report of examination of avalon insurance …...avalon insurance company -2- conclusions,...

Examination Warrant Number 16-1230-12358-R1

Report of Examination of

Avalon Insurance Company Harrisburg, Pennsylvania

As of December 31, 2016

Avalon Insurance Company

TABLE OF CONTENTS

Salutation ........................................................................................................................................ 1 Scope of Examination ..................................................................................................................... 1 History............................................................................................................................................. 2 Management and Control:

Capitalization .............................................................................................................................. 2 Stockholder ................................................................................................................................. 2 Insurance Holding Company System ......................................................................................... 3 Board of Directors ...................................................................................................................... 3 Committees ................................................................................................................................. 4 Officers ....................................................................................................................................... 5

Corporate Records: Minutes ....................................................................................................................................... 5 Articles of Incorporation ............................................................................................................. 5 By-Laws ...................................................................................................................................... 5

Service and Operating Agreements: Agreements with External Parties ............................................................................................... 6 Intercompany Agreements with Affiliates ................................................................................ 10

Reinsurance ................................................................................................................................... 12 Territory and Plan of Operations .................................................................................................. 12 Significant Operating Trends ........................................................................................................ 13 Pending Litigation ......................................................................................................................... 13 Financial Statements:

Comparative Statement of Assets, Liabilities, Surplus and Other Funds ................................. 15 Comparative Statement of Income ........................................................................................... 16 Comparative Statement of Capital and Surplus ........................................................................ 17 Comparative Statement of Cash Flow ...................................................................................... 18

Summary of Examination Changes .............................................................................................. 19 Notes to Financial Items:

Assets: Investments ........................................................................................................................... 19

Liabilities: Policyholder and Claim Reserves ......................................................................................... 20

Subsequent Events ........................................................................................................................ 21 Recommendations:

Prior Examination ..................................................................................................................... 21 Current Examination ................................................................................................................. 21

Conclusion .................................................................................................................................... 22

Harrisburg, Pennsylvania May 11, 2018

Honorable Joseph DiMemmo, CPA Deputy Insurance Commissioner Commonwealth of Pennsylvania Insurance Department Harrisburg, Pennsylvania

Dear Sir:

In accordance with instructions contained in Examination Warrant Number 16-1230-12358-R1, dated June 3, 2016, an examination was made of

Avalon Insurance Company, NAIC Code: 12358

a Pennsylvania domiciled, multi-state stock life insurance company, hereinafter referred to as the “Company” or “AIC.” The examination was conducted at the Company’s home office, located at 2500 Elmerton Avenue, Harrisburg, Pennsylvania 17177.

A report of this examination is hereby respectfully submitted.

SCOPE OF EXAMINATION

The Pennsylvania Insurance Department (“Department”) has performed an examination of the Company, which was last examined as of December 31, 2011. This examination covered the five-year period from January 1, 2012 through December 31, 2016.

Work programs employed in the performance of this examination were designed to comply with the standards promulgated by the Department and the National Association of Insurance Commissioners (“NAIC”) Financial Condition Examiners Handbook (“Handbook”).

The Handbook requires that the Department plan and perform the examination to evaluate the financial condition, assess corporate governance, identify current and prospective risks of the Company, evaluate system controls and procedures used to mitigate those risks, and review subsequent events. 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, in accordance with 40 P.S. § 323.5(a), and general information about the Company and its financial condition. There may be other items identified during the examination that, due to their nature (e.g., subjective


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conclusions, proprietary information, etc.), are not included within the examination report but separately communicated to other regulators and/or the Company.

For each year during the period under examination, the certified public accounting firm of Ernst & Young (“CPA”) has provided an unmodified opinion based on statutory accounting principles. Relevant work performed by the CPA, during its annual audit of the Company, was reviewed during the examination and incorporated into the examination workpapers.

The following affiliated Pennsylvania domiciled insurance companies were examined concurrently with the above examination:

Company NAIC Code

Capital Blue Cross (“CBC”) 54720

Capital Advantage Assurance Company (“CAAC”) 14411

Capital Advantage Insurance Company (“CAIC”) 41203

Keystone Health Plan Central, Inc. (“KHPC”) 95199

HISTORY

The Company was incorporated on September 26, 2005, licensed by the Department on December 12, 2005, and commenced business on January 1, 2006.

The Company is currently authorized to transact those classes of insurance described in 40 P.S. § 382 (a)(1) Life and Annuities, and (a)(2) Accident and Health.

MANAGEMENT AND CONTROL

CAPITALIZATION

As of the examination date, December 31, 2016, the Company’s total capitalization was $15,508,455, consisting of 11,000 shares of issued and outstanding common stock with a par value of $100 per share for a value of $1,100,000, $38,100,000 of gross paid-in capital and contributed surplus and unassigned funds (“surplus”) of ($23,691,545).

The total capitalization required of the Company, to engage in the types of business for which it is licensed, is $1,100,000 in capital and $550,000 in capital and surplus. The Company meets this requirement.

STOCKHOLDER

The sole Stockholder for the Company is CAIC. No changes in ownership have occurred during the examination period, and no dividends had been paid or declared during the exam period.


