A- Effective: December 2, 2014

Transcription

1 STANDARD SECURITY LIFE INSURANCE COMPANY OF NEW YORK New York, New York A- Effective: December 2, 2014 Ultimate Parent: Geneve Holdings, Inc. STANDARD SECURITY LIFE INSURANCE COMPANY OF NEW YORK 485 Madison Avenue, 14th Floor New York, NY Web: Tel: Fax: AMB#: NAIC#: Ultimate Parent#: FEIN#: BEST S CREDIT RATING Best s Financial Strength Rating: A- Best s Financial Size Category: VIII Outlook: Stable RATING RATIONALE Rating Rationale: The rating of the Independence Holding Company (IHC) organization has been extended to Standard Security Life Insurance Company of New York (Standard Security), which reflects the strength it receives as part of the company. Standard Security continues reporting consistent operating earnings while maintaining a more than adequate risk-adjusted capital position. A.M. Best notes that Standard Security continues to emphasize the growth of its medical stop-loss and fully insured products. This growth is an important part of IHC s business strategy. Independence Holding Company Group (AMB# ). The rating of the core operating affiliates of Independence Holding Company Group (IHC Group) reflects the group s consistently positive earnings, focus on profitable segments premium growth and its more-than-adequate combined risk-adjusted capitalization. Partially offsetting these positive rating factors are recent earnings decline and the challenge to maintain an appropriate level of risk-adjusted capitalization given the impact of new business expense strain and the ongoing payment of stockholder dividends to service the holding company debt. Additionally, A.M. Best remains cautious regarding the lower yields and the potential future performance of IHC Group s investment portfolio, given the persistent low interest rate environment. IHC Group has been able to generate profitable operating earnings across its operations. While the group s medical stop-loss and fully insured medical lines of business account for the majority of statutory earnings, ordinary and group life products as well as ancillary health products also contribute materially to the group s earnings. A.M. Best notes that medical stop-loss earnings have benefited in recent years from improved loss ratios following initiatives taken to improve the performance of the block. Furthermore, as part of its strategic plan, IHC Group moved away from major medical, both individual and small group, to fully insured ancillary medical offerings. New products include limited medical, short-term medical, critical illness and international benefits written by Madison National Life Insurance Company, Inc. (Madison National), and Independence American Insurance Company (Independence American), along with non-subscriber occupational accident and pet insurance written by Independence American. While these new insurance products are not expected to replace their major medical premiums over the near term, IHC Group remains focused on underwriting and pricing discipline 2014 A.M. Best Company, Oldwick, NJ Printed December 17, Page 1 of 6

2 and measured profitable growth. IHC Group s consolidated risk-adjusted capital position, as measured by Best s Capital Adequacy Ratio (BCAR), has been more than adequate for the rating of its members for the last five years and has been aided by the group s trend of profitable earnings. IHC Group s underwriting earnings declined during 2013 driven primarily by a higher loss ratio in the major medical line of business, as the utilization increased in advance of the implementation of The Patient Protection and Affordable Care Act (ACA). In addition, investment income was lower following the reduction in invested assets related to a reinsurance transaction of annuity block of business. While underwriting results improved substantially during the first nine months of 2014 as IHC Group discontinued the majority of major medical policies and realized substantial improvement in loss ratios, the investment income experienced further decline, primarily as a result of a lower interest rate environment. Lower earnings combined with premium growth, as well as the payment of stockholder dividends, resulted in lower riskadjusted capitalization at Standard Security Life Insurance Company of New York (Standard Security) and Independence American in Although the capitalization remains above the minimum guidelines for the rating, A.M. Best is concerned that given the growth of stop-loss premium, additional deterioration of risk-adjusted capital remains possible. A.M. Best will monitor the impact of new business strain and how the group will utilize its capital going forward. Historically, IHC Group had used excess capital for acquisitions, dividends and share repurchases. In addition, A.M. Best remains cautious regarding the prolonged low interest rate environment and the impact it has had on IHC Group s earnings and investment portfolio performance. Similar to other life and annuity companies, the extended period of low interest rates continues to have an adverse impact on the company s net investment yields. In addition to the reduction in net investment income, net income could also be adversely impacted by future realized losses, although unrealized losses have all but disappeared in A.M. Best notes that the IHC Group s investment portfolio is actively managed, and the organization has been active in decreasing its holdings in riskier assets in recent years. Positive rating movements for the members of IHC Group are unlikely in the near to medium term. Factors that could lead to negative rating actions include deterioration of risk-adjusted capital within the insurance subsidiaries, a prolonged period of declining net