Accountability of members at beginning of year (1,925,680) (1,183,311) Decrease (increase) in nonadmitted assets 4,231 (450) Member company disbursements, net (2,206,195) (920,232) Other comprehensive loss (41,528) (103,474) Accountability of members at end of year $ (9,365,371) $ (1,925,680) Accountability of members consists of: Unassigned deficit (9,165,897) (1,767,734) Accumulated other comprehensive loss (199,474) (157,946) $ (9,365,371) $ (1,925,680) See accompanying notes. 4

7 Statements of Cash Flows - Statutory Basis Years ended September 30, Operating activities Premiums collected $ 5,061,477 $ 2,725,107 Loss benefits paid (4,424,222) (1,138,014) Underwriting and loss adjustment expenses paid (4,115,511) (1,391,110) Net investment income received 49,311 51,355 Other income received 117, ,342 Member fees received 1,525,050 1,557,409 Net cash (used in) provided by operating activities (1,786,604) 2,055,089 Financing activities Distributions to member companies, net of member assessments (2,206,195) (920,232) Other miscellaneous sources (uses) 1,901,479 (245,622) Net cash used in financing activities (304,716) (1,165,854) Net (decrease) increase in cash (2,091,320) 889,235 Cash and short-term investments at beginning of year 3,772,313 2,883,078 Cash and short-term investments at end of year $ 1,680,993 $ 3,772,313 See accompanying notes. 5

8 Years ended September 30, 2012 and Nature of Operations and Significant Accounting Policies The Florida Automobile Joint Underwriting Association (the Association) provides automobile insurance to qualified applicants in the state of Florida who are unable to procure such insurance through ordinary methods. Every insurer authorized to write automobile liability insurance or automobile physical damage insurance in the state of Florida is required to be a member of the Association. The Board of Governors of the Association has appointed servicing carriers or providers to issue insurance policies, collect premiums, pay commissions, and adjust claims. They are paid a fee for these services based on premiums written and premiums earned. The Board of Governors has also appointed a central processor, AIPSO, to perform accounting and statistical functions for the Association, for which the Association is charged a service fee. Basis of Presentation The accompanying statutory basis financial statements have been prepared in accordance with statutory accounting practices (SAP) prescribed or permitted by the Florida Office of Insurance Regulation (the Office). Such statutory practices require preparation of the financial statements in accordance with the National Association of Insurance Commissioners (NAIC) Accounting Practices and Procedures Manual subject to deviations prescribed by the Office. SAP is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America (GAAP). Such practices vary in certain respects from those under GAAP. The Association's significant accounting practices and the variances from GAAP are summarized below: Investments in bonds or debt securities are reported at amortized cost or market value based on their NAIC rating; for GAAP, such fixed maturity investments would be designated at purchase as held-to-maturity, trading, or available-for-sale. Held-tomaturity fixed maturity investments would be reported at amortized cost, and the remaining fixed maturity investments would be reported at fair value with unrealized holding gains and losses reported in operations for those designated as trading and as a component of other comprehensive income for those designated as available-forsale. Fair values of certain investments in bonds and corporate stocks are based on values specified by the NAIC rather than on actual or estimated market values as would be required under GAAP. Changes between amortized cost and admitted asset investment amounts are credited or charged directly to accountability of members rather than to other comprehensive income as would be required under GAAP. 6

