park avenue 12-31-15 - delaware department of … · on march 18, 1996, the company was purchased...

EXAMINATION REPORT

OF

PARK AVENUE LIFE INSURANCE COMPANY

AS OF

DECEMBER 31, 2015

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TABLE OF CONTENTS

SALUTATION .............................................................................................................................. 1

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

SUMMARY OF SIGNIFICANT FINDINGS ............................................................................ 3

COMPANY HISTORY ................................................................................................................ 3

GENERAL ................................................................................................................................. 3

CAPITALIZATION ..................................................................................................................... 4

DIVIDENDS ............................................................................................................................... 5

MANAGEMENT AND CONTROL ........................................................................................... 5

DIRECTORS .............................................................................................................................. 5

OFFICERS ................................................................................................................................. 6

CORPORATE RECORDS ............................................................................................................ 6

INSURANCE HOLDING COMPANY SYSTEM ............................................................................. 7

AFFILIATED AGREEMENTS ..................................................................................................... 7

TERRITORY AND PLAN OF OPERATION ........................................................................... 8

REINSURANCE ........................................................................................................................... 9

FINANCIAL STATEMENTS.................................................................................................... 10

STATEMENT OF ASSETS ......................................................................................................... 11

STATEMENT OF LIABILITIES, CAPITAL AND SURPLUS ......................................................... 12

STATEMENT OF OPERATIONS ............................................................................................... 13

RECONCILIATION OF CAPITAL AND SURPLUS FOR THE PERIOD FROM THE PRIOR

EXAMINATION ....................................................................................................................... 14

ANALYSIS OF CHANGES IN FINANCIAL STATEMENTS RESULTING FROM THE EXAMINATION ......................................................................................................................... 15

COMMENTS ON FINANCIAL STATEMENT ITEMS ........................................................ 15

SUBSEQUENT EVENTS ........................................................................................................... 17

COMPLIANCE WITH PRIOR EXAMINATION RECOMMENDATIONS ...................... 17

SUMMARY OF RECOMMENDATIONS ............................................................................... 17

CONCLUSION ........................................................................................................................... 18

SALUTATION May 19, 2017

Honorable Trinidad Navarro Commissioner of Insurance Delaware Department of Insurance Rodney Building 841 Silver Lake Boulevard Dover, Delaware 19904

Commissioner:

In compliance with instructions and pursuant to statutory provisions contained in

Certificate of Authority No. 16.028, dated March 30, 2016, an examination has been made of the

affairs, financial condition and management of


with its statutory home office located at 2711 Centerville Road, Suite 400, Wilmington,

Delaware 19808. The examination was conducted at the principal administrative offices of The

Guardian Life Insurance Company of America located at 7 Hanover Square, New York, New

York 10004. The report of examination thereon is respectfully submitted.

SCOPE OF EXAMINATION

We have performed our multi-state examination of Park Avenue Life Insurance Company

(the “Company”). The last examination of the Company covered the period of January 1, 2008

through December 31, 2011. This examination of the Company covers the period of January 1,


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2012 through December 31, 2015. Our examination was conducted concurrently with our

examination of the Company’s affiliate, The Guardian Insurance & Annuity Company, Inc.

We conducted our examination in accordance with the National Association of

Insurance Commissioners (NAIC) Financial Condition Examiners Handbook (Handbook).

The NAIC Handbook requires that we plan and perform the examination to evaluate the

financial condition, assess corporate governance, identify current and prospective risks of the

company and evaluate system controls and procedures used to mitigate those risks. An

examination also includes identifying and evaluating significant risks that could cause an

insurer’s surplus to be materially misstated both currently and prospectively.

All accounts and activities of the Company were considered in accordance with the risk-

focused examination process. This may include assessing significant estimates made by

management and evaluating management’s compliance with Statutory Accounting Principles.

The examination does not attest to the fair presentation of the financial statements included

herein. If, during the course of the examination an adjustment is identified, the impact of such

adjustment will be documented separately following the Company’s financial statements.

This examination report includes significant findings of fact, along with general

information about the insurer and its financial condition. There may be other items identified

during the examination that, due to their nature (e.g., subjective conclusions, proprietary

information, etc.), are not included within the examination report but separately communicated

to other regulators and/or the Company.

