INSURANCE DEPARTMENT · 15 Gross Paid In and Contributed Surplus 15 Unassigned Funds (Surplus) 15 Recommendations 16 Subsequent Event 16 ... the procedures outlined in the NArC Financial

STATE OF CONNECTICUT INSURANCE DEPARTMENT

ORDER ADOPTING REPORT OF EXAMINATION

I, Thomas B. Leonardi, Insurance Commissioner of the State of Connecticut,

having fully considered and reviewed the Examination Report (the "Report") of

ConnectiCare Insurance Company Inc.("the Company") as of December 31, 2010, do

hereby adopt the findings and recommendations contained therein based on the following

findings and conclusions,

TO WIT:

1. I, Thomas B. Leonardi, Insurance Conunissioner of the State of Connecticut, and as such is charged with the duty of administering and enforcing the provisions of Title 38a of the Connecticut General Statutes.

2. The Company is a domestic insurer authorized to transact the business of insurance in the State of Connecticut.

3. On October 3,2011, the verified Examination Report of the Company was filed with the Connecticut Insurance Department.

4. In accordance with Conn. Gen. Statutes §38a-14(e) (3), the Company was afforded a period of thirty (30) days within which to submit to the Connecticut Insurance Department a written submission or rebuttal with respect to any matters contained in the Report.

5. On October 26, 2011, the Company notified the Department of certain responses and conunents relating to matters contained in the Report.

6. Following review of the Report, it was deemed necessary and appropriate to modify the Report. A copy of the Report is attached hereto and incorporated herein as Exhibit A.

www.state.ct.us/cid/ P. O. Box 816 Hartford, CT 06142-0816

An Equal Opportunity Employer

NOW, THEREFORE, it is ordered as follows:

1. That the Examination Report of the Company hereby is adopted as filed with the Insurance Department.

2. That the Company shall comply with all of the recommendations set forth in the Report, and that the failure of the Company to so comply shall result in sanctions or administrative action as provided by Title 38a of the Connecticut General Statutes.

Dated at Hartford, Connecticut this 21st day of November, 2011

Thomas B. Leonardi Insurance Commissioner

EXHIBIT A

EXAMINATION REPORT

OF

CONNECTICARE INSURANCE COMPANY, INC.

AS OF

DECEMBER 31, 2010

BY THE CONNECTICUT INSURANCE DEPARTMENT

TABLE OF CONTENTS

Salutation

Scope of Examination 1

History 3

Organizational Chart 4

Management and Control 4

Investments 6

Related Parties 6

Insurance Coverages 7

Territory and Plan of Operation 8

Reinsurance 8

Information Technology and Controls 8

Accounts and Records 9

Financial Statements 10 Assets 10 Liabilities, Capital and Surplus 11 Statement of Revenue and Expenses 12

Statutory Reserves 13

Common Capital Stock 15

Gross Paid In and Contributed Surplus 15

Unassigned Funds (Surplus) 15

Recommendations 16

Subsequent Event 16

Conclusion 16

Signature 17

October 3, 2011

The Honorable Joseph Torti, III Chair, Financial Condition (E) Committee Deputy Director and Superintendent of Insurance Rhode Island Department of Business Regulation Division of Insurance 1511 Pontiac Avenue, Building 69-2 Cranston, Rhode Island 02920

The Honorable Joseph G. Murphy Secretary, Northeast Zone Commissioner of Insurance Division of Insurance 1000 Washington St. Suite 810 Boston, Massachusetts 02118 - 6200

The Honorable Thomas B. Leonardi Commissioner of Insurance State of Connecticut Insurance Department P.O. Box 816 Hartford, Connecticut 06142

Dear Superintendent/Commissioners:

In compliance with your instructions and pursuant to the requirements of Section 38a-14 of the General Statutes of the State of Connecticut (CGS), the undersigned has made a financial examination of the condition and affairs of:


(hereafter referred to as the Company or CICI) a corporation with capital stock, incorporated under the laws of the State of Connecticut and having its statutory and administrative office located at 175 Scott Swamp Road, Farmington, Connecticut. The report of such examination is submitted herewith.

SCOPE OF EXAMINATION

The previous examination of the Company was conducted as of December 31, 2005. The current examination which covers the subsequent five-year period was conducted at the statutory home office of the Company.