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INSURANCE HOLDING COMPANY SYSTEM

The Company meets the requirements for filing an insurance holding company system annual registration statement (“Annual Registration Statement”), in compliance with 40 P.S. § 991.1404. The Company has filed the Annual Registration Statement for all years of the examination period.

The Company is a wholly-owned subsidiary of CAIC, which in turn, is a wholly-owned subsidiary of CBC. CBC is the ultimate controlling entity of the insurance holding company system.

The following chart details the insurance holding company system as of December 31, 2016, as it relates to the entities owned by Capital Blue Cross:

BOARD OF DIRECTORS

Management of the Company is vested in its Board of Directors (“Board”), which was comprised of the following members as of the examination date, December 31, 2016:


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Name and Address Principal Occupation

Aji M. Abraham Mechanicsburg, PA

Senior Vice President, Business & Network Development Capital Blue Cross

Sherry E. Baskin Mechanicsburg, PA

Corporate Secretary Capital Blue Cross

Michael R. Cleary Harrisburg, PA

Senior Vice President & Treasurer Capital Blue Cross

Christopher T. Davis Enola, PA

Vice President, Ancillary Services Capital Blue Cross

Donna K. Lencki Candia, NH

Senior Vice President & Chief Marketing Officer Capital Blue Cross

Debra A. Rittenour Atlantic Beach, FL

Senior Vice President, Government Programs Capital Blue Cross

Gary D. St. Hilaire Mechanicsburg, PA

President & Chief Executive Officer Capital Blue Cross

Directors are elected by the Stockholder at the annual meeting, and each director serves a one-year term and until a successor is elected and qualified.

The Company’s directors and officers are required to complete a Conflict of Interest Disclosure Statement on an annual basis. The statements are filed with and reviewed by the Corporate Compliance Officer of the Company’s ultimate parent, CBC.

Board members reaffirm their commitment to the Company’s Code of Conduct each year, as well as disclose any outside activities and relationships that may cause a conflict of interest for them or the Company.

AIC Directors are subject to the same Code of Conduct and Disclosure Statements as the employees of CBC. As a result, all Directors of AIC are subject to the uniform Code of Conduct.

COMMITTEES

The By-laws of the Company make the following provisions respective to Board Committees:

“The Chairman of the Board shall, by and with the advice and consent of the Board of Directors, appoint such committees as may be deemed advisable or necessary. These committees are to be under the control and supervision of the Board of Directors and shall have the power and perform the duties which may be delegated to them by the Board of Directors.”


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There were no appointed committees formed at December 31, 2016. Further, AIC’s Board has delegated its auditing responsibilities to the Audit Committee of its ultimate parent, CBC.

OFFICERS

As of the examination date, December 31, 2016, the following officers were appointed and serving in accordance with the Company’s By-laws:

Name Title

Gary D. St. Hilaire President and Chief Executive Officer Michael R. Cleary Senior Vice President and Treasurer Sherry E. Baskin Corporate Secretary Rebecca A. Smith Assistant Corporate Secretary

CORPORATE RECORDS

MINUTES

A compliance review of corporate minutes revealed:

The Annual Meetings of the Stockholder of the Company were held in compliance with the By-laws.

Directors were elected at the Annual Meeting of the Stockholder in accordance with the Company’s By-laws.

The Company’s officers were appointed at the Annual Organizational Meeting of the Board of Directors.

The Stockholder ratified the prior year’s actions of the officers and directors.

A quorum was present at all Stockholder and directors’ meetings.

The Company’s investment transactions were approved quarterly by the Board.

All directors attend Board meetings regularly.

ARTICLES OF INCORPORATION

There were no changes made to the Company’s Articles of Incorporation during the period of examination.

BY-LAWS


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There were no changes made to the Company’s By-laws during the period of examination.

SERVICE AND OPERATING AGREEMENTS

The Company is party to various service and operating agreements, including several external and intercompany agreements. The following significant agreements were in place during the examination period:

AGREEMENTS WITH EXTERNAL PARTIES

Agreement for Vision Care with National Vision Administrators, Inc.

On March 15, 2002, CBC and CAIC entered into an agreement for Vision Care Management Services with National Vision Administrators, Inc. (“NVA”). Through amendments adopted, the agreement has added the following affiliates: KHPC effective July 1, 2005; Dominion Dental Services and AIC effective January 1, 2011; and CAAC effective January 1, 2013.

This agreement permitted the contracting companies and their brokers to be listed with American International Group (“AIG”) in order to solicit applications for insurance policies between National Union Fire Insurance Company of Pittsburgh, PA, an AIG company, and the contracting companies’ customers, as well as to retain the services of NVA to administer and manage the self-funded and insured vision care benefit programs for its customers. Upon its addition as a party to the agreement, Dominion Dental Services was granted permission to bundle its dental insurance programs and products with AIG’s vision products for marketing to its customers. Concurrent with the amendment to add CAAC as a party to the agreement, the contracting companies, with the exception of Dominion Dental Services, granted NVA exclusivity as its provider of vision care benefit management services.

In consideration for the services rendered by NVA, the contracting companies have agreed to pay administrative fees. Through various amendments adopted, the contract’s termination date has been extended to December 31, 2018. This agreement also provides that the contract automatically renews for successive one-year terms unless the ninety (90) day written notice of termination is provided by either party.

