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STATE OF WASHINGTONOFFICE OF THE INSURANCE COMMISSIONERFINANCIAL EXAMINATIONOFPEMCO MUTUAL INSURANCE COMPANYSEATTLE, WASHINGTONNAIC CODE 24341December 31, 2013Order No. 14-215PEMCO Mutual Insurance CompanyExhibit A
SALUTATIONSeattle, WashingtonSeptember 30, 2014The Honorable Mike Kreidler, CommissionerWashington State Office of the Insurance Commissioner (OIC}Insurance Building-Capitol Campus302 Sid Snyder Avenue SW, Suite 200Olympia, WA 98504Dear Commissioner Kreidler:In accordance with your instructions, and in compliance with the statutory requirements of RCW48.03.010, an examination was made of the corporate affairs and financial records ofPEMCO Mutual Insurance CompanyofSeattle, Washingtonhereinafter referred to as "PMIC," or the "Company" at the location of its home office 325 EastlakeAvenue East, Seattle, WA 98109. This report is respectfully submitted showing the financial condition andrelated corporate matters of PMIC as of December 31, 2013.
CHIEF EXAMINER'S AFFIDAVITI hereby certify I have read the attached Report of the Financial Examination of PEMCO Mutual InsuranceCompany of Seattle, Washington. This report shows the financial condition and related corporate mattersas of December 31, 2013.P u frlPatrick H. McNaughtonChief Examiner/J - 1- llfDate
TABLE OF CONTENTSSCOPE OF THE EXAMINATION .1INSTRUCTIONS 1COMMENTS AND RECOMMENDATIONS 3COMPANY PROFILE .3Company History . 3Territory and Plan of Operation . 3Growth of Company . 3Affiliated Companies . 4Intercompany Agreements . 4MANAGEMENT AND CONTROL . . SBoard of Directors (BOD) . 5Officers . 5Conflict of Interest . 5Fidelity Bond and Other Insurance . 5Officers', Employees', and Agents' Welfare and Pension Plans . 6CORPORATE RECORDS GUNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES .6REINSURANCE .7STATUTORY DEPOSITS .7ACCOUNTING RECORDS AND INFORMATION SYSTEM .7SUBSEQUENT EVENTS . 8FINANCIAL STATEMENTS .8Assets, Liabilities, Surplus and Other Funds . 9Statement of Income and Capital and Surplus Account. . 10Five Year Reconciliation of Surplus . 11NOTES TO THE FINANCIAL STATEMENTS .12ACKNOWLEDGMENT .13AFFIDAVIT .14
SCOPE OF THE EXAMINATIONThis examination covers the period January 1, 2009 through December 31, 2013 and comprises a riskfocused review of the books and records of the Company. The examination followed statutoryrequirements contained in the Washington Administrative Code (WAC), the Revised Code of Washington(RCW), and the guidelines recommended by the National Association of Insurance Commissioners (NAIC)Financial Condition Examiners Handbook (FCEH). The examination included identification anddisposition of material transactions and events occurring subsequent to the date of examinationthrough the end of field work on September 30, 2014.Corporate records, external reference materials, and various aspects of the Company's operatingprocedures and financial records were reviewed and tested during the course of this examination andare commented upon in the following section of this report. In addition, the Company's Certified PublicAccountant's (CPA's) work papers were reviewed and utilized, where possible, to facilitate efficiency inthe examination.This examination was performed in compliance with the 2013 NAIC FCEH which requires the examinerto consider the Company's risk management process, corporate governance structure, and controlenvironment. The examiners utilized the information obtained during the examination to assess theCompany's overall potential risks both currently and on an on-going basis, allowing the examiners tofocus on the Company's greatest areas of risk, and providing assurance on the Company's financialstatements as of the examination date.INSTRUCTIONSThe examiners reviewed the Company's filed 2013 NAIC Annual Statement as part of the statutoryexamination. This review was performed to determine if the Company prepared the NAIC AnnualStatement in accordance with the NAIC Annual Statement Instructions and to determine if theCompany's accounts and records were prepared and maintained in accordance with Title 48 RCW, Title284 WAC, and the NAIC Statements of Statutory Accounting Principles (SSAP) as outlined in the NAICAccounting Practices and Procedures Manual (AP&P).The following summarizes the exceptions noted while performing this review:1.Investment Policy RequirementsThe Company's written Investment Policy reviewed by its Board of Directors did not contain maximuminternal limits for eligible investment classes as required by RCW 48.13.051(2).The Company is instructed to comply with RCW 48.13.051 and ensure that its written InvestmentPolicy meets the requirements of Chapter 48.13 RCW, and that the Policy is reviewed and approvedby its Board of Directors annually, including such approval being documented in the Board minutes.1