As part of the examination planning procedures, the Financial Regulation Division of the Connecticut Insurance Department (the Division) reviewed the following materials submitted by the Company:


• Board of Director (Board) minutes from 2006 through the latest 2011 meeting; • Statutory Audit reports from 2006 through 2010, completed by the Company's

independent certified public accountants, Deloitte and Touche, LLP (D&T); • Management's Discussion and Analysis from 2006 through 2010; • Statements of Actuarial Opinion from 2006 through 2010; • Annual Statements filed with the Division from 2006 through 2010; • Documentation supporting Section 404 of the Sarbanes-Oxley Act (SOX) of

2002; and • Reports of the Company's Internal Audit Department from 2006 through 2010.

A comprehensive review was made ofthe financial analysis files and documents submitted to the Financial Analysis Unit of the Division, reports from the National Association of Insurance Commissioners (NAIC) database, as well as the independent audit reports which indicated no material concerns with respect to financial condition or regulatory compliance issues.

Work papers prepared by D&T in connection with its annual statutory audit were reviewed and relied upon to the extent deemed appropriate.

DeWesse Consulting, Inc. (DeWeese) was engaged by the Division to assist in the actuarial review. RSM McGladrey, Inc (McGladrey) was also engaged by the Division to provide accounting services.

A concurrent examination was made of ConnectiCare, Inc., an affiliated Connecticut domestic insurance company.

The examination was conducted on a full scope, comprehensive basis in accordance with the procedures outlined in the NArC Financial Condition Examiners Handbook (the Handbook). The Handbook requires that we plan and perform the examination to evaluate the financial condition and identify prospective risks of the Company by obtaining information about the Company including corporate governance, identifying inherent risks within the Company, and evaluating system controls and procedures used to mitigate those risks. An examination also includes assessing the principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation, management compliance with Statutory Accounting Principles, and Annual Statement Instructions (Instructions).

All accounts and activities of the Company were considered in accordance with the riskfocused examination process.

Comments in this report are generally limited to exceptions noted or to items considered to be of a material nature.

Failure of items in this report to add to totals or for totals to agree with captioned amounts is due to rounding.

2


HISTORY

The Company was incorporated on April 30, 2001, in Connecticut and was licensed to conduct accident and health business in Connecticut on December 18,2001. On June 19, 2001, an application seeking approval of acquisition of control of ConnectiCare Holding from the Connecticut Health Foundation by Carlyle Partners Holding, LLC (Carlyle) and Liberty Partners Holding, LLC (Liberty) was approved by the Division. The closing was consummated on June 22,2001. The ultimate owners of ConnectiCare Holding Company, Inc. (ConnectiCare Holding) following the close in June were Carlyle at 60% and Liberty at 40%. There were subsequent investments for a minority share by new equity investors and senior management investors.

As part of this restructuring, 100% ownership of the Company was transferred from ConnectiCare Holding to ConnectiCare Capital, LLC (ConnectiCare Capital). ConnectiCare Capital was formed primarily to secure debt financing required by the restructuring transaction. A credit facility of $70 million was put in place with ConnectiCare Capital consisting of a $55 million term loan and a $15 million revolving line of credit of which $2.2 million was drawn at closing.

The Company is a wholly-owned subsidiary of ConnectiCare Capital, a wholly-owned subsidiary of ConnectiCare Holding. On January 19, 2005, the Division approved the acquisition of ConnectiCare Holding by Health Insurance Plan of Greater New York (HIP). On March 10, 2005, ConnectiCare Holding and its subsidiaries were acquired by Health Insurance Plan Holding, Inc. (HIP Holding), a Delaware domiciled holding company, a wholly-owned subsidiary of HIP, a not-for-profit company domiciled in the State ofNew York. On November 15, 2006, the board of directors of Group Health Incorporated (OHI), a New York not-for-profit health insurer, changed the bylaws of OHI, making HIP Foundation, Inc. the sole corporate member ofOHI. As a result of this change, OHI and HIP came under common control and operate as affiliated companies. The name "HIP Foundation, Inc." was changed to "EmblemHealth, Inc." (EH), the Company's ultimate parent.

3


ORGANIZATIONAL CHART

The following is an organizational chart for the Company and its major affiliates:

EMBLEMHEALTH, INC. (NY)

I

HEALTH INSURANCE PLAN OF GREATER NEW YORK (NY)

I HIP HOLDINGS, INC. (DE) I

I CONNECTICARE HOLDING

COMPANY, INC. (CT)

I CONNECTICARE CAPITAL, LLC

(CT)

I I I I I

CONNECTICARE, INC. (CT)

CONNECTICARE INSURANCE

COMPANY, INC. (CT)

CONNECTICARE OF

MASSACHUSETTS, INC. (MA)

CONNECTICARE OF NEW YORK,

INC. (NY)

PRODUCER PARTNERS, INC.