This agreement was still in force as of December 31, 2016.

Prescription Benefit Services Agreement for Medicare Part D with CVS Caremark Part D Services, L.L.C.

Effective January 1, 2011, CBC, on behalf of itself and its subsidiaries CAIC, KHPC and AIC, entered into a Prescription Benefit Services Agreement with CVS Caremark Part D Services, L.L.C. (“CVS Part D”) to provide prescription benefit management services in support of the contracting companies’ Medicare Part D plans. The initial term of this agreement expired on December 31, 2013. Thereafter, the contract automatically renews for successive one-year


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terms unless a written notice of termination is provided by either party no less than ninety (90) days prior to the expiration date.

An amendment to the agreement was executed, effective July 1, 2013, to adopt changes to the pricing schedule for services provided by CVS Part D. This amendment also extended the term of the agreement through December 31, 2016; the automatic renewal terms were not changed.

An amendment to the agreement was executed, effective January 1, 2016, to adopt changes to the pricing schedule for services provided by CVS Part D. This amendment also extended the term of the agreement through December 31, 2019; the automatic renewal terms were not changed.


Prescription Benefit Services Agreement with Caremark PCS Health, L.L.C.

Effective January 1, 2011, CBC, on behalf of itself and its subsidiaries CAIC, KHPC and AIC, entered into a Prescription Benefit Services Agreement with Caremark PCS Health, L.L.C. (“Caremark PCS”) to provide prescription benefit management and specialty pharmacy services in support of the contracting companies’ health benefit. The initial term of this agreement expired on December 31, 2013. Thereafter, the contract automatically renews for successive one-year terms unless a written notice of termination is provided by either party no less than ninety (90) days prior to the expiration date.

The agreement was amended, effective October 1, 2012, to add CAAC, as a party to the agreement.

This agreement was further amended, effective January 1, 2016, to update the wording of certain sections of the agreement and to update the drug pricing schedule included as Exhibit A. This amendment also made provisions to extend the expiration date of the agreement to December 31, 2019. Thereafter, the contract automatically renews for successive one-year terms unless a written notice of termination is provided by either party no less than ninety (90) days prior to the expiration date.


Pharmacy Specialty Products Agreement with Accredo Health Group, Inc. (formerly CuraScript)

Effective January 1, 2008, CBC, on behalf of itself and its subsidiaries CAIC, KHPC and AIC, entered into a Pharmacy Specialty Products Agreement with Accredo Health Group (“Accredo”), formerly CuraScript, for the latter to provide prescription drug benefit management and specialty pharmacy services in support of the contracting companies’ health benefit to its members, including those under the CHIP and Healthy PA programs sponsored by the Commonwealth of Pennsylvania, as well as Medicare Part D. The initial term of this agreement expired on December 31, 2011. Thereafter, the contract automatically renews for successive one-year terms unless a written notice of termination is provided by either party no less than ninety (90) days prior to the expiration date.


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In addition to the above, the parties entered into a separate agreement, effective January 1, 2010, under which Accredo agrees to provide medical specialty drugs to the contracting companies’ providers through physician offices on a patient-specific basis. The initial term of this agreement expired on December 31, 2012. Thereafter, the contract automatically renews for successive one-year terms unless a written notice of termination is provided by either party no less than ninety (90) days prior to the expiration date.

These agreements have been amended numerous times, predominately to adjust the underlying drug pricing schedules, terms of service, provider performance standards, supported programs, and termination date.

The agreement that was effective January 1, 2008, was also amended, effective October 1, 2012, to add CAAC as a party to the agreement.

Effective November 11, 2013, the contracting companies and CuraScript executed an amendment under which CuraScript assigned all of its rights, duties, and interests to and under the agreements to Accredo. Both CuraScript and Accredo are subsidiaries of Express Scripts Holding Company, and the assignment was necessitated following a corporate restructuring.

Both of these agreements were still in force as of December 31, 2016.

Program Participation Agreement with American Specialty Health Fitness, Inc.

On January 1, 2012, CBC, KHPC, and CAIC entered into an agreement whereby their Medicare eligible member enrollees obtained access to participate in the Silver & Fit wellness and education programs developed and administered by American Specialty Health Systems, Inc. (“ASH Systems”). In consideration for services provided by ASH Systems, the contracting companies pay a monthly per subscriber fee. The initial term of the agreement expired on December 31, 2012; however, it automatically renews for successive one-year terms unless a written notice of termination is given by either party one hundred twenty (120) days prior to the end of the then current term.

By the effect of an amendment to the contract dated January 1, 2013, CAAC was added as a party to the agreement. Further, ASH Systems’ name was changed to American Specialty Health Fitness, Inc.

By the effect of an amendment to the contract dated January 1, 2016, AIC was added as a party to the agreement.


Master Software License Agreement with General Dynamics Information Technology, Inc. (formerly ViPS, Inc.)

