Keeping Promises

Transcription

Keeping Promises

Keeping Promises
2012 Annual Report
25
Celebrating 25 Years of
1
MISSION, VISION AND VALUES
MISSION
To assure security and
peace of mind through
simple, innovative chronic
care financing solutions.
VISION
To be the industry leader
in promoting value
and accessibility of LTCi
through innovation.
Integrity
Quality
VALUES
Respect
Teamwork
Goal Orientation
Creativity
Transparency
2
COMPANY PROFILE
MedAmerica Insurance Company, MedAmerica
MedAmerica’s SimplicityiiSM product has consistently
Insurance Company of New York, MedAmerica
maintained its position as the highest independently-
Insurance Company of Florida, MIG Assurance
rated long term care insurance (LTCi) product on the
(Cayman) Ltd., and Excellus Insurance Agency,
market* and the only 100% cash LTCi policy available.
Inc., comprise The Long Term Care Business of
MedAmerica (“MedAmerica”). The MedAmerica
In support of its vision to promote value and
Companies are subsidiaries of Excellus Health
accessibility of LTCi, MedAmerica expanded its
Plan, Inc., which is part of The Lifetime Healthcare
product portfolio with the launch of FlexCare® and
Companies, Inc., a $6 billion not-for-profit health
TransitionsTM. FlexCare is an innovative reimbursement
care company headquartered in Rochester, New
model long term care insurance product designed to
York that finances and delivers health care to
bring LTCi to the masses. It features affordable benefit
approximately 2 million people in New York State.
designs and an incredibly flexible benefit structure
that allows producers to custom design the right
MedAmerica insurers have a Standard & Poor’s
policy at the right price for nearly any client. FlexCare
rating of A-, “Strong,” and an A.M. Best’s rating
also offers a unique 100% cash rider called FlexCash®.
of B++, “Good.” These long term care insurance
companies are recognized nationally for financial
Transitions is designed as a short term care insurance
and rate stability attributable to responsible
policy that fills the gap between health insurance and
underwriting and risk management disciplines.
LTCi coverage. It offers an affordable alternative to
traditional LTCi for a wide range of clients.
With chronic care insurance as its singular focus,
MedAmerica brings a high level of expertise and
With its powerful portfolio of products, MedAmerica
commitment to the challenging issue of chronic
has opened new markets and provided the tools to
care financing. Throughout its 25 years in the
help ensure that individuals have access to chronic
industry, the company has grown to be a leader
care financing solutions that meet their needs.
in delivering innovative chronic care financing
solutions with in-force contracts in every state and
MedAmerica consistently stands out amongst the
the District of Columbia.
giants of the long term care industry. The heart,
soul and passion we bring to LTCi has solidified
MedAmerica is a company that embraces
MedAmerica’s position as an industry leader in
continuous innovation, anticipates the future
fulfilling our mission to assure security and peace
needs of consumers and producers, and responds
of mind through simple, innovative chronic care
with leading-edge products and services. Its
financing solutions.
success in innovation is evident in its vast portfolio
of chronic care financing solutions.
*SellingLTC.com
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A LETTER FROM THE PRESIDENT
This year, MedAmerica was proud to celebrate 25 years of success achieved through
dedication and passion for helping families prepare for, finance, and navigate the eventual
need for long term care. Our primary purpose of helping families in their time of need is
always at the core of our company’s mission. Remaining focused on that mission while
constantly adapting to the ever changing long term care environment has been the key
to our success. We recognize that part of being focused on and fulfilling our mission is to
keep our finger on the pulse of the industry and evolve along with it. Through evolution,
we can continue to meet the needs and exceed the expectations of our policyholders,
their families, and our producers for many more years to come.
Our mission focus and ability to be nimble would not be possible without the scores of
dedicated, talented and passionate people who have helped MedAmerica grow from
the small, regional long term care insurance carrier it was when it was born in 1987 to
the nationally known success story of today. We are blessed to have so many wonderful
people contributing to MedAmerica’s success. Each and every functional area of the
company strives toward continuous improvement, and we continue to work with our
distribution partners to develop new ways to support their business, grow awareness of
the need to plan for long term care, and ultimately, achieve success together.
As the current steward helping to guide MedAmerica today, I am humbled and thankful
for the many who have come before and made it possible for us to reach this 25 year
milestone. I’m thankful for the current team of dedicated and talented people who help
to guide us today and who will assure MedAmerica’s success over the next 25 years.
Of course, we are all thankful for the many thousands of clients who have entrusted
MedAmerica with their eventual long term care financing needs. The legacy of success
that MedAmerica has achieved will continue well into the future because of our people,
their talent, passion and commitment.
As always, we thank you for your support and for believing in us. Here’s to 25 more years!
William E. Jones, Jr., President
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KEEPING PROMISES SINCE 1987
“MedAmerica has succeeded because
“of our talented, passionate, and
“committed people, including our
“business partners. I am confident
“our legacy of success will continue
“well into the future.”
- Bill Jones,
President of MedAmerica
Cheryl Bush
Senior Vice President, Operations
Bill Jones
President
Bill Naylon
Senior Vice President, Finance
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MedAmerica Celebrates 25 Years
25th Anniversary Events
In recognition of the company’s historic milestone, MedAmerica
employees took part in a number of events and activities
throughout the year, including monthly giveaways, a company
picnic, and a special anniversary-themed holiday lunch.
The highlight event of the year was MedAmerica’s gala
celebration on September 28, at beautiful Locust Hill Country
Club, host to the internationally renowned LPGA Championship.
More than 250 people took part in the festivities, including
MedAmerica employees and their spouses, producers, and key
leadership of the Lifetime Healthcare Companies, MedAmerica’s
parent company. The evening provided an opportunity to
network, enjoy a delicious meal, dance, and reflect on the
company’s early development, growth, and overall success.
Speakers included MedAmerica’s two founders—former CEOs of
the Lifetime Healthcare Companies, Howard Berman and David
Klein (retired at the end of 2012) and current CEO, Chris Booth.
Bill Jones, president of MedAmerica, Bill Naylon, senior vice
president of finance, and Cheryl Bush, senior vice president of
operations also spoke at the event.
Photo 1: Angela Hoteling-Rodriguez, VP Compliance & Regulatory Affairs;
Dr. Patricia Bomba, Medical Director; Jim VonB, VP Sales & Marketing; Del
Winkelman, Chief Actuary (retired 12/31/12); Ed Kamela, Chief Actuary; Cheryl
Bush, SVP Operations; Bill Naylon, SVP Finance; Bill Jones, President.
Photo 2: Heather Salatino, Executive Administrator; Kathy Nicosia, Sales
Specialist, MAX Team.
Photo 3: Darcie Miller Coleman, Customer Service Representative; Jennifer
Obstarczyk, Benefits Manager
Photo 4: Lisa Culhane, Compliance Analyst; Jamie Vahue, Compliance Analyst;
Dorie Cottman-Clincy; Sales Specialist, MAX Team; Mary Jane Maltese,
Personal Care Advisor
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of Dedication to the LTCI Industry
Profiles in Caring — Keeping the Promise Alive
As a part of our year-long 25th anniversary celebration, we published Profiles
in Caring, a commemorative brochure that highlighted MedAmerica’s unique
approach to personalized care management. The brochure features17 members
of our benefits team, known as personal care advisors (PCAs). These dedicated
professionals are united in a common purpose—to address the needs of
insureds and their family members when they need us the most—at the time of
claim. They are the heart and soul of our company.
Profiles in Caring illustrates our unwavering commitment to service through the
compelling, real life experiences of our PCAs. Their stories speak to the passion
they bring to their jobs and they recall some of their most memorable cases.
They described the physical and emotional struggles faced by claimants and
their family members and the strength and courage they found to overcome
those challenges. The brochure tells the stories of the devoted relationships our
PCA’s have with our policyholders — relationships that began with a phone call
and were nurtured over months and years to remain strong today.
At MedAmerica, our business is not simply selling chronic care insurance. Our
business is rooted in the commitment we make and the support we provide to those who place their trust in us.
Profiles in Caring is a testament to how our company is helping to change the lives of our insureds and their family
members.