(CT)

MANAGEMENT AND CONTROL

The amended and restated bylaws provide that there shall be an annual meeting of shareholders for the election of directors and for the transaction of such other business that may corne before such meeting. Special meetings of the shareholders may be called by the Chairman of the Board (Chairman), the president, the secretary or by the Board. The presence at any meeting, in person or by proxy, of the holders of a majority of the aggregate voting power of the shares issued and outstanding shall constitute a quorum for the transaction of business.

The number of directors shall consist of two to ten members, as determined by resolution adopted by the Board.

The Board shall meet each year immediately following the annual meeting of shareholders for the purpose of organization, election of officers, and consideration of such other business as the Board considers relevant to the management of the Corporation.

Regular meetings of the Board shall be held as determined by the Board. Special meetings shall be held at the call of the Chairman or the secretary, or at the written request of a majority of directors.

A majority of the members of the Board shall constitute a quorum for the transaction of business, unless by express provision of law, or the certificate of incorporation or these

4


bylaws, a different vote is required, in which case such express provision shall govern and control.

The elected officers shall be the president, one or more vice presidents, a secretary and a treasurer. All shall hold office for one year and until a successor shall have been duly elected and shall qualify.

The Board may, by a vote of a majority ofthe directors, designate one or more committees, each consisting of two or more directors, to exercise the powers and authority of the Board in the management of the business and affairs of the Company.

Members of the Board serving the Company at December 31, 2010, were as follows:

Director Title and Principal Business Affiliation Michael R. Wise President, ConnectiCare Insurance Company, Inc. Anthony L. Watson Chairman and Chief Executive Officer, EmblemHealth,

Inc. Michael D. Fullwood, Esq. Executive Vice President, Chief Financial Officer,

General Counsel, EmblemHealth, Inc. Frank J. Branchini President and Chief Operating Officer, EmblemHealth,

Inc.

The executive officers serving the Company at December 31,2010, were as follows:

Name Title Michael R. Wise President William Mastro, Esq. Secretary Frank A. Scalise Vice President, Chief Financial Officer, Treasurer

The Company executives participate in a Supplemental Executive Retirement Plan (SERP) managed and held at both the holding company and the parent company level. The Company did not disclose its SERP as required by the Instructions for completing the notes to financial statement of the Annual Statement. It is recommended that the Company comply with the Instructions relating to the reporting its SERP in the notes to financial statement of the Annual Statement.

During our review of the corporate governance structure it was noted that the Company did not formally designate an audit committee or a group of individuals to constitute its audit committee. Section 38a-54-3, paragraph (d) of the CGS states: "Every insurer required to file an annual audited financial report pursuant to Sections 38a-54-l through 38a-54-l4, inclusive, of the Regulations of the Connecticut State Agencies, shall designate a group of individuals as constituting its audit committee, as defined in Section 38a-54-2 of this Regulation of the Connecticut State Agencies. The Audit Committee of an entity that controls an insurer may be deemed the insurer's audit committee for purposes ofSections38a-54-l through 38a54-14, inclusive, of the Regulations of the Connecticut State Agencies at the election of the controlling person".

It is recommended that the Company comply with the requirement of Section 38a-54-3 paragraph (d) of the CGS. It is noted that the Board has since passed a resolution

5


designating the Audit & Finance Committee (AFC) of the Board of Directors of ConnectiCare Holding as its AFC.

INVESTMENTS

During our review of the 2006 through 2010 AFC meeting minutes of ConnectiCare Holding it was noted that the AFC review of ConnectiCare's investment portfolio results were inconsistent with the charter requirement. The charter of the AFC states that it shall "review investment policies and the performance of investments made under such policies and assist the Board of Directors in providing oversight of the Corporation's investment activities". The APC does not have a mechanism in place to approve investment transactions as required by Section §38a-102e of the CGS which states "no domestic insurer shall make any loan or investment, other than a life insurance policy loan secured by its policies in an amount not exceeding the net reserve value thereof, unless authorized or approved by its Board of Directors or a committee thereof responsible for supervising or making such loan or investment or by committees or persons pursuant to a delegation of authority. The terms and limitations of any delegation of authority by the Board of Directors or any committee shall be by its actions which are duly recorded".

It is recommended that the Company institute proper controls to ensure compliance with Section §38a-l02e of the CGS. It is noted that the Company has since amended the Charter for the AFC of ConnectiCare Holding to include the authorization and approval of any loan or investment transactions.