Effective October 21, 2004, CBC, on behalf of itself and its affiliates, entered into a Master Software License Agreement with ViPS, Inc. Under the terms of the agreement, the contracting companies were granted a non-exclusive, non-transferrable, non-assignable right and license to use the MCSource system, along with selected member service and support modules, for the health insurance indemnity plans or health plans administered by the Companies. Under


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the terms of the agreement, the vendor is also obligated to provide software maintenance support services to the contracting companies.

This agreement has been amended several times to add access to additional software modules, adjust the license and support service fees, extend the termination date, and to recognize the change in the name of the provider, as successor in interest, to General Dynamics Information Technology, Inc. (“GDIT”).

The most recent amendment to this agreement, effective September 2, 2016, extended the term through the seventeenth (17th) anniversary date of the contract (i.e., October 20, 2021), unless terminated by the contracting companies with written notice to GDIT at least sixty (60) days prior to the next occurring anniversary date.

This agreement was still in effect as of December 31, 2016.

Services Agreement with National Imaging Associates, Inc.

On January 1, 2006, CBC and its affiliates entered into a Services Agreement with National Imaging Associates, Inc. (“NIA”). Under the agreement, NIA agreed to provide Utilization Management Services for outpatient Diagnostic Imaging Services provided to covered individuals by hospitals, radiologists, and other imaging providers in exchange for a monthly per subscriber fee. The initial term of the agreement was for two years through December 31, 2007; however, in connection with the execution of numerous amendments, the primary purpose of which were to adjust the specifics of the services provided and the related compensation to the provider, the termination date was extended through December 31, 2016. Thereafter, it automatically renews for additional one-year terms unless terminated by either party by providing written notice at least one hundred and twenty (120) days prior to the expiration of the then existing term. In addition, through reference to the listing of parties to the agreement, CAAC was added as a party effective January 1, 2014.


Master License Agreements with the TriZetto Corporation

On February 11, 2005, and September 29, 2006, CBC entered into separate Master License Agreements with The TriZetto Group, Inc., subsequently renamed TriZetto Corporation (“TriZetto”). Under the terms of the agreements, CBC and its affiliates are granted non-exclusive and non-transferrable licenses to use TriZetto’s Proprietary Software, including, but not limited to, Clinical Care Advance, Facets Account Management, and Provider POS (Point of Service) Direct. These agreements have each been amended several times to license additional software modules, expand the scope of services and support, and adjust the amounts of the licensing fees.

Under the agreements, the contracting companies are entitled to receive new releases for the licensed software, in addition to standard support services from TriZetto, in exchange for the payment of annual license and maintenance fees. The term for the licenses are on a perpetual basis unless terminated by either party for cause or with notice.

These agreements were still in force as of December 31, 2016.


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Contract with Eligible Prescription Drug Plan Sponsor

Effective April 1, 2006, AIC and the Centers for Medicare and Medicaid Services (“CMS”) entered into a Novation agreement that allowed AIC to replace Avalon Health, Ltd. (“AHL”) in a contract that originally allowed AHL to operate a Medicare Part D Prescription Drug Benefit Program. The agreement between AHL and CMS was executed September 29, 2005, effective January 1, 2006. The initial term expired on December 31, 2006, and was subject to annual renewals unless the contract was terminated upon notice by either party. This contract was terminated and replaced by the contract described below.

AIC executed a contract with CMS that enables AIC to offer a Medicare Part D Prescription Drug Benefit Program to eligible members effective October 15, 2011. The initial term of the contract expired on December 31, 2012, with successive one-year renewal periods thereafter unless non-renewed or terminated by either party. The contract is governed by 42 CFR 423 of the Social Security Act.

The contract may be renewed only if the following happen:

AIC has not notified CMS of its intent to non-renew;

CMS has not notified AIC of its intent to non-renew;

CMS and AIC agree on bid; and

CMS informs AIC that it authorizes a renewal.


INTERCOMPANY AGREEMENTS WITH AFFILIATES

Allocation of Consolidated Tax Liability Agreement

On December 31, 2002, CBC entered into an Allocation of Consolidated Tax Liability Agreement with its subsidiaries CAIC, Consolidated Benefits, Inc. (“CBI”), and NCAS. Prior to the current examination period, numerous amendments and acknowledgements were made to add KHPC, CBC Insurance Company (“CBCIC”), AIC, Dominion Dental USA, Inc. (“DDUSA”), Dominion Dental Services, Inc. (“DDS”), Dominion Dental Services USA, Inc. (“DDSUSA”), and Dominion Dental Services of New Jersey, Inc. (“DDSNJ”) as parties. Additional amendments were made during the current examination period to add the following subsidiaries:

1. Geneia Holdings, LLC (“Geneia Holdings”), effective July 1, 2012;

2. Geneia, LLC (“Geneia”), effective July 1, 2012

3. CAAC, effective September 4, 2012;

4. Dominion National Insurance Company, effective January 1, 2016;

5. Accenda Health Company (“Accenda”), effective January 1, 2016;

6. DentaQuest Mid-Atlantic, Inc (“DQMA”), effective January 1, 2016; and

7. DentaQuest Virginia, Inc. (“DQVA”), effective January 1, 2016


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Under this agreement, CBC agreed to file consolidated federal income tax returns on the behalf of the group to the Internal Revenue Service. Each subsidiary computes a separate return tax liability for each taxable year and pays CBC its share of the tax liability on a quarterly basis within sixty (60) days of the due date for the estimated tax installments. Any tax refund from the IRS will be refunded by CBC to the respective subsidiary within sixty (60) days of receipt or within sixty (60) days after the statutory due date.