“It’s important for people to know we are there for them. Sometimes it’s just talking to them
because they have no one else to talk to. It’s about the daughter who feels she needs to be
strong for her dad while they put mom in a nursing home, or the mom who is trying to hold
it together for her children because she has to put their father in hospice. Most people are
scared because they are losing the companion they have had in their lives for many years. Even
though they are surrounded by family, they still feel lonely because they can’t talk about how
they feel. They believe they need to be strong for everyone else. It’s our job to help them through
Cheryl Robertson, LPN
Manager, Benefits Intake
those difficult situations. It’s not just about supporting the policyholder; it’s the commitment
we make to the entire family.”
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2012 AT A GLANCE
• Increased new policy sales by more than 37%.
• Earned premium revenues of $151.7 million.
• Grew assets to $1.9 billion.
• Earned pre-tax income of $16.4 million.
• Total revenues increased to $251.5 million.
• Equity grew 28%.
• Paid $89.1 million in claims.
• Number of in-force policies totaled approximately 118,600.
• Increased number of writing agents by 47%.
• Commemorated 25 years of dedicated service to the long term care industry.
• Released Profiles in Caring – a commemorative brochure highlighting MedAmerica’s unique
approach to personalized care management and service to insureds and their family members.
• MedAmerica President, Bill Jones appeared on the Lifetime Network television series Baby
Boomers in America, hosted by Emmy and Golden Globe-nominated actress Morgan Fairchild.
• Launched FlexCare in California, Connecticut and New York, expanding the product’s
availability to 46 states.
• Expanded the availability of Transitions to 43 states.
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MANAGEMENT’S REPORT ON
RESPONSIBILITY FOR FINANCIAL REPORTING
The management of MedAmerica Insurance Company of New York, MedAmerica Insurance Company,
MedAmerica Insurance Company of Florida, MIG Assurance (Cayman) Ltd., and Excellus Insurance Agency,
Inc. (the Company), are responsible for preparing the combined financial statements and other financial
information in this Annual Report. This responsibility includes maintaining the integrity and objectivity of
financial data and the presentation of the Company’s results of operations, financial position, and cash flows
in accordance with accounting principles generally accepted in the United States of America. The financial
statements include amounts that are based on management’s best estimates and judgments.
The Company’s combined financial statements have been audited by Deloitte & Touche LLP, whose report
appears in this Annual Report.
The Company maintains a system of internal controls that provides reasonable assurance that its records
reflect its transactions in all material respects and that significant misuse or loss of assets is prevented.
There are limits inherent in all systems of internal control based on the recognition that the cost of such
systems should be related to the benefits to be derived. Management believes that the costs of internal
control systems do not exceed the benefits obtained and are adequate to accomplish its objectives on a
continuous basis. The Company maintains a strong internal auditing program that independently assesses
the effectiveness of internal controls and takes appropriate actions to respond to these recommendations.
The Board of Directors, acting through its Audit Committee composed solely of non-employee directors, is
responsible for determining that management fulfills its responsibilities in the preparation of the combined
financial statements and the maintenance of internal controls. In fulfilling its responsibility, the Audit
Committee recommends independent auditors to the Board of Directors for appointment. The committee
also reviews the combined financial statements and adequacy of internal controls. The Audit Committee
meets regularly with management, Corporate Internal Audit, and the independent auditors.
Both the independent auditors and Corporate Internal Audit have full and free access to the Audit
Committee, without management representatives present, to discuss the scope and results of their audits
and their views on the adequacy of internal controls and the quality of financial reporting.
William E. Jones, Jr., President
Dorothy A. Coleman, Chief Financial Officer
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MANAGEMENT DISCUSSION & ANALYSIS
overview
2012 was marked with double digit sales growth and
positive financial results. Net income before tax was
$16.4 million and equity grew by $73.2 million or 28.1% in
2012. Total revenues during 2012 increased from $226.3
million to $251.5 million, and assets grew from $1.7 billion
to $1.9 billion. Based on its strong financial position and
proven business strategy, the long term care business of
MedAmerica (the Company) maintained an A- rating from
Standard and Poor’s and a B++ rating from A.M. Best
during 2012.
The Company continues to focus on underwriting, servicing
and reinsuring long term care insurance and related
products. The Company sells long term care insurance
products in 50 states and the District of Columbia.
RESULTS OF OPERATIONS
Sales— Contracts inforce were approximately 118,600 at
the end of 2012, and new policy sales increased by more
than 37%, adding $11.1 million in annualized premium. Premium revenue increased 3.6% from $146.5 million in
2011 to $151.7 million in 2012.
The number of agents who submitted a MedAmerica
policy application increased 47% during 2012, from
1,405 to 2,063, reflecting the Company’s efforts to focus
on productive agents. Distribution channels include
Supervising General Agencies (SGA’s), general brokerage
agencies, and long term care insurance dedicated
agents. The Company continues to expand its sales
capacity by contracting other forms of distribution,
including financial planners and group brokers.
The Company is selling its 15th generation of long term
care insurance products. Simplicityii is an innovative
product that is focused on the needs of baby boomers.
The product is rated number one by SellingLTC.com,
and is uniquely designed to provide consumers with
cash and control over the delivery of long term care. The
Company’s portfolio includes two additional products.
FlexCare is a traditional reimbursement model long term
care insurance product. Transitions is the Company’s
short term health care product.
Premiums were directly written in all 50 states during
2012. New York continues to be the main source of sales,
accounting for 26% of new premiums, with California (11%),
Tennessee (6%) and Florida (5%) comprising other areas of
high market penetration.
Asset Growth
Sales
(in millions)
(annualized premiums — in millions)
$11.1
$1,887
$1,681
2011
10
$8.0
$7.0
2012
2010
2011
2012
Expenses — Benefits expenses are actuarially determined
based upon assumptions as to utilization, mortality, lapses
and investment yields. Liabilities for policy and contract
claims are computed using the net level premium method.
Incurred claims continue to be lower than expected when
the products were priced.
Operating expenses decreased from 31.4% of premium
in 2011 to 26.4% of premium in 2012. This decrease is
attributed to administrative efficiencies as a result of
sustained growth and third party administration business.
Investments
The Company’s cash and investments ended the year at
$1.7 billion, an increase of $199.7 million or 13.2% over the
$1.5 billion held at the end of 2011. Interest and dividend
income, net of investment expense, totaled $76.7 million,
an increase of $1.7 million, or 2.3% over the $75 million
recorded in 2011. Realized gains increased from $4.9
million in 2011 to $23.2 million in 2012. Unrealized gains of
$204.7 million are reflected on the 2012 balance sheet. The
investment portfolio’s total 2012 yield was 6.2% compared
to 5.7% in 2011.
The asset allocation of the Company’s portfolio at year
end 2012 was 79.4% bonds, 15.5% closed end mutual
funds and stocks and 5.1% cash, including cash utilized
for operating purposes. The fixed income portion of the
portfolio was held in U.S. Treasury securities (2.4%) and
corporate bonds (97.6%). It is the Company’s policy to
invest only in investment grade bonds as identified by a
nationally recognized rating agency. The Company has no
significant exposure to investments backed by non-prime
mortgages. It is the opinion of Management that the
Company has no significant concentration of credit risk.
Liquidity and Capital Resources
The Company’s liquidity position remained strong. The
Company has no outstanding debt and ended the year
with stockholders’ equity of $333.5 million. For 2012, the
Company reported $1.4 billion in reserves and paid $89.1
million in claims.
Insurance law requires that the Company maintain a
minimum statutory surplus which complies with the
Risk-Based Capital Formula promulgated by the National
Association of Insurance Commissioners (NAIC). The
formula includes components for asset risk, liability risk,
interest rate exposure and other factors. The Company
exceeded the authorized control level for 2012.
GAAP Equity
(in millions)
$333.5
$260.3
2011
2012
11
Combined Balance Sheets
(Dollar amounts in thousands)
As of December 31, 2012 and 2011
2012
2011
Assets
Cash and cash equivalents
$
87,139 $
68,969 Investments
1,623,786 1,442,242 Securities lending collateral
34,228 Receivables
71,223 58,901 Deferred policy acquisition costs
58,421 56,336 Real estate and software
2,385 Other assets
9,620 7,994 TOTAL ASSETS
$1,886,802
$1,680,900
Aggregate liability for policy and contract claims
$ 1,350,923
$ 1,233,999
Premium deposits and unearned premiums
42,904
40,784
Deferred income taxes
101,974
77,735
Securities lending payable
34,228
46,458
Accounts payable and accrued expenses
23,301
21,612
46,458 Liabilities and Stockholders’ Equity
TOTAL LIABILITIES 1,553,3301,420,588
Stockholders’ Equity
Common stock
11,578
Additional paid-in capital
171,229
Accumulated other comprehensive income
133,359
94,438
Accumulated equity (deficit)
17,306
(2,533)
333,472
260,312
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$1,886,802
11,578
158,829
$1,680,900
See notes to combined financial statements.