RELATED PARTIES

In connection with shared service agreements between the Parent, the Company and other affiliates, certain costs, including facilities and services are purchased jointly on behalf of the Company, the Parent, and affiliates in the ordinary course of business. The Company has the following key intercompany agreements in place:

Tax Sharing Agreement

The Company is party to a Tax Sharing Agreement with HIP Holding. HIP Holding files a consolidated federal income tax return for other affiliates. The consolidated tax liability is allocated among affiliates in the ratio that each affiliate's separate return tax liability bears to the sum of the separate tax return liabilities of all affiliates that are members of the consolidated group.

Administrative Services Agreement

The Company is party to an administrative services agreement with Emblem Health Services Company, LLC. This agreement delegates specific Medicare services that includes: sales; enrollment and premium billing; member services; provider services; claims and liability recovery; pharmacy administration; grievances and appeals; vendor interactions; conductivity and business support; legal and compliance; network support; and payment of behavioral health claims for private fee-for-service plans on a cost basis.

6



The Company is party to an administrative services agreement with ConnectiCare Holding. This agreement provides services of: certain personnel; facilities; equipment; personal property; licenses; and contracts owned or leased by the Company. Services provided under this contract include: financial and accounting services (including actuarial); banking and treasury operations; investment custodial services; underwriting; forms and rates; claims processing; utilization review; credentialing; marketing; agency development; member services; fraud and abuse; personnel; information systems; legal and government relations on a cost basis.


The Company is party to an administrative services agreement with HIP Administrators of Florida, Inc. (HIPA). This agreement provides services of certain personnel, facilities, equipment, personal property, licenses, and contracts owned or leased by HIPA. The services provided under this agreement are for claims processing, member services, and information systems on a cost basis.

INSURANCE COVERAGES

The Company's parent, EH, maintains fidelity bond coverage through various insurers. The Company is covered for employee dishonesty by a commercial crime policy issued by Great American Insurance Company. The limit ofliability on the policy is $20,000,000 for a single loss in excess of the $250,000 deductible which exceeds the suggested minimum limits of insurance pursuant to the Handbook.

In addition to fidelity bond insurance, EH and its subsidiaries maintain insurance coverage with various insurance carriers including the following:

Insurance Company Coverage XL Insurance Company Property

National Union Fire Insurance Company Directors & Officers, managed care errors and omissions

Zurich American Insurance Company and General liability, auto liability, workers Allied World Assurance Company compensation, umbrella liability, and

employee benefits

Illinois National Insurance Company Fiduciary liability, employed lawyers liability, cyber risk liability

7


TERRITORY AND PLAN OF OPERATION

The Company is a licensed health insurance company in the State of Connecticut. The Company offers a variety of both fully insured and self-funded Point of Service (POS) products (including high deductible health plans with savings accounts), as well as a dental product. The Company offers products in the large group, small group and individual markets.

The Company has approximately 201,000 members contracted with 31 acute care hospitals in Connecticut and approximately 16,400 providers (e.g., physicians, chiropractors, laboratories, skilled nursing facilities, psychologists) in Connecticut. The Company markets its products through approximately 2,300 independent, licensed and appointed brokers, and six employee sales representatives. The Company does not contract with general agents or master general agents. Individual and small group products are marketed via web channels and small group products are distributed through the Connecticut Business and Industry Association.

REINSURANCE

Effective January 1, 2010, the Company entered into an excess of loss reinsurance agreement with HIP Insurance Company of New York. The Company has a net retention of $250,000 for Commercial Preferred Provider Organization (PPO) and POS members with a maximum reinsurance limit of $4,750,000 per member.

INFORMATION TECHNOLOGY AND CONTROLS

An evaluation of information technology (IT) controls was conducted in accordance with NAIC requirements as outlined in the Handbook. The guidance and direction used to perform the review of the Company's IT general controls was derived from Exhibit C Part 1 - Information Technology Planning Questionnaire (ITPQ) and Exhibit C Part 2 Information Technology Work Program. The Company's responses to the ITPQ were evaluated and certain controls within the IT control environment were tested to assess whether the selected controls were designed effectively and are functioning properly.

Our review ofIT controls placed reliance upon the results of the 2010 work performed by the Company's independent auditors during their review. This review included an assessment of Company controls in place to prevent unauthorized access and use of AMISYS, the Company's main production system, handling insurance processing which member servicing and claims payment processing.

The IT risks outlined in the work programs, focused on the areas of logical and physical security over the IT infrastructure and key application systems. The scope of the IT review also included:

• Confirmation of compliance with corporate policies, regulatory requirements, and other governing bodies;

• Determination that the Company had adequate controls over contingency planning to ensure business continuity; and

8


• Detennination that the Company had adequate controls in place to safeguard its computing assets.

There were no material findings which affected the Division's overall reliance on the Company's IT controls.