On July 13, 2010, CBC and its affiliates CBI, NCAS, CAIC, KHPC, AIC, DDS, DDSNJ, DDSUSA and DDUSA executed Amendment No. 1 to the agreement. Under this Amendment, the method of determining each subsidiary’s separate return tax liability was adjusted to disregard any adjustments made pursuant to IRC Section 482, with respect to all consolidated federal tax returns filed on or after June 1, 2010. By reference, this amendment also removed AHL and CBCIC as parties to the agreement.

On March 1, 2017, CBC and its affiliates, CBI, Capital Administrative Services, Inc. (“CAS”) (formerly known as NCAS), CAIC, KHPC, AIC, DDS, DDSNJ, DDSUSA, DDUSA, Geneia Holdings, and Geneia executed Amendment No. 2 to the agreement. The purpose of this amendment was to adopt the then newly mandated provisions required by 31 Pa. Code § 25.21. This amendment was retroactively made effective to the tax year beginning January 1, 2016.

Administrative Support Services Agreements

CBC has entered into individual Administrative Support Services Agreements with seven of its subsidiaries, including AIC. Under these agreements, CBC provides its subsidiaries with management, operations, information technology, accounting, and administrative support services. In turn, each subsidiary reimburses CBC based upon CBC’s cost of performance. Each agreement automatically renews unless terminated by either party by providing written notice at least sixty (60) days prior to the expiration of the then current term.


Management Services Agreement with Geneia, LLC

CBC, by itself and on behalf of its affiliates AIC, CAIC, and KHPC, has entered into a Medical Management Services Agreement, effective July 1, 2012, with its indirect affiliate, Geneia. Under this agreement, Geneia provides medical management services including utilization management, disease management, care management, population health and wellness services and appeals services to its included affiliated companies. The original term of this agreement was for three years, through June 30, 2015. This agreement automatically renews for successive one-year terms unless terminated by either party by providing written notice at least ninety (90) days prior to the expiration of the then current term.

On February 22, 2013, CBC and Geneia executed a Restatement of the Management Services Agreement for the purpose of adding CAAC as a party to the agreement, in addition to clarifying changes to the delegation arrangement.

This agreement was amended effective July 1, 2014, for the purpose of removing the handling of appeals and to clarify the remaining services delegated to Geneia on behalf of the contracting companies.


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Support Services Agreement with Dominion Dental USA, Inc.

On August 1, 2012, AIC and DDUSA and its subsidiaries entered into a support services agreement. Under this agreement, DDUSA provides all sales, rating and underwriting, fulfillment, membership and billing, administrative, vendor management, information technology, and support services for dental plans issued by AIC. In exchange, AIC will compensate DDUSA on a tiered fixed fee basis dependent upon the number of enrolled members. The original term of this agreement expired July 31, 2013, upon which time it automatically renews for successive one-year terms unless terminated by either party by providing written notice at least sixty (60) days prior to the expiration of the then current term.


REINSURANCE

The Company does not participate in any form of ceded nor assumed reinsurance as of the examination date.

TERRITORY AND PLAN OF OPERATIONS

The Company is licensed in Delaware, the District of Columbia, Maryland, Pennsylvania, Virginia, and West Virginia. As of the examination date, the Company reported direct premiums of $62,605,334 in Pennsylvania and $951,679 in West Virginia, representing 98.14% and 1.49% of direct premium, respectively. Premiums recorded in the remaining states was immaterial.

As of December 31, 2016, the Company underwrites the following lines of business:

Medicare Supplement Medicare Prescription Drug Plan Vision Stop Loss

Plan subscribers are primarily solicited by the Company’s sales and marketing staff. The Company also works with select brokers.

The following is a summary of premiums by major line of business reported by the Company for the year ended December 31, 2016:

DirectLine of Business and Assumed Ceded Net Percentage

Premium Premium Premium of TotalDecember 31, 2016Medicare Supplement 2,127,840$ 0$ 2,127,840$ 3.3%Vision only 308,619 0 308,619 0.5%Other health 61,353,870 0 61,353,870 96.2%Health subtotal 63,790,329 0 63,790,329 100.0%Totals 63,790,329$ 0$ 63,790,329$ 100.0%


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The Company has recently experienced significant adverse experience relative to its other health line of business, which is primarily comprised of standard aggregate and specific stop loss coverage. The following table summarizes the Company’s experience within this segment over the examination period:

SIGNIFICANT OPERATING TRENDS

The following table indicates the growth of the Company during the period covered by this examination:

PENDING LITIGATION

The Company is a named party in matters under litigation that have arisen in the normal course of the Company’s operations. Pending litigation and other commitments and contingencies as disclosed in the Company’s Annual Statement footnotes were reviewed and no significant discrepancies or omissions were noted. Company counsel has also provided a representation identifying pending material litigation.

The Company has established appropriate reserves against the potential unfavorable outcome of matters for pending and threatened litigation with material consequences.