During the course of this examination, consideration was given to work performed by the

Company’s external accounting firm, PricewaterhouseCoopers, LLP. Certain auditor work

papers have been incorporated into the examination work papers.


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SUMMARY OF SIGNIFICANT FINDINGS

There were no significant findings or material changes to the Company’s financial

statements as a result of this examination.

COMPANY HISTORY

General

The Company was incorporated as AM Life Insurance Company (“AM Life”) under the

laws of the Commonwealth of Massachusetts on November 19, 1964, and commenced business

on April 9, 1965. It was chartered as a stock company to issue policies for life, annuities and

accident and health insurance.

The Company was ultimately controlled by American Mutual Liability Insurance

Company (“AMLICO”) until January 5, 1987, when ultimate control was transferred to The

Cooperants Mutual Life Insurance Society (“Cooperants Mutual”) as a result of an acquisition of

the Company’s direct parent by Cooperants Mutual and its affiliates. On June 1, 1988, the

Company’s name was changed to First International Life Insurance Company as part of a

structural reorganization within Cooperants Mutual. The Company was sold in 1992 as a result

of the bankruptcy of Cooperants Mutual. Effective April 17, 1992, ultimate control of the

Company was transferred to Standard Management Corporation (“Standard Management”) as

result of an acquisition of the Company’s direct parent by Standard Management.

On March 18, 1996, the Company was purchased by The Guardian Insurance and

Annuity Company, Inc. (“GIAC”), a wholly owned subsidiary of The Guardian Life Insurance

Company of America (“The Guardian”). On December 23, 1996, The Guardian purchased the

Company from GIAC and re-domesticated it from Massachusetts to Delaware. In conjunction


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with the re-domestication, the name of the Company was changed to Park Avenue Life Insurance

Company.

The Guardian and its subsidiaries provide financial services throughout the United States

including a full range of insurance, investment, securities brokerage, and other financial products

and services. Principal products and services include individual life and disability insurance;

group life and health insurance; annuities; mutual funds; pension and retirement related

investments and administration; and asset management and securities brokerage. The Company

was acquired by The Guardian as part of a growth strategy that included the acquisition of

several entities and blocks of business within its ‘Reinsurance Profit Center’. The Reinsurance

Profit Center stopped acquiring blocks of business in the early 2000’s. As a result, the

Reinsurance Profit Center business and related entities, including the Company, were placed in

run-off.

Capitalization

The Company’s Certificate of Incorporation authorizes the issuance of 100 thousand

shares of common stock with a par value of $25 per share. As of December 31, 2015, the

Company had 100 thousand common shares issued and outstanding totaling $2.5 million in

common capital stock. All outstanding shares of the Company are owned by The Guardian. As

of December 31, 2015, the Company reported gross paid-in and contributed surplus of $169.9

million. The following chart summarizes the Company’s reported capital stock and gross paid-in

and contributed surplus from the prior examination date to December 31, 2015.

Capital StockGross Paid-in &

Contributed Surplus

Total Capital Stock and Gross Paid-in & Contributed Surplus

December 31, 2011 2,500,000$ 169,941,332$ 172,441,332$ Activity - - -

December 31, 2015 $ 2,500,000 $ 169,941,332 $ 172,441,332


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Dividends

The Company paid an extraordinary dividend in the amount of $25 million to The

Guardian on December 23, 2015. The dividend was approved by the Delaware Department of

Insurance. No other dividends were paid during the examination period.