2.Loan Backed and Structured SecuritiesThe Company does not review changes in currently estimated cash flows, including paymentassumptions of loan backed and structured securities at least quarterly as required by SSAP No. 43R,paragraph 13, Loan Backed and Structured Securities.The Company is instructed to comply with RCW 48.43.097 by filing its financial statements inaccordance with the AP&P, and WAC 284-07-050(2) which requires adherence to the NAIC AnnualStatement Instructions and the SSAP No. 43R.3. Annual Statement Errors and OmissionsDuring the examination, the examiners uncovered several instances in which the filing of theCompany's 2013 NAIC Annual Statement did not conform to the AP&P and the NAIC AnnualStatement Instructions.a.Schedule Y, Part 2 - Policyholder Proxy Services Company was included in error. In addition,PCCS, Inc., (a wholly-owned subsidiary of PEMCO Corporation) was inadvertently omitted.b. Underwriting and Investment Exhibit Part 3 - Expenses line 26 column 2 ( 40,093,942) does notagree to the Liabilities, Surplus and Other Funds lines 4, 5, 6 and 26.c. Underwriting and Investment Exhibit Part 3 - Expenses - donation expenses were allocated toloss adjustment expenses which is not in compliance with the items listed in SSAP No. 55.d. Schedule A - Part 1, Column 10 - The amounts reported do not represent the fair value lessencumbrances of the properties listed in Column 1, and the amounts are not consistent with theappraisals provided.e. Notes to Financial Statements - Note 12 - Retirement Plans, Deferred Compensation, PostEmployment Benefits and Compensated Absences and Other Postretirement Benefit Plans Part A of Note 12 had eight separate tables; the amounts reported in six of these tables did notagree with the amounts reported in the 2013 CPA audited financial statements.f. In addition, the NAIC Financial Reporting & Analysis Data Validation Notification dated April16,2014 also identified numerous instances where the disclosures in the 2013 Annual Statementwere either missing, incorrect, or the electronic version did not match the printed version.While none of the above errors had a material impact on the financial position of the Company, theydo demonstrate some weaknesses in its control structure in the preparation of NAIC AnnualStatements, which requires adherence to the NAIC Annual Statement Instructions.The Company is instructed to comply with RCW 48.43.097 by filing its financial statements inaccordance with the AP&P, and WAC 284-07-050(2) which requires adherence to the NAIC AnnualStatement Instructions and the AP&P.2
COMMENTS AND RECOMMENDATIONSNoneCOMPANY PROFILECompany HistoryPMIC was organized as a mutual insurer in the state of Washington in October 1948, and commencedbusiness during February 1949 under the name, Public Employees Mutual Insurance Company. InJanuary 1977, pursuant to RCW 48.31.010, the merger of Public Employees Mutual Casualty Companyinto Public Employees Mutual Insurance Company was approved. The name was later changed toPEMCO Mutual Insurance Company in January 1989. PMIC is the ultimate controlling entity in theinsurance holding company system.PMIC is one of four affiliated companies in a holding company group. PMIC is the ultimate controllingentity serving as the holding company of the group. PMIC wholly owns its subsidiaries, PEMCO InsuranceAgency, Inc., and PEMCO Corporation. PEMCO Corporation wholly owns PCCS, Inc. In addition, SchoolEmployees Credit Union of Washington and PEMCO Foundation are under common management.On August 29, 2011, OIC approved the merger of PEMCO Insurance Company (PIC) into