9 1. Nature of Operations and Significant Accounting Policies (continued) Basis of Presentation (continued) Cash in the statements of cash flows includes cash, cash equivalents, and short-term investments with remaining maturities of one year or less. Under GAAP, the corresponding caption of cash and cash equivalents would include cash balances and investments with initial maturities of three months or less. The costs of acquiring and renewing business are expensed when incurred. Under GAAP, such costs, to the extent recoverable, would be deferred and amortized over the effective period of the related insurance policies. Certain assets designated as "nonadmitted," principally past-due uncollected premiums, prepaid expenses, and other assets not specifically identified as an admitted asset within the Accounting Practices and Procedures Manual, are excluded from the accompanying statements of admitted assets, liabilities, and accountability of members and are charged directly to accountability of members. Under GAAP, such assets would be included in the balance sheet at net realizable values. Certain other reported amounts are classified or presented differently in the financial statements prepared on the basis of SAP than they would be under GAAP. Statutory requirements require that the financial statements of the Association be filed with state regulatory authorities. Accordingly, the financial statements are presented in a format similar to the filed annual statement, which differs from the format of financial statements presented under GAAP. Required statutory disclosures that are not applicable to the Association are not included in the notes to these statutory financial statements. Other significant accounting practices are as follows: Cash and Cash Equivalents Cash and cash equivalents include demand deposits with financial institutions and other highly liquid investments with original maturities of three months or less. Investments Investments are recorded at admitted asset values as prescribed by the valuation procedures of the NAIC s Securities Valuation Office (SVO). Short-term investments are principally stated at amortized cost. 7

10 1. Nature of Operations and Significant Accounting Policies (continued) Investments (continued) Bonds not backed by other loans are stated at amortized cost using the interest method. Loanbacked bonds and structured securities are stated at amortized cost using the interest method including anticipated prepayments at the date of purchase. Common stocks are reported at market value as determined by the SVO and the related net unrealized capital gains (losses) are reported in accountability of members. Short-term investments include investments with original maturities of one year or less and consist principally of amounts invested in the State of Florida's Special Purpose Investment Account. Realized capital gains and losses are determined using the specific identification basis. Changes in admitted asset carrying amounts of bonds, preferred stocks, and common stocks are credited or charged directly to accountability of members. Premiums Premiums are recorded as earned on a daily pro rata basis over the contract period that the related policies are expected to be in force. The portion of premiums not earned at the end of the year is recorded as unearned premiums. Acquisition costs, including commissions and servicing carrier fees, are charged to operations as incurred. Loss and Loss Adjustment Expense (LAE) Reserves Loss and LAE reserves represent the estimated ultimate net cost of all unpaid reported and unreported losses and LAE. The reserves for unpaid losses and LAE are estimated using individual case-basis estimates for reported losses and actuarial estimates for losses incurred but not yet reported. Those estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, management believes, based on actuarial determination, that the reserves for losses and LAE are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations. The ultimate settlement of losses and LAE may vary significantly from the estimated amounts included in the financial statements. The Association does not discount its loss and LAE reserves. The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and the estimated liabilities are modified if necessary. 8

11 1. Nature of Operations and Significant Accounting Policies (continued) Premium Deficiency Reserves Premium deficiency reserves are established for the estimated amount of the anticipated losses, loss adjustment expenses, commissions and other acquisition costs, and maintenance costs that have not previously been expensed in excess of the recorded unearned premium reserve and future installment premiums on existing policies. The Association uses anticipated investment income as a factor in the premium deficiency calculation. Income Taxes The Association is a not-for-profit organization and is exempt from federal income taxes under the provisions of Section 501(c)(6) of the Internal Revenue Code. Member Company Assessments and Distributions The Association has the authority to assess members for anticipated cash needs. If the available cash balance of the Association falls below established contingency levels and the expected transfers from servicing carriers or providers are not considered to be adequate to fund current operations, the Association may make assessments to member companies. Additionally, after the close of an accident year and when funds are available, the Association may make distributions back to member companies based on each member company's pro rata share of written premiums for the accident year being closed. Generally, the Association may close an accident year 10 years after the end of the accident year. Member companies that become insolvent cease to participate in distributions upon the entry of an order of liquidation. Reclassification Certain 2011 financial statement amounts have been reclassified to conform to the 2012 financial statement presentation. Subsequent Events The Association has evaluated subsequent events through April 22, 2013, the date the financial statements were available to be issued. During the period from September 30, 2012 to April 22, 2013, the Association did not have any material recognizable subsequent events other than the assessments and distributions disclosed in Note 11. 9