premium within the organization s core lines of business or significant changes in the profitability of the group. KEY FINANCIAL INDICATORS ($000) Total Capital Capital Asset Net Net Surplus Valuation Premiums Invest Net Year Assets Funds Reserve Written Income Income , , ,198 13,291 8, , , ,313 12,182 3, , ,481 1, ,642 12,043 7, , , ,362 8,104 15, , ,972 1, ,413 6,639 9,180 (*) Data reflected within all tables of this report has been compiled from the company-filed statutory statement. BUSINESS PROFILE Independence Holding Company (IHC), a Delaware corporation, is a publicly traded insurance holding company for a group of insurance companies operating throughout the United States trading on the NYSE under the symbol IHC. The company markets life and health insurance business directly through its insurance subsidiaries and marketing affiliates, and through independent managing general underwriters (MGUs), brokers and agents. The Independence Holding Company Group (IHC Group), which consists of Standard Security Life Insurance Company of New York (Standard Security), Madison National Life Insurance Company, Inc. (Madison National) and Independence American Insurance Company (Independence American), sells individual and group life, final expense, medical stop-loss and group long-term disability and New York short-term disability (DBL). The group also markets a variety of health insurance products including dental, vision, supplemental gap, limited and short-term medical, and most recently, pet insurance, international health and non-subscriber accidental insurance. Scope of Operations: The IHC Group is comprised of three insurance subsidiaries that market insurance products. Standard Security, the lead company within the group, markets medical stop-loss, short-term medical, limited medical, DBL, life, dental and vision products. Over the last two years, the company renewed its focus on profitable growth of the stop-loss segment and posted a substantial revenue growth in that product that is expected to continue. Standard Security also has a sizeable share in the DBL market that was further enhanced following assumption of premium from a competitor that exited the market in The company used to market major medical, but made a decision to exit/deemphasize this product following ACA implementation. The company had sold deferred fixed annuities prior to 2012, but has since sold off the majority of that line of business. Standard Security is domiciled in New York and is licensed in all 50 states, the District of Columbia, the Virgin Islands, and Puerto Rico. In an effort to simplify the organizational structure within IHC Group, Madison National dividended 100% of its common stock in Standard Security to its parent, Independence Capital Corporation, effective September 30, As a result of the transaction, Standard Security became a sister company to Madison National. Madison National is domiciled in Wisconsin and is licensed to sell insurance products in 49 states, the District of Columbia, American Samoa, Guam, and the Virgin Islands. Historically, the company s core operations have involved acquiring life and annuity blocks of policies from other insurance companies and state insurance guaranty associations under assumption reinsurance and coinsurance agreements. Madison National also offers group term life and disability, individual life and annuities, fully insured health products and a minimal amount of medical stop-loss. The company has initiated direct marketing of ordinary life policies through distribution sources available from some of its acquisitions and its wholly owned marketing organization, IHC Financial Group, Inc. Most of its ordinary life inforce business has been acquired A.M. Best Company, Oldwick, NJ Printed December 17, Page 2 of 6

3 Over the past several years, premium volume and reserves have been affected by the volume of reinsurance and acquisition activity conducted. The acquisition of blocks of business through assumption reinsurance has mainly concentrated on ordinary life and annuity contracts. Acquisition activity has been minimal since 2008 as the company continues to grow organically and add to its capital and surplus. In recent years, Madison National s business profile has changed considerably. Its medical stop-loss, which was once a core product for the company, is now primarily written by Standard Security. In addition, during 2013, the company entered into a coinsurance agreement with an unaffiliated reinsurer for the majority of its annuity block of business. Furthermore, similar to Standard Security, Madison National has exited/de-emphasized the major medial product following ACA implementation. Today Madison National emphasizes the marketing of its ordinary life, group life, and fully insured health products, including dental, vision, and international disability through its acquired distribution channels. Independence American is owned by American Independence Corp. (AMIC), a publicly traded company trading on NASDAQ under the ticker symbol AMIC. The company is domiciled in Delaware and is currently licensed in 50 states and the District of Columbia. In 2011, Madison Investors Corporation, a subsidiary of Madison National, took over majority ownership of AMIC. Madison Investors Corporation, together with IHC, owns approximately 90% of AMIC. Historically, Independence American has generated most of its premium income as a reinsurer (over 20%) of employer medical stop-loss business produced by Standard Security and the modest amount Madison National continues to write. In addition to this reinsurance premium, Independence American now focuses on selling various ancillary medical products, pet insurance, non-subscriber