CERTIFICATE OF ADOPTION
Notice of the proposed report for the financial examination of
SURETY LIFE INSURANCE COMPANY
13520 California Street, Suite 290
Omaha, Nebraska 68154
dated as of December 31, 2018, verified under oath by the examiner-in-charge on
May 8, 2020 and received by the company on May 27, 2020, has been adopted
with modification as the final report pursuant to Neb. Rev. Stat. § 44-5906(3) (a).
Dated this 8
th
day of June 2020.
STATE OF NEBRASKA
DEPARTMENT OF INSURANCE
Justin C. Schrader, CFE
Chief Financial Examiner
STATE OF NEBRASKA
Department of Insurance
EXAMINATION REPORT
OF
SURETY LIFE INSURANCE COMPANY
as of
December 31, 2018
TABLE OF CONTENTS
Item Page
Salutation .........................................................................................................................................1
Introduction ......................................................................................................................................1
Scope of Examination ......................................................................................................................2
Description of Company:
History........................................................................................................................................4
Management and Control:
Holding Company ................................................................................................................5
Shareholder ..........................................................................................................................5
Board of Directors................................................................................................................6
Officers ................................................................................................................................7
Committees ..........................................................................................................................7
Transactions with Affiliates:
Services Agreement .............................................................................................................8
Territory and Plan of Operation .................................................................................................8
Reinsurance:
Ceded ...................................................................................................................................9
General .................................................................................................................................9
Body of Report:
Growth .....................................................................................................................................10
Financial Statements ................................................................................................................10
Examination Changes in Financial Statements ........................................................................12
Compliance with Previous Recommendations ........................................................................12
Commentary on Current Examination Findings:
Intercompany Settlement ...................................................................................................13
Subsequent Event:
Stop Loss Agreement ...............................................................................................................13
Summary of Comments and Recommendations ............................................................................13
Acknowledgment ...........................................................................................................................15
Lee’s Summit, Missouri
May 4, 2020
Honorable Bruce R. Ramge
Director of Insurance
Nebraska Department of Insurance
1135 M Street, Suite 300
Lincoln, Nebraska 68508
Dear Sir:
Pursuant to your instruction and authorizations, and in accordance with statutory
requirements, an examination has been conducted of the financial condition and business affairs of:
SURETY LIFE INSURANCE COMPANY
which has its Statutory Home Office located at:
13520 California Street, Suite 290
Omaha, Nebraska 68154
with its Principal Executive Office located at:
310 NE Mulberry Street
Lee’s Summit, Missouri 64086
(hereinafter also referred to as the “Company”) and the report of such examination is respectfully
presented herein.
INTRODUCTION
The Company was last examined as of December 31, 2013 by the State of Nebraska. The
current financial condition examination covers the intervening period to, and including, the close
of business on December 31, 2018, and includes such subsequent events and transactions as were
considered pertinent to this report. The State of Nebraska participated in this examination and
assisted in the preparation of this report.
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SCOPE OF EXAMINATION
This examination was conducted pursuant to and in accordance with both the NAIC
Financial Condition Examiners Handbook (Handbook) and Section §44-5904(1) of the Nebraska
Insurance Statutes. The Handbook requires that examiners plan and perform the examination to
evaluate the financial condition and identify prospective risks of the Company by obtaining
information about the Company including, but not limited to: corporate governance, identifying
and assessing inherent risks within the Company, and evaluating system controls and procedures
used to mitigate those risks. The examination also includes assessing the principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation and management’s compliance with Statutory Accounting Principles and Annual
Statement Instructions, when applicable to domestic state regulations.
A general review was made of the Company’s operations and the manner in which its
business has been conducted in order to determine compliance with statutory and charter
provisions. The Company’s history was traced and has been set out in this report under the
caption “Description of Company”. All items pertaining to management and control were
reviewed, including provisions for disclosure of conflicts of interest to the Board of Directors
and the departmental organization of the Company. The Articles of Incorporation and By-Laws
were reviewed, including appropriate filings of any changes or amendments thereto. The minutes
of the meetings of the Shareholder, Board of Directors and committees, held during the
examination period, were read and noted. Attendance at meetings, proxy information, election of
Directors and Officers, and approval of investment transactions were also noted.
