report of examination of obi america insurance company and … · 2018-04-16 · examination...

Examination Warrant Numbers 16-1129-15645-R1 16-1129-14190-R1

Report of Examination of

OBI America Insurance Company and OBI National Insurance Company

Harrisburg, Pennsylvania

As of December 31, 2016

TABLE OF CONTENTS

Subject Page

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

Capitialization ........................................................................................................................... 3 Stockholder ............................................................................................................................... 3 Insurance Holding Company System........................................................................................ 3 Board of Directors..................................................................................................................... 6 Committees ............................................................................................................................... 7 Officers ..................................................................................................................................... 8

Corporate Records: Minutes ..................................................................................................................................... 8 Articles of Incorporation ........................................................................................................... 8 By-Laws .................................................................................................................................... 8

Service amd Operating Agreements ............................................................................................... 9 Reinsurance:

Ceded ........................................................................................................................................ 9 Assumed .................................................................................................................................. 10

Territory and Plan of Operation .................................................................................................... 10 Significant Operating Ratios and Trends ...................................................................................... 11 Pending Litigation ......................................................................................................................... 12 Financial Statements – OBI America Ins Co

Comparative Statement of Assets, Liabilities, Surplus and Other Funds ............................... 14 Comparative Statement of Income .......................................................................................... 15 Comparative Statement of Capital and Surplus ...................................................................... 16 Comparative Statement of Cash Flow .................................................................................... 17

Financial Statements – OBI National Ins Co Comparative Statement of Assets, Liabilities, Surplus and Other Funds ............................... 18 Comparative Statement of Income .......................................................................................... 19 Comparative Statement of Capital and Surplus ...................................................................... 20 Comparative Statement of Cash Flow .................................................................................... 21

Summary of Examination Changes .............................................................................................. 22 Notes to Financial Statements: Assets:

Investments ............................................................................................................................. 22 Liabilities:

Loss and Loss Adjustment Expense Reserves ........................................................................ 23 Subsequent Events ........................................................................................................................ 24 Recommendations:

Prior Examination ................................................................................................................... 24 Current Examination ............................................................................................................... 24

Conclusion .................................................................................................................................... 25

Harrisburg, Pennsylvania December 20, 2017

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

Dear Sir:

In accordance with instructions contained in Examination Warrant Numbers 16-1129-15645-R1 and 16-1129-14190-R1, dated June 29, 2016, an examination was made of

OBI America Insurance Company, NAIC Code: 15645

OBI National Insurance Company, NAIC Code: 14190

Pennsylvania domiciled multi-state, property and casualty companies, hereinafter collectively referred to as the “Companies,” or individually as OBI America Insurance Company (“OBIA”) and OBI National Insurance Company (“OBIN”). The examination was conducted at the Companies’ administrative office, located at 605 Highway 169 North, Suite 800, Plymouth, Minnesota 55441.

A report of this examination is hereby respectfully submitted.

SCOPE OF EXAMINATION

The Pennsylvania Insurance Department (“Department”) has performed an examination of OBIA and OBIN, which were last examined as of October 10, 2014, and December 31, 2011, respectively. The OBIA examination covered the two-year period from January 1, 2015 through December 31, 2016, and the OBIN 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 Companies share the same key processes, systems, and management. The Handbook provides for a group examination of multiple insurers in a holding company group that have similar key processes, systems, and/or management.

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 Companies, 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.

OBI America Ins Co & OBI National Ins Co

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All accounts and activities of the Companies 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 Companies’ financial statements.

This examination report includes significant findings of fact, in accordance with 40 P.S. § 323.5(a), and general information about the Companies and their 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 Companies.

For each year during the period under examination, the certified public accounting firm of PricewaterhouseCoopers (“CPA”) provided an unmodified audit opinion on the Companies’ year-end financial statements based on statutory accounting principles. Relevant work performed by the CPA, during its annual audit of the Companies, was reviewed during the examination and incorporated into the examination workpapers.

