REPORT OF EXAMINATION OF THE
NATIONS INSURANCE COMPANY AS OF
DECEMBER 31, 2011
Filed April 8, 2013
TABLE OF CONTENTS
PAGE
SCOPE OF EXAMINATION ... 1
MANAGEMENT AND CONTROL:... 2
Management Agreements ... 3
CORPORATE RECORDS ... 5
FIDELITY BONDS AND OTHER INSURANCE ... 5
TERRITORY AND PLAN OF OPERATION ... 5
REINSURANCE ... 6
ACCOUNTS AND RECORDS: ... 6
Information Systems ... 6
FINANCIAL STATEMENTS: ... 6
Statement of Financial Condition as of December 31, 2011 ... 7
Underwriting and Investment Exhibit for the Year Ended December 31, 2011 ... 8
Reconciliation of Surplus as Regards Policyholders from December 31, 2008 through December 31, 2011 ... 9
COMMENTS ON FINANCIAL STATEMENT ITEMS: ... 10
Losses and Loss Adjustment Expenses ... 10
SUMMARY OF COMMENTS AND RECOMMENDATIONS: ... 10
Current Report of Examination ... 10
Previous Report of Examination ... 11
ACKNOWLEDGMENT ... 12
Los Angeles, California February 15, 2013 Honorable Dave Jones
Insurance Commissioner
California Department of Insurance Sacramento, California
Dear Commissioner:
Pursuant to your instructions, an examination was made of the
NATIONS INSURANCE COMPANY
(hereinafter also referred to as the Company) at its home office located at 2390 East Orangewood Avenue, Suite 250, Anaheim, California 92806. During the course of examination, the Company moved its statutory office to its current location from 17777 Center Court Drive, Suite 325, Cerritos, California 90703.
SCOPE OF EXAMINATION
We have performed our single-state examination of the Company. The previous examination of the Company was made as of December 31, 2008. This examination covers the period from January 1, 2009 through December 31, 2011. The examination was conducted in accordance with the National Association of Insurance Commissioners’ Financial Condition Examiners’ Handbook. The Handbook requires the planning and performance of the examination to evaluate the Company’s financial condition, to identify prospective risks, and to obtain information about the Company, including corporate governance, identification and assessment of inherent risks, and the evaluation of the system controls and procedures used to mitigate those risks. The examination also included an assessment of the principles used and the significant estimates made by management, as well as an evaluation of the overall financial statement presentation, and management’s compliance with Statutory Accounting
Principles and Annual Statement instructions. All accounts and activities of the Company were considered in accordance with the risk-focused examination process.
In addition to those items specifically commented upon in this report, other phases of the Company’s operations were reviewed including the following areas that require no further comment: company history; pensions, stock ownership and insurance plans; growth of company; loss experience; and statutory deposits.
MANAGEMENT AND CONTROL
The controlling stockholders, Elias Assaf and Raimundo Ruiz, own 86% and 14%, respectively, of the Company’s stock. The following chart depicts the Company’s relationship with its affiliated companies as of December 31, 2011:
Elias Assaf and Raimundo Ruiz
Nations Insurance Company
(California) Elias Assaf – 86% Raimundo Ruiz – 14%
Multi-State General Agency, Inc.
(California) Elias Assaf – 50% Raimundo Ruiz – 50% Multi-State Insurance
Services, Inc. (California) Elias Assaf – 50% Raimundo Ruiz – 50%
AFA Claim Services, Inc. (California)
Elias Assaf – 33.34% Raimundo Ruiz – 33.33%
Perry Daskas – 33.33%
The three members of the board of directors, who are elected annually, manage the business and affairs of the Company. Following are members of the board and principal officers of the Company serving at December 31, 2011:
3 Directors
Name and Residence Principal Business Affiliation Elias Assaf
Huntington Beach, California
Chairman of the Board, President and Chief Executive Officer
Nations Insurance Company Zeina Assaf
Huntington Beach, California
Secretary
Nations Insurance Company Raimundo Ruiz
Valencia, California
President
Multi-State Insurance Services, Inc.
Principal Officers
Name Title
Elias Assaf President and Chief Executive Officer Elda Boudaghians Chief Financial Officer
Zeina Assaf Secretary
Management Agreements
Program Management Agreement: On March 8, 2008, the Company entered into a program management agreement with its affiliate, Multi-State Insurance Services, Inc. (MSIS). MSIS provides the Company with accounting, marketing, administrative, underwriting, computer programming, personnel, and other management services. MSIS performs similar services on behalf of other non-affiliated insurers (Insurers). As compensation, for the services provided, MSIS is reimbursed based on the total cost expensed on behalf of all Insurers divided by the percentage of net written premium written through the Company as compared to net written premium written through the Insurers. This agreement was approved by the California Department of Insurance (CDI) on March 8, 2008. During the three year examination period, the Company made the following payments to MSIS:
Year Amount 2009 $ 846,365 2010 $1,450,157 2011 $2,193,587
Claims Management Agreement: The Company was a party to a claims management agreement with a former affiliate, MSI Claims Administrator, Inc. (MSI). MSI had provided the Company with processing, investigating, adjusting, compromising, defending, litigating, supervising, and payment of claim services. MSI also performed similar claims services on behalf of the Insurers. Under the terms of the agreement, MSI was reimbursed for its services based on the total cost expended on behalf of all Insurers, divided by the percentage of claims adjusted on behalf of the Company, as compared to total claims adjusted on behalf of the Insurers. The agreement was previously approved by the CDI on March 8, 2008. The Company terminated the agreement in March 2009. During 2009, the Company paid MSI $101,523.