The fidelity bond and other insurance coverages protecting the Company’s property and
interests were reviewed. Certificates of Authority to conduct the business of insurance in the
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various states were inspected and a survey was made of the Company’s general plan of
operation.
Data reflecting the Company’s growth during the period under review, as developed from
the Company’s filed annual statements, is reflected in the financial section of this report under
the caption “Body of Report”.
The Company’s reinsurance facilities were ascertained and noted, and have been
commented upon in this report under the caption “Reinsurance”. Accounting records and
procedures were tested to the extent deemed necessary through the risk-focused examination
process. The Company’s method of claims handling and procedures pertaining to the adjustment
and payment of incurred losses were also noted.
All accounts and activities of the Company were considered in accordance with the risk-
focused examination process. This included a review of workpapers prepared by BKD, LLP, the
Company’s external auditors, during their audit of the Company’s accounts for the years ended
December 31, 2018. Portions of the auditor’s workpapers have been incorporated into the
workpapers of the examiners and have been utilized in determining the scope and areas of
emphasis in conducting the examination. This utilization was performed pursuant to Title 210
(Rules of the Nebraska Department of Insurance), Chapter 56, Section 013.
Any failure of items to add to the totals shown in schedules and exhibits appearing
throughout this report is due to rounding.
4
DESCRIPTION OF COMPANY
HISTORY
The Company, originally named Commercial Travelers Insurance Company, was
organized on March 14, 1936, as a mutual benefit assessment association under the laws of the
State of Utah and received a Certificate of Authority on March 31, 1936.
In 1943 and 1944, the Company acquired, through reinsurance agreements, the assets and
liabilities of the following Utah mutual benefit associations; Guaranty Indemnity Association,
National Life and Casualty, and Surety Mutual Life Insurance Company.
Conversion of the Company from a mutual benefit assessment association to a stock life
insurance company was accomplished by a vote of the policyholders at a special meeting held on
October 30, 1950. The Company’s name was changed to Surety Life Insurance Company on
March 1, 1957. Legal Reserve Life Insurance Company of California was merged into the
Company on November 2, 1965.
In December 1976, Dean Witter Reynolds Organization, Inc. (DWR Organization) of San
Francisco, California, acquired the Company. During 1981, DWR Organization contributed the
Company’s stock to Dean Witter Reynolds Insurance Holdings, Inc., a Delaware corporation.
The Company became a member of the Sears, Roebuck and Company holding company
system on December 29, 1981 with the merger of Sears, Roebuck and Company and DWR
Organization. The outstanding stock of the Company was ultimately transferred to Allstate Life
Insurance Company (ALIC), a subsidiary of Sears, Roebuck and Company, on January 1, 1984.
Effective December 31, 1987, the Company entered into a reinsurance treaty with ALIC
whereby ALIC assumed 100% of the Company’s policyholder related liabilities, excluding
certain single premium deferred annuity policies issued from 1979 through 1987.
5
Effective September 1, 1997, the Company re-domesticated to the State of Nebraska,
relocating its home office from Salt Lake City, Utah to its sister company, Lincoln Benefit Life
Company’s facility located in Lincoln, Nebraska.
Effective August 1, 2012, Government Employee Health Association, Inc. (GEHA),
acquired control of the Company through GEHA’s wholly-owned subsidiary, GEHA Holdings,
Inc. (GHI), a Missouri corporation. As a result of the acquisition, the Company is a wholly-
owned, direct subsidiary of GHI and a wholly-owned indirect subsidiary of GEHA. The
Company cedes all in-force business to ALIC who also administers this business for the
Company. The in-force business has been in run-off since 1999.
MANAGEMENT AND CONTROL
Holding Company
The Company is a member of an insurance holding company system as defined by
Nebraska Statute. An organizational listing flowing from the “Ultimate Controlling Person”, as
reported in the 2018 Annual Statement, is represented by the following (subsidiaries are denoted
through the use of indentations, and unless otherwise indicated, all subsidiaries are 100%
owned):
Government Employees Health Association, Inc.