Combined Statements of Income
For the years ended December 31, 2012 and 2011
2012
2011
Revenue
Premiums earned
$
151,688
$
146,473
Investment income — net of investment expenses
76,661 74,977
Net gain on investments
23,178 4,854
251,527
226,304
Total Revenue
Expenses
Benefits
195,148
176,009
Operating
39,987 45,983
235,135
221,992
Total Expenses
Income before income taxes
16,392
4,312
Income tax (benefit) expense
(3,447)
1,511
NET INCOME
$
19,839
$
2,801
12
Combined Statements of Comprehensive Income
2012
For the years ended December 31, 2012 and 2011 (Dollar amounts in thousands)
2011
$
19,839
$
2,801
Net Income
OTHER COMPREHENSIVE INCOME:
Gross unrealized holding gains on investment securities during the period
91,403 70,681
Income tax effect
(33,172) (20,927)
Total unrealized gains — net of tax
58,231
49,754
Gross reclassification adjustment for net realized gains included in net earnings
(26,631)
(11,145)
Income tax effect
9,321 3,901
Total reclassification adjustment — net of tax (17,310)(7,244)
OTHER COMPREHENSIVE INCOME
40,921
42,510
COMPREHENSIVE INCOME
$
60,760
Combined Statements of Changes in Stockholders’ Equity
Common
Stock
Additional
Paid-in
Capital
$ 45,311
Accumulated Other
Comprehensive Income
Net Unrealized Gains on
Investments
Accumulated
(Deficit) Equity
Total
Stockholders’
Equity
Balance — January 1, 2011 $ 9,653 $ 144,454
$ 49,928
$ (5,334)
$ 198,701
Net income
2,801
2,801
Other comprehensive income
42,510
42,510
Issuance of common stock
1,925 14,375
16,300
Balance — December 31, 2011 11,578158,829 92,438 (2,533)260,312
Net income
19,839
19,839
Other comprehensive income
40,921
40,921
Capital contribution
12,400
12,400
Balance — December 31, 2012
$ 11,578 $ 171,229
$ 133,359
$ 17,306
$ 333,472
Combined Statements of Cash Flows
2012
2011
Operating activities:
Net income
$ 19,839
$
2,801
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of bond discount and other
(14,123)
(26,486)
Deferred income taxes
24,239
30,484
Change in valuation allowance
(10,379)
Net realized gain on investments
(23,178)
(4,854)
Increase in receivables
(12,322)
(1,615)
Increase in deferred policy acquisition costs
(2,085)
(739)
Increase in other assets
(1,626) (1,018)
Increase in aggregate liability for policy and contract claims
116,924
115,196
Increase in premium deposits and unearned premiums
2,120
2,181
Increase in accounts payable and accrued expenses
1,689
4,544
Net cash provided by operating activities 101,098 120,494
Investing activities:
Acquisition of real estate and software
(2,412)
Proceeds from sales and maturities of investments
406,801
241,672
Purchases of investments
(499,717)
(368,566)
Net cash used in investing activities (95,328)(126,894)
Financing activities — Paid-in capital 12,400 16,300
Net increase in cash and cash equivalents 18,170
9,900
Cash and cash equivalents — Beginning of year 68,969 59,069
Cash and cash equivalents — End of year
$ 87,139
$ 68,969
13
NOTES TO COMBINED FINANCIAL STATEMENTS
As of and for years ended December 31, 2012 and 2011 (Dollar amounts in thousands)
1. Description of business and summary of significant accounting policies
Organization
The combined financial statements include MedAmerica Insurance Company of New York (“MedAmerica NY”), MedAmerica
Insurance Company (“MedAmerica”), MedAmerica Insurance Company of Florida (“MedAmerica FL”), MedAmerica, Inc.,
MIG Assurance (Cayman), Ltd., (“MIG”), and Excellus Insurance Agency, Inc. (the “Agency”), (together, “the Company”). The
Company underwrites, and reinsures long term care insurance, which provides coverage for chronically ill individuals. The
Company is licensed to issue policies for long term care coverage in 50 states and the District of Columbia. MedAmerica NY
and MedAmerica are subsidiaries of MedAmerica, Inc., which in turn, is wholly owned by Excellus Health Plan, Inc. (“Excellus”),
an entity that provides health and medical insurance coverage to subscribers. MedAmerica FL is a wholly owned subsidiary
of MedAmerica. MIG, a captive reinsurer, and the Agency are wholly owned subsidiaries of Excellus Ventures, Inc. (“Ventures”).
MIG reinsures policies issued or reinsured by MedAmerica and an unaffiliated insurer. Excellus and Ventures are members of
Lifetime Healthcare, Inc. (“Lifetime”), a holding company.
Basis of Combination
The combined financial statements have been prepared on the basis of accounting principles generally accepted in the
United States of America (GAAP) which vary from statutory accounting practices prescribed or permitted by insurance
regulatory authorities (see Note 11). All significant intercompany balances and transactions have been eliminated in
combination.
Use of Estimates
The preparation of combined financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the
date of the combined financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are highly liquid investments with an original maturity of three months or less. The Company’s
banking arrangements allow for the Company to fund outstanding checks when presented to the financial institution
for payment. This cash management practice frequently results in a net cash book overdraft position, which occurs when
total issued checks exceed available cash balances at a single financial institution. The Company has recorded its cash
disbursement accounts with a net cash book overdraft position in accounts payable. At December 31, 2012 and 2011, the
Company had net cash book overdrafts of $227 and $368, respectively, classified in accounts payable and accrued expenses
in the accompanying combined balance sheets. Included in cash and cash equivalents is a restricted cash deposit in the State
of Florida of $118 and $115 as of December 31, 2012 and 2011, respectively.
Investments
The Company classifies its investments in debt and equity securities as either trading or available for sale, and accordingly,
such securities are carried at fair value. The net unrealized holding gain or loss on trading securities is included in net gain
on investments in the accompanying combined statements of income. The net unrealized holding gain or loss on available
for sale securities is excluded from the accompanying combined statements of income and reported as a component of
other comprehensive income, net of deferred income taxes in the accompanying combined statements of comprehensive
income. The change in fair value for investment securities that are classified as trading securities and those for which the
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Company has elected the fair value option in accordance with Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Topic 825, Financial Instruments — Fair Value Option, are included in the results of operations.
All other investment securities are evaluated in accordance with FASB ASC Topic 320, Recognition and Presentation of OtherThan-Temporary Impairments, to determine if a decline in fair value below cost is other-than-temporary. Investment expenses,
including performance fees, if applicable, amounted to $4,137 and $2,898 for the years ended December 31, 2012 and
2011, respectively, and are reflected in investment income – net of investment expenses in the accompanying combined
statements of income.
The Company accounts for impairments in accordance with Topic 320 which requires companies to evaluate investments
in debt securities for impairment considering a company’s intent to sell the security or the likelihood that it will be required
to sell the security before recovery of the entire amortized cost basis or maturity of the security. If a company either intends
to sell or determines it will more likely than not be required to sell a debt security before recovery of the entire amortized
cost basis or maturity of the security, the entire impairment must be recognized in the results of operations. If a company
does not intend to sell the security and determines it will not more likely than not be required to sell the security but does
not expect to recover the entire amortized cost basis, the impairment must be bifurcated into the amount attributed to the
credit loss, which must be recognized in the results of operations, and all other causes, which must be recognized in other
comprehensive income, the same as any other unrealized fair value adjustment.
When the fair value of equity securities is lower than its cost, and such decline is determined to be other-than-temporary, the
cost of the investment is written down to fair value and the amount of the writedown is charged to net gain on investments
in the accompanying combined statements of income.
Costs of investments sold are determined on a first-in, first-out basis.
The Company maintains a diverse portfolio of investments. The Company abides by applicable insurance laws which
may place restrictions on the type, amount and quality of investments, as well as internal corporate policies which place
additional restrictions on investment activity. Management does not believe that the Company has any significant
concentrations of credit risk.