Claims Management Agreement: On April 1, 2009, the Company entered into a new claims management agreement with its affiliate, AFA Claim Services, Inc. (AFA), to replace the previous terminated claims management agreement with MSI, as discussed above. Under the terms of the agreement, AFA provides the Company with processing, investigating, adjusting, compromising, defending, litigating, supervising, and payment of claims. For compensation, AFA receives 5.5% of the Company’s gross earned premiums for its services. This agreement was approved by the CDI on June 9, 2009. During the three year examination period, the Company made the following payments to AFA:
Year Amount
2009 $254,864
2010 $400,563
2011 $721,674
5
CORPORATE RECORDS
California Insurance Code (CIC) Section 735 requires that the Company inform the board members of receipt of the Report of Examination. The board should be informed of the report both in the form first formally prepared by the examiners and in the form as finally settled and officially filed by the commissioner. The board must also enter that fact in the board minutes. A review of the board minutes disclosed that both the officially filed report and the first formally prepared draft by the examiners were not presented to the board. It is recommended that the Company implement procedures to ensure compliance with CIC Section 735.
The Company’s board actions regarding the authorization and approval of investments did not satisfy the requirements of CIC Section 1201, as the board minutes failed to document specific references to amounts, facts and the values of the securities. This deficiency was also noted in the prior Report of Examination, and it is again recommended that the Company implement procedures to ensure compliance with CIC Section 1201.
FIDELITY BONDS AND OTHER INSURANCE
The Company obtained fidelity bond coverage of $150,000 as it was recommended in the prior Report of Examination. However, based on the Company’s current exposure, the National Association of Insurance Commissioners (NAIC) suggested minimum coverage for the Company is now $1,000,000. It is again recommended that the Company obtain adequate fidelity bond and additional insurance coverage in accordance with the NAIC recommendation.
TERRITORY AND PLAN OF OPERATION
As of December 31, 2011, the Company is authorized to write private passenger automobile liability and physical damage coverage solely in California. Underwriting
activities are targeted exclusively toward insuring non-standard risks. In 2011, the Company wrote $15.9 million of direct premiums. The Company’s business is produced by an affiliated general agency, Multi-State Insurance Services, Inc., whose sales are generated through independent insurance brokers across California.
REINSURANCE
The Company had no reinsurance during the examination period.
ACCOUNTS AND RECORDS
Information Systems
During the course of the examination, a review was made of the Company’s general controls over its information systems, including the areas of improvement recommended in the prior Report of Examination. The review noted improvements in the Company’s general controls over its information systems and the Company indicated that it has made further progress and capital improvements in these areas since the last review. However, deficiencies were still noted in areas such as information security, operational controls, disaster recovery, and business continuity planning. It is recommend that the Company review its information systems and make appropriate changes to further strengthen its general controls.
