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REPORT OF EXAMINATIONOF THECYPRESS INSURANCE COMPANYAS OFDECEMBER 31, 2016Filed on April 12, 2018
TABLE OF CONTENTSPAGESCOPE OF EXAMINATION . 1COMPANY HISTORY . 3MANAGEMENT AND CONTROL:. 3Intercompany Agreements. 5TERRITORY AND PLAN OF OPERATION. 8REINSURANCE: . 9Assumed. 9Ceded . 9FINANCIAL STATEMENTS: . 10Statement of Financial Condition as of December 31, 2016 . 11Underwriting and Investment Exhibit for the Year Ended December 31, 2016 . 12Reconciliation of Surplus as Regards Policyholders from December 31, 2012through December 31, 2016 . 13COMMENTS ON FINANCIAL STATEMENT ITEMS:. 14Common Stocks. 14Losses and Loss Adjustment Expenses . 14SUMMARY OF COMMENTS AND RECOMMENDATIONS: . 15Current Report of Examination . 15Previous Report of Examination . 15ACKNOWLEDGEMENT. 17
Los Angeles, CaliforniaMarch 28, 2018Honorable Dave JonesInsurance CommissionerCalifornia Department of InsuranceSacramento, CaliforniaDear Commissioner:Pursuant to your instructions, an examination was made of theCYPRESS INSURANCE COMPANY(hereinafter also referred to as the Company) at the primary location of its books andrecords at 1314 Douglas Street, Omaha, Nebraska 68102. The Company’s statutoryhome office and main administrative office is located at 1 California Street, Suite 600,San Francisco, California 94111.SCOPE OF EXAMINATIONWe have performed our multi-state examination of the Company.The previousexamination of the Company was made as of December 31, 2012. This examinationcovers the period from January 1, 2013 through December 31, 2016. The AssociationofInsuranceCommissioners Financial Condition Examiners Handbook. The Handbook requires theplanning and performance of the examination to evaluate the Company’s financialcondition, assess corporate governance, identify current and prospective risks, andevaluate system controls and procedures used to mitigate those risks. The examinationalso included identifying and evaluating significant risks that could cause the Company’ssurplus to be materially misstated both currently and prospectively.
All accounts and activities of the Company were considered in accordance with the riskfocused examination process. This may include assessing significant estimates madeby management and evaluating management’s compliance with Statutory AccountingPrinciples.The examination did not attest to the fair presentation of the financialstatements included herein. If, during the course of the examination an adjustment wasidentified, the impact of such adjustment would be documented separately following theCompany’s financial statements.This examination report includes significant findings of fact and general informationabout the Company and its financial condition. There might be other items identifiedduring the examination that, due to their nature (e.g., subjective conclusions, proprietaryinformation, etc.), were not included within the examination report, but separatelycommunicated to other regulators and/or the Company.This was a coordinated examination of the Berkshire Hathaway Group with Nebraska asthe lead state.The examination was conducted concurrently with other insuranceentities belonging to two separate subgroups of the Berkshire Hathaway holdingcompany group, National Indemnity Companies Group (NICO) and Berkshire HathawayHomestate Companies Group (BHHC).The NICO Group is comprised of insurers as listed below: American Centennial Insurance Company (DE) Berkshire Hathaway Assurance Corporation (NY) Berkshire Hathaway Life Insurance Company of Nebraska (NE) Columbia Insurance Company (NE) Finial Reinsurance Company (CT) National Fire & Marine Insurance Company (NE) National Indemnity Company (NE) National Indemnity Company of Mid-America (IA) National Indemnity Company of the South (FL) National Liability and Fire Insurance Company (CT)2
Stonewall Insurance Company (NE) Unione Italiana Reinsurance Company of America (NY) Wesco-Financial Insurance Company (NE)The BHHC Group consists of the following six insurers: Berkshire Hathaway Homestate Insurance Company (NE) Brookwood Insurance Company (IA) Continental Divide Insurance Company (CO) Cypress Insurance Company (CA) Oak River Insurance Company (NE) Redwood Fire and Casualty Insurance Company (NE)COMPANY HISTORYThe Company was incorporated in California on October 17, 1962 under the laws of thestate of California and commenced business on March 8, 1963. The Company has104,000 authorized and outstanding shares of common stock with a par value of 50per share.The Company was previously owned by Berkshire Hathaway Inc. (“BHI”), a publiclytraded Delaware corporation. Effective July 1, 2016, the Company became a whollyowned subsidiary of National Indemnity Company as a result of a capital contributionfrom its prior direct owner BHI.The Company remains an indirect wholly-ownedsubsidiary of BHI.MANAGEMENT AND CONTROLThe Company is a member of an insurance holding company system, BerkshireHathaway Inc. (BHI), an American multinational holding company headquartered inOmaha, Nebraska.3