Fair Value Measurements
Assets and liabilities are recorded at fair value according to the provisions of FASB ASC Topic 820, Fair Value Measurements
and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair
value measurements. Assets and liabilities recorded at fair value in the combined balance sheets are categorized based upon
the level of judgment associated with the inputs used to measure their fair value. Level inputs, as defined by FASB ASC Topic
820, are as follows:
Level Input:Input Definition:
Level 1
Level 2
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through
corroboration with market data at the measurement date.
15
Level 3
Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
An asset’s classification is based on the lowest-level input that is significant to its measurement. For example, a Level 3 fair
value measurement may include inputs that are both observable (Levels 1 and 2) and unobservable (Level 3).
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, investments, receivables and accounts payable
and other liabilities. The carrying amounts of these financial instruments approximate their fair value.
Securities Lending Collateral
The Company records a securities lending asset and an offsetting securities lending payable for the underlying cash collateral
received in securities lending transactions in its combined balance sheets. Collateral received by the Company which may be
reinvested or repledged is recorded in accordance with the Company’s investment accounting policies. Collateral received
which may not be sold or repledged is excluded from the accompanying combined financial statements.
Receivables
Receivables consist primarily of reinsurance recoverables for aggregate policy and contract claim liabilities, income taxes
receivable from Lifetime, investment income receivable and premiums receivable from customers.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs include commissions in excess of ultimate renewal commissions, solicitation and printing
costs, sales material and some support costs, such as underwriting and policy issuance expenses that are directly related to
the successful acquisition of an insurance contract. Amortization is determined as a level proportion of premium based on
commonly accepted actuarial methods and reasonable assumptions about mortality, morbidity, lapse rates, expenses and
future yield on investments established when the policy is issued.
Property and Software
Property is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using
the straight-line method over the following useful lives:
Buildings and improvements
15–40 years
Software
3–10 years
Leasehold improvements
Shorter of lease term or estimated useful life
Expenditures that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and
repairs are charged to expense as incurred. When items of property or equipment are sold or retired, the related cost and
accumulated depreciation are removed from the accounts and any gain or loss is included in the combined statements of
income.
Certain costs related to acquired and developed computer software for internal use are capitalized as incurred. Capitalized
costs are amortized, generally over a three- to ten-year useful life, using the straight-line method.
In accordance with FASB ASC Topic 360, Property, Plant, and Equipment — Accounting for the Impairment or Disposal of LongLived Assets, the Company assesses its property and equipment for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
16
Other Assets
Other assets consist primarily of goodwill, agent advances and prepaid expenses.
Aggregate Liability for Policy and Contract Claims
This liability represents management’s estimate of future obligations on policies currently in force. The liability has been
computed using the net level premium method and is based upon assumptions as to future investment yield, mortality,
utilization, and withdrawal. These assumptions, which are consistent with those used for pricing purposes, have been
developed from information provided by an independent consulting actuary.
Management believes that the aggregate liability for policy and contract claims at December 31, 2012 and 2011, is
appropriately established in the aggregate and is adequate to cover the ultimate net cost of reported and unreported claims
arising from losses which had occurred by those dates. The establishment of appropriate liabilities is an inherently uncertain
process. Such liabilities are necessarily based on estimates and the ultimate net cost may vary from such estimates. These
estimates are regularly reviewed and updated using the most current information available. Any resulting adjustments are
reflected in current operations.
Premium Deposits and Unearned Premiums
Premium deposits are retained by the Company until medical underwriting is complete. Upon acceptance or denial of
a policy, deposits are recorded as unearned premiums or refunded to the applicant. Policyholder premiums are billed in
advance of the respective coverage periods. Premiums applicable to the unexpired portion of coverage are recorded as
unearned premiums in the accompanying combined balance sheets.
Premiums Earned
Premiums, which are generally billed in advance, are recognized as revenue ratably throughout the respective periods of
coverage. Reinsurance premiums earned are included in premiums earned and reinsurance premiums ceded are excluded
from premiums earned as described in Note 2.
Income Taxes
The Company accounts for income taxes using the liability method in accordance with the provisions of FASB ASC Topic 740,
Income Taxes. Under Topic 740, deferred income tax assets and liabilities are determined based on temporary differences
between the financial statement and income tax bases of assets and liabilities. A valuation allowance is provided when it is
more likely than not that some portion of the deferred tax assets will not be realized.
Topic 740 also provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not
that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes,
based on the technical merits. Income tax positions must meet a more likely than not recognition threshold at the effective
date to be recognized upon the adoption of this interpretation and in subsequent periods. This Topic also provides guidance
on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
MedAmerica NY, MedAmerica, MedAmerica FL, and the Agency are included in the consolidated federal tax return of Lifetime.
Income tax expense and benefit are allocated to each member based on the equivalent of a separate company basis.
MIG is also a taxable entity, but files a separate life insurance company tax return.
The Company recognizes interest and penalties related to unrecognized tax benefits, if any, within the income tax expense
line in the accompanying combined statements of income. Accrued interest and penalties are included within the accounts
payable and accrued expenses line in the combined balance sheets. There were no interest and penalties recognized in 2012
or 2011.
17
Comprehensive Income
Comprehensive income includes all changes in stockholders’ equity during a period except those resulting from
investments by owners and distributions to owners. The Company’s comprehensive income includes net income and
unrealized gains, unrealized gains and losses on foreign currency transactions or losses on available for sale investments that
are not other-than-temporarily impaired.
Subsequent Events
Subsequent events have been evaluated by the Company through March 22, 2013, the date of issuance of these combined
financial statements and it was determined there were no subsequent events that required disclosure.
Recently Issued Accounting Pronouncements
In October 2010, the FASB issued Accounting Standards Update (ASU) 2010-26, Accounting for Costs Associated with Acquiring
or Renewing Insurance Contracts, which modified the definition of the types of costs incurred by insurance entities that can
be capitalized in the acquisition of new and renewal contracts. An insurance entity may only capitalize incremental direct
costs of contract acquisition, the portion of employees’ compensation directly related to time spent performing specified
acquisition activities for a contract that has actually been acquired, other costs related directly to specified activities that
would not have been incurred had the acquisition contract transaction not occurred, and advertising costs that meet
capitalization criteria in other GAAP guidance. The guidance is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2011. The Company adopted the guidance prospectively on January 1, 2012. The
acquisition costs that were previously being capitalized are costs that are allowed under the new guidance, therefore there
was no change to the current practice of deferring costs. As a result, the adoption did not impact the Company’s combined
results of operations and financial position.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair
Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This update provides guidance on how fair value
measurements should be applied where existing GAAP already requires or permits fair value measurements. In addition
this guidance requires expanded disclosures regarding fair value measurements. ASU 2011-04 became effective for the
Company on January 1, 2012. The adoption of the measurement guidance of ASU 2011-04 did not have a material impact
on the combined financial statements. The new disclosures have been included with the Company’s fair value disclosures in
Note 4.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, and in December 2011 also issued ASU
2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications
of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which amended
guidance on the presentation of comprehensive income. This amended guidance eliminates one of the presentation
options previously provided, which was to present the components of other comprehensive income as part of the
statement of changes in stockholders’ equity, and requires utilization of one of two optional methods. The two optional
methods allow for presentation of net income and the components of other comprehensive income in either a single
continuous financial statement or in two separate but consecutive financial statements. These presentation requirements
became effective on a retrospective basis beginning January 1, 2012. The Company has elected to present the components
of comprehensive income in two separate but consecutive financial statements, which is illustrated in the combined
statements of comprehensive income and the combined statements of income. The adoption of ASUs 2011-05 and 2011-12
did not have an impact on the Company’s combined financial position or results of operations.
18
In December 2011, the FASB issued Accounting Standards Update (ASU) 2011-11, Balance Sheet (Topic 210) Disclosures
about Offsetting Assets and Liabilities. The amendments in this ASU require an entity to disclose information about offsetting
and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its
financial position. Entities must apply the amendments in this ASU retrospectively for comparative periods presented for
annual reporting periods beginning on or after January 1, 2013. The Company does not expect the adoption of this ASU to
have a material impact on the combined financial position or results of operations.