The New York Department of Financial Services (“NYDFS”), as lead state, led the coordinated examination of the companies in the White Mountains Insurance Group, Ltd., which involved four states. The following companies, shown with their state of domicile, were examined at the same time during the above examination:

Company NAIC Code

Atlantic Specialty Insurance Company (NY) – “ASIC” 27154

Homeland Insurance Company of Delaware (DE) – “HODE” 14231

Homeland Insurance Company of New York (NY) – “HONY” 34452

Houston General Insurance Exchange (TX) – “HGIE” 11988

OBI America Insurance Company (PA) 15645

OBI National Insurance Company (PA) 14190

HISTORY

OBIA was incorporated on January 17, 2013, licensed by the Department on February 23, 2015, and commenced business on or about April 15, 2016. OBIN was incorporated on July 28, 2011, licensed by the Department on April 19, 2012 and commenced business on or about December 31, 2012. The Companies were formed to allow the OneBeacon Insurance Group, Ltd. (“OBIG, Ltd”), a publicly traded insurance holding company domiciled in Bermuda, to write tiered workers’ compensation coverage in states that do not allow tiering within a single insurance company.


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On April 18, 2016, White Mountains Insurance Group, Ltd., the Companies’ ultimate controlling person, completed the sale of Sirius International Insurance Group, Ltd., and its subsidiaries to CM International Holding PTE Ltd. This sale had no material impact to the Companies.

OBIA and OBIN are each currently authorized to transact those classes of insurance described in 40 P.S. § 382, (b)(1) Property and Allied Lines, (b)(2) Inland Marine and Physical Damage, (b)(3) Ocean Marine, (c)(1) Fidelity and Surety, (c)(2) Accident and Health, (c)(3) Glass, (c)(4) Other Liability, (c)(5) Boiler and Machinery, (c)(6) Burglary and Theft, (c)(7) Credit, (c)(8) Water Damage, (c)(9) Elevator, (c)(10) Livestock, (c)(11) Auto Liability, (c)(12) Mine and Machinery, (c)(13) Personal Property Floater, and (c)(14) Workers’ Compensation.

MANAGEMENT AND CONTROL

CAPITALIZATION

As of the examination date, December 31, 2016, OBIA’s total capital was $15,301,199, consisting of 45,000 capital shares of issued and outstanding common stock with a par value of $100 per share amounting to $4,500,000; $10,500,000 in gross paid in and contributed surplus; and $301,199 in unassigned funds (surplus).

As of the examination date, December 31, 2016, OBIN’s total capital was $13,135,146, consisting of 45,000 capital shares of issued and outstanding common stock with a par value of $100 per share amounting to $4,500,000; $8,500,000 in gross paid in and contributed surplus; and $135,146 in unassigned funds (surplus).

The Companies’ minimum capital and minimum surplus requirements for the types of business for which they are licensed, pursuant to 40 P.S. § 386, is $2,350,000 in capital and $1,175,000 in surplus. The Companies have met the minimum capital and minimum surplus requirements throughout the examination period.

STOCKHOLDER

ASIC directly owns all of the issued and outstanding common stock of OBIA and OBIN, representing 100% of the voting securities of each company.

INSURANCE HOLDING COMPANY SYSTEM

The Companies meet the requirements for filing an insurance holding company system annual registration statement (“Annual Registration Statement”), in accordance with 40 P.S. § 991.1404. For each year of the examination period, the Companies filed the required Annual Registration Statement by March 31.

White Mountains Insurance Group, Ltd., is named as the ultimate controlling person in the holding company system. The Companies are wholly-owned subsidiaries of ASIC, which in turn is a wholly-owned subsidiary of OneBeacon Insurance Group LLC (“OBLLC”), an


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insurance holding company domiciled in the State of Delaware. OBLLC is an indirect wholly-owned subsidiary of OBIG, Ltd.

The organizational chart below depicts the Companies’ direct and indirect ownership within its holding company system as of December 31, 2016.


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White Mountains Insurance Group, Ltd. Bermuda LTD

Lone Tree Holdings Ltd. Bermuda LTD

60.5%

Bridge Holdings (Bermuda) Ltd. Bermuda LTD

15.2%

OneBeacon Insurance Group, Ltd. Bermuda LTD

Mill Shares Holdings (Bermuda) Ltd. Bermuda LTD

OB Portfolio Solutions ICAV Ireland ICAV

OB (Barbados) International SRL

Barbados SRL

Split Rock Insurance, Ltd.

Bermuda LTD

Grand Marais Capital Limited U.K. Lloyd's

OneBeacon Holdings

(Gibraltar) Limited Gibraltar LTD

OneBeacon Investments (Luxembourg) S.à.r.l. LUX S.à r.l.

OneBeacon U.S. Financial Services, Inc. DE CORP

OneBeacon U.S. Enterprises Holdings, Inc.

