REPORT OF EXAMINATION OF THE AS OF DECEMBER 31, 2018
REPORT OF EXAMINATIONOF THEAUTOMOBILE CLUB OF SOUTHERN CALIFORNIALIFE INSURANCE COMPANYAS OFDECEMBER 31, 2018Filed November 15, 2019
TABLE OF CONTENTSPAGESCOPE OF EXAMINATION . 2COMPANY HISTORY: . 3Capitalization . 4MANAGEMENT AND CONTROL:. 4Management Agreements. 6TERRITORY AND PLAN OF OPERATION . 7LOSS EXPERIENCE. 8REINSURANCE: . 8Assumed . 8Ceded . 9FINANCIAL STATEMENTS: . 9Statement of Financial Condition as of December 31, 2018 . 10Summary of Operations and Capital and Surplus Account for theYear Ended December 31, 2018 . 11Reconciliation of Capital and Surplus from December 31, 2015through December 31, 2018 . 12COMMENTS ON FINANCIAL STATEMENT ITEMS: . 13Aggregate Reserve and Related Actuarial Items . 13SUBSEQUENT EVENTS . 13SUMMARY OF COMMENTS AND RECOMMENDATIONS: . 14Current Report of Examination . 14Previous Report of Examination. 14ACKNOWLEDGMENT . 15
Los Angeles, CaliforniaOctober 4, 2019Honorable Ricardo LaraInsurance CommissionerCalifornia Department of InsuranceSacramento, CaliforniaDear Commissioner:Pursuant to your instructions, an examination was made of theAUTOMOBILE CLUB OF SOUTHERN CALIFORNIA LIFE INSURANCE COMPANY(hereinafter also referred to as the Company). Its home office located at 3333 FairviewRoad, Costa Mesa, California 92626. The primary location of its books and records is17900 North Laurel Park Drive, Livonia, Michigan 48152.SCOPE OF EXAMINATIONWe have performed our multi-state examination of the Company. The previousexamination of the Company was made as of December 31, 2015. This examinationcovers the period from January 1, 2016 through December 31, 2018.The examination was conducted in accordance with the National Association ofInsurance Commissioners Financial Condition Examiners’ Handbook (Handbook). TheHandbook requires the planning and performance of the examination to evaluate theCompany’s financial condition, assess corporate governance, identify current andprospective risks, and evaluate system controls and procedures used to mitigate thoserisks. The examination also includes identifying and evaluating significant risks thatcould cause an insurer’s surplus to be materially misstated, both currently andprospectively.2
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 does not attest to the fair presentation of the financialstatements included herein. If, during the course of the examination, an adjustment isidentified, the impact of such adjustment will be documented separately following theCompany’s financial statements.This examination report includes findings of fact and general information about theCompany and its financial condition. There might be other items identified during theexamination 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 with Michigan as the lead state, and wasconducted concurrently in conjunction with the examinations of AAA Life InsuranceCompany (Michigan), Auto Club Life Insurance Company (Michigan), and AAA LifeInsurance Company of New York (New York). The following states participated on theexamination: California and New York.COMPANY HISTORYThe Company is equally owned by the Automobile Club of Southern California (ACSC),a California nonprofit mutual benefit corporation and the Interinsurance Exchange of theAutomobile Club (IEAC), a California reciprocal insurer. ACSC is the ultimate controllingentity of the insurance holding company system, which includes the Company andIEAC.On September 11, 2013, ACSC, IEAC, and the California Department of Insurance(CDI) entered a Commitment Letter Agreement (agreement), which was effectiveJanuary 1, 2015 and was expired on December 31, 2017. Under the terms of theagreement, ACSC and IEAC will equally provide additional capital contributions to the3
Company, as needed, in order to maintain the Company’s risk-based capital ratio at aminimum level of 250%. On August 1, 2017, the CDI requested ACSC and IEAC toextend their commitment to provide additional capital contributions. A new agreementwas issued, effective January 1, 2018, affirming the parent companies’ commitment toproviding additional capital, and is effective until December 31, 2020. The Company willreview the current agreement, in its final year, to determine if it is still necessary.CapitalizationThe Company received the following capital cash contributions from its shareholdersduring the period under examination:YearCapital 000MANAGEMENT AND CONTROLThe following abridged organizational chart, which is limited to the Company’s parentalong with its affiliated insurance companies, depicts the Company’s relationship withinthe holding company system at December 31, 2018:4