In July 2012, the FASB issued ASU 2012-02, Intangibles — Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible
Assets for Impairment, which amends the guidance in ASC 350 on testing indefinite-lived intangible assets, other than
goodwill, for impairment. An entity testing an indefinite-lived intangible asset for impairment has the option of performing
a qualitative assessment before calculating the fair value of the asset. If the entity determines, on the basis of qualitative
factors, that the fair value of the indefinite-lived intangible asset is not more likely than not impaired, the entity would not
need to calculate the fair value of the asset. ASU 2012-02 is effective for annual and interim impairment tests performed for
fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company does not expect the adoption
of this ASU to have a material impact on the combined financial position or results of operations.
2. Reinsurance
The Company operates under agreements to reinsure 50%–100% of the risk for certain long term care insurance policies
issued by other insurance companies (the “Reinsureds”). As a result of transactions with the Reinsureds, the combined
financial statements included the following:
2011
2012
Combined Balance Sheets
Receivables
$
3,315
Aggregate liability for policy and contract claims
$ 548,582
$ 518,889
Combined Statements of Operations — Reinsurance premiums assumed
$
$
41,968
$
3,037
43,497
Reinsurance premiums assumed are included in premiums earned in the accompanying combined statements of income.
The Company has also entered into agreements to cede the risks of certain written long term care insurance policies to
other unrelated insurance companies (the “Reinsurers”), in which the Company is not relieved of its primary obligation to
the policyholder. As a result of transactions with the Reinsurers, the Company’s combined financial statements exclude the
following:
Combined Statements of Operations — Reinsurance premiums ceded
2011
2012
$
9,747
$
11,164
Premiums earned are reduced by reinsurance premiums ceded in the accompanying combined statements of income.
In connection with reinsurance transactions, the Company evaluates the applicable contracts to ensure appropriate risk
transfer and any needed adjustments are reflected in the accompanying combined financial statements.
19
3. Investments
The cost or amortized cost and unrealized gains and losses of available for sale securities as of December 31, 2012 and 2011,
were as follows:
Gross
Unrealized
Gains
Cost or Amortized
Cost
2012
Estimated
Fair Value
Gross
Unrealized
Losses
Debt securities:
U.S. Treasury securities and obligations
of U.S. government corporations and agencies
$
32,609
$
1709
$
U.S. Agency mortgage-backed securities
17,884 1,352
1
19,235
States and municipal obligations
43,162
7,859
32
50,989
Residential mortgage-backed securities
6,590
1,322
54
7,858
Commercial mortgage-backed securities
59,156
9,629
318
68,467
Other asset backed securities
33,723
2,049
1
35,771
Corporate obligations
968,204
175,076
1,446
Total debt securities 1,161,328 198,996 275
$ 34,043
1,141,834
2,1271,358,197
Equity securities:
Fixed income funds
Common stock
TOTAL
252,848 4,490
$1,418,666
8,377
5
$207,378 467
260,758
63
$ 2,657
4,432 $1,623,387
2011
Debt securities:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies
$ 22,365 $ 1,679 $
16,215 1,217 78
17,354
33,710 6,402 40,112
1,186 286
10,171
9,271 -
$ 24,044
75,899 9,007 441
84,465
45,317 1,945 81
47,181
900,082 130,277 4,818
1,025,541
Total debt securities1,102,859 151,713 5,704
1,248,868
6,900
163,246
Equity securities:
Fixed income funds
169,300 Common stock
TOTAL
20
$1,272,159 846 $152,559 $ 12,604 $1,412,114
The amortized cost and estimated fair value of debt securities at December 31, 2012, by contractual maturity, are shown
below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Due in one year or less
Amortized
Cost
$ 15,597 Estimated
Fair Value
$ 15,892
Due after one year through five years
Due after five years through ten years
134,779 155,637
Due after ten years
839,880 995,481
Mortgage-backed securities
117,353 131,331
TOTAL
$1,161,328 $1,358,197
53,719 59,856
Proceeds from sales and maturities of investments during 2012 and 2011, were $406,801 and $241,672, respectively. Noncash bond conversions were $27,306 for the year ended December 31, 2012. Gross realized gains and (losses) on those sales
of investments are as follows:
2012
Available for sale securities:
2011
Realized gains
$
31,079 $
15,518 Realized losses
(4,448) (4,373) Subtotal
26,631 11,145 1,897 1,234 Realized losses
(10,990) Trading securities:
Realized gains
(78)
Subtotal
(9,093) 1,156
Fair value adjustment on trading securities held at year end
5,640 (7,447)
Total realized gains — net
$
$
4,854
23,178
21
Investment securities available for sale in an unrealized loss position as of December 31, 2012 and 2011, are summarized as
follows:
Less than 12 Months
2012
More than 12 Months
Unrealized
Losses
Market
Value
Total
Unrealized
Losses
Market
Value
Market
Value
Unrealized
Losses
of U.S. government corporations
and agencies $
11,378 $ 275 $
- U.S. Agency mortgage-backed securities
413 States and municipal obligations
3,708
686 1
413 1
32
3,708
32
702
54
702
54
7,298
318
7,298
318
686 1
1 $ -
$ 11,378 $ 275
39,060 1,249
3,628 197 42,688 1,446
Fixed income funds
22,756 467
22,756 467
Common and preferred stocks
3,712
63
3,712
63
TOTAL
$81,713 2011
Less than 12 Months
Market
Value
$ 2,088 $ 11,628 $
569 $ 93,341 $
More than 12 Months
Unrealized
Losses
Total
Market
Value
Unrealized
Losses
Market
Value
2,657
Unrealized
Losses
of U.S. government securities
$
478 $
-
869 17 U.S. Agency mortgage-backed securities
$
- $
577 - $
478 $ - 61
1,446 78
699 7
3,410 279 4,109 286
8,736 326 928 115 9,664 441
11,542 81 11,542 81
67,290 3,297 10,095 1,521 77,385 4,818
Fixed income funds
144,314 6,888 144,845 6,900
TOTAL
$ 233,928 $ 10,616 531 $ 15,541 12
$ 1,988 $249,469 $ 12,604
The Company holds a diversified portfolio of investments in the general investment categories shown above. As of
December 31, 2012, in the fixed income categories there were 62 debt securities in an unrealized loss position, which
were not considered other-than-temporarily impaired (OTTI) since the unrealized loss was due to changes in the overall
level of interest rates, excessive liquidity premiums or excessive changes in credit spreads. The Company has a policy,
which considers historic interest rate volatility and the target and actual duration of its investments in debt securities to
initially identify potentially OTTI fixed income securities.
As of December 31, 2102, for equity securities, there were 23 fixed income funds and one common stock in an unrealized
loss position, which was a result of general market, economic and industry fluctuations since the time of acquisition and,
in some cases, factors particularly affecting the fixed income funds. Such losses are considered temporary.
22
When evaluating a debt security for OTTI, the Company analyzes relevant factors including the length of time and extent
to which fair value has been less than amortized cost, the financial condition and near-term prospects of the issuer as well
as specific events or circumstances that may influence the operations of the issuer, and whether the Company has the
intent to sell or if it is more likely than not it will be required to sell a security before there is sufficient time to recover the
Company’s amortized cost. When the Company intends to sell or it is more likely than not it will be required to sell a security
before recovery of its entire amortized cost, it records the full difference between fair value and amortized cost in results
of operations. When the Company does not have intent to sell or it is not more likely than not it will be required to sell a
security, and it does not expect to receive all amounts due contractually, it bifurcates the loss between a credit component,
which is recorded in the results of operations, and all other causes, which are recorded in other comprehensive income. The
credit component is defined as the difference between the amortized cost basis of the debt security and the net present
value of its projected future cash flows.
For the years ended December 31, 2012 and 2011, the Company recorded impairment charges of $3,052 and $1,850,
respectively, for OTTI.