DE CORP

OneBeacon U.S. Holdings, Inc. DE CORP

OneBeacon Insurance Group LLC DE LLC

WM Belvaux (Luxembourg) S.à r.l..

LUX S.à r.l.

WM Findel

(Luxembourg) S.à r.l. LUX S.à r.l.

WM Kehlen (Luxembourg) S.à r.l.

LUX S.à r.l.

WM Queensway (Gibraltar) Limited Gibraltar LTD

81.2%

A.W.G. Dewar, Inc. MA CORP

Atlantic Specialty Insurance Company NY INS CO

OBI America Insurance Company

EBI Claims Services, LLC

DE LLC

Houston General Insurance Management Company

TX CORP

Houston General Insurance Exchange

TX INS CO

PA INS CO

Homeland Insurance Company of Delaware

DE INS CO

OBI National Insurance Company PA INS CO

OneBeacon

Entertainment, LLC DE LLC

OneBeacon Sports and Leisure, LLC

DE LLC

National Marine OneBeacon Specialty 50% 50%

Underwriters, Inc. MD CORP

Insurance Company PA INS CO Specialty Advantage

Insurance Services Homeland Insurance Company

of New York NY INS CO

OneBeacon Select Insurance

Company PA INS CO

CA GP

OneBeacon Services, LLC

DE LLC

Public Entities of America, LLC

FL LLC


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BOARD OF DIRECTORS

Management of the Companies is vested in each Companies’ board of directors (“Board”). The composition of each Companies’ Board is identical and comprised of the following members as of December 31, 2016:

Name and Address Principal Occupation

Dennis Albert Crosby Executive Vice President Suwanee, GA OBI America Insurance Company OBI National Insurance Company Sean William Duffy Senior Vice President & Chief Claims Officer Minneapolis, MN OBI America Insurance Company OBI National Insurance Company

Joan Kathleen Geddes Vice President & Assistant Secretary Hanover, MA OBI America Insurance Company OBI National Insurance Company Josette Durling Kiel Senior Vice President & Chief Underwriting Officer Boerne, TX OBI America Insurance Company OBI National Insurance Company

Scott Walter McClintock Senior Vice President & Chief Information Officer Wayzata, MN OBI America Insurance Company OBI National Insurance Company

Paul Harrington McDonough Executive Vice President, & Chief Financial Officer Wayzata, MN OBI America Insurance Company OBI National Insurance Company Timothy Michael Miller President, Chief Executive Officer, & Chairman Deephaven, MN OBI America Insurance Company OBI National Insurance Company Maureen Ann Phillips Senior Vice President & General Counsel Golden Valley, MN OBI America Insurance Company OBI National Insurance Company Thomas Norman Schmitt Senior Vice President & Eden Prairie, MN Chief Human Resources Officer OBI America Insurance Company OBI National Insurance Company

The by-laws provide that the Board have between two and eighteen directors, with the exact number to be determined by resolution adopted by a majority of the Board. It is the responsibility of the Nominating & Governance Committee, acting under the authority provided in its charter, to assess the Board’s composition and recommend changes in the size of the Board as circumstances and the needs of the Companies change from time to time.


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Directors are elected at the annual meeting. There are no limits to the number of terms a Director may serve on the Board. The Chairman of the Board is selected by the Board from among its members.

The Board meets at least four times per year. Regular attendance by the Companies’ senior officers is generally required at all full sessions of the Board.

The form and amount of Director compensation, including perquisites and other benefits, are reviewed and determined on an annual basis by the Compensation Committee. No member of the Audit Committee may receive, directly or indirectly, any compensation from the Companies other than: (i) fees paid to Directors for service on the Board, (ii) additional fees paid to Directors for service on a Committee of the Board (including the Audit Committee) or as the chairperson of any committee, and (iii) a pension or other deferred compensation for prior service that is not contingent on future service on the Board. A Director who is also an Officer of the Companies is prohibited from receiving additional compensation for their service as a Director.

The Companies have a formal conflict of interest policy. The Directors and Officers must review, make disclosures, if applicable, and then sign the policy annually.