FINANCIAL STATEMENTS
The financial statements prepared for this examination report include:
Statement of Financial Condition as of December 31, 2011
Underwriting and Investment Exhibit for the Year Ended December 31, 2011 Reconciliation of Surplus as Regards Policyholders from December 31, 2008 through December 31, 2011
7
Statement of Financial Condition as of December 31, 2011
Assets
Ledger and Nonledger
Assets
Assets Not Admitted
Net Admitted
Assets Notes
Bonds $ 2,084,077 $ $ 2,084,077
Common stocks 480,801 480,801
Cash and short-term investments 11,576,514 11,576,514
Investment income due and accrued 19,207 19,207
Premiums and agents’ balances in course of collection 1,981,761 1,981,761 Premiums, agents’ balances and installments booked but
deferred and not yet due 5,595,916 5,595,916
Net deferred tax asset 576,533 17,393 559,140
Electronic data processing equipment and software 15,854 15,854 0 Furniture and equipment, including health care
delivery assets 6,042 6,042 0
Aggregate write-ins for other than invested assets Total assets
19,269 19,269
$ 58,558
0
$ 22,355,974 $ 22,297,416
Liabilities, Surplus and Other Funds
Losses and loss adjustment expenses $ 3,559,466 (1)
Commissions payable, contingent commissions
and other similar charges 366,784
Other expenses 79,944
Taxes, licenses and fees 228,820
Current federal and foreign income taxes 48,999
Unearned premiums 7,348,583
Payable to parent, subsidiaries and affiliates 258,922
Total liabilities 11,891,518
Common capital stock $ 2,600,040
Gross paid-in and contributed surplus 7,400,147
Unassigned funds (surplus) 405,711
Surplus as regards policyholders 10,405,898
Total liabilities, surplus and other funds $ 22,297,416
Underwriting and Investment Exhibit for the Year Ended December 31, 2011
Statement of Income
Underwriting Income
Premiums earned $ 13,253,977
Deductions:
Losses and loss expenses incurred $ 9,150,297
Other underwriting expenses incurred 5,607,545
Total underwriting deductions 14,757,842
Net underwriting loss (1,503,865)
Investment Income
Net investment income earned $ 133,652
Net realized capital gain 8,059
Net investment gain 141,711
Other Income
Net loss from agents’ or premium balances charged off
(amount recovered $6,087 amount charged off $138,449) $ (132,362) Finance and service charges not included in premiums 2,280,415 Aggregate write-ins for miscellaneous income
Total other income
1,400
2,149,453
Net income before federal and foreign income taxes 787,299
Federal and foreign income taxes incurred 425,405
Net income $ 361,894
Capital and Surplus Account Surplus as regards policyholders,
December 31, 2010 $ 9,882,907
Net income $ 361,894
Change in net unrealized capital losses (19,209)
Change in net deferred income tax 210,727
Change in nonadmitted assets (30,421)
Change in surplus as regards policyholders for the year 522,991
Surplus as regards policyholders,
December 31, 2011 $ 10,405,898
9
Reconciliation of Surplus as Regards Policyholders from December 31, 2008 through December 31, 2011
Surplus as regards policyholders,
December 31, 2008, per Examination $ 9,172,258
Gain in Loss in Surplus Surplus
Net income $ 933,690 $
Net unrealized capital losses 19,209
Change in net deferred income tax 213,496
Change in nonadmitted assets 105,976
Surplus adjustments: Transferred from capital
Total gains and losses $
313
$ 19,522
1,253,162
Net increase in surplus as regards policyholders 1,233,640
Surplus as regards policyholders,
December 31, 2011, per Examination $ 10,405,898
COMMENTS ON FINANCIAL STATEMENT ITEMS
(1) Losses and Loss Adjustment Expenses
The December 31, 2011 loss and loss adjustment expense reserves were evaluated by a Casualty Actuary from the California Department of Insurance. Based on the analysis performed, the Company’s reserves for losses and loss adjustment expenses were deemed reasonable.
SUMMARY OF COMMENTS AND RECOMMENDATIONS
Current Report of Examination
Corporate Records (Page 5): It is recommended that the Company implement procedures to ensure compliance with California Insurance Code (CIC) Section 735.
Corporate Records (Page 5): It is again recommended that the Company implement policies and procedures to ensure compliance with CIC Section 1201.
Fidelity Bonds and Other Insurance (Page 5): It is again recommended that the Company obtain adequate fidelity bond and additional insurance coverage in accordance with the National Association of Insurance Commissioners’ recommendation.
Accounts and Records – Information Systems (Page 6): It is recommended that the Company review its information systems and make appropriate changes to further strengthen its general controls.
11 Previous Report of Examination
Corporate Records (Page 4): It was recommended that the Company implement procedures within its board meetings to comply with California Insurance Code (CIC) Sections 1200 and 1201. The Company complied with CIC Section 1200; however the Company failed to comply with CIC Section 1201.
Fidelity Bonds and Other Insurance (Page 4): It was recommended that the Company obtain adequate fidelity bond and additional insurance coverage in accordance with the National Association of Insurance Commissioners’ (NAIC) suggestion. The Company obtained fidelity bond coverage; however, the Company failed to obtain adequate coverage suggested by the NAIC based on the Company’s current exposure.
Accounts and Records (Page 5): It was recommended that the Company correct the disclosures in the Annual Statement, Jurat Page and Notes to Financial Statement, Note 19. The Company complied with the recommendation.
Accounts and Records (Page 5): It was recommended that the Company prepare an aging report for agents’ balances on at least a quarterly basis to comply with the non- admitted calculation requirements set forth in the National Association of Insurance Commissioners Statements of Statutory Accounting Principles No. 6. The Company complied with the recommendation.
Accounts and Records (Page 6): It was recommended that the Company review its information systems and make appropriate changes to strengthen its internal controls. The Company made improvements; however, further enhancements are necessary to strengthen its general controls.
ACKNOWLEDGMENT
Acknowledgment is made of the cooperation and assistance extended by the Company’s officers and employees during the course of this examination.
Respectfully submitted,
______/S/________________ Sayaka T. Dillon, CFE
Examiner-In-Charge
Senior Insurance Examiner Department of Insurance State of California