The table below is a roll forward of the cumulative credit loss component of OTTI recognized in earnings on debt securities
still held for which a portion of the OTTI was recognized in other comprehensive loss and are still held on December 31, 2012
and 2011
Years Ended December 31
2011
2012
Beginning balance
$
2,142 $
457
Increase attributable to credit component of OTTI on securities
for which an OTTI was not previously recorded
1,362 1,606
Increase attributable to additional credit component of OTTI on
securities for which an OTTI was previously recorded
1,308 160
Credit component of OTTI previously recognized on securities
that matured, paid down or were sold
(2,563) (81)
$
2,142
OTTI on securities that are intended to be sold
Ending balance
$
118
2,367 The Company participates in a securities lending program whereby certain marketable securities in its investment portfolio
are transferred to independent brokers or dealers based on, among other things, credit worthiness in exchange for collateral
initially equal to 102% of the market value of the loaned securities. The duration of each loan is one day, which may be reset
overnight. Collateral may take the form of cash or obligations issued or guaranteed by the United States Treasury or by an
agency or instrumentality of the United States government. Collateral received in the form of cash is immediately reinvested
in a short-term cash equivalent fund. Securities on loan are reported in the applicable investment category within the
tables above. At December 31, 2012 and 2011, the Company had loaned securities with a fair value of $33,361 and $45,584,
respectively, including accrued interest. The fair value of the corresponding collateral was $34,228 and $46,458, respectively,
for cash collateral reinvested and $0 for non-cash collateral at December 31, 2012 and 2011. As there is a corresponding
payable for securities lending associated with the cash collateral, these amounts have also been excluded from the
combined statements of cash flows.
23
4. Fair Value Measurements
Certain assets are recorded at fair value in the combined balance sheets and are categorized into levels based upon the
inputs used to measure their fair value. Transfers between levels, if any, are recorded as of the end of the reporting period in
which the transfer occurs.
Non-financial assets and liabilities or financial assets and liabilities that are measured at fair value on a nonrecurring basis are
subject to fair value adjustments only in certain circumstances, such as when the Company records an impairment. There
were no significant fair value adjustments for these assets and liabilities recorded during the year ended December 31, 2012
and 2011.
The following methods and assumptions were used to estimate the fair value and determine the fair value hierarchy
classification of each class of financial instrument included in the tables below:
Cash and Cash Equivalents — The carrying value of cash and cash equivalents approximates fair value as maturities are less
than three months. Fair values of cash equivalent instruments that do not trade on a regular basis in active markets are
classified as Level 2.
Debt Securities, Equity Securities and Open Ended Bond Funds — Fair values of debt securities, equity securities and open
ended bond funds are based on quoted market prices, when available. The Company obtains one price for each security
primarily from the Company’s custodian which uses multiple third party pricing services. These prices are typically derived
through recently reported trades for identical or similar securities making adjustments through the reporting date based
upon available observable market information. For securities not actively traded, the pricing service may use quoted market
prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in
the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited
to, nonbinding broker quotes, benchmark yields, credit spreads, default rates, and prepayment speeds. The Company is
responsible for the determination of fair value, therefore management performs analyses on the prices received from the
custodian to determine whether the prices are reasonable estimates of fair value by comparing the prices received from
the custodian to prices reported by its investment managers. The Company also compares changes in the reported market
values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s procedures
and reviews of the values provided by the custodian have not historically resulted in material adjustments in the prices
obtained from the pricing service.
Fair values of debt securities that do not trade on a regular basis in active markets but are priced using other observable
inputs or for which there is a lack of transparency into the specific pricing are classified as Level 2. Those securities for which
the Company has the ability to redeem the investment with the investee at net asset value per share (or its equivalent) at
the measurement date or in the near term (90 days) are classified as Level 2 under ASU 2011-04.
Fair value estimates for Level 1 and Level 2 equity securities and open ended bond funds are based on quoted market
prices for actively traded equity securities and open ended bond funds or other market data for the same or comparable
instruments and transactions in establishing the prices.
The Company’s Level 3 debt securities are primarily investments that do not have observable inputs in determining fair
value and are estimated using discounted cash flow models or other information obtained from investment managers.
Inputs into the discounted cash flow model include the terms and conditions of the tranche and prepayment speeds.
The evaluated price is checked against securities with similar characteristics trading in the market. The discount rate is
the combination of the appropriate rate from the benchmark yield curve and the discount margin determined based on
quoted prices. For more distressed securities, the underlying loan performance is examined along with the deal structure in
order to determine whether additional adjustments are warranted. Fair values may also be based off of recent transactions
in inactive markets for identical or similar securities. Significant changes in any of these inputs could result in significantly
24
lower or higher fair value measurements. Those securities for which the Company does not have the ability to redeem the
investment with the investee at net asset value per share (or its equivalent) at the measurement date or in the near term (90
days) are classified as Level 3 under ASU 2011-04.
Throughout the procedures discussed above in relation to the Company’s processes for validating third party pricing information,
the Company validates the understanding of assumptions and inputs used in security pricing and determines the proper
classification in the hierarchy based on that understanding.
Securities Lending Collateral — Fair value of mutual funds are based on quoted prices, which represent the net asset value of
shares held.
The carrying value of the Company’s investments is the same as fair value. Investments that are measured at fair value on a
recurring basis at December 31, 2012 and 2011 are as follows:
25
Fair Value Measurement Using
Quoted Prices in
Active Markets
(Level 1)
Other Observable
Inputs (Level 2)
Unobservable
Inputs
(Level 3)
Total Fair
Value
2012
$
86,917
$
222
$
-
$
87,139
Available for sale securities:
of U.S. government corporations and agencies
$
-
$ 34,043
$
- $
34,043
19,235 19,235
50,989 50,989
7,858 7,858
68,467 68,467
35,771 35,771
1,139,217 2,617 1,141,834
Common stock
4,432 4,432
Fixed income funds
54,845 205,913 260,758
Total available for sale securities
59,277 1,561,493
2,617 1,623,387
Trading securities:
Corporate convertible obligations
100 100
Preferred stock
299 299
Total trading securities
399 399
Total Investments
$ 59,277 $ 1,561,892 $
2,617 $ 1,623,786
Securities Lending
$
34,228
$
-
$
-
$ 34,228
Fair Value Measurement Using
2011
Quoted Prices in Significant Other
Active Markets for Observable Inputs
Identical Assets
(Level 2)
(Level 1)
Significant
Unobservable
Inputs
(Level 3)
Total Fair
Value
$
68,969
$
-
$
-
$
68,969
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
$
24,044 $ -
$
-
$
24,044
U.S. agency mortgage-backed securities
17,354 17,354
40,112 40,112
10,171 10,171
84,465 84,465
Asset backed securities
47,181 47,181
1,025,541 1,025,541
Fixed income funds
42,245 121,001 163,246
Total available for sale securities
66,289 1,345,825
- 1,412,114
Trading securities:
Corporate convertible obligations
26,306
1,501
27,807
Preferred stock
2,321 2,321
Total trading securities 2,32126,306 1,50130,128
Total Investments
$ 68,610$1,372,131 $ 1,501
$1,442,242
Securities Lending
$46,458 $
- $
- $46,458
26
U.S. Treasury securities and obligations of US government corporations and agencies were classified as Level 2 during 2012
recognizing that there is a lack of transparency into the specific pricing of individual securities.
There were no transfers between Level 1 and Level 2 for the year ended December 31, 2011.
The carrying amounts reported in the accompanying combined balance sheets for receivables, other assets, premium
deposits and unearned premiums, accounts payable and accrued expenses approximate fair value because of their short
term nature. These assets and liabilities are not listed in the table above.
There were no financial instruments not measured at fair value on a recurring basis for the years ended December 31, 2012
and 2011.
A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3
inputs is as follows:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Corporate Obligations
2011
2012
Balance — January 1
$ 1,501 $ 838
Realized in earnings
1,103
Purchases and exchanges
661
1,567 1,511
Sales and disposals
(2,593)
(1,509)
Transfer into/out of Level 3
Balance — December 31
$ 2,617
1,039
$1,501
There were no transfers between Levels 2 or 3 of any financial assets during 2011.
5. REAL ESTATE AND SOFTWARE
At December 31, 2012, amounts included in real estate and software are as follows:
2012
Real estate
$ 2,072
Software
Total
2,412
Less: accumulated depreciation
Real estate — net
340
(27)
$ 2,385
Depreciation expense for real estate was $27 for the year ended December 31, 2012. There was no software depreciation
expense for the year ended December 31, 2012.
The Company determined that no impairment loss was required for the year ended December 31, 2012. There were no real
estate and software assets for the year ended December 31, 2011.