12 1. Nature of Operations and Significant Accounting Policies (continued) Use of Estimates The preparation of statutory basis financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the statutory basis financial statements, and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and described in the financial statements. 2. Premiums Receivable Premiums receivable includes amounts due from insureds for billed premiums. The Association nonadmits balances due from insureds for which a portion of the receivable is more than 90 days past due and exceeds the related unearned premium. Premiums receivable are charged to bad debt expense in the period determined uncollectible. Recoveries received on amounts previously charged-off are credited to bad debt expense in the period received. Premiums receivable consists of the following: September 30, Premiums receivable, gross $ (92,665) $ 78,885 Nonadmitted premiums receivable - (4,175) Premiums receivable, net $ (92,665) $ 74, Investments The Association's investments consist of deposits of excess funds in the state of Florida's Special Purpose Investment Account (SPIA). The SPIA is a highly-liquid governmental pooled investment account and is reported as cash and short term investments in the accompanying financial statements. At September 30, 2012 and 2011, the SPIA investments totaled $1,704,878 and $3,378,595, respectively. For the years ended September 30, 2012 and 2011, total reported net investment income of $44,418 and $54,335, respectively, was earned on investments in the SPIA. 4. Concentration of Credit Risk The financial instruments exposed to concentrations of credit risk consist primarily of cash and short-term investments. Cash and short-term investments consist of deposits with financial institutions and deposits with SPIA. Deposits with financial institutions are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor. Bank deposits at times may exceed federally insured limits. The Association has not experienced any losses in such accounts. 10

13 5. Loss and Loss Adjustment Expense (LAE) Reserves The following table provides a reconciliation of the beginning and ending loss reserve balances for losses and LAE. September 30, (in thousands) Loss and LAE reserves at beginning of year $ 2,995 $ 2,795 Losses and LAE incurred related to: Current year 7,395 2,152 Prior years (231) (814) 7,164 1,338 Losses and LAE paid related to: Current year 3, Prior years 1, ,206 1,138 Loss and LAE reserves at end of year $ 4,953 $ 2,995 Anticipated salvage and subrogation recoverables of $46,000 and $16,000 have been recorded as a reduction of the reserve for losses at September 30, 2012 and 2011, respectively. Incurred losses attributable to insured events of prior years have developed approximately $(231,000) and $(814,000), respectively, as a result of reestimation of unpaid losses. These adjustments are generally the result of ongoing analysis of recent loss development trends. Original estimates are decreased or increased as additional information becomes known regarding individual claims. 6. Assessments and Distributions As participating members of the Association, all companies that are licensed to write automobile insurance in the state of Florida receive quarterly and annual reports from AIPSO that indicate their share of the Association's experience by policy year. Each member's share is calculated based on a formula as set forth in the Florida Automobile Joint Underwriting Association's Accounting and Statistical Requirements Manual. A member company is required to report its share of premiums, losses, other income, and expense on its annual statement filed with the Office. The Association may make distributions back to member companies for accident years being closed when funds are available. Member company distributions for the years ended September 30, 2012 and 2011, were $4,391,290 and $1,864,826, respectively. Member company distributions paid, net of member assessments, during 2012 and 2011 were $2,206,195 and $920,232, respectively. 11