COMMITTEES

The Companies’ Board and the Board of its parent, ASIC, do not appoint any committees; however, the Companies benefit from the Board committees of their parent, OBIG, Ltd. As of the examination date, December 31, 2016, the following committees were appointed by the Board of OBIG, Ltd and serving in accordance with the by-laws of OBIG, Ltd:

Audit Committee Compensation Committee Kent D. Urness (Chairman) Lowndes A. Smith (Chairman) Ira H. Malis Raymond Barrette Lowndes A. Smith Lois W. Grady Patrick A. Thiele Kent D. Urness Nominating & Governance Committee David T. Foy (Chairman) Reid T. Campbell Lois W. Crady Morgan W. Davis


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OFFICERS

As of the examination date, December 31, 2016, the following officers were appointed and serving in accordance with each Companies’ by-laws:

Name Title

Timothy Michael Miller President & Chief Executive Officer John Charles Treacy Senior Vice President & Treasurer Christopher Vincent Jerry Secretary Paul John Brehm Senior Vice President, Chief Risk Officer, and Chief Actuary

CORPORATE RECORDS

MINUTES

A compliance review of corporate minutes for OBIA and OBIN revealed the following:

The annual meetings of the Companies’ stockholder were held in compliance with the by-laws.

The stockholder elected directors at such meetings in compliance with the by-laws.

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

Quorums were present at all directors’ meetings.

The Companies’ investment transactions are approved quarterly by the Board.

All directors attended Board meetings regularly.

The Companies’ Board approved the reinsurance contracts.

ARTICLES OF INCORPORATION

There were no amendments to the articles of incorporation of OBIA during the examination period.

OBIN amended its articles of incorporation on May 23, 2012 to change the address of its registered office.

BY-LAWS

There were no amendments to the by-laws of OBIA or OBIN during the examination period.


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SERVICE AND OPERATING AGREEMENTS

The Companies are party to agreements with their affiliates which among others includes ASIC, HONY, and HODE and were entered into prior to and during the period covered by this examination. These agreements are summarized below.

Tax Allocation Agreement

Effective December 23, 2014, the Company entered into a Tax Allocation Agreement with OneBeacon U.S. Financial Services, Inc. and certain affiliates including the Companies which is noted as affiliated group. Under the terms of the agreement, the affiliated group shall compute, on or before the date provided by law for the payment of any federal income tax or estimated tax, the amount of income taxes or estimated tax or refund to which each company listed would have to make or to which such member would be entitled if it filed on a separate basis. The agreement was amended on May 1, 2015 to add OBIA.

Investment Management Agreement

Effective, December 23, 2014, OBIN was added to an Amended and Restated Investment Management Agreement (“IMA”) with White Mountains Advisors, LLC (“WMA”), an affiliated company with ASIC and certain other affiliates (“Affiliates”). The original agreement was effective October 1, 2010. Under the IMA, WMA provides investment management services, including the investment and reinvestment of Affiliates investment assets. The fees for these services are paid on a quarterly basis at rates applied based on the value of each Affiliate’s investment portfolio. In 2015 and 2016, WMA amended the IMA to add OBIA and to modify the fee schedule.

REINSURANCE

CEDED

OBIA and OBIN are each a party to a 100% quota share reinsurance agreement with their parent, ASIC. Under the terms of this agreement, ASIC will pay, or provide services for, all of OBIA’s and OBIN’s non-investment expenses both underwriting and non-underwriting, for no fee or cost as long as the agreement remains in effect.

OBIA’s agreement became effective May 1, 2015, and OBIN’s agreement became effective October 12, 2012, and was amended and restated on August 1, 2016. ASIC is licensed to write business in Pennsylvania and also has authority for all business it assumes from the Companies in New York.

The total ceded premium for 2016 was $3,000 for OBIA and $18,750,000 for OBIN. The net amount recoverable for 2016 was $2,000 for OBIA, which was far less than 1% of its surplus and $23,911,000 for OBIN, which was 182% of its surplus. As of December 31, 2016, the Companies had $0 outstanding recoverables due from ASIC.

All reinsurance contracts contain appropriate insolvency and arbitration clauses. Additionally, all contracts transfer risk as outlined in Statement of Statutory Accounting Principles No. 62.


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ASSUMED

The Companies did not assume any business during the examination period.

TERRITORY AND PLAN OF OPERATION

As of December 31, 2016, OBIA is licensed in the following jurisdictions: Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, and Wisconsin.

The Company began writing business in 2016. For the year ending December 31, 2016, OBIA recorded $3,308 in direct workers’ compensation business, as shown in the following chart:

As of December 31, 2016, OBIN is licensed in all states, including the District of Columbia. OBIN’s primary lines of business written include commercial multi-peril, ocean marine, workers’ compensation, other liability, and credit. Business is primarily written in California, Georgia, Illinois, Minnesota, New York, Pennsylvania, Rhode Island, Tennessee, and Texas.

