2015 Annual Report

CMIC – 2015 Management Discussion and Analysis

The 2015 premium written was $36.8 million and is $1.8 million lower than 2014. While membership increased 2.8% over the prior year-end, soft market conditions continue to put pricing pressure on new business and renewals. Reinsurance expenses at $5.0 million are $2.6 million lower than the prior year due to improved pricing terms on the Company’s 2015 primary reinsurance contract and lower premium written in the current year. Net premium earned for 2015 at $36.9 is $1.9 million above 2014. Both years have benefited from favorable adjustments to the Company’s unearned premium reserve with 2015 benefiting $6.25 million and 2014 benefiting $4.0 million.

Reported losses and loss expenses for 2015 amounted to $24.9 million. The 2015 loss provision benefited from the continuing improvement of ultimate loss projections relating to prior policy years. This trend has been in place for a number of reporting years. The savings from these improving ultimates in 2015 and 2014 amounted to $10.3 million and $14.4 million, respectively. Loss development occurs over an extended period of time, which may result in actual ultimate losses and loss expenses differing significantly from projected amounts previously reported in the Company's financial statements.

Underwriting expenses at $9.8 million were $.6 million higher than 2014. The 2015 underwriting expenses increase is the result of vacant staffing positions being filled and the Company engaging a consulting firm to perform a strategic study on business growth.

2015 investment income at $13.3 million is approximately $.3 million lower than the amount reported for 2014. The Company’s investment portfolio continues to be adversely impacted by the continuing low interest rate environment. The Company recorded $.8 million net capital gains for 2015, which is lower than 2014’s $2.4 million. The 2014 gains were enhanced by the repayment of the $1.4 million mortgage held by the Company on the building it occupies which in a prior year was written off. Gains from sales in the Company’s municipal fixed income and equity investment portfolios were responsible for the balance of the gains reported in both years.

During 2015 the Company declared a $5.0 million policyholders’ dividend. The dividend, comparable to the amount declared in the prior year, will again be distributed in 2016 as a premium credit to all renewing insureds.

Other expenses in both 2015 and 2014 include the Company’s Policyholders’ Loyalty Rewards Program. The Program rewards insureds based on the number of consecutive years an insured is with the Company. The reward is payable upon an active insured’s retirement, total disability, or death. The 2014 and 2015 contribution to the Program was $1.7 and $1.2 million, respectively.

Federal income taxes for 2015 of $1.2 million compares to $2.3 million paid in 2014. The decrease in federal income taxes is the result of lower taxable income for 2015 when compared to 2014.

Net Income at $8.9 million compares to $10.7 million in 2014. Net income for both years was favorably impacted by the adjustments to the unearned premium reserve. Additionally, improved loss development of prior policy years and capital gains, though to a lesser extent in the current year, also contributed to the reported net income for both calendar years.

The Company's investments are primarily made in the fixed income market and must comply with the Company's strict guidelines. The fixed income investment portfolio is comprised of 49% in corporate and industrial bonds, 26% in municipals and states (not guaranteed by the U.S. Government), 23% in U.S. Government and agency securities guaranteed by the U.S. Government, and 2% in cash and cash equivalents. The National Association of Insurance Commissioners (NAIC) has rated 99% of the Company’s bonds held at year-end in their two highest categories. The Company has $47.3 million in equities that have been market adjusted upwards at year-end 2015 by $31.2 million for a total equity market valuation of $78.5 million.

2015 Unpaid Losses and Loss Expense Reserves were reported at $129.7 million, which is $7.4 million lower than the prior year end. The Unpaid Losses and Loss Expenses Reserves were increased by the policy year 2015 provision for estimated losses of $35.2 million offset by reduced estimates for prior policy years' ultimate losses and expenses of $10.3 million and 2015 net payments for loss and loss expense of $32.3 million.

The Company's 2015 Unearned Premium Reserve of $37.3 million includes $329.7 million to provide for the future issuance of free tails for death, disability or retirement. The reserve, which was reduced by $6.25 million in the current year, is determined actuarially in accordance with the guidelines established by the NAIC.

The Company has received a favorable opinion from its consulting actuaries that Unpaid Losses and Expenses and Unearned Premium reserve levels for 2015 are reasonably stated. Management has continued to closely monitor the Company’s reserve development to insure these reserves are maintained at an adequate level.

The Company has entered into reinsurance agreements which limit the risk assumed by the Company. Reinsurance payments are based on a fixed percentage of the Company's premium written. The Company incurred $5.0 million in expenses for its 2015 reinsurance program and prior reinsurance contract years. During the year, the Company recovered from its reinsurers $4.1 million in losses and loss expense payments.

Policyholders' surplus at $286.8 million was $7.7 million higher than the beginning of the year balance. The higher level was principally the result $8.9 million from 2015’s profitable operations.

CMIC FINANCIAL PERFORMANCE

Key financial data for the last two years.