14 6. Assessments and Distributions (continued) The Association has the authority to assess members for anticipated cash needs. The Association's assessment policy requires assessments to be made based upon anticipated cash needs for the next 12 months. Member company assessments of $2,185,095 and $944,594 were made for the years ended September 30, 2012 and 2011, respectively. 7. Commitments and Contingencies The Association is named defendant in various legal actions arising in the normal course of business from claims made under insurance policies and contracts. These actions are considered by the Association in estimating the loss and LAE reserves. The Association's management believes that the resolution of these actions will not have a material adverse effect on the Association's financial position or results of operations. Leases On May 1, 2008, the Association entered into an operating lease agreement for office space, which is effective through April 30, Under the terms of the lease, the Association is required to make monthly payments of $3,163 with 4% increases every year beginning in the second year. In September 2009, the Association negotiated a new base rental of $2,600 per month with 3% increases every year. The total future commitments under this operating lease are $20,484 for the year ended September 30, Total rent expense, including sales tax, for operating leases was $36,955 and $36,041 for the years ended September 30, 2012 and 2011, respectively. 8. Employee Benefits Defined Benefit Plan/Other Postretirement Benefits The Association is a direct participant in the retirement plan of the Pension Plan for Insurance Organizations administered by Prudential Financial. The retirement plan is a defined benefit plan covering substantially all of the Association s employees upon reaching certain service requirements. As of September 30, 2012, the Association accrued in accordance with actuarially determined amounts with an offset to the pension cost accrual for the incremental asset amortization. 12

15 8. Employee Benefits (continued) A summary of assets, obligations, and assumptions of the Pension and Other Postretirement Benefit Plans are as follows at September 30, 2012 and 2011: Other Postretirement Pension Benefits Benefits Change in benefit obligation Benefit obligation at beginning of year $ 473,206 $ 339,392 $ 218,309 $ 185,904 Service cost 21,587 7,522 12,410 12,205 Interest cost 24,429 18,247 12,895 11,110 Actuarial loss 81, ,045 94,901 9,090 Benefits paid - - (3,633) - Benefit obligation at end of year $ 600,926 $ 473,206 $ 334,882 $ 218,309 Change in plan assets Fair value of plan assets at beginning of year $ 229,021 $ 208,640 $ - $ - Employer contributions 25,136 16, Actual return on plan assets 41,718 3, Fair value of plan assets at end of year $ 295,875 $ 229,021 $ - $ - Accumulated benefit obligation for vested employees $ 533,247 $ 401,616 $ 334,882 $ 218,309 Funded status of plan (305,051) (244,185) (334,882) (218,309) There was no pension obligation for nonvested employees at September 30, 2012 and Components of net periodic benefit cost Service cost $ 21,587 $ 7,522 $ 12,410 $ 12,205 Interest cost 24,429 18,247 12,895 11,110 Expected return on plan assets (17,459) (16,694) - - Amount of recognized losses 19,828 6, Total net periodic benefit cost $ 48,385 $ 15,450 $ 25,305 $ 23,315 The amount included in accountability of members arising from a change in the additional minimum pension liability recognized is $(41,528). 13

16 8. Employee Benefits (continued) Weighted-average assumptions used to determine net periodic benefit cost as of September 30: Weighted-average discount rate 5.25 % 5.50 % 5.75 % 5.25 % Expected long-term rate of return on plan 7.50 % 8.00 % N/A N/A Rate of compensation increase 4.00 % 4.00 % N/A N/A Weighted-average assumptions used to determine projected benefit obligations as of September 30: Weighted-average discount rate 4.00 % 5.25 % 4.00 % 5.75 % Rate of compensation increase 3.00 % 4.00 % N/A N/A For measurement purposes related to other postretirement benefits, a 9% annual rate of increase in the per capita cost of covered health care benefits was assumed for The rate was assumed to decrease gradually to 5% for 2020 and remain at that level thereafter. A measurement date of September 30, 2012, was used to determine the above. Assumed health care cost trend rates have significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects: One Percentage Point Increase Decrease Effect on total of service and interest cost components $ 4,435 $ (3,582) Effect on postretirement benefit obligation 66,834 (52,767) The defined benefit pension plan asset allocation as of the measurement date, September 30, and the target asset allocation presented as a percentage of total plan assets, were as follows: Debt securities % % Equity securities % % Cash 2.10 % 2.60 % % % The target asset allocation is 60% equity securities and 40% debt securities. 14