Directand Assumed Ceded Net Written Percentage

Line of Business Premium Premium Premium of Total

December 31, 2016Workers' compensation 3,308$ 3,308$ 0$ 0.0%Totals 3,308$ 3,308$ 0$ 100.0%


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The following chart depicts OBIN’s premium distribution by line of business as of December 31, 2016:

SIGNIFICANT OPERATING RATIOS AND TRENDS

OBIA’s underwriting ratios, summarized below, are shown on an earned/incurred basis, and encompass the two-year period covered by this examination.

OBIN’s underwriting ratios, summarized below, are shown on an earned/incurred basis, and encompass the five-year period covered by this examination.

Directand Assumed Ceded Net Written Percentage

Line of Business Premium Premium Premium of Total

December 31, 2016Fire 3,602$ 3,602$ 0$ 0.0%Allied lines 5,688 5,688 0 0.0%Commercial multiple peril 323,236 323,236 0 0.0%Ocean marine 1,796,866 1,796,866 0 0.0%Inland marine 244,917 244,917 0 0.0%Earthquake 206 206 0 0.0%Group accident and health 12,008 12,008 0 0.0%Workers' compensation 14,864,081 14,864,081 0 0.0%Other liability - occurrence 37,230 37,230 0 0.0%Other liability - claims-made 293,447 293,447 0 0.0%Products liability - occurrence 500 500 0 0.0%Products liability - claims-made 8,921 8,921 0 0.0%Commercial auto liability 116,485 116,485 0 0.0%Auto physical damage 23,659 23,659 0 0.0%Fidelity 475 475 0 0.0%Boiler and machinery 3,527 3,527 0 0.0%Credit 1,014,777 1,014,777 0 0.0%Totals 18,749,625$ 18,749,625$ 0$ 100.0%

Amount PercentagePremiums earned 0$ 0.0 %

Losses incurred 0$ 0.0 %Other underwriting expenses incurred 10,981 0.0 %Net underwriting gain or (loss) (10,981) 0.0 %Totals 0$ 0.0 %

Amount PercentagePremiums earned 0$ 0.0 %

Losses incurred 0$ 0.0 %Other underwriting expenses incurred 4,049 0.0 %Net underwriting gain or (loss) (4,049) 0.0 %Totals 0$ 0.0 %


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The Companies reported the following net underwriting, investment, and other gains or losses during the period under examination:

PENDING LITIGATION

The Companies are involved in litigation arising in and out of the normal course of business. The Companies are not party to any current or pending litigation that might have a material, adverse impact on the financial position of the Companies through the date of this examination report.

OBI America Insurance Co. 2016 2015

Admitted assets 15,336,937$ 15,161,426$ Liabilities 35,738$ 44,001$ Surplus as regards policyholders 15,301,199$ 15,117,425$ Gross premium written 3,308$ 0$ Underwriting gain/(loss) 0$ (10,981)$ Investment gain/(loss) 267,461$ 176,026$ Net income 196,391$ 98,082$

OBI National Insurance Co. 2016 2015 2014 2013 2012

Admitted assets 13,157,395$ 13,139,343$ 13,060,195$ 12,950,877$ 13,258,647$ Liabilities 22,249$ 23,339$ 25,786$ 7,522$ 52,829$ Surplus as regards policyholders 13,135,146$ 13,116,004$ 13,034,409$ 12,943,355$ 13,205,818$ Gross premium written 18,749,625$ 20,588,772$ 11,475,609$ 3,681,863$ 0$ Underwriting gain/(loss) 0$ 0$ 0$ 0$ (4,049)$ Investment gain/(loss) 87,213$ 125,761$ 133,349$ (159,848)$ 264,431$ Net income 18,743$ 81,423$ 90,255$ (264,100)$ 205,382$


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FINANCIAL STATEMENTS

The financial condition of the Companies, as of December 31, 2016, and the results of its operations for the 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; and Comparative Statement of Cash Flow.

*Note: Some financials shown in this report may contain immaterial differences to those reported in each Companies filed Annual Statements due to rounding errors.