Club ExchangeCorporation(Missouri)(*)Automobile ance Exchangeof the Automobile Club(California)(*)ACSC ManagementServices, Inc.(Attorney in Fact)(California)100%Automobile Club ofSouthern California(California)100%50%Auto Club FamilyInsuranceCompany(Missouri)13.1525%Auto ClubCasualtyCompany(Texas)100%Automobile Club ofSouthern CaliforniaLife InsuranceCompany(California)ACLI AcquisitionCompany(Delaware)50%13.1525%100%Auto ClubIndemnityCompany(Texas)Auto Club CountyMutual InsuranceCompany(Texas)100%AAA LifeInsuranceCompany(Michigan)50%(*)100%Motor ClubInsuranceCompany(Rhode Island)(*) Contractual or other relationship to operate the Exchange5Life AllianceReassuranceCorporation(Hawaii)100%AAA LifeInsuranceCompany ofNew York(New York)
Management of the Company is vested in a four-member board of directors electedannually. Following are members of the board and principal officers of the Companyserving at December 31, 2018:DirectorsName and ResidencePrincipal Business AffiliationChristopher M. BaggaleySan Clemente, CaliforniaSenior Vice PresidentACSC Management Services, Inc.John F. BoyleCoto De Caza, CaliforniaPresident and Chief Executive OfficerAutomobile Club of Southern CaliforniaLife Insurance CompanyJohn P. BybeeTrabuco Canyon, CaliforniaVice President, InvestmentsAutomobile Club of Southern CaliforniaRaju T. Varma,Yorba Linda, CaliforniaVice President, Chief Financial Officer,Treasurer, and ControllerAutomobile Club of Southern CaliforniaLife Insurance CompanyPrincipal OfficersNameTitleJohn F. BoyleRaju T. VarmaPresident and Chief Executive OfficerVice President, Chief Financial Officer,Treasurer, and ControllerCorporate SecretaryVice President and Assistant SecretaryVice PresidentGail C. LouisAvery R. BrownAnwar M. OthmanManagement AgreementsExpense Sharing Agreement: On December 15, 1999, the Company entered into anExpense Sharing Agreement with the following affiliated companies: AAA Life InsuranceCompany (AAA Life), Auto Club Life Insurance Company (ACL), ACLI AcquisitionCompany (ACLI), Pacific Beacon Life Reassurance Company (PBLR), and AAA LifeRe, Ltd (AAA Life Re). Under the terms of the agreement, on an annual basis, theparties agree upon a unit charge to be applied to each new policy written and each6
policy inforce. The unit charge is based upon expense assumptions used in pricing eachproduct and includes administration, underwriting, and marketing costs and expensesincurred by AAA Life, ACL, and ACLI for policies reinsured by any party to theagreement. The total expense allocation for each reinsurer is computed as the unitcharge for each policy written by ACL and AAA Life, and multiplied by the reinsurancepercentage set forth in the applicable reinsurance agreement. Adjustments are made ona quarterly basis to assure the estimated expenses reasonably approximate actualexpenses.The Expense Sharing Agreement was integrated with the reinsurance agreements,such that costs are ultimately allocated based on volume of new business processedand existing in-force policies, refer to Reinsurance section. The Company submitted thisagreement for approval to the California Department of Insurance (CDI). The agreementwas non-disapproved by the CDI on August 5, 2010. The first amendment wasapproved by the CDI on June 17, 2014. The amendment was effective on January 1,2015, refer to the Susequent Event Section. In conjunction with the reinsurance andexpenses sharing agreements, amounts paid in 2016, 2017, and 2018 by the Companyto AAA Life were 67,357,640, 70,607,351, and 76,285,523 respectively.TERRITORY AND PLAN OF OPERATIONThe Company is licensed to transact life and accident and health insurance only in thestate of California, and is also an accredited reinsurer in Michigan. The Company doesnot directly underwrite any life insurance risks or directly issue any life or annuityproducts. The Company primarily assumes life insurance and annuity products fromAAA Life Insurance Company and Auto Club Life Insurance Company, affiliatedMichigan insurance companies. All premiums assumed by the Company are generatedthrough the life insurance agency operations of the Automobile Club of SouthernCalifornia.7