27
6. AGGREGATE LIABILITY FOR POLICY AND CONTRACT CLAIMS
Activity in the aggregate liability for policy and contract claims at December 31, 2012 and 2011, which includes a reserve for
claim adjustment expenses calculated based on experience, is summarized as follows:
2012
Balance — January 1
2011
$
1,233,999
$ 1,118,803
Less: Liability for claims administration expenses
(31,639) Beginning aggregate liability for policy and contract claims
1,202,360
Reinsurance reserve transfers
(27) 17,580
Mod-co reserve adjustment
402 417
Change in reinsurance recoverable
7,541
(4,724)
180,200
158,122
(28,349)
1,090,454
Incurred related to:
Current year
Prior year
Total incurred
14,948
17,887
195,148176,009
Paid related to:
Current year
(17,997)
(12,302)
Prior year
(71,138)
(65,074)
(89,135)
(77,376)
Total paid
Ending aggregate liability for policy and contract claims
1,316,2891,202,360
Plus: Liability for claims administration expenses
34,634
Balance — December 31
$
1,350,923
31,639
$ 1,233,999
As a result of changes in estimates of insured events in prior years, the aggregate liability for policy and contract claims
increased by $14,948 and $17,887 in 2012 and 2011, respectively, because actual lengths of stay for active claimants and
reported claims differed from those anticipated.
During 2011, the Company terminated a quota share reinsurance agreement that ceded risk for long term care insurance
policies to another insurance company. Pursuant to this agreement, policy reserves were transferred in the amount of
$17,580.
During 2012, the Company transferred cash associated with reserves for policies pursuant to an assumption and indemnity
reinsurance agreement executed in 2009 where the Company ceded policies to another insurer. These policies were
to be assumed by the other insurer when and if certain policyholders were no longer active claimants. Pursuant to this
agreement, policy reserves were transferred to the other insurer in the amount of $27.
The Company incurred claim administration expenses of $4,245 and $4,448 in 2012 and 2011, respectively. These costs are
included in operating expenses in the accompanying combined statements of income. The following table discloses paid
claim administration expenses, incurred claim administration expenses, and the balance in the unpaid claim administration
expenses reserve for 2012 and 2011:
2012
2011
Total claim administration expenses incurred
$ 4,245 $4,448
Less current year unpaid claim administration expenses
(34,634)
(31,639)
Add prior year unpaid claim administration expenses
31,639
28,349 Total claim administration expenses paid
$ 1,250
$1,158
28
7. STOCKHOLDERS’ EQUITY
The separate components of the Company’s common stock and additional paid-in capital at December 31, 2012 and 2011,
are as follows:
MedAmerica, MedAmerica,
Inc
NY
MIG
MedAmerica
Total
Excellus
Insurance
Agency
2012
Common stock:
Par value per share (whole dollars)
$
Shares outstanding (whole amounts)
0.001 $
10,000,000
Amount outstanding
$
10 Additional paid-in capital
$ 300 $
13.32 6,000 733,100 $
1,800
$
- $ 104,367
$
1
$
3,000 9,765 $
3
$ 66,564 $
297
0.01 900 $ -
$ 11,578
$
1
$171,229
2011
Common stock:
Par value per share (whole dollars)
$
Shares outstanding (whole amounts)
0.001 $
10,000,000 Amount outstanding
$
Additional paid-in capital
$ 10
-
300 6,000
$
$
13.32 733,100
$
1
$
3,000 1,800 $ 9,765 $
3
$ 99,367 $ 59,164 $
297 0.01 900 $ - $ 11,578
$
1
$158,829
During 2012 and 2011, Excellus contributed additional capital to MedAmerica, Inc. Subsequently, MedAmerica, Inc.
contributed this capital to MedAmerica NY in the amount of $5,000 and $7,300, respectively, which is included in additional
paid-in capital above.
During 2011, Excellus contributed additional capital to MedAmerica, Inc. Subsequently, MedAmerica, Inc. purchased
144,500 shares of common stock of MedAmerica resulting in an increase in common stock of $1,925 and paid in capital of
$7,075. During 2012, Excellus contributed additional capital to MedAmerica Inc., which in turn contributed this capital to
MedAmerica in the amount of $7,400.
29
8. RELATED PARTY TRANSACTIONS
As of December 31, 2012 and 2011, JP Morgan Chase has issued two irrevocable letters of credit totaling $50 million for
the benefit of MedAmerica as additional collateral for MIG’s reinsurance obligations to MedAmerica. The letter of credit is
collateralized by $19,537 of Ventures’ cash and investments, which are held in a trust account for the benefit of MedAmerica
and recorded in the Ventures consolidated financial statements.
As of December 31, 2012 and 2011, Ventures has issued an irrevocable letter of credit of $120,000 and $125,000, respectively,
for the benefit of MedAmerica as additional collateral for MIG’s reinsurance obligations to MedAmerica. The letter of credit
has been accepted and approved by the Insurance Department of the Commonwealth of Pennsylvania as of December 31,
2012 and 2011. The letter of credit is collateralized by $35,133 of Ventures’ cash and investments, which are held in a trust
account for the benefit of MedAmerica and recorded in the Ventures consolidated financial statements.
The Company believes that its claim obligations are adequately collateralized as of December 31, 2012 and 2011.
Effective January 1, 2011, the reinsurance agreement between MedAmerica and MIG was terminated with respect to policies
issued on or after January 1, 2011.
Excellus has guaranteed the payment of the direct policyholder obligations associated with insurance policies directly issued
by the Company after June 24, 1997 and prior to July 1, 2010.
Additionally, a capital support agreement was entered into with Excellus which requires Excellus to ensure that the Company
has sufficient liquid assets for the timely payment of amounts due on policies it directly issues after July 1, 2010. This
agreement defines sufficient liquid assets as cash and invested assets exceeding disabled life reserves for these applicable
policies as measured annually starting December 31, 2010. No contributions were required from Excellus to satisfy this
agreement at December 31, 2012 or 2011.
Under the tax allocation agreement, applicable entities within the Company pay to or receive from Lifetime, the ultimate
parent corporation, the amount, if any, by which the group’s federal income tax liability was affected by virtue of inclusion of
the applicable entities within the Company in the consolidated federal return. Effectively, this results in the Company’s annual
income tax provision being computed, with adjustments, as if the Company filed a separate return. Amounts due from
Lifetime as a result of this transaction were $8,950 and $5,456 as of December 31, 2012 and 2011, respectively. The amounts
are included in receivables in the accompanying combined balance sheets for the years then ended.
The Company has an administrative service agreement with Excellus. As part of the agreement, the Company reimburses
Excellus for the full amount of operating expenses paid on its behalf. Amounts due to Excellus as a result of these transactions
were $995 and $812 at December 31, 2012 and 2011, respectively, and are included in accounts payable and accrued
expenses in the accompanying combined balance sheets. Also under this agreement, the Company participates in the
noncontributory defined benefit pension plan and the defined contribution 401(k) plan sponsored by Excellus. The Company
incurred $2,049 and $1,483 for the years ended December 31, 2012 and 2011, respectively, as part of these plans.
During 2012, the MedAmerica NY purchased real estate property from an affiliate, Genesee Region Home Care Association,
Inc., for a purchase price of $1,990 which was equal to its fair market value.
30
9. INCOME TAXES
The Company, with the exception of MIG, is included in the federal tax return of Lifetime, its ultimate parent corporation.
Pursuant to a tax allocation agreement, the Company pays to or receives from Lifetime the amount, if any, by which the
group’s federal income tax liability was affected by virtue of inclusion of the Company in the consolidated federal return.
Components of the Company’s 2012 and 2011 income taxes, are as follows:
2011
2012
Federal:
Current
Deferred
Income tax (benefit) expense
$ (3,840) 393
$ (3,447) $ (4,162) 5,673
$ 1,511
The Company’s share of the tax expense allocation was a benefit of $3,840 and $4,162 as of December 31, 2012 and 2011,
respectively. The provision for federal income taxes incurred is different from that which would be obtained by applying the
federal statutory federal income tax rate of 35% to net income before taxes. The significant items causing this difference are
changes in the valuation allowance against deferred tax assets and non-deductible compensation.
The Company has a net deferred tax liability resulting from unrealized gains, benefits payable, and deferred acquisition costs.
During 2012 and 2011, a valuation allowance of $9,253 and $21,074, respectively, was established against the deferred tax
assets to reduce such assets to amounts that management believes more likely than not will be realized.
Cash paid for federal income taxes during 2012 and 2011 was $0 and $3,062, respectively.