17 8. Employee Benefits (continued) The expected long-term rate of return on assets assumption is 7.50%. This assumption represents the rate of return on plan assets reflecting the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the benefit obligation. The assumption has been determined by reflecting expectations regarding future rates of return for the investment portfolio with consideration given to the distribution of investments by asset class and historical rates of return for each individual asset class. The following estimated future payments, which reflect expected future service, as appropriate, are expected to be paid in the years indicated: Other Postretirement Pension Benefits Benefits Year Amount Year Amount 2013 $ 16, $ 3, , , , , , , , , , ,012 The Association does not have any regulatory contribution requirements for 2013; however, the Association currently expects to make voluntary contributions to the defined benefit pension plan and the other postretirement benefit plan of $66,503 and $3,904, respectively, during the year ended September 30, Defined Contribution Plan The Association is a participant in the Insurance Company Supported Organizations 401(k) Savings Plan, a trustee administered defined contribution plan, covering substantially all of the Association s employees. The Association matches 75% of participant contributions up to 6% of their annual compensation. Association contributions to the 401(k) plan were $11,656 and $11,740 for the years ended September 30, 2012 and 2011, respectively. Impact of Medicare Modernization Act on Postretirement Benefits The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act) was signed into law in December The Act includes the following two new features to Medicare Part D that could affect the measurement of the accumulated postretirement benefit obligation (APBO) and net periodic postretirement cost for the Plan: A federal subsidy (based on 28% of an individual beneficiary s annual prescription drug costs between $250 and $5,000), which is not taxable, to sponsors of retiree healthcare benefit plans that provide a prescription drug benefit that is at least actuarially equivalent to Medicare Part D; and 15

18 8. Employee Benefits (continued) The opportunity for a retiree to obtain prescription drug benefit under Medicare. The Association is unable to conclude whether the benefits provided by the Plan are actuarially equivalent to Medicare Part D under the Act. As a result, the effects of the Act on the accumulated postretirement benefit obligation are not reflected in the financial statements or the accompanying notes. 9. Reconciliation of Annual Statement to Audited Financial Statements Differences exist between amounts reported in the audited statutory financial statements and those reported in the annual statement of the Association for the year ended September 30, 2012, resulting from the grossing up of premiums receivable, nonadmitted prepaid expenses, reclassifications of insolvent former member distributions and assessments, and the other comprehensive income relating to the minimum pension liability. Presented below is a reconciliation of amounts previously reported to the Office and those amounts appearing in the audited statutory financial statements for the year ended September 30, Audited Financial Statement Amount Annual Statement Amount Increase (Decrease) Total admitted assets $ 1,605,662 $ 1,622,076 $ (16,414) Total liabilities 10,971,033 10,971,033 - Total accountability of members (9,365,371) (9,348,957) (16,414) Member company disbursements, net (2,206,195) (2,229,607) 23,412 Net loss (5,196,199) (5,203,986) 7,787 Other comprehensive loss (41,528) - (41,528) 10. Financial Condition At September 30, 2012 and 2011, the Association's accountability of members was approximately $(9,365,000) and $(1,926,000), respectively. These balances are significantly lower than the minimum requirements imposed on insurance carriers in the state of Florida and would typically result in regulatory action on the part of the Office. However, the Association is a residual market entity and is not regulated by the Office as a voluntary market insurance company. The Association assesses member companies, as needed, sufficient to provide for its anticipated cash flow requirements (see Note 6). 16

19 11. Subsequent Events Florida Automobile Joint Underwriting Association In January 2013, the Association assessed its members $5,609,447, net of assessments written off due to insolvency or rehabilitation of former members. Assessments were issued on February 19, 2013, were due on March 11, 2013, and $5,460,892 has been collected. In January 2013, the Association closed out accident year 2001 and distributed the net profits to its members. The total distribution amount, net of distributions disallowed due to insolvency or rehabilitation of former members, was $1,738,741 and was distributed on March 12,