GEHA Holdings, Inc.
PPO USA Inc.
Surety Life Insurance Company
Shareholder
Article IV of the Company’s Articles of Incorporation states that, “the aggregate number
of shares which the Corporation shall have authority to issue is three million (3,000,000) shares
of common stock having a par value of one dollar ($1.00) per share.” At the exam date,
Company records indicated that 2,500,000 shares were issued and outstanding in the name of
6
GHI. The Company’s parent, GHI, made a $4,300,000 capital contribution in 2014, and a
$10,000,000 capital contribution to the Company in 2015. The GHI Annual Shareholder and
Directors Meeting was conducted May 17, 2018 at the GEHA home office.
Board of Directors
Article I, Section 1, of the Company’s By-Laws states that, “the property, business and
affairs of the Company shall be managed and controlled by a Board of Directors composed of
not less than five nor more than twenty-one members. The number of Directors may be fixed or
changed from time to time, within the minimum and maximum, by the Board without further
amendment to these By-Laws. The Directors shall be elected at each annual meeting of the
Shareholders of the Company for a term of one year.” Section 10 states that, “an annual meeting
of the Board shall be held each year immediately after the adjournment of the annual meeting of
the Shareholders. Other meetings of the Board may be held at such time as the Board may
determine or when called by the Chairman of the Board or by a majority of the Board.”
The following persons were serving as Directors at December 31, 2018:
Name and Residence Principal Occupation
Cecil D. Bykerk President, CDBykerk Consulting LLC
Omaha, Nebraska
Laura J. Cook Retired, Former Special Agent for U.S. Food and
Gardner, Kansas Drug Administration, Criminal Investigations Unit
Thomas L. Handley Retired, Former Vice President, Lewis & Ellis, Inc.
Overland Park, Kansas
Shannon J. Horgan President, Surety Life Insurance Company
Minneapolis, Minnesota
Michael P. Horton Retired, Former Vice President, Kansas City Life
Olathe, Kansas Insurance Company
Joseph Witkowski Retired, Former Vice President, Corporate Services,
Liberty, Missouri Government Employees Health Association, Inc.
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Officers
Article II, Section 1, of the By-Laws states that, “the general Officers of the Company
shall consist of a Chairman of the Board, President, two or more Vice Presidents, a Secretary, a
Treasurer, and a Controller, who shall be elected annually by the Board at the stated annual
meeting held upon adjournment of the annual shareholders’ meeting, and if not elected at such
meeting, such Officers may be elected at any meeting of the Board held thereafter. Such Officers
shall be elected by a majority of the Directors, and shall hold office for one year and until their
respective successors are elected and qualified, subject to removal at will by the Board.” Section
1 also states that, “any two of the aforesaid offices may be filled by the same person, with the
exception of the offices of President and Vice President, or President and Secretary.”
The following is a listing of Officers elected and serving the Company at December 31,
2018:
Name Office
Shannon J. Horgan President
Joe Witkowski Secretary
Angela D. Johnson Assistant Treasurer
Lynn M. Ballantyne Assistant Secretary
It is recommended that the Company document the election of a Chairman of the Board,
two or more Vice Presidents, a Treasurer, and a Controller, to comply with the existing By-
Laws, or amend the By-Laws to reflect the current arrangement utilized by the Company.
Committees
Article I, Section 8 of the By-Laws states that, “the Board shall have the power to appoint
committees, including but not limited to an Executive Committee, and to grant them powers not
inconsistent with the laws of Nebraska, the Articles of Incorporation of the Company, or these
8
By-Laws.” The Board does not have an Executive Committee but it does have an Audit and
Investment Committee.