Two Year Summary - Thousands

2015

2014

Net Premiums Written

$31,815

$31,053

Net Premiums Earned

$36,866

$35,008

Net Underwriting Income

$2,150

$3,650

Net Investment Income

$14,037

$16,037

Dividend & Rewards Program

$6,133

$6,677

Net Income

$8,944

$10,698

Invested Assets

$470,200

$474,414

Total Admitted Assets

$476,699

$479,911

Unpaid Losses & Loss Expenses

$129,732

$137,094

Total Liabilities

$189,942

$200,829

Policyholders’ Surplus

$286,757

$279,082





CMIC RRG – 2015 Management Discussion and Analysis

The 2015 premium written was $2,379 thousand and is $789 thousand higher than 2014. The Company has expanded its professional liability writings in 2015 into the states of New Jersey and Maryland, which is the primary reason for the increased premium writings. The increase was partially offset by lower cyber liability premium. The cyber coverage, which is entirely ceded to reinsurers, received a favorable reduction in its reinsurance cost that was completely passed on to its insureds. Reinsurance expenses are the result of contracts with the Company’s sponsor, Connecticut Medical insurance Company (CMIC), for its professional liability writings and several Lloyd’s syndicates for its cyber liability writings. These contracts transfer a substantial portion of the losses and loss expenses to the reinsurers. The 2015 ceded reinsurance expense was $2,207 thousand, which is higher than the prior year. The increase was due to the higher professional liability writings partially offsetting the lower reinsurance cost for its cyber premium writings. The 2015 net premium earned after adjusting for the change in unearned premium was a charge of $80 thousand and is comparable to the 2014’s net premium earned charge of $79 thousand.

Reported losses and loss adjustment expenses for 2015 amounted to $168 thousand and are $49 thousand lower than 2014. The 2014 provision included a significant adjustment for projected losses from the medical and legal defense coverage offered by the Company, which are not reinsured. Loss development occurs over an extended period of time, this may result in actual ultimate losses and loss adjustment expenses differing significantly from initial and projected amounts previously reported in the Company's financial statements. Therefore, estimates and assumptions used to establish the liability for losses and loss adjustment expenses will be continually reviewed, and as adjustments become necessary, such adjustments are included in the current year's reported loss and loss expenses results.

Underwriting expenses for 2015 are a credit of $170 thousand, which compares to the 2014 credit for underwriting expenses of $100 thousand. A favorable increase of $234 thousand from higher-ceded reinsurance commissions was partially offset by higher broker commissions, service, and professional fees.

The 2015 investment income at $46 thousand is comparable to the amount recorded in 2014. The continuing low interest rate environment, especially for higher quality investments held by the Company, have significantly impacted investment income as reinvestment rates are lower than maturing ones. The Company did not realize any significant capital gains or losses in either 2015 or 2014.

The Company recorded and paid interest expense of $65 thousand in 2015 and 2014. The interest expense relates to the $3.25 million surplus note the Company has outstanding with its Sponsor, CMIC. The interest payments on the note require permission from the District of Columbia’s Department of Insurance, Securities and Banking Commission before the Company may record and pay the interest.

No Federal income taxes were incurred for either 2015 or 2014 as the Company’s operations generated losses of $100 thousand and $215 thousand, respectively.

At year-end, assets were $4.6 million, $995 thousand higher than the beginning of the year. The increase is in investments and account receivables, the result of higher premium writing during the year.

The Company's investments are in the fixed income market and must comply with the Company's strict guidelines. The fixed income investment portfolio is comprised of 51% in U.S. Government and agency securities (backed by the U.S. Government), 26% in high-quality corporate securities and 23% in cash. The National Association of Insurance Commissioners (NAIC) has rated all of the Company’s bonds held at year-end in their highest categories.

2015 Unpaid Losses and Loss Adjustment Expenses reserves were reported at $400 thousand and are $153 thousand more than the prior year. The reserve increase is the result of higher premium writings.

The Company's 2015 Unearned Premium Reserve of $554 thousand includes $500 thousand to provide for the future issuance of free tails for death, disability or retirement. This reserve will be determined actuarially in accordance with the guidelines established by the NAIC. The balance of the Unearned Premium reserve represents policies written in 2015 that will be earned in 2016.

The Company has entered into reinsurance agreements, which limit the risk assumed by the Company. The reinsurance contract for professional liability coverages is based on a 95%/5% quota-share basis with the Company retaining 5%. After commissions, the Company cedes approximately 70% of its professional liability premium to its Sponsor, CMIC. The Company also provides medical cyber-liability coverage for its insureds and the insureds of its Sponsor, CMIC. The Company cedes 100% of this premium to several Lloyds syndicates while retaining a ceding commission of 15%.

Policyholders' surplus at $2.6 million is lower than the beginning of the year due to the 2015 operating loss of $100 thousand.

CMIC RRG FINANCIAL PERFORMANCE

Key financial data for the last two years.

Two Year Summary - Thousands

2015

2014

Net Premiums Written

$874

$526

Net Premiums Earned

$622

$389

Net Underwriting (Loss)

($78)

($196)

Net Investment (Expense)

($22)

($18)

Net Income (Loss)

($100)

($215)

Invested Assets

$3,914

$3,396

Total Admitted Assets

$4,622

$3,628

Unpaid Losses & Loss Expenses

$400

$240

Total Liabilities

$1,980

$886

Policyholders’ Surplus

$2,642

$2,742

Life Insurance Company Ratings CMIC