PMIC. EffectiveOctober 1, 2011, the separate corporate existence of PIC ceased, and PMIC is the surviving entity. Thismerger was part of PMIC's overall simplification and corporate efficiency strategy due to the similarity ofboth companies.On February 22, 2012, PMIC signed a contingent stock purchase agreement with Sagicor Life InsuranceCompany (Sagicor) to sell its wholly-owned subsidiary, PEMCO Life Insurance Company (PUC). OICapproved Sagicor's acquisition of PUC on September 20, 2012.Territory and Plan of OperationThe Company is licensed to operate in the states of Washington, Oregon and Idaho and its Certificates ofAuthority were issued on February 8, 1949, January 21, 2004, and September 4, 2009, respectively.PEMCO Mutual Insurance Company primarily writes private passenger auto physical damage, autoliability, homeowners multiple peril, and other miscellaneous personal liability coverage through directand independent agent channels.Growth of CompanyThe financial information presented below is the growth data for PMIC for each year for comparativepurposes.3
Capital &SurplusYearAdmitted Assets20132012201120102009 629,425,259611,437,265603,811,852516,762,707524, 141,656 392,019,909378,726,403362, 165,265277,844,158277,895,076 6,580YearPremium EarnedNet UnderwritingGain (Loss)Net InvestmentGain (Loss)20132012201120102009 8,893---Liabilities( 12, 755,336)(30,947,412)( 18,111, 764)( 28,624, 797)( 34,998, 762) Net Income( 3,301,372)( 16,310,870)8,190,284( 4,486,474)26,822,626Affiliated CompaniesThe following organization chart is taken from PMIC's filed 2013 NAIC Annual Statement:PEMCO MutualInsuranceCompanyIIPEMCO InsuranceAgency, Inc.IPEMCOCorporation100%100%PCCS, Inc.'----100%Intercompany AgreementsThe Company was a party to various intercompany agreements with its affiliates which were incompliance with SSAP 70. All intercompany agreements were filed with and approved by OIC.Significant agreements in force as of December 31, 2013 are listed below:Tax Sharing AgreementThe Tax Sharing Agreement between PMIC and its affiliates was effective January 1, 2001. Allaffiliates within the holding company are allocated their proportional share of tax liability, which iscalculated as if the entities had filed separate returns.4
Cost Sharing AgreementsThe cost sharing agreement between PMIC and Pemco Insurance Agency, Inc., (PIA) was effectiveMarch 26, 2001. Cost sharing agreements between PMIC and other affiliates were effective October10, 2006. The agreements allocate operating expense to the affiliates based on a system of costaccounting.MANAGEMENT AND CONTROLBoard of Directors (BOD)Directors of the Company as of December 31, 2013Stan McNaughtonBorje SaxbergBrian BenzelWilliam BonaudiLinda CowanShirley HodgsonSandra KurackRoger ReimerRichard RutkowskiCarl TingelstadChairVice ChairOfficersOfficers of the Company as of December 31, 2013Stan McNaughtonSteven RiccoRodney BrooksJeffery WeeksSusan McNabStephen MillerWilliam ClumpnerDenice TownPresident and CEOVice President, Treasurer, and CFOVice President and CMOVice President and CIOVice President and CPSOVice President and COOVice President and General CounselSecretaryConflict of InterestThe Company requires the annual completion of a conflict of interest statement by officers, directors,and all employees. All are required to disclose relevant outside interests, memberships, associations,and affiliations. Our review did not disclose any exceptions.Fidelity Bond and Other InsurancePMIC is a named insured on a financial institution fidelity bond insurance policy. The aggregate amountof coverage meets the recommended NAIC guidelines.5