The following persons were serving on the Audit and Investment Committee at
December 31, 2018:
Thomas L. Handley, Chairman Laura J. Cook Joseph Witkowski
TRANSACTIONS WITH AFFILIATES
Services Agreement
The Company entered into a service agreement with GEHA for administrative services
such as general corporate services, underwriting, policyholder, and regulatory affairs services,
financial services, and other services. GEHA will also provide employees, bank accounts,
tradenames and trademarks, and facilities. The term of the agreement began on August 1, 2012,
and will automatically renew each year. The Company will pay GEHA a service fee that is based
on actual cost without profit factor being built into the cost. Indirect or shared expenses will be
allocated in accordance with a method of cost allocation in conformity with SSAP No. 70 and
will be mutually agreeable to the parties. GEHA will provide the Company a statement of
expenses incurred no later than the twentieth calendar day of the month following the end of the
month in which the services were provided. The balance will be settled within thirty calendar
days after the receipt of the statement. Any late payments will be subject to an interest rate of
1.5% per month until fully paid.
TERRITORY AND PLAN OF OPERATION
As evidenced by current or continuous Certificates of Authority, the Company is licensed to
transact business in all states, with the exception of New York. The Company is also licensed in the
District of Columbia, Guam, and the U.S. Virgin Islands.
9
Effective August 31, 1999, the Company discontinued the sale of new business. The
Company previously sold universal life, single premium deferred annuities, flexible premium
deferred annuities, and ordinary life and term policies. The Company cedes all premiums to
ALIC, which continues to administer all in-force business in run-off.
REINSURANCE
Ceded
In 2012, the Company entered into an Amended and Restated Coinsurance Agreement
with ALIC. The Amended and Restated Coinsurance Agreement replaces and supercedes the
Coinsurance Agreement which was entered into on December 31, 2001. In the agreement, the
Company is to cede one-hundred percent of the reinsured liabilities, under all policies, to ALIC.
The policies include life insurance, accident and health insurance, annuity, and supplemental
benefit polices, contracts, and certificates. The reinsured liabilities are the sum of benefits
payable by the Company with respect to the policies; commissions and other sales compensation
payable by the Company with respect to the polices; net reinsurance premiums payable by the
Company to another reinsurer with respect to the policies, and guaranty fund and similar charges
and premium taxes payable by the Company relating to premiums and fees received with respect
to the policies. Statements will be sent quarterly to ALIC and payments will be made within 30
days after receipt.
General
All contracts reviewed contained standard insolvency, arbitration, errors and omissions, and
termination clauses where applicable. All contracts contained the clauses necessary to assure
reinsurance credits could be taken.
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BODY OF REPORT
GROWTH
The following comparative data reflects the growth of the Company during the period
covered by this examination:
2014 2015 2016 2017 2018
Bonds $10,482,343 $ 9,004,277 $ 7,527,841 $ 6,888,637 $11,876,785
Admitted assets 16,941,100 23,247,500 19,738,471 19,081,489 19,651,380
Total liabilities 713,004 1,460,980 756,080 535,719 1,470,168
Capital and surplus 16,228,096 21,786,520 18,982,391 18,545,769 18,181,213
Net investment income 468,896 719,508 460,752 274,287 321,074
Net income (823,119) (4,398,534) (2,690,147) (417,862) (368,582)
FINANCIAL STATEMENTS
The following financial statements are based on the statutory financial statements filed by
the Company with the State of Nebraska Department of Insurance and present the financial
condition of the Company for the period ending December 31, 2018. The accompanying
comments on financial statements reflect any examination adjustments to the amounts reported
in the annual statements and should be considered an integral part of the financial statements. A
reconciliation of the capital and surplus account for the period under review is also included.