MANAGEMENT AND CONTROL

Directors

Pursuant to the general Corporation Laws of the State of Delaware, as implemented by

the Company’s Certificate of Incorporation and bylaws, the business and affairs of the Company

must be exercised by, or under the authority of, its Board of Directors. The Company’s bylaws

require its Board of Directors consist of not less than five members. Directors are elected

annually by the stockholders for a term of one year. Directors duly elected and serving as of

December 31, 2015, were as follows:

Name Business Affiliation

Dean Anthony Del Vecchio Executive Vice President, Chief Information Officer Head of Enterprise Shared Services The Guardian Life Insurance Company of America

Michael Nicholas Ferik Senior Vice President of Individual Markets Guardian Life Insurance Company of America & Guardian Investor Services LLC

John Hunter Flannigan Senior Vice President and Corporate Controller The Guardian Life Insurance Company of America

Sean David Quinn Vice President Law and Corporate Secretary The Guardian Life Insurance Company of America


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Michael Slipowitz Senior Vice President, Corporate Chief Actuary and Chief Risk Officer

The Guardian Life Insurance Company of America

Officers

Officers were appointed in accordance with the Company’s bylaws during the period

under examination. The bylaws require appointment of the following executive officers: a

President, a Vice President, a Secretary and a Treasurer. The Board may appoint other officers

and agents at its discretion. Any number of offices may be held by the same person. The

primary officers of the Company serving as of December 31, 2015, were as follows:

Name Title

Michael Slipowitz President & Chief Executive Officer

Alphonsus Lawrence Padavano Assistant Vice President and Controller

Sonya Lee-Anne Crosswell Director, Corporate Secretary

Walter Robert Skinner Vice President, Treasurer

Jeffrey Joseph Butscher Second Vice President and Chief Compliance Officer

Karen Ladd Farnsworth-Einsidler Vice President, Investment and Real Estate Counsel

Roland Raymond Rose Associate Actuary

Thomas George Sorell Executive Vice President and Chief Investment Officer

Corporate Records

The recorded minutes of the sole shareholder and Board of Directors were reviewed for

the period under examination. The minutes adequately documented and approved Company

transactions and events, including approval of investment transactions in accordance with 18

Del. C. §1304.


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Insurance Holding Company System

The Company is a member of an insurance holding company system as defined under 18

Del. C. §5001 of the Delaware Insurance Code. The Company is a wholly owned subsidiary of

The Guardian, which is a mutual insurance company that is wholly owned by its policyholders.

The following is an abbreviated organizational chart depicting the Company’s primary

relationships with affiliated entities within the holding company system as of December 31,

2015:

Company Domicile % Own The Guardian Life Insurance Company of America New York Park Avenue Life Insurance Company Delaware 100% Family Service Life Insurance Company Texas 100% Sentinel American Life Insurance Company Texas 100%

Family Service Life Insurance Company (“FSLIC”) and Sentinel American Life

Insurance Company (“SALIC”) were both acquired by the Company in 1998 from Liberty

National Life Insurance Company. FSLIC is licensed in forty-three states, the District of

Columbia and the U.S. Virgin Islands. SALIC is licensed in twelve states. Prior to being placed

into run-off, both companies were direct writers of preneed and final expense insurance. No new

policies have been written by either FSLIC or SALIC since the mid-1990s.

Affiliated Agreements

Tax Allocation Agreement - Effective July 19, 2001, and covering all tax years after

December 31, 1982, the Company became party to a ‘Tax Sharing Agreement’ between

The Guardian and its specified subsidiaries. In accordance with the agreement, each

qualifying member of the group computes its tax provision and liability on a separate

return basis, but may, where applicable, recognize benefits of net operating losses and


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capital losses utilized in the consolidated group. Subsidiary tax liabilities/benefits are

settled subsequent to the filing of the federal income tax return.

General Operating Expense Agreement – Effective December 31, 2007, the Company

entered into an ‘Amended and Restated Agreement for Services and Reimbursement

Agreement’ with The Guardian and its subsidiaries. The agreement supersedes all prior

agreements for the provision of services and reimbursement between The Guardian and

all other parties to the agreement. In accordance with the agreement, The Guardian

provides office space, furniture, equipment, building utilities, clerical staff, employee

benefits and any other services including but not limited to policy services, consulting

services and advisory services. The agreement authorizes The Guardian to enter into

other agreements to provide assets or services on behalf of all parties. Expenses are

allocated to the parties based on a direct basis or through an allocation system developed

by The Guardian's cost accounting department utilizing assets, head count or overhead

information. The agreement requires settlement within forty-five days following the end

of each quarter and permits payment by offset.