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

OBI America Insurance Company2016 2015

Bonds 14,585,200$ 14,253,004$ Cash, cash equivalents, and short term investments 714,174 363,329 Receivable for securities 1,281 499,019 Subtotals, cash and invested assets 15,300,655 15,115,352 Investment income due and accrued 36,282 40,607 Net deferred tax asset 0 5,467 Total 15,336,937$ 15,161,426$

Other expenses 4,601$ 4,881$ Current federal and foreign income taxes 18,035 32,578 Net deferred tax liability 7,150 0 Payable to parent, subsidiaries and affiliates 5,952 6,542 Total liabilities 35,738 44,001 Common capital stock 4,500,000 4,500,000 Gross paid in and contributed surplus 10,500,000 10,500,000 Unassigned funds (surplus) 301,199 117,425 Surplus as regards policyholders 15,301,199 15,117,425 Totals 15,336,937$ 15,161,426$


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Comparative Statement of Income For the Year Ended December 31,

OBI America Insurance Company

Underwriting Income 2016 2015

Deductions: Other underwriting expenses incurred 0 10,981 Total underwriting deductions 0 10,981

Net underwriting gain or (loss) 0 (10,981)

Investment Income

Net investment income earned 205,806 173,936

Net realized capital gains or (losses) 61,655 2,090

Net investment gain or (loss) 267,461 176,026 Net income before dividends to policyholders and

before federal and foreign income taxes 267,461 165,045 Federal and foreign income taxes incurred 71,070 66,963

Net income 196,391$ 98,082$


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

OBI America Insurance Company 2016 2015

Surplus as regards policyholders,

December 31, previous year 15,117,425$ 15,013,682$ Net income 196,391 98,082 Change in net deferred income tax (12,617) 5,661 Change in surplus as regards policyholder for the year 183,774 103,743


December 31, current year 15,301,199$ 15,117,425$


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

OBI America Insurance Company 2016 2015

Cash from OperationsNet investment income 232,005$ 279,503$ Total income 232,005 279,503

Commissions, expenses paid and aggregate write-ins for deductions 0 10,981 Federal and foreign income taxes paid (recovered) 94,000 43,000

Total deductions 94,000 53,981

Net cash from operations 138,005 225,522

Cash from Investments

Proceeds from investments sold, matured or repaid: Bonds 7,675,237 10,952,505 Net gain or (loss) on cash and short-term investments (86) 40 Miscellaneous proceeds 497,738 1

Total investment proceeds 8,172,889 10,952,546

Cost of investments acquired (long-term only): Bonds 7,959,458 14,459,914 Miscellaneous applications 1 499,019

Total investments acquired 7,959,459 14,958,933

Net cash from investments 213,430 (4,006,387)

Cash from Financing and Miscellaneous Services

Other cash provided (applied): Other cash provided or (applied) (590) 6,131

Net cash from financing and miscellaneous sources (590) 6,131

Reconciliation of cash and short-term investments:

Net change in cash and short-term investments 350,845 (3,774,734) Cash and short-term investments: Beginning of the year 363,329 4,138,063

End of the year 714,174$ 363,329$


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

OBI National Insurance Company 2016 2015 2014 2013 2012

Bonds 12,504,775$ 12,482,918$ 10,861,055$ 8,713,925$ 13,126,490$ Cash, cash equivalents, and short term investments 621,024 630,036 2,178,137 4,220,070 108,496 Receivable for securities 1,813 6,081 106 412 0 Subtotals, cash and invested assets 13,127,612 13,119,035 13,039,298 12,934,407 13,234,986 Investment income due and accrued 29,783 20,308 20,897 12,387 18,975 Current federal and foreign income tax recoverable and interest thereon 0 0 0 1,170 0 Receivable from parent, subsidiaries and affiliates 0 0 0 2,913 0 Aggregate write-ins for other than invested assets 0 0 0 0 4,686 Total 13,157,395$ 13,139,343$ 13,060,195$ 12,950,877$ 13,258,647$

Other expenses 3,939$ 4,074$ 3,796$ 7,108$ 3,692$ Current federal and foreign income taxes 13,069 12,282 11,263 0 46,001 Net deferred tax liability 0 399 571 414 3,007 Payable to parent, subsidiaries and affiliates 5,241 6,584 9,757 0 129 Aggregate write-ins for liabilities 0 0 399 0 0 Total liabilities 22,249 23,339 25,786 7,522 52,829 Common capital stock 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000 Gross paid in and contributed surplus 8,500,000 8,500,000 8,500,000 8,500,000 8,500,000 Unassigned funds (surplus) 135,146 116,004 34,409 (56,645) 205,818 Surplus as regards policyholders 13,135,146 13,116,004 13,034,409 12,943,355 13,205,818 Totals 13,157,395$ 13,139,343$ 13,060,195$ 12,950,877$ 13,258,647$