2016 2015 2014 2013 2012

Net Premium Income 61,353,870$ 59,483,139$ 52,205,982$ 41,762,907$ 38,150,115$

Prescription Drug Benefits 7,160,019 7,140,023 10,289,468 11,177,331 16,398,207 Stop Loss Claims 51,760,093 42,057,131 37,429,232 15,549,871 8,373,927 Claims Adjustment Expenses 1,447,346 1,186,215 1,399,222 970,749 709,971 General Administrative Expenses 15,454,089 16,593,803 14,035,590 10,077,158 8,195,688 Total Underwriting Deductions 75,821,547 66,977,172 63,153,512 37,775,109 33,677,793

Net Underwriting Gain (Loss) (14,467,677)$ (7,494,033)$ (10,947,530)$ 3,987,798$ 4,472,322$

2016 2015 2014 2013 2012

Admitted Assets 38,276,430$ 41,367,687$ 33,891,368$ 33,485,723$ 31,811,669$ Liabilities 22,767,975$ 22,963,451$ 20,112,724$ 13,732,312$ 14,309,159$ Capital and Surplus Funds 15,508,455$ 18,404,236$ 13,778,644$ 19,753,411$ 17,502,510$ Net Premium Income 63,790,329$ 62,427,944$ 55,972,376$ 46,025,895$ 41,503,265$ Benefits to Members 60,800,939$ 51,411,262$ 50,397,739$ 31,244,140$ 28,714,169$ Net Investment Income 315,472$ 325,472$ 300,306$ 273,863$ 202,316$ Net Income (9,307,808)$ (4,733,006)$ (6,144,006)$ 3,000,985$ 1,121,727$


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FINANCIAL STATEMENTS

The financial condition of the Company, as of December 31, 2016, and the results of its operations for the five-year period under examination, are reflected in the following statements*:

Comparative Statement of Assets, Liabilities, Surplus and Other Funds; Comparative Statement of Income; Comparative Statement of Capital and Surplus; Comparative Statement of Cash Flow

*Note: Some financials shown in this report may contain immaterial differences to those reported in the Company’s filed Annual Statements due to rounding errors.


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Comparative Statement of Assets, Liabilities, Surplus and Other Funds As of December 31,

2016 2015 2014 2013 2012Bonds 15,441,161$ 14,875,593$ 14,113,299$ 13,898,623$ 13,076,718$ Common stocks 1,015,494 1,013,972 1,012,076 1,010,054 1,007,870 Cash, cash equivalents and short-term investments 13,400,088 16,762,844 7,312,663 8,850,342 12,470,392 Subtotal, cash and invested assets 29,856,743 32,652,409 22,438,038 23,759,019 26,554,980 Investment income due and accrued 187,572 184,415 163,621 177,507 105,084 Premiums and considerations 1,119,449 1,457,411 861,937 659,836 1,163,915 Amounts receivable relating to uninsured plans 548,624 366,351 2,083,931 1,824,017 0 Current federal and foreign income tax recoverable and interest thereon 3,016,766 1,021,307 2,533,660 908,405 0 Net deferred tax asset 0 0 128,365 0 718,795 Receivable from parent, subsidiaries and affiliates 770,985 2,965,671 3,379,191 4,641,980 2,356,702 Health care and other amounts receivable 2,012,956 2,603,326 2,302,625 1,514,959 912,193 Aggregate write-ins for other than invested assets 763,335 116,797 0 0 0 Total 38,276,430$ 41,367,687$ 33,891,368$ 33,485,723$ 31,811,669$

Claims unpaid 16,281,986$ 17,253,853$ 14,700,120$ 8,855,404$ 8,758,759$ Unpaid claims adjustment expenses 426,075 473,464 403,514 256,111 231,792 Aggregate health policy reserves 627,524 683,397 0 894,676 1,658,677 Premiums received in advance 1,840 0 0 0 0 General expenses due or accrued 177,115 557,288 387,122 219,413 197,489 Current federal and foreign income tax payable and interest thereon 0 0 0 0 78,119 Amounts due to parent, subsidiaries and affiliates 5,213,210 3,798,596 4,530,158 3,477,174 2,933,410 Liability for amounts held under uninsured plans 0 168,357 66,450 0 435,136 Aggregate write-ins for other liabilities 40,225 28,496 25,360 29,534 15,777 Total liabilities 22,767,975 22,963,451 20,112,724 13,732,312 14,309,159 Aggregate write-ins for special surplus funds 0 217,290 283,975 0 0 Common capital stock 1,100,000 1,100,000 1,100,000 1,100,000 1,100,000 Gross paid in and contributed surplus 38,100,000 32,100,000 22,100,000 22,100,000 22,100,000 Unassigned funds (surplus) (23,691,545) (15,013,054) (9,705,331) (3,446,589) (5,697,490) Total capital and surplus 15,508,455 18,404,236 13,778,644 19,753,411 17,502,510 Totals 38,276,430$ 41,367,687$ 33,891,368$ 33,485,723$ 31,811,669$


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Comparative Statement of Income For the Year Ended December 31,