The following abridged organizational chart is limited to some of the entities that theCompany had interrelationships with during the examination period within the holdingcompany system (all ownership is 100% unless otherwise indicated).Berkshire Hathaway Inc.(Delaware) *National Fire andMarine InsuranceCompany(Nebraska)National IndemnityCompany(Nebraska)Berkshire HathawayHomestate InsuranceCompany * *Redwood Fire andCasualty InsuranceCompany * *CypressInsuranceCompany **Oak RiverInsuranceCompany * *ContinentalDivide InsuranceCompany **BrookwoodInsuranceCompany * do)(Iowa)* 32.483% owned by Warren E. Buffett at December 31, 2016* * Collectively referred to as the Berkshire Hathaway Homestate CompaniesThe three members of the board of directors, who are elected annually, manage thebusiness and affairs of the Company. Following are members of the board and principalofficers of the Company serving at December 31, 2016:DirectorsName and LocationPrincipal Business AffiliationJ. Michael GottschalkOmaha, NebraskaVice PresidentNational Indemnity CompanyThomas J. MortlandOmaha, NebraskaVice PresidentBerkshire Hathaway HomestateInsurance CompanyDonald F. WursterOmaha, NebraskaPresidentNational Indemnity Company4
Principal OfficersNameTitleRobert N. Darby, Jr.Andrew R. LinkhartJackie L. PerryTracy L. GuldenBrian T. WesselmanMark BarbaBrian P. HallMargaret A. HartmannRichard O. KirsteWilliam M. LawrenceMichael V. CampbellChristopher J. DesautelRussell A. SelingerJeffrey W. MorrisPresidentChief Financial OfficerSecretary and TreasurerSenior Vice PresidentSenior Vice PresidentVice PresidentVice PresidentVice PresidentVice PresidentVice PresidentVice PresidentVice PresidentVice PresidentVice PresidentIntercompany AgreementsConsolidated Federal Income Tax Allocation Agreement:The Company has aConsolidated Federal Income Tax Allocation Agreement with its ultimate parent,Berkshire Hathaway Inc., effective November 23, 1994. Pursuant to the agreement, theconsolidated federal tax liability is allocated among the subsidiaries in the ratio thateach subsidiary’s separate tax return liability bears to the total consolidated federal taxliabilities of all subsidiaries that are members of the consolidated group. This agreementwas in place before prior approval was required under California Insurance Code (CIC)Section 1215.5(b)(4). Taxes payable under this agreement for 2013, 2014, 2015 and2016 respectively were: 9,005,914, 13,852,294, 11,061,551, and 24,754,564.Intercompany Service Agreement: The Company entered into a written IntercompanyService Agreement, effective November 23, 1994, with five affiliated insurers within theBerkshire Hathaway Homestate Companies Group (BHHC). The agreement covers thefollowing services: accounting; tax and auditing; underwriting; claims; investments; andother functional support services such as actuarial; telecommunications and electronic5
data processing; legal; and purchasing; payroll and employee relations services. Eachmember may provide to other members any of the services listed above. The costs ofshared services are allocated based on actual costs. In 2013, the agreement wasamended to reflect one affiliate’s name change from Cornhusker Casualty Company toBerkshire Hathaway Homestate Insurance Company (BHHIC) and to add a paragraphregarding appropriate licensing.The amendment was filed with the CaliforniaDepartment of Insurance (CDI) in accordance with CIC Section 1215.5(b)(4).The CDIapproved this amendment on September 6, 2013. The amounts paid/(received) forthese services for 2013, 2014, 2015, and 2016, respectively were: 192,255,685,( 47,570,636), ( 9,968,983), and 2,223,680.The amount paid in 2013 includedbalance paid to each Company as a result of the commutation of all non-Californiaassumed workers compensation business in 2012.Intercompany Service Agreement: The Company entered into an Intercompany ServiceAgreement with its affiliate, the GUARD Insurance Group, Inc. (GUARD), effectiveNovember 1, 2013. Under the terms of the agreement, the Company