TERRITORY AND PLAN OF OPERATION

As of December 31, 2015, the Company was licensed to write life insurance; accident &

health insurance; disability insurance; and fixed and variable annuities in forty-eight states and

the District of Columbia. The Company is not licensed in Hawaii or New York. The

Company’s book of business consists of direct written insurance, reinsurance assumed and

reinsurance ceded that is in run-off. The following is a summary of the Company’s direct

premium and annuity considerations on a gross and net basis by line of business for the year-


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ended December 31, 2015:

Line of Business Direct Assumed Ceded Total % of TotalOrdinary life insurance 579,492$ 1,817,195$ 58,627$ 2,338,060$ 99.8%Group life insurance 2,889 - - 2,889 0.1%Ordinary individual annuities 564 1,547 - 2,111 0.1%

582,945$ 1,818,742$ 58,627$ 2,343,060$ 100%

The Company’s policy administration is outsourced to either a third-party administrator

or reinsurance entities that perform the same functions. As of December 31, 2015, the majority

of the Company’s policies, based on consolidated reserves, were administered by Concentrix

Insurance Administration Solutions Corporation (“CIS”) in accordance with a third-party

insurance administrative services agreement. CIS provides transactional and record keeping

services related to: premiums, commissions, policy loans and surrenders, claims and reinsurance.

REINSURANCE

The Company’s ceded reinsurance program utilizes various modified coinsurance

agreements, coinsurance agreements, and combinations thereof, and yearly renewable term

agreements to provide for reinsurance of selected individual life policies and group life and

group health contracts in accordance with the specified coverage and limitations of each

agreement. The following is a summary of the Company’s gross and net premium for the year-

ended 2015 and gross and net reserves as of December 31, 2015:

Direct premium and annuity considerations 582,945$ Direct contract reserves 11,718,631$ Assumed premium and annuity considerations 1,818,742 Assumed contract reserves 173,968,739

Total gross premium 2,401,687$ Total gross reserves 185,687,370$ Ceded to affiliates - Ceded to affiliates - Ceded to non-affiliates 58,627 Ceded to non-affiliates 96,911

Total ceded 58,627$ Total ceded 96,911$ Net premium and annuity considerations 2,343,060$ Net contract reserves 185,590,459$

Gross and Net Premium Summary Gross and Net Reserve Summary


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FINANCIAL STATEMENTS

The following financial statements are based on the statutory financial statements filed by

the Company with the Delaware Department of Insurance and present the financial condition of

the Company for the period ending December 31, 2015:

Statement of Assets Statement of Liabilities, Capital and Surplus Statement of Operations Reconciliation of Capital and Surplus


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Statement of Assets As of December 31, 2015

Ledger Assets

Assets Not

Admitted

Net Admitted

Assets Notes

Bonds 223,972,662$ -$ 223,972,662$ 1Common stocks 27,461,227 - 27,461,227 2Cash 703,835 - 703,835 Cash equivalents 7,499,282 - 7,499,282 1Contract loans 2,788,883 - 2,788,883 Investment income due and accrued 3,850,454 - 3,850,454 Uncollected premiums and agents' balances 96,231 85,292 10,939 Deferred premiums 775,118 - 775,118 Net deferred tax asset 4,074,084 2,664,473 1,409,611 Receivables from parent; subsidiaries and affiliates 325,976 - 325,976

Total assets 271,547,752$ 2,749,765$ 268,797,987$


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Statement of Liabilities, Capital and Surplus As of December 31, 2015

NotesAggregate reserve for life and contracts 185,590,459$ 3Liability for deposit-type contracts 3,276,680 Life contract claims 10,181,943 Premiums and annuity considerations received in advance 30,741 Interest maintenance reserve 10,322,289 Commissions to agents due or accrued 79,098 Commissions and expense allowances payable on reinsurance assumed 16,128 General expenses due or accrued 82,356 Taxes, licenses and fees due or accrued, excluding federal income taxes 405,943 Current federal and foreign income taxes 138,050 Unearned investment income 13,805 Amounts withheld or retained by company as agent or trustee 7,871 Amounts held for agents' account; including $17,296 agents' credit balances 4,919 Remittances and items not allocated 627,471 Asset valuation reserve 1,823,507 Payable to parent; subsidiaries and affiliates 1,932,393 Aggregate write-ins for liabilities 3,589,998