2016 2015 2014 2013 2012Net premium income 63,790,329$ 62,427,944$ 55,972,376$ 46,025,895$ 41,503,265$ Total revenues 63,790,329 62,427,944 55,972,376 46,025,895 41,503,265 Hospital/medical benefits 1,621,411 2,033,178 2,481,603 4,317,572 3,821,714 Other professional services 161,251 105,585 67,573 48,670 0 Emergency room and out-of-area 98,165 75,345 129,863 150,696 120,321 Prescription drugs 7,160,019 7,140,023 10,289,468 11,177,331 16,398,207 Aggregate write-ins for other hospital and medical 51,760,093 42,057,131 37,429,232 15,549,871 8,373,927 Subtotal (hospital and medical) 60,800,939 51,411,262 50,397,739 31,244,140 28,714,169 Total hospital and medical 60,800,939 51,411,262 50,397,739 31,244,140 28,714,169 Claims adjustment expenses, including cost containment expenses 1,493,051 1,248,752 1,484,619 1,068,562 786,134 General administrative expenses 15,916,215 17,424,659 14,899,048 11,066,153 9,071,557 Increase in reserves for life accident and health contracts 107,270 0 (668,884) (989,793) 1,015,188 Total underwriting deductions 78,317,475 70,084,673 66,112,522 42,389,062 39,587,048 Net underwriting gain or (loss) (14,527,146) (7,656,729) (10,140,146) 3,636,833 1,916,217 Net investment income earned 315,472 325,472 300,306 273,863 202,316 Net realized capital gains or (losses) (12,218) (3,287) 0 0 8,247 Net investment gains or (losses) 303,254 322,185 300,306 273,863 210,563 Aggregate write-ins for other income or expenses 1,736 26,152 0 38,017 30,771 Net income or (loss) before federal income taxes (14,222,156) (7,308,392) (9,839,840) 3,948,713 2,157,551 Federal income taxes incurred (4,914,348) (2,575,386) (3,695,834) 947,728 1,035,824 Net income (loss) (9,307,808)$ (4,733,006)$ (6,144,006)$ 3,000,985$ 1,121,727$


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Comparative Statement of Capital and Surplus For the Year Ended December 31,

2016 2015 2014 2013 2012Capital and surplus, December 31, previous year 18,404,236$ 13,778,644$ 19,753,411$ 17,502,510$ 15,938,322$ Net income or (loss) (9,307,808) (4,733,006) (6,144,006) 3,000,985 1,121,727 Change in net deferred income tax (339,866) 175,895 163,969 (764,598) 355,669 Change in nonadmitted assets 751,893 (817,297) 5,270 14,514 86,477 Cumulative effect of changes in accounting principles 0 0 0 0 315 Surplus adjustments: Paid in 6,000,000 10,000,000 0 0 0 Net change in capital and surplus (2,895,781) 4,625,592 (5,974,767) 2,250,901 1,564,188 Capital and surplus, December 31, current year 15,508,455$ 18,404,236$ 13,778,644$ 19,753,411$ 17,502,510$


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Comparative Statement of Cash Flow For the Year Ended December 31,

2016 2015 2014 2013 2012Cash from Operations

Premiums collected net of reinsurance 63,998,237$ 62,428,117$ 55,562,233$ 46,745,015$ 41,236,621$ Net investment income 597,346 562,568 579,121 434,388 256,225 Total 64,595,583 62,990,685 56,141,354 47,179,403 41,492,846 Benefit and loss related payments 60,789,639 49,610,629 45,338,381 31,875,065 27,622,953 Commissions, expenses paid and aggregate write-ins for deductions 18,005,185 18,264,938 16,068,555 12,088,472 9,819,915 Federal and foreign income taxes paid (recovered) (2,918,889) (4,087,739) (2,070,578) 1,934,252 1,066,869 Total deductions 75,875,935 63,787,828 59,336,358 45,897,789 38,509,737 Net cash from operations (11,280,352) (797,143) (3,195,004) 1,281,614 2,983,109

Cash from InvestmentsProceeds from investments sold, matured or repaid: Bonds 2,560,000 1,700,000 750,000 0 2,500,000 Total investment proceeds 2,560,000 1,700,000 750,000 0 2,500,000 Cost of investments acquired (long-term only): Bonds 3,422,817 2,723,469 1,229,605 1,057,037 14,585,381 Stocks 1,522 1,896 2,022 0 0 Total investments acquired 3,424,339 2,725,365 1,231,627 1,057,037 14,585,381 Net cash from investments (864,339) (1,025,365) (481,627) (1,057,037) (12,085,381)

Cash from Financing and Miscellaneous SourcesCash provided (applied): Capital and paid in surplus, less treasury stock 6,000,000 10,000,000 0 0 0 Other cash provided or (applied) 2,781,935 1,272,689 2,138,952 (3,844,627) (723,309) Net cash from financing and miscellaneous sources 8,781,935 11,272,689 2,138,952 (3,844,627) (723,309)

Reconciliation of cash and short-term investments:Net change in cash and short-term investments (3,362,756) 9,450,181 (1,537,679) (3,620,050) (9,825,581) Cash and short-term investments: Beginning of the year 16,762,844 7,312,663 8,850,342 12,470,392 22,295,973 End of the year 13,400,088$ 16,762,844$ 7,312,663$ 8,850,342$ 12,470,392$


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SUMMARY OF EXAMINATION CHANGES

No changes or adjustments have been made to the Company’s financial statements as a result of this examination.