utilizes the GuardSoftware, a comprehensive proprietary policy administration and claims system, toprocess its workers’ compensation line of business.GUARD in turn, charges theCompany for services and use of facilities allocated as follows; 100% of direct staffingcost, 75% of indirect cost and 100% of direct expenses and capital cost. Thisagreement was filed with the CDI in accordance with CIC Section 1215.5(b)(4). The CDIapproved this agreement on November 5, 2013.The Company paid GUARD 2,659,078 in 2014 for the development of the Bravo underwriting system. No otherpayments were made during the examination period.On June 7, 2017 an addendum to change the name from GUARD Insurance Group, Inc.to WestGUARD Insurance Company and the inclusion of various safeguard provisionswas submitted to the CDI.The CDI approved the addendum on July 3, 2017.WestGUARD Insurance Company is a wholly-owned subsidiary of National IndemnityCompany.6
Intercompany Allocation Agreement: The Company entered into an IntercompanyAllocation Agreement with the Berkshire Hathaway Homestate Companies Group(BHHC) and National Fire and Marine Insurance Company, an affiliate, effectiveDecember 31, 2010.The agreement was established to memorialize the BHHCcompanies’ understanding of how recoveries from reinsurance carriers are assigned ifthe reinsurance aggregate limit is ever exhausted on the Property Excess per RiskReinsurance Contract.The Company is one of the cedents in the aforementionedReinsurance Contract. In addition, the agreement also assigned Berkshire HathawayHomestate Insurance Company (BHHIC), formerly known as Cornhusker CasualtyCompany, to be the agent for the BHHC companies.As an agent, BHHIC isresponsible for sending or receiving notices and receiving or remitting monies due anyparty.Pursuant to California Insurance Code (CIC) Section 1215.5(b)(3), no priorapproval was necessary from the CDI because the amount of premium ceded in theProperty Excess per Risk Reinsurance Contract was immaterial.Intercompany Allocation Agreement: Multi-Cedent Reinsurance: The Company enteredinto an Intercompany Allocation Agreement: Multi-Cedent Reinsurance with the BHHCcompanies, National Fire and Marine Insurance Company, National IndemnityCompany, National Indemnity Company of Mid-America and National Liability & FireInsurance Company, all affiliated with the Company, effective December 31, 2014. Theagreement was established to formalize the provisions and reinsurance recoveriesamongst affiliates participating in the Property Excess per Risk Reinsurance Contract.This agreement supersedes the Intercompany Allocation Agreement with the BHHCcompanies and National Fire & Marine Insurance Company that was effectiveDecember 31, 2010. Berkshire Hathaway Homestate Insurance Company is still theagent for the BHHC Companies. Pursuant to California Insurance Code (CIC) Section1215.5(b)(3), no prior approval was necessary from the CDI, because the amount ofpremium ceded in the Property Excess per Risk Reinsurance Contract was immaterial.Investment Services Agreement: Effective April 21, 2017, the Company became arecipient to the Investment Services Agreement (ISA) provided by its ultimate parent,7
Berkshire Hathaway, Inc. (BHI). Under the terms of the agreement, BHI providesinvestment management services to the National Indemnity Company (NICO) and itsvarious affiliates. As compensation, NICO and its affiliates will pay BHI a fee based onthe actual cost incurred in managing its investment.As an affiliate of NICO, theCompany submitted to the CDI Amendment No.5 to be added as one of the servicerecipient to the ISA. The CDI approved the amendment on April 21, 2017.TERRITORY AND PLAN OF OPERATIONThe Company operates as a specialty carrier, focusing on workers’ compensationbusiness primarily in California and five other southeastern states. During 2016, theCompany wrote direct premiums of 437 million, of which 90.7% was written inCalifornia, 5.2% in Georgia, 1.4% in Alabama, 1.2% in Arkansas, .9% in South Carolina,and .6% in Tennessee. Workers’ compensation policies comprised 91% of the totaldirect premiums written in 2016.As of December 31, 2016, the Company was also licensed to write property andcasualty insurance in Alabama, Arkansas, California, Georgia, Hawaii, Idaho,Mississippi, New Mexico, Oklahoma, South Carolina, Tennessee, and Virginia.Inaddition to being licensed to write surplus lines in Texas, the Company was anaccredited reinsurer in the states of Colorado, Delaware, Iowa, and Nebraska. TheCompany currently concentrates on writing workers’ compensation business inCalifornia, even though the Company has made efforts towards expanding into otherstates to diversify geographically.Business is marketed through approximately 840 independent agents. The primarylocation of the Company’s books and records is in Omaha, Nebraska.The workers’compensation line of business is operated from the Company’s statutory home officelocated in San Francisco, California. Other lines of business are conducted in Omaha,Nebraska. In addition, the Company maintains branch offices in San Diego, California,as well as Atlanta, Georgia.8