The Company does not anticipate significant increases or decreases in its uncertain tax positions within the next twelve
months.
The Company is subject to U.S. Federal income tax and income tax in various state jurisdictions. As of December 31, 2012,
the Company’s tax years for 2009 through 2012 are subject to examination by federal and state tax authorities.
10. CONTINGENCIES
From time to time the Company is involved in pending and threatened litigation in the normal course of business in which
claims for monetary damages are asserted. In the opinion of management, the ultimate liability, if any, arising from such
pending or threatened litigation is not expected to have a material effect on the financial position, results of operations, or
liquidity of the Company.
31
11. STATUTORY ACCOUNTING PRACTICES
Certain members of the combined group report to various insurance departments on a separate company basis using
statutory accounting practices (SAP). In March 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles (NAIC SAP), which was intended to standardize regulatory accounting and
reporting to state insurance departments. The combined financial statements of the Company included herein have been
prepared in conformity with GAAP. MedAmerica NY, MedAmerica FL, and MedAmerica report to various regulators using
statutory accounting practices (NAIC SAP), which may differ in certain respects from GAAP. The significant accounting
policies prescribed or permitted under NAIC SAP which differ from GAAP are as follows:
Nonadmitted Assets
Statutory accounting principles do not allow certain assets to be included in statutory basis financial statements. Such assets
include receivables over 90 days past due; prepaid expenses; furniture, fixtures, and purchased software; amounts due from
affiliates over 90 days past due; deferred tax assets to the extent they do not reverse or are realizable within a prescribed
period and exceed a prescribed percentage of statutory capital and surplus, offset by existing deferred tax liabilities;
agents balances, and portions of goodwill. The net change in nonadmitted assets is charged directly to capital and surplus.
Nonadmitted assets are not a relevant concept under GAAP.
Short-term Investments
Short term investments are all investments with remaining maturities of one year or less from the time of acquisition. For
statutory accounting, short term investments are stated at amortized cost and are classified with cash and cash equivalents.
Under GAAP, investments other than cash equivalents are classified as trading, available for sale, or held to maturity and are
excluded from the presentation of cash and cash equivalents.
Investments
Debt securities are stated at amortized cost. When the fair value of the debt security is lower than its cost, and such a decline
is determined to be other than temporary, the cost of the investment is written down to fair value, or by the amount of the
credit loss for structured securities, and the amount of the write down is charged to net income as a realized loss. For loanbacked and structured securities, consideration is given to the Company’s ability and intent to hold to maturity for interest
related impairments. For GAAP purposes, debt securities are stated at fair value. Other than temporary impairments due
to credit losses are recognized as a realized loss and measured as the difference between amortized cost and the present
value of projected cash flows discounted at the security’s effective rate. The non-credit portion of an other than temporary
impairment is recognized in other comprehensive income unless the Company intends to sell the security, in which case,
that portion of the write down would be recognized as a realized loss.
Deferred Policy Acquisition Costs
Policy acquisition costs are expensed as incurred. For GAAP, policy acquisition costs that are directly related to the successful
acquisition of an insurance contract are capitalized and amortized over the life of the insurance contract. Amortization is
determined as a level proportion of premium based on commonly accepted actuarial methods and reasonable assumptions
about mortality, morbidity, lapse rates, expenses and future yield on investments established when the policy is issued.
Leases
NAIC SAP provides that all leases are treated as operating leases. For GAAP purposes, leases meeting certain criteria are
treated as capital leases.
Aggregate Liability for Policy and Contract Claims
These amounts represent the estimated liability for future policy benefits. The liability is calculated using either a one- or twoyear preliminary term method and is based upon mandated assumptions as to investment yield, mortality, and withdrawal.
32
For GAAP, the liability has been computed using the net level premium method and is based upon assumptions as to future
investment yield, mortality, utilization, and withdrawal. These assumptions are consistent with those used for pricing purposes.
Interest Maintenance Reserve (IMR)
Realized gains and losses on the sale of fixed income investments, net of federal income taxes, which resulted from market
interest rate changes are not reported immediately as a component of net income, but rather are deferred by means of an IMR
and are amortized into income based on the remaining term to maturity of the investments sold. IMR is not a relevant concept
under GAAP.
Asset Valuation Reserve (AVR)
The Company records an AVR to establish a reserve to offset potential credit-related investment losses on all fixed income
investments. The net change in AVR is charged or credited directly to capital and surplus. AVR is not a relevant concept under
GAAP.
Income Taxes
Income tax expense is based upon income reported for tax purposes on a separate company basis. Deferred tax assets
and liabilities are recognized for temporary differences between statutory accounting and tax basis of assets and liabilities.
Deferred tax assets are admitted to a limited extent based on reversal and realizability in accordance with realization threshold
limitations, plus the offset of remaining deferred tax assets against existing deferred tax liabilities. The change in deferred tax
assets and liabilities is recognized as a separate component of gains/losses in capital and surplus. For GAAP purposes, deferred
taxes are recognized for temporary differences between the amount of taxable income and pre-tax book income and the
financial reporting and tax basis of assets and liabilities and are included in income tax expense in results of operations.
Other Comprehensive Income
Other comprehensive income and its components are not presented in the statutory basis financial statements, which are
required by GAAP.
12. STATUTORY RESTRICTIONS
The Company follows the National Association of Insurance Commissioners Risk-Based Capital (RBC) formula. This formula
requires the insurer to calculate its total adjusted capital and RBC requirement and provides for an insurance commissioner
to intervene if the insurer experiences financial difficulty. The formula includes components for asset risk, liability risk,
interest rate exposure, and other factors. As of December 31, 2012 and 2011, the Company was in compliance with these
requirements.
The Company is required to maintain minimum paid-in capital amounts and is subject to certain restrictions regarding
the payment of dividends. The Company must also maintain restricted deposits, as required by various state insurance
departments. As of December 31, 2012 and 2011, the Company was in compliance with these requirements.
33
INDEPENDENT AUDITORS’ REPORT
To the Boards of Directors of the Long Term Care Business of MedAmerica, Rochester, NY:
We have audited the accompanying combined financial statements of The Long Term Care Business of MedAmerica (the
“Company”), which comprise the combined balance sheets of December 31, 2012 and 2011, and the related combined
statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended,
and the related notes to the combined financial statements.
Management’s Responsibility for the Combined Financial Statements
Management is responsible for the preparation and fair presentation of these combined financial statements in accordance
with accounting principles generally accepted in the United States of America; this includes the design, implementation,
and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements
that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these combined 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 combined financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks
of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the
combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no
such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined
financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the
years then ended in accordance with accounting principles generally accepted in the United States of America.
Rochester, N.Y.
March 22, 2013
34
33
Officers and Directors
Officers
Directors
Randall L. Clark
Chairman
Cheryl L. Bush
Senior Vice President, Operations
Thomas E. Rattmann
Vice Chairman
William L. Naylon
Senior Vice President, Finance
A. Thomas Hildebrandt
Vice Chairman
Angela Hoteling-Rodriguez
Vice President, Compliance &
Regulatory Affairs
Hermes L. Ames, III
Jennifer C. Balbach
Natalie L. Brown
John G. Doyle, Jr.
Marianne W. Gaige
William H. Goodrich
Thomas Y. Hobart, Jr.
Dennis P. Kessler
Joseph F. Kurnath M.D.
Patrick A. Mannion
Alfred D. Matt
Colleen E. O’Leary, M.D.
Charles H. Stuart
George Flemming Tagger Yancey, Jr.
David H. Klein
Chief Executive Officer
William E. Jones, Jr.
President
Dorothy A. Coleman
Treasurer,
Chief Financial Officer
Del L. Winkelman
Chief Actuary
Stephen R. Sloan
Secretary
Margaret M. Cassady
Assistant Secretary
James Haefner
Assistant Treasurer
35
MedAmerica Insurance Company
Home Office: Pittsburgh, PA
MedAmerica Insurance Company of Florida
Home Office: Orlando, FL
MedAmerica Insurance Company of New York
Home Office: Rochester, NY
Excellus Insurance Agency
Home Office: Rochester, NY
MIG Assurance (Cayman), Ltd.
Home Office: Grand Cayman, Cayman Islands, BWI
www.MedAmericaLTC.com • www.LTCMedAmerica.com • 165 Court Street, Rochester, New York 14647
36

Keeping Promises

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