NOTES TO FINANCIAL ITEMS

ASSETS

INVESTMENTS

As of December 31, 2016, the Company’s invested assets were distributed as follows:

The Company’s bond and short-term investment portfolio had the following quality and

maturity profiles:

The Company’s investments are of high quality, consisting of investment grade stocks,

bonds and money market and mutual funds. Overall, the portfolio is viewed as conservative and liquid, with the majority of the securities easily priced.

The composition of the portfolio has changed since the prior examination as the Company has strategically deployed assets previously held in cash and short-term investments. At that time approximately 91.2% of the Company’s overall portfolio was in this category, as opposed to the current percentage of 44.8%.

Amount Percentage

Bonds 15,441,161$ 51.8%Common stocks 1,015,494 3.4%Cash 161,426 0.5%Short-term investments 13,238,662 44.3%Totals 29,856,743$ 100.0%

NAIC Designation Amount Percentage1 - highest quality 23,477,392$ 82.1%2 - high quality 4,597,037 16.1%3 - medium quality 505,370 1.8%Totals 28,579,799$ 100.0%

Years to Maturity Amount Percentage1 year or less 15,594,396$ 54.5%2 to 5 years 6,362,589 22.3%6 to 10 years 4,118,301 14.4%11 to 20 years 2,504,513 8.8%Totals 28,579,799$ 100.0%


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The Company has a written investment policy as required by 40 P.S. § 504.1(c), and is following this policy relative to the maintenance of its investment portfolio and asset allocations.

The Company utilized the services of Sterling Advisors as its investment manager during 2016. Sterling was formed with the merger of Valley Forge Asset Management with Stratton. Valley Forge served as the investment manager during the remaining years in the examination period.

In addition to the above, CBC, on behalf of itself and its affiliates, has entered into a Consulting Services Agreement with U.S. Institutional Corp. (“USI”). Under this agreement, which became effective May 1, 2005, USI provides advice and recommendations to assist the contracting companies in the management of their respective investment portfolios, investment policies, investment managers, asset allocation modeling, fund efficiency review and investment policy compliance in exchange for an annual retainer fee.

Effective March 22, 2005, the Company entered into a Custodial Agreement for invested assets with Mellon Bank, N.A. This agreement was reviewed and found to be compliant with 31 Pa. Code § 148a3.

LIABILITIES

POLICYHOLDER AND CLAIM RESERVES

The Company reported reserves for Claims Unpaid of $16,281,986; Unpaid Claims Adjustment Expenses of $426,075; and Aggregate Health Policy Reserves of $627,524 in its December 31, 2016 Annual Statement.

Mark Spitler, FSA, MAAA, Senior Director of Actuarial Services at the Company, has been the Company’s appointed actuary (“AA”) for all years in the examination period.

The AA issued a Statement of Actuarial Opinion as of December 31, 2016, concluding that the Company’s reserves “make a good and sufficient provision for all unpaid claims and other actuarial liabilities of the organization under the terms of its contracts and agreements.”

As of December 31, 2016, Ernst & Young, LLC, the Company’s independent auditors, developed an independent estimate of the Policyholder and Claim Reserves to determine the reasonableness of the estimates developed by management. Based on the results of their audit procedures, E&Y issued an unmodified opinion as to the Company’s Policyholder and Claim Reserves.

The examination team utilized the services of an actuarial firm, Lewis & Ellis, Inc., to assist in the performance of examination activities related to the Company’s reserving and pricing practices and processes. Procedures were performed by the examiners to validate the amounts for reasonableness, completeness and accuracy. No material discrepancies were noted or detected in the claim reserves reported by the Company as of December 31, 2016. The Policyholder and Claim Reserves were accepted as reported.


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SUBSEQUENT EVENTS

Effective March 1, 2017, Sherry E. Baskin retired from her position as Corporate Secretary of the Company. She was succeeded in the role, along with her position as a Director, by Todd A. Shamash, who also serves as the Company’s General Counsel.

Effective July 1, 2017, Michael R. Cleary retired from his position as Senior Vice President and Treasurer of the Company. Mr. Cleary was succeeded in these roles, along with his position as a Director, by Harvey F. Littman, who previously served as the Company’s Vice President of Finance.

In December 2017, following obtaining the Department’s approval, the Company’s direct parent, CAIC, made a capital contribution to the Company in the amount of $8,000,000.

RECOMMENDATIONS

PRIOR EXAMINATION

The prior examination report contained the following recommendation:

1. It was recommended that the Company’s Appointed Actuary include in future Actuarial Memoranda documentation of the reconciliation of the data used for analysis to the Underwriting and Investment Exhibit, Part 2B as is required by the NAIC’s Health Annual Statement Instructions. It is further recommended that the Company establish and implement a control to prevent the omission of required components during the preparation of these documents in the future.

The Company has complied with this recommendation.

CURRENT EXAMINATION

There are no recommendations as result of the current examination.

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