LOSS EXPERIENCEThe following schedule reflects the net operating losses and net losses from 2016through 2018 as reported by the Company:YearNet Operating LossesNet Losses2016 (9,992,309) (10,439,342)2017 (17,410,015) (17,328,873)2018 (15,128,765) (15,610,362)Totals (42,531,089) (43,378,577)During the examination period, the Company reported Net Operating Losses and NetLosses of 42,531,089 and 43,378,577, respectively. The Company has stated itsoperating losses and net losses through 2018 are primarily a result of the continuedgrowth in new business and the first-year costs associated with new businessproduction, which includes an increase in direct mail expense. Recent projectionsindicated that as the Company builds up its inforce policy base, operating profits areexpected as early as 2021.REINSURANCEAssumedOn December 15, 1999, the Company entered into a retroactive reinsurance agreementto assume 80% of the life and annuity sales produced by the Automobile Club ofSouthern California agency operations and written by Auto Club Life InsuranceCompany (ACL), a Michigan domiciled insurer. The reinsurance transactions are coinsurance agreements for traditional insurance products and modified co-insuranceagreements for interest-sensitive products. In January 2000, the Company entered intoa Quota Share Reinsurance Agreement (Agreement) with AAA Life Insurance Company(AAA Life), a Michigan domiciled insurer, to assume 80% of the California businessunderwritten by AAA Life. This reinsurance arrangement effectively replaced the8
Company’s arrangement with ACL, and was approved by the California Department ofInsurance (CDI) on October 8, 2002. The CDI approved the assuming rate increasefrom 80% to 90% on February 18, 2005, and further approved the assuming percentageincrease from 90% to 100% on September 12, 2013. The Agreement was integratedwith the Expense Sharing Agreement on August 5, 2010. Subsequent to theexamination period the Company amended the agreement, refer to the SubsequentEvents Section.CededThe Company does not have any ceded reinsurance.FINANCIAL STATEMENTSThe financial statements prepared for this examination report include:Statement of Financial Condition as of December 31, 2018Summary of Operations and Capital and Surplus Account for the Year EndedDecember 31, 2018Reconciliation of Capital and Surplus from December 31, 2015through December 31, 20189
Statement of Financial Conditionas of December 31, 2018AssetsLedger andAssets NotNonledger Assets AdmittedBondsCash and short-term investmentsContract loansReceivable for securitiesInvestment income due and accruedUncollected premiums and agents’ balances in thecourse of collectionDeferred premiums, agents’ balances andinstallments booked but deferred and not yet dueOther amounts receivable under reinsurancecontractsNet deferred tax asset 1,178,073,658 46,004,77311,023,7658,52812,095,166Total assets 1,354,200,703 Net AdmittedAssets 56529,541,370Liabilities, Capital and 5 1,336,289,328Current YearNotesAggregate reserve for life contractsAggregate reserve for accident and health contractsLiability for deposit-type contractsContract claims: LifeContract claims: Accident and healthPremiums and annuity considerations for life andaccident and health contracts received in advanceInterest maintenance reserveCommissions and expense allowances payable on reinsurance assumedGeneral expenses due or accruedUnearned investment incomeMiscellaneous liabilities: Asset valuation reserveMiscellaneous liabilities: Payable to parent, subsidiaries and affiliatesTotal liabilitiesCommon capital stockGross paid in and contributed surplusUnassigned funds (surplus)Capital and surplus 3(1)(1)(1)(1)(1)Total liabilities, capital and surplus 0(140,181,658)93,618,342(1)(1)