occupational accident insurance and medical stop-loss on its paper. Territory: The company is licensed in the District of Columbia, Puerto Rico, U.S. Virgin Islands and all states. Business Trends: Over the last five years, IHC Group has experienced premium fluctuations. Prior to 2012, IHC Group net premiums had been declining as the organization executed its strategic business plan to eliminate certain non-core lines of business and under-performing distributors, in addition to consolidating affiliated MGUs to improve efficiencies within the organization. As a result, net premiums earned within its core stop-loss and fully insured health segments declined considerably in 2010 and Additionally, IHC Group s individual life and annuity segment has also seen a reduction in premium due to the continuing low interest rate environment and a decrease in production sources. In 2012, net premiums started to increase, especially within the medical stop-loss segment, and gaining more traction on newer products including pet insurance and non-subscriber occupational accident insurance. The growth in these lines of business were partially offset by Standard Security transferring most of its group annuity contracts to a non-affiliated carrier during the first quarter of the year. The increasing premium trends from 2012 continued in While medical stop-loss and newer lines of business continue to grow, IHC Group s core group major medical and New York disability has also reported a significant increase in net premium for the year. However, A.M. Best notes that there are several one-time events that have boosted the organization s net premiums in those lines of business. This includes processing some of the 2014 renewals within major medical during the fourth quarter of 2013, taking on more risk within its major medical products as the result of terminating its reinsurance agreement with a third party company, and obtaining a sizeable portion of New York disability renewals from a carrier that has exited the marketplace. For a full year 2014, it is anticipated that premium will experience about 5% decline primarily driven by an almost 50% drop in major medical premium following the exit from that line of business. Lower major medical revenue is partially offset by growth of stop-loss and expansion of multiple ancillary medical products. The decline of major medical revenue is expected to continue to affect the company in 2015, as overall fully-insured premium is expected to decrease. In addition, A.M. Best notes IHC Group s increased premium concentration within stop-loss segment. However, the company is well positioned to grow its ancillary medical products and further diversify its premium revenue in the medium term. OPERATING PERFORMANCE Operating Results: The IHC Group has diverse sources of revenue that have produced positive earnings on both a statutory and GAAP basis. Virtually all major lines of business, including medical stop-loss, fully insured group medical insurance, and ordinary life, have contributed to the group s profitability in recent years. The earnings in the group health lines of business have been relatively consistent due to initiatives taken to improve the medical stop-loss. The ordinary life business segment within Madison National has also been producing profitable, yet fluctuating, earnings due to the strength of its government segment. Although profitable, statutory earnings within the IHC Group declined in 2013 primarily due to higher loss ratios in Standard Security s medical stop-loss and fully insured lines of business and a decrease in net investment income. Results in the major medical segment were affected, similar to other carriers, by increased utilization in advance of ACA implementation. This was partially offset by higher premium within the company s medical stop-loss, short term medical and disability lines of business. Additionally, Standard Security had a one-time interest maintenance reserve (IMR) release that contributed to higher earnings in Underwriting results at Standard Security improved substantially during the first nine months of 2014 compared to the same period in 2013, as the major medical loss ratio moderated and profitability of stop-loss and ancillary medical lines continued to improve. Going forward, A.M. Best expects Standard Security to maintain underwriting and pricing discipline and increase premium revenue in its profitable lines of business. Madison National, which produced roughly one-half of IHC Group s statutory earnings in 2013, reported substantially lower operating and net earnings during the first nine months of 2014 compared to the same period in The results were primarily affected by lower investment income that, in addition to lower net yield, resulted from over $200 million decrease in invested assets following Madison National s annuity reinsurance transactions completed during A.M. Best Company, Oldwick, NJ Printed December 17, Page 3 of 6