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FINANCIAL STATEMENT
December 31, 2018
Assets Net
Assets Not Admitted
Assets Admitted Assets
Bonds $11,876,785 $11,876,785
Real estate 2,340,508 2,340,508
Cash 1,432,834 1,432,834
Cash equivalents 2,531,214 2,531,214
Subtotal, cash and invested assets $18,181,341 $18,181,341
Investment income due and accrued 109,436 109,436
Other amounts receivable under reinsurance 1,358,767 1,358,767
Electronic data processing equipment 1,836 1,836
Furniture and equipment 78,686 $78,686 __________
Totals $19,730,066 $78,686 $19,651,380
Liabilities, Surplus, and Other Funds
Interest maintenance reserve $ 99,058
Federal income taxes 1,011,328
Asset valuation reserve 110,219
Payable to parent and affiliates 243,151
Lessee deposits 6,412
Total liabilities $ 1,470,168
Common capital stock $ 2,500,000
Gross paid in and contributed surplus 14,300,000
Unassigned funds 1,381,213
Total capital and surplus $18,181,213
Total liabilities, capital and surplus $19,651,381
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SUMMARY OF OPERATIONS – 2018
Net investment income $ 321,074
Amortization of interest maintenance reserve 50,625
Commissions and expense allowances on reinsurance ceded 580,336
Total income $ 952,034
Commissions on premiums and annuity considerations $ 580,336
General insurance expenses 734,307
Insurance taxes, licenses and fees 117,346
Total expenses $1,431,989
Net gain from operations before federal income taxes $ (479,955)
Federal income taxes incurred (111,373)
Net income $ (368,582)
CAPITAL AND SURPLUS ACCOUNT
2014 2015 2016 2017 2018
Capital and surplus,
beginning $12,756,834 $16,228,094 $21,786,516 $18,982,391 $18,545,770
Net income (823,119) (4,398,534) (2,690,147) (417,862) (368,582)
Change in nonadmitted
assets (580) (86,778) (16,829) 25,500
Change in asset
valuation reserve (5,621) (42,425) (27,204) (1,931) (21,475)
Surplus paid in 4,300,000 10,000,000 __________
Net change in capital and
surplus for the year 3,471,260 5,558,461 (2,804,128) (436,622) (364,556)
Capital and surplus
ending $16,228,094 $21,786,516 $18,982,391 $18,545,770 $18,181,214
EXAMINATION CHANGES IN FINANCIAL STATEMENTS
Unassigned funds (surplus) in the amount of $1,381,213, as reported in the Company’s
2018 Annual Statement, has been accepted for examination purposes. Examination findings, in
the aggregate, were considered to have no material effect on the Company’s financial condition.
COMPLIANCE WITH PREVIOUS RECOMMENDATIONS
No recommendations were made as a result of the previous examination.
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COMMENTARY ON CURRENT EXAMINATION FINDINGS
Intercompany Settlement
The exam team reviewed the Services Agreement between the Company and its ultimate
parent, GEHA, effective August 1, 2012. Article 4.2 of the Services Agreement states that,
“GEHA shall provide each company a statement of expenses incurred no later than the twentieth
(20
th
) calendar day of the month following the end of the month in which services were provided.
Each company must settle these intercompany balances within (30) calendar days following such
company’s receipt of such statement.” The exam team noted that settlements currently occur on a
quarterly basis. It is recommended that the Company settle intercompany balances in compliance
with the existing Services Agreement.
SUBSEQUENT EVENT
STOP LOSS AGREEMENT
In conjunction with its indirect parent, GEHA, the Company submitted and received
approval on a stop loss policy form in Missouri in 2019. Effective January 1, 2020, the Company
issued an aggregate stop loss policy to GEHA.
SUMMARY OF COMMENTS AND RECOMMENDATIONS
The following comments and recommendations have been made as a result of this
examination:
Compliance with By-Laws – It is recommended that the Company document the
election of a Chairman of the Board, two or more Vice Presidents, a Treasurer, and a
Controller, in order to comply with the existing By-Laws, or amend the By-Laws to
reflect the current arrangement utilized by the Company.
14
Intercompany Settlement – It is recommended that the Company settle intercompany
balances in compliance with the existing Services Agreement.
15
ACKNOWLEDGMENT
The courteous cooperation extended by the Officers and employees of the Company
during this examination is hereby acknowledged.
In addition to the undersigned, Skyler Lawyer, CFE, and John Wiatr, Financial
Examiners; Linda Scholl, CFE, CISA, APIR, Financial Examiner and Information Systems
Specialist; and Derek Wallman, Actuarial Specialist; all with the Nebraska Department of
Insurance, participated in this examination and assisted in the preparation of this report.
Respectfully submitted,
_____________________________
Isaak Russell, CFE
Supervisory Examiner
Department of Insurance
State of Nebraska