Total liabilities 218,123,651$

Common capital stock 2,500,000$ Gross paid in and contributed surplus 169,941,332 Unassigned funds (surplus) (121,766,996)

Total capital and surplus 50,674,336$

Total liabilities, capital and surplus 268,797,987$


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Statement of Operations For the Year Ended December 31, 2015

Premium and Other Revenue:

Premiums and annuity considerations 2,343,060$ Net investment income 15,338,845 Amortization of Interest Maintenance Reserve 1,043,306 Commissions and expense allowances on reinsurance ceded 13,680 Aggregate write-ins for miscellaneous income 140,770

Total premium and other revenue 18,879,661$

Benefits:

Death benefits 15,481,929$ Annuity benefits 22,386 Disability benefits and benefits under accident and health contracts 3,187,634 Surrender benefits and withdrawals 1,732,084 Interest and adjustments on contract or deposit-type contract funds 110,945 Payments on supplementary contracts with life contingencies 13,335 Increase (decrease) in aggregate reserves (10,493,275)

Total benefits 10,055,038$

Other ExpensesCommissions on premiums, annuity considerations and deposit-type contracts 11,923$ Commissions and expense allowances on reinsurance assumed 1,132,960 General insurance expenses 1,113,613 Insurance taxes; licenses and fees; excluding federal income taxes 272,221 Increase in loading on deferred and uncollected premiums (7,987) Aggregate write-ins for deductions 43,627

Total other expenses 2,566,357$

6,258,266$

Federal and foreign income taxes incurred (benefit) 1,334,771 Net realized capital gains (losses) (109)

4,923,386$

Net gain from operations before federal income tax and capital gains (losses)

Net income (loss)


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Reconciliation of Capital and Surplus for the Period from the Prior Examination as of December 31, 2011 to December 31, 2015

(In Thousands)

Common Capital Stock

Gross Paid-in & Contributed

Surplus

Unassigned Funds

Surplus TotalDecember 31, 2011 2,500$ 169,941$ (117,018)$ 55,423$ 2012 Net income (loss) - - 5,256 5,256 2012 Changes in capital & surplus (1) - - (3,004) (3,004) December 31, 2012 2,500$ 169,941$ (114,765)$ 57,676$

2013 Net income (loss) - - 6,659 6,659 2013 Changes in capital & surplus (1) - - 3,507 3,507 December 31, 2013 2,500$ 169,941$ (104,599)$ 67,842$

2014 Net income (loss) - - 2,170 2,170 2014 Changes in capital & surplus (1) - - 5,678 5,678 December 31, 2014 2,500$ 169,941$ (96,752)$ 75,690$

2015 Net income (loss) - - 4,923 4,923 2015 Changes in capital & surplus (1) - - (4,939) (4,939) 2015 Dividends (2) - - (25,000) (25,000) December 31, 2015 2,500$ 169,941$ (121,767)$ 50,674$

(1): Changes in capital & surplus for each year may include: change in net unrealized capital gains/losses, change in net deferred income tax, changes in non-admitted assets, and change in asset valuation reserve. (2): The Company paid an extraordinary dividend to The Guardian on December 23, 2015.


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ANALYSIS OF CHANGES IN FINANCIAL STATEMENTS RESULTING FROM THE EXAMINATION

There were no adjustments to the Company’s financial statements as a result of this

examination.

COMMENTS ON FINANCIAL STATEMENT ITEMS

Note 1: Schedule D – Bonds Schedule E – Cash Equivalents

$ 223,972,662 7,499,282

Total Bonds $ 231,471,944 As of December 31, 2015, the Company reported total bond investments on Schedule D –

Part 1 with book adjusted carrying values in the amount of $223.9 million, which was $38.7

million less than the total fair market value of $262.6 million. The Company reported an

additional $7.5 million in United States Treasury bills on Schedule E – Part 2 – Cash

Equivalents. As of December 31, 2015, bonds were comprised of the following classes:

Schedule D - Bonds: Book Value % of Book Value Fair ValueIndustrial and Miscellaneous - Issuer Obligations 206,910,365$ 89.4% 240,386,723$ U.S. Government Bonds - Issuer Obligations 10,337,748 4.5% 12,934,375 All Other Governments - Issuer Obligations 5,696,386 2.5% 8,190,666 Industrial and Miscellaneous - Other 1,028,163 0.4% 1,123,763

Total Schedule D - Bonds 223,972,662$ 96.8% 262,635,527$

Schedule E - Cash Equivalents:

United States Treasury Bills 7,499,282$ 3.2% 5,499,671$

Total Bonds 231,471,944$ 100% 268,135,198$

Of the Company’s total bond holdings, $126.6 million or 54.7% were categorized as

Class 1 with respect to NAIC credit quality standards. NAIC Class 2 bonds totaled $99.3 million

and represented 42.9% of total bonds. NAIC Class 3 bonds totaled $2.5 million and 1.1% of


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total bonds. The remaining holdings were NAIC Class 5 bonds totaling $3.1 million and

accounted for 1.3% of total bonds. Of the total bond holdings, 98.3% were publicly traded

securities and 1.7% were private placements. The Company segments its portfolios as part of its

asset and liability matching program. As of December 31, 2015, bond maturities were structured

with 6.8%, 20.9%, 17.8%, 47.3% and 7.2% maturing in less than one year, one to five years, five

to ten years, ten to twenty years and over twenty years, respectively.

Note 2: Schedule D – Part 2 – Section 2 – Common Stock

$ 27,461,227

As of December 31, 2015, the Company reported total common stock investments on

Schedule D – Part 2 – Section 2 with book/fair market value in the amount of $27.5 million. The

Company’s common stock holdings consist entirely of its wholly owned subsidiary, Family

Service Life Insurance Company. FSLIC owns common stock with a book value of $4.2 million

in its wholly owned subsidiary, Sentinel American Life Insurance Company.

Note 3: Aggregate Reserves for Life and Annuity Contracts

$ 185,590,459

As of December 31, 2015, the Company reported total gross, ceded and net reserves by

product class as follows:

Reserve Segment Gross Reserves

% of Total Gross

ReservesReinsurance

Ceded

% of Total Reinsurance

Ceded Net ReservesLife insurance 142,982,589$ 77.0% 74,904$ 77.3% 142,907,685$ Annuities 42,447,689 22.9% - 0.0% 42,447,689 Other 257,092 0.1% 22,007 22.7% 235,085

Total 185,687,370$ 100% 96,911$ 100% 185,590,459$

INS Consultants, Inc. (“Consulting Actuary”) assisted in the review of the inherent risks,

management oversight and other mitigating controls over the Company’s actuarial processes and

procedures. The Consulting Actuary performed an independent reserve analysis including an


17

assessment of the Company’s reserves for compliance with standard valuation laws and

applicable NAIC Actuarial Guidelines and Model Regulations. The Consulting Actuary also

reviewed the Company’s asset adequacy analysis filed in accordance with the Actuarial Opinion

Memorandum Regulation for the year ended December 31, 2015. The Consulting Actuary

determined the Company complied with all requirements and the Company’s reported reserves

were sufficient on both a gross and net basis as of December 31, 2015.

SUBSEQUENT EVENTS

No significant events occurred subsequent to the examination date of December 31, 2015.

COMPLIANCE WITH PRIOR EXAMINATION RECOMMENDATIONS

There were no prior examination findings or recommendations.

SUMMARY OF RECOMMENDATIONS

There were no examination findings or recommendations as a result of the examination.


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CONCLUSION

The assistance of Delaware’s consulting actuarial firm, INS Consultants, Inc. is

acknowledged. In addition, the assistance and cooperation of the Company’s external audit firm,

PricewaterhouseCoopers, LLP, and the Company’s management and staff is appreciated and

acknowledged.

Respectfully submitted,

______________________________ Richard E. Palmatary, CPA, CFE Examiner In-Charge Delaware Department of Insurance

______________________________ Steve Guest, CFE, CPA, ACI Examination Supervisor Delaware Department of Insurance

park avenue 12-31-15 - delaware department of … · on march 18, 1996, the company was purchased...

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