Officers', Employees', and Agents' Welfare and Pension Plans The Company sponsors unfunded postretirement defined benefits that provide medical anddental benefits for eligible retirees and their eligible dependents hired or rehired before January1, 2004.The postretirement benefits were amended on October 1, 2013 when the Company changed toa fixed contribution to retirees which limits the Company's exposure to increases in futurehealthcare costs. The Company sponsors a defined contribution retirement savings plan covering all eligibleemployees. Eligible employees may contribute any percentage of their eligible compensation upto the annual federal maximum dollar amount. The Company has contributed an amount equalto twice the amount of the employee's contribution, up to a maximum employer contribution ofthe lesser of 12 percent of each employee's eligible compensation or the annual federalmaximum dollar amount. The Company also offers a non-qualified deferred compensation plan for senior executives andoutside directors of the Company. Under these arrangements, a portion of their salaries anddirector fees can be deferred and funded into the plan by the Company, which has no legalobligation to provide benefits under this arrangement.CORPORATE RECORDSThe Company's Articles of Incorporation, Bylaws, and minutes of the BOD and committees, werereviewed for the period under examination. All BOD meetings were conducted with a quorum present.UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSESLoss AdjustmentYearLosses20132012201120102009 ,788Expenses As shown above, the reserves carried by the Company for unpaid losses and loss adjustment expenseswere 138,249,187 and 30,101,348, respectively, as of December 31, 2013.The OIC actuarial staff reviewed the unpaid losses and loss adjustment expenses of the Company andconcluded that the reserves were within a range of reasonable estimates. Therefore, the Company's lossand loss adjustment expense reserves were accepted as reasonable and no adjustments were proposedto the amounts reported in the Company's 2013 NAIC Annual Statement.6
REINSURANCEPMIC participates in quota share, excess loss, and catastrophic treaties. The Company does not assumeany reinsurance. Reinsurance agreements were found to be in compliance with Washington Statereinsurance statutes and are all properly classified in Schedule F of the Company's 2013 NAIC AnnualStatement. The agreements transfer risk in accordance with SSAP No. 62R, paragraph 10.PMIC utilizes the services of a reinsurance intermediary, Guy Carpenter & Company, Inc., to solicit,negotiate, and place reinsurance cessions on its behalf. Guy Carpenter & Company, Inc. is aninternational reinsurance intermediary owned by Marsh & Mclennan and is licensed in WashingtonState.STATUTORY DEPOSITSThe Company maintained the following statutory deposits as of December 31, 2013:StateWashingtonTypeBondBook Value995,897 995,897TotalFair Value1,076,120 1,076,120ACCOUNTING RECORDS AND INFORMATION SYSTEMThe Company maintains its accounting records on a Statutory Accounting Principles (SAP) accrual basisof accounting. The Company was audited annually by the certified public accounting firm ofPricewaterhouse Coopers LLP. The Company received an unqualified opinion for all years under review.The Company's accounting procedures, internal controls, and transaction cycles were reviewed duringthe planning and testing phase of the examination and no exceptions were noted.The Company's information technology (IT) environment was reviewed during the planning and testingphase of the examination, focusing on the following Control Objectives for Information and RelatedTechnology (COBIT) Framework domains: Plan and OrganizeAcquire and ImplementDeliver and SupportMonitor and EvaluateThe IT systems and controls were evaluated to gain an understanding of general IT control risks andassess the effectiveness of these controls. Appropriate mitigating and internal controls have beenimplemented to reduce residual risk to appropriate levels.7
SUBSEQUENT EVENTSThere were no additional material events impacting the Company between the examination date andthe last day of our field work on September 30, 2014.FINANCIAL STATEMENTSThe following financial statements show the financial condition of PEMCO Mutual Insurance Company asof December 31, 2013:Assets, Liabilities, Surplus and Other FundsStatement of Income and Capital and Surplus AccountFive Year Reconciliation of Surplus8
PEMCO Mutual Insurance CompanyAssets, Liabil
PEMCO Mutual Insurance Company I I I PEMCO Insurance PEMCO Agency, Inc. Corporation 100% 100% PCCS, Inc. '----100% Intercompany Agreements The Company was a party to various intercompany agreements with its affiliates which were in compliance with SSAP 70. All intercompany agreements were filed with and approved by OIC.File Size: 222KB