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Comparative Statement of Income For the Year Ended December 31,

OBI National Insurance Company

Underwriting Income 2016 2015 2014 2013 2012

Deductions: Other underwriting expenses incurred 0 0 0 0 4,049 Total underwriting deductions 0 0 0 0 4,049

Net underwriting gain or (loss) 0 0 0 0 (4,049)

Investment Income

Net investment income earned 130,968 129,658 118,318 96,003 160,304

Net realized capital gains or (losses) (43,755) (3,897) 15,031 (255,851) 104,127

Net investment gain or (loss) 87,213 125,761 133,349 (159,848) 264,431 Net income before dividends to policyholders and

before federal and foreign income taxes 87,213 125,761 133,349 (159,848) 260,382 Federal and foreign income taxes incurred 68,470 44,338 43,094 104,252 55,000

Net income 18,743$ 81,423$ 90,255$ (264,100)$ 205,382$


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


Surplus as regards policyholders, December 31, previous year 13,116,004$ 13,034,409$ 12,943,355$ 13,205,818$ 13,003,443$ Net income 18,743 81,423 90,255 (264,100) 205,382 Change in net deferred income tax 399 172 (78,534) 80,970 (3,007) Change in nonadmitted assets 0 0 79,333 (79,333) 0 Change in surplus as regards policyholder for the year 19,142 81,595 91,054 (262,463) 202,375


December 31, current year 13,135,146$ 13,116,004$ 13,034,409$ 12,943,355$ 13,205,818$


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


Cash from OperationsNet investment income 139,324$ 146,370$ 129,932$ 143,615$ 245,563$ Total income 139,324 146,370 129,932 143,615 245,563

Commissions, expenses paid and aggregate write-ins for deductions 0 0 3,312 0 4,049 Federal and foreign income taxes paid (recovered) 45,000 44,000 28,102 29,000 61,853

Total deductions 45,000 44,000 31,414 29,000 65,902

Net cash from operations 94,324 102,370 98,518 114,615 179,661

Cash from Investments

Proceeds from investments sold, matured or repaid: Bonds 11,948,048 6,067,492 11,278,407 17,386,842 20,192,285 Net gain or (loss) on cash and short-term investments (3) 320 194 0 95 Miscellaneous proceeds 4,268 0 306 0 0

Total investment proceeds 11,952,313 6,067,812 11,278,907 17,386,842 20,192,380

Cost of investments acquired (long-term only): Bonds 12,054,304 7,708,736 13,433,383 13,389,705 20,427,136 Miscellaneous applications 0 5,975 0 866 0

Total investments acquired 12,054,304 7,714,711 13,433,383 13,390,571 20,427,136

Net cash from investments (101,991) (1,646,899) (2,154,476) 3,996,271 (234,756)

Cash from Financing and Miscellaneous Services

Other cash provided (applied): Other cash provided or (applied) (1,345) (3,572) 14,025 688 (4,558)

Net cash from financing and miscellaneous sources (1,345) (3,572) 14,025 688 (4,558)

Reconciliation of cash and short-term investments:

Net change in cash and short-term investments (9,012) (1,548,101) (2,041,933) 4,111,574 (59,653) Cash and short-term investments: Beginning of the year 630,036 2,178,137 4,220,070 108,496 168,149

End of the year 621,024$ 630,036$ 2,178,137$ 4,220,070$ 108,496$


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SUMMARY OF EXAMINATION CHANGES

There were no examination changes to the preceding financial statements as filed with regulatory authorities over the review period.

NOTES TO FINANCIAL STATEMENTS

ASSETS

INVESTMENTS

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

OBIA’s bond and short-term investment portfolio had the following quality and maturity profiles:

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

OBIN’s bond and short-term investment portfolio had the following quality and maturity profiles:

Amount Percentage

Bonds 14,585,200$ 95.3 %Short-term investments 714,174 4.7 %Receivable for securities 1,281 0.0 %Totals 15,300,655$ 100.0 %

NAIC Designation Amount Percentage1 - highest quality 13,802,339$ 90.2 %2 - high quality 1,497,035 9.8 %Totals 15,299,374$ 100.0 %

Years to Maturity Amount Percentage1 year or less 2,882,918$ 18.9 %2 to 5 years 11,925,452 77.9 %6 to 10 years 403,514 2.6 %11 to 20 years 86,319 0.6 %over 20 years 1,171 0.0 %Totals 15,299,374$ 100.0 %

Amount Percentage

Bonds 12,504,775$ 95.3 %Short-term investments 621,024 4.7 %Receivable for securities 1,813 0.0 %Totals 13,127,612$ 100.0 %


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The Companies have a written investment policy as required by 40 P.S. § 653b(b). The Board of OBIA and OBIN reviews, updates, and approves the investment policy on an annual basis. The Companies were following their investment policy as of December 31, 2016.