Summary of Operations and Capital and Surplus Accountfor the Year Ended December 31, 2018Summary of OperationsUnderwriting IncomeCurrent YearPremiums and annuity considerationsNet investment incomeAmortization of interest maintenance reserve (IMR)Aggregate write-ins for miscellaneous incomeTotalDeath benefitsAnnuity benefitsDisabilty benefits and benefits under accident and health policiesSurrender benefits and withdrawals for life contractsGroup conversionsInterest and adjustments on contract or deposit-type contract fundsIncrease in aggregate reserves for life and accident and healthcontractsCommissions and expense allowances on reinsurance assumedGeneral insurance expensesInsurance taxes, licenses and fees, excluding federal income taxesIncrease in loading on deferred and uncollected premiumsTotal Net loss from operations before federal income taxesFederal income taxes incurred Net loss from operations after federal income 7,731369,896,661(14,902,775)225,990(15,128,765)Net realized capital losses(481,597)Net loss (15,610,362) 72,909,266 20,709,07693,618,342Capital and Surplus AccountCapital and surplus, December 31, 2017Net lossChange in net deferred income taxChange in nonadmitted assetsChange in reserve on account of change in valuation basisChange in asset valuation reserveAggregate write-ins for gains and losses in surplusSurplus adjustments:Paid-inNet change in capital and surplus for the yearSurplus as regards policyholders, December 31, 201411 5,176)34,300,000
Reconciliation of Capital and Surplusfrom December 31, 2015 through December 31, 2018Capital and surplus, December 31, 2015 perexamination Gain inSurplusNet loss Change in net deferred income taxChange in nonadmitted assetsChange in reserve on account of change in valuationbasisChange in asset valuation reserveAggregate write-ins for gains and losses in surplusSurplus adjustment: Paid-inTotal gains and lossesNet change in capital and surplusCapital and surplus, December 31, 2018 perexamination 82,083,016Loss 169659,70048,800,00058,699,702 47,164,37611,535,326 1293,618,342
COMMENTS ON FINANCIAL STATEMENT ITEMS(1) Aggregate Reserve for Life Policies and ContractsAggregate Reserve for Accident and Health PoliciesLiabilities for Deposit -type ContractsContract Claims – LifeContract Claims – Accident and HealthAsset Valuation ReserveInterest Maintenance ReserveThe December 31, 2018 policy reserves and related actuarial items were evaluated byan Examining Actuary from the Michigan Department of Insurance and FinancialServices. Based on the analysis performed, the Company’s policy reserves and relatedactuarial items were found to be reasonably stated. The assigned California Departmentof Insurance (CDI) actuary reviewed the work performed by the lead state, andrecommended that CDI adopt the review and conclusion of the lead state regardingpolicy reserves and related actuarial items.SUBSEQUENT EVENTSPursuant to California Insurance Code Section 1215.5 (b)(4), a Form D was filed toamend the Expense Sharing Agreement with the California Department of Insurance(CDI). The Amended and Restated Expense Sharing Agreement, effective July 1, 2019,will increase each parties’ total amount of Shared Organizational InfrastructureExpenses (OIE) from 11.3 million to 19.1 million in 2019. The annual increase in OIEcosts will be capped from 2% to 3%. In addition, certain costs associated with thebuilding and implementation of the new policy administration system will be taken out ofthe unit costs allocation process, and shared based on the costs based on theownership interest of their affiliated entities in AAA Life, rather than based on unit costsand premium. The Form D was approved by the CDI on August 23, 2019.13
SUMMARY OF COMMENTS AND RECOMMENDATIONSCurrent Report of ExaminationNone.Previous Report of ExaminationNone.14
ACKNOWLEDGMENTAcknowledgment is made of the cooperation and assistance extended by theCompany’s officers and employees of the Automobile Club of Southern California andAAA Life Insurance Company during the course of this examination.Respectfully submitted,/S/Tzuwen Y. Meyer, CFEExaminer-In-ChargeAssociate Insurance ExaminerDepartment of InsuranceState of California/S/Anjanette Briggs, CFESenior Insurance Examiner, SupervisorDepartment of InsuranceState of California15
Statement of Financial Condition as of December 31, 2018 . Summary of Operations and Capital and Surplus Account for the Year Ended . December 31, 2018 . Reconciliation of Capital and Surplus from December 31, 2015 . through December 31, 2018 . 9
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