4 Furthermore, 2013 operating earnings benefited from reserve release and lower income taxes attributable to the treatment of the reinsurance transaction. Independence American reported stable results in 2013 and stronger earnings during the first nine months of 2014 driven primarily by higher underwriting income resulted from growing revenue and improved loss ratios. Premium growth was attributable to pet insurance, medical stop-loss and other health and disability lines of business. Prior to 2013, IHC Group reported a significant increase in statutory net operating earnings in 2011 and again in 2012 primarily due to its medical stop-loss line of business. Improved loss ratios within the group s medical stop-loss business, primarily due to lower claims, lower utilization and less exposure to larger groups, has led to greater underwriting profitability compared to prior years. A.M. Best notes that the increase in IHC Group s medical stop-loss earnings could also be attributable to the cancellation of most of its non-owned, underperforming, managing general underwriters compared to prior years, resulting in improved underwriting performance. Furthermore, A.M. Best notes that the group s other core lines of business, including individual and group life and annuities products, have also contributed favorably to IHC Group s earnings in recent years. BALANCE SHEET STRENGTH Independence Holding Company Group (AMB# ). Capitalization: IHC Group maintains an appropriate capital position relative to its insurance and investment risks. The relative consistency of operating earnings within its diversified businesses has offset annual dividends paid to the ultimate holding company over the years. As a result, capital and surplus has grown considerably during that time. However, A.M. Best notes that while capital growth has outpaced premium growth over the last five years, during 2013, 35% growth of net premium written was supported by only 2% of capital and surplus expansion. As such, the level of risk-adjusted capitalization declined; however, it remains more than adequate for the rating level. Furthermore, 2014 risk-adjusted capitalization may improve slightly, as full year premiums are expected to post approximately 5% decrease, while capital and surplus is projected to grow by about 3%. Like the IHC Group, Madison National has been able to increase statutory surplus over the last three years primarily due to two coinsurance agreements on existing blocks of ordinary annuity business. In 2011, Madison National s capital and surplus decreased substantially as its former subsidiary, Standard Security, was distributed to the holding company. Since 2011, the growth of capital and surplus at Madison National was supported by consistent statutory net income and favorable changes within its net unrealized gain position. This was partially offset by about $7.5 million in dividends being paid out of the company during 2012 and Due to the growth in capital and surplus, as well as changed product mix in recent years, Madison National maintains more than adequate level of capitalization to support its liabilities. As a result of the sizable dividends Standard Security paid to a parent over the years, its capital and surplus has remained relatively flat. In 2012, the company s capital and surplus increased over 9% primarily due to the significant increase in statutory earnings and a favorable reserve adjustment. Standard Security has reported lower capitalization in 2013, as lower operating earnings and unfavorable changes within its net unrealized gain position were more than offset by the $8 million dividend paid out during the year. Furthermore, due to a combination of lower capital and surplus and sharp increase in net premium during 2013, the level of risk-adjusted capitalization dropped by almost 100 points. However, the level of capitalization remains adequate to support company s liabilities. In addition, A.M. Best expects capitalization to improve in 2014, as the level of premium moderates while capital and surplus grows. Like Madison National and Standard Security, Independence American is adequately capitalized in support of its insurance and investment risks. The company s capital and surplus has increased over 30% since 2009, including six percent growth in 2013 due to consistent net income and no dividends being paid during the year. A.M. Best expects Independence American to continue to grow its capital and surplus as the company s newer products, including pet insurance and non-subscriber occupational accident insurance lines of business, gain more traction. Liquidity: IHC Group maintains an adequate level of liquidity, based on A.M. Best s methodology for liquidity, due to the majority of its holdings in publicly-traded securities in addition to its material amount of cash and short-term investments. Despite the fluctuating percentage of cash and short-term investments, the liquidity position within the group has remained relatively unchanged in recent years. A.M. Best believes IHC Group s liquidity position is appropriate for the nature of its liabilities. Investments: IHC Group s insurance subsidiaries investment portfolios are managed by the chief investment officer within IHC. The overall investment objective is to construct a conservative, diversified portfolio of multiple asset classes designed to match IHC Group s liability durations and cash flow requirements while maintaining a predominately investment-grade, diversified fixed income portfolio, with a high degree of liquidity. In an effort to improve liquidity and the overall quality of its investments, the group shortened the duration of its investment portfolio by moving new money away from municipal backed credit and into agency-backed municipal mortgage bonds, U.S. government backed bonds and municipals backed by corporate credits. Furthermore, IHC Group generated higher yields, despite the continuing low interest rate environment, as the group moved away from lower-yielding municipals and into high-yield corporate bonds. The result of this change in investment strategy was an improvement in the group s liquidity while maintaining favorable yields. However, the group s net investment income has remained depressed in recent years due to lower 2014 A.M. Best Company, Oldwick, NJ Printed December 17, Page 4 of 6