REINSURANCEAssumedOther than immaterial amounts assumed under mandatory pools and associations, theCompany had no assumed reinsurance in-force as of December 31, 2016.CededEffective December 31, 2012, the Company entered into a 50% Quota ShareReinsurance Agreement (QS Agreement) with its affiliate, Redwood Fire and CasualtyInsurance Company (“Redwood”). Under the QS Agreement, the Company ceded 50%of its direct workers’ compensation business to Redwood. The CDI approved the QSAgreement on December 5, 2012. Effective December 31, 2015, the QS Agreementwas terminated.The Company had the following ceded reinsurance programs in effect as ofDecember 31, 2016:Line of Business andType of ContractReinsurer’s Name(A) - Authorized(U) - UnauthorizedCompany’sRetentionReinsurer’s LimitWorkers’ CompensationExcess of LossColumbia InsuranceCompany (A) 10,000,000 500,000,000Liability & Workers’ CompensationExcess of LossNational IndemnityCompany (A) 600,000 9,400,000(Policiesissued on V-4 onlyreferenced as packageworkers comp) 1,000,000 4,000,000Commercial AutoExcess of LossColumbia InsuranceCompany (A)9
PropertyExcess of LossExcess of Loss6 reinsurers withvarying participations,5 of which areauthorized. 1,000,000 4,000,0006 reinsurers withvarying participations,5 of which areauthorized 5,000,000 5,000,000 2,000,000 10,000,000 10,000,000 500,000,000Property CatastropheExcess of LossNational IndemnityCompany (A)Property & CasualtyExcess of LossColumbia InsuranceCompany (A)FINANCIAL STATEMENTSThe following financial statements are based on the statutory financial statements filedby the Company with the California Department of Insurance and present the financialcondition of the Company for the period ending December 31, 2016. The accompanyingcomments on financial statements should be considered an integral part of the financialstatements. There is no examination adjustments to the amounts reported in the annualstatements.Statement of Financial Condition as of December 31, 2016Underwriting and Investment Exhibit for the Year Ended December 31, 2016Reconciliation of Surplus as Regards Policyholders from December 31, 2012through December 31, 201610
Statement of Financial Conditionas of December 31, 2016Ledger andNonledgerAssetsAssetsBonds Preferred stocksCommon stocksCash and short-term investmentsInvestment income due and accruedPremiums and agents’ balancesin course of collectionDeferred premiums, agents’ balances andInstallments booked but deferred and not yetdue (including 11,534,530 earnedbut unbilled premiums)Amount recoverable from reinsurersGuaranty funds receivable or on depositElectronic data processing equipment and softwareReceivables from parent subsidiaries and affiliatesAggregate write-ins for other than invested assetsTotal assetsAssets NotAdmitted504,941,122 460Net AdmittedAssets 3,15710,684,832010,5696,592,460Notes(1) 1,504,227,142 4,558,709 1,499,668,433Liabilities, Surplus and Other FundsLossesReinsurance payable on paid loss and loss adjustment expensesLoss adjustment expensesCommissions payable, contingent commissions and other similar chargesOther expensesTaxes, licenses and feesCurrent federal and foreign income taxes (including 4,612On realized capital gains (losses))Net deferred tax liabilityUnearned premiumsAdvance premiumCeded reinsurance premiums payableDrafts outstandingPayable to parent, subsidiaries and affiliatesAggregate write-ins for liabilitiesTotal liabilities 1609,77913,287,3931,333,4051,133,660,033Common capital stockGross paid-in and contributed surplusUnassigned funds (surplus)Surplus as regards policyholdersTotal liabilities, surplus and other funds 5,200,0003,255,000357,553,400366,008,400 1,499,668,433.11(2)(2)
Underwriting and Investment Exhibitfor the Year Ended December 31, 2016Stat
to WestGUARD Insurance Company and the inclusion of various safeguard provisions was submitted to the CDI. The CDI approved the addendum on July 3, 2017. WestGUARD Insurance Company is a w