The Companies entered into a custodial agreement with the Bank of New York Mellon effective February 1, 2014, with OBIA and October 7, 2011 with OBIN. The custodial agreement complies with the standards for custodial agreements pursuant to 31 Pa. Code § 148a.3.

LIABILITIES

LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

The following chart depicts the Companies’ reported reserves for losses and loss adjustment expenses (“LAE”) on the December 31, 2016, Annual Statements. These amounts are reported in accordance with the terms of the 100% quota share agreement with ASIC as described above.

Company Losses LAEOBIA $0 $0OBIN $0 $0

Paul J. Brehm, FCAS, CERA, Chief Actuary and Executive Vice President for the One Beacon Insurance Group was the Companies’ appointed actuary for years ending 2016 and 2015.

Brian D. Poole, FCAS, MAAA, Chief Actuary and Executive Vice President for the One Beacon Insurance Group was OBIN’s appointed actuary for years ending 2014, 2013, and 2012.

At December 31, 2016, the appointed actuary issued a Statement of Actuarial Opinion for each OBIA and OBIN, concluding that the Company’s reserves “make a reasonable provision for all unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements”.

In order for the examination team to gain an adequate comfort level with the Companies’ pricing and reserving practices, an internal actuary from the NYDFS performed a risk-focused

NAIC Designation Amount Percentage1 - highest quality 12,718,548$ 96.9 %2 - high quality 407,251 3.1 %Totals 13,125,799$ 100.0 %

Years to Maturity Amount Percentage1 year or less 2,855,657$ 21.8 %2 to 5 years 9,507,066 72.4 %6 to 10 years 763,076 5.8 %Totals 13,125,799$ 100.0 %


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review of the Companies’ reserving and pricing activities. Certain risks within the pricing and reserving processes required Phase 5 substantive test work.

Based on the procedures performed and results obtained by the NYDFS, the examination team obtained sufficient evidence to support the conclusion that the Companies’ net loss and LAE reserves are reasonably stated as of December 31, 2016.

SUBSEQUENT EVENTS

On September 28, 2017, the Companies’ parent, OBIG, Ltd, was acquired by Toronto, Canada based Intact Financial Corporation (“Intact”) for $18.10 per common share in cash, resulting in an aggregate purchase price of approximately $1.7 billion. Effectively, OBIG, Ltd became a wholly-owned subsidiary of Intact and will continue to operate as OneBeacon Insurance Group in the United States. Timothy Michael Miller, former Chief Executive Officer of OBIG, Ltd, was appointed President of Intact’s United States operations and reports directly to Charles Brindamour, Intact’s Chief Executive Officer.

RECOMMENDATIONS

PRIOR EXAMINATION

There were no recommendations made in the Companies’ prior examination reports.

CURRENT EXAMINATION

There are no recommendations being made as a result of the current examination.


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CONCLUSION

As a result of this examination, the financial condition of OBI America Insurance Company and OBI National Insurance Company, as of December 31, 2016, was determined to be as follows:

Since the previous examination, made as of October 10, 2014, OBIA’s assets increased by $336,937 its liabilities increased by $35,738, and its surplus increased by $301,199.

Since the previous examination, made as of December 31, 2011, OBIN’s assets increased by $152,098 its liabilities increased by $20,395, and its surplus increased by $131,703.

OBI America Insurance Company Amount Percentage

Admitted assets 15,336,937$ 100.0 %

Liabilities 35,738$ 0.2 %Surplus as regards policyholders 15,301,199 99.8 %Total liabilities and surplus 15,336,937$ 100.0 %

OBI National Insurance Company Amount Percentage

Admitted assets 13,157,395$ 100.0 %

Liabilities 22,249$ 0.2 %Surplus as regards policyholders 13,135,146 99.8 %Total liabilities and surplus 13,157,395$ 100.0 %

report of examination of obi america insurance company and … · 2018-04-16 · examination...

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