5 portfolio yields and the significant decrease in invested assets that were attributable to the transfer of the majority of Standard Security s and Madison National s annuity reserves in 2012 and With virtually all of IHC Group s longer-term annuity liabilities being moved off of its books, A.M. Best expects the duration of IHC Group s fixed maturity portfolio will be gradually modified to reflect the changes to its shorter-term liability structure. In 2013, IHC Group s investment portfolio was comprised of the following: approximately three-quarters in fixed maturity securities, virtually all being of investment grade quality, and over ten percent invested in equities. A.M. Best notes that most of the equity holdings are within affiliated companies within the group. The remainder of IHC Group s invested assets is allocated to cash and short-term securities, policy loans, alternative investments and other invested assets, with only cash and short-term securities exceeding 4% of the group s total investment portfolio. The subsidiaries within the IHC Group follow the same investment objectives as their ultimate parent, IHC. However, due to the various products each company markets, the composition of their individual investment portfolio will be slightly different to match its liability obligations. Independence American invests in high-quality bonds which represent over 85% of the company s invested assets. Equities, cash and short-term investments comprise almost all of the remaining invested assets within the investment portfolios of Independence American. Madison National s and Standard Security s investment portfolio allocations are similar to Independence American since it markets similar products. However, both companies have a much larger allocation to common stocks due to their ownership in other subsidiaries within IHC. Preferred and common stock make up over one-tenth of both Madison National s and Standard Security s invested assets. As a result of their higher equity holdings, investment grade bonds comprise 80% of both companies fixed maturity holding. The remainders of the investment portfolios for both companies are comprised of policy loans, cash and short-term investments in addition to Schedule BA assets. Madison National, with its longer life insurance liabilities, has average bond maturity of almost fourteen years while the average bond maturity for both Independence American and Standard Security, because of its shorter duration liabilities, is slightly less. Balance Sheet Assets ($000) 12/31/2013 Total bonds $131,775 Total preferred stocks ,048 Total common stocks ,630 Contract loans Cash & short-term invest ,293 Other invested assets ,803 Funds held or dep with reins ,183 Prems and consids due ,146 Recvble from affiliates ,030 Accrued invest income Other assets ,960 Assets $249,503 Liabilities ($000) Net policy reserves $ 88,905 Policy claims Deposit type contracts ,198 Comm taxes expenses ,712 Asset val reserve ,476 Funds held reinsurance ,343 Funds held coinsur ,482 Other liabilities ,548 Total Liabilities $135,531 Common stock ,587 Paid in & contrib surpl ,775 Group cont reserve Unassigned surplus ,164 Total $249,503 MANAGEMENT Officers: Chairman and Chief Executive Officer, Roy T. K. Thung; Vice Chairperson, Rachel Lipari; President, David T. Kettig; Executive Vice President and Chief Financial Officer, Gary J. Balzofiore; Senior Vice President and Chief Underwriting Officer, Michael A. Kemp; Vice President and Secretary, Loan Nisser; Vice President and Controller, David B. Getz; Vice Presidents, Richard DeMarco (Taxation), Marla DiResta, Jan Dubauskas, Vincent Furfaro (Information Technology), Thomas A. Gibbons. Directors: Gary J. Balzofiore, Bernard Eichwald, Larry R. Graber, David T. Kettig, John L. Lahey, Steven B. Lapin, Robert M. Leopold, Rachel Lipari, James G. Tatum, Roy T. K. Thung A.M. Best Company, Oldwick, NJ Printed December 17, Page 5 of 6

6 Why is this Best s Rating Report important to you? A Best s Rating Report from the A.M. Best Company showcases the opinion from the leading provider of insurer ratings of a company s financial strength and ability to meet its obligations to policyholders, as well as its relative credit risk. The A.M. Best Company is the oldest, most experienced rating agency in the world and has been reporting on the financial condition of the insurance companies since A Best s Financial Strength Rating is an independent opinion of an insurer s financial strength and ability to meet its ongoing insurance policy and contract obligations. The Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance policy and contract obligations. The rating is not assigned to specific insurance policies or contracts and does not address any other risk, including, but not limited to, an insurer s claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. The rating is not a recommendation to purchase, hold or terminate any insurance policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. In arriving at a rating decision, A.M. Best relies on third-party audited financial data and/or other information provided to it. While this information is believed to be reliable, A.M. Best does not independently verify the accuracy or reliability of the information. The company information appearing in this pamphlet is an extract from the complete company report prepared by the A.M. Best Company or A.M. Best Europe Rating Services Limited. For the latest Best s Financial Strength Ratings along with their definitions and A.M. Best s Terms of Use, visit the A.M. Best website at You may also obtain AMB Credit Reports by visiting our site or calling our Customer Service department at , ext To expedite your request, please provide the company s identification number (AMB#) A.M. Best Company, Oldwick, NJ Printed December 17, Page 6 of 6