ACCOUNTS AND RECORDS

The Company utilizes the PeopleSoft system for its general ledger and accounts payable reporting and the AMISYS system for insurance processing.

AMISYS provides much of the infonnation that is used for membership, billing, revenue, cash application, accounts receivable, and provider payments for claims and capitation. AMISYS is structured to provide reporting required to meet statutory and product line reporting.

The Company utilizes the services of an outside asset management finn to maintain its investment financial records and manage its investments.

The Company utilized Hooke Seminars "The Complete Package" for preparation of the 2010 Annual Statement.

General ledger account balances were reconciled and traced to the amounts reported in the annual statement for 2010. Further detail analyses were perfonned on the individual accounts throughout the examination.

9


FINANCIAL STATEMENTS

The following statements reflect the assets, liabilities, capital and surplus, and statement of revenue and expenses as of December 31, 2010, as reported by the Company and as determined by the examination:

ASSETS

1

Assets

2

Nonadmitted Assets

3

Net Admitted Assets

Bonds Cash, cash equivalents and short-tenn investments Investment income due and accrued Premiums and Considerations:

Uncollected premiums and agents' balances in course of collection

Reinsurance: Amounts recoverable from reinsurers

Amount receivable relating to uninsured plan

Current federal and foreign income tax recoverable and interest thereon

Net deferred tax asset Receivables from parent, subsidiaries and affiliates Health care and other amounts receivable

$15,839,744 9,182,538

117,327

1,560,594

57,757 1,715,428

175,489

204,178 1,110

325,559

$18,237

68,809

$15,839,744 9,182,538

117,327

1,542,357

57,757 1,715,428

175,489

204,178 1,110

256,750

Totals $29,179,]24 $87,046 $29,092,678

10


LIABILITIES, CAPITAL AND SURPLUS

1

Covered

2

Uncovered

3

Total Claims unpaid Unpaid claims adjustment expenses Premiums received in advance General expenses due or accrued Remittances and items not allocated Amounts due to parent, subsidiaries and affiliates Funds held under reinsurance treaties Reinsurance in unauthorized companies Liability for amounts held under uninsured plans Aggregate write-ins for other liabilities

$ 6,695,394 151,345

1,681,010 1,335 5,759

2,556,261 145,738 969,619

1,990,325 413

$ 221,355 $ 6,916,749 151,345

1,681,010 1,335 5,759

2,556,261 145,738 969,619

1,990,325 413

Total liabilities

Common capital stock Gross paid in and contributed surplus Unassigned funds (surplus)

$ 14,197,199 $221,355 $ 14,418,554

500,000 11,000,000 3,174,127

Total capital and surplus $14,674,127

Total liabilities, capital and surplus $29,092,681

11


STATEMENT OF REVENUE AND EXPENSES

Uncovered Current Year

Total Current Year

Member Months 270,214

Net premium income

Aggregate write-ins for other health care related revenues

$80,594,228

Total revenues 80,594,228

Hospital and Medical: HospitaVmedical benefits $1,989,889 51,797,124

Other professional services 1,196,755 Prescription drugs

Incentive pool, witllloid adjustments and bonus amounts 7,810,771

Subtotal

Less: Net reinsurance recoveries

1,989,889 60,804,650

1,294,253 Total hospital and medical

Claims adjustment expenses

General administrative expenses

1,989,889 59,510,397

2,381,523

12,191,484

Total underwriting deductions $1,989,889 74,083,404

Net underwriting gain or (loss) 6,510,824

Net investment income earned

Net realized capital gains or (losses)

582,426

(5,237)

Net investment gains or (losses) 577,189

Aggregate write-ins for other income or expenses 97,422

Net income or (loss) after capital gains tax and before all other federal income taxes

Federal and foreign income taxes incurred

7,185,435

2,498,263

Net income (loss)

CAPITAL AND SURPLUS ACCOUNT

u.2KZ,l72

Capital and surplus prior reporting period

GAINS AND (LOSSES) IN SURPLUS

9,116,433

Net income or (loss) 4,687,172

Change in net deferred income tax (52,541)

Change in non-admitted assets 153,570

Change in unauthorized reinsurance 769,493

Net change in capital and surplus

Capital and surplus end of reporting period

5,557,694 $14,674,127

12


STATUTORY RESERVES $7,068,094

The following items were included in the captioned accounts:

Claims Unpaid (CU) $6,916,749 Unpaid Claims Adjustment Expenses (CAE) 151,345 Statutory Reserves $7,068,094

The Division engaged DeWeese to conduct a comprehensive actuarial analysis of the statutory reserves of the Company as of December 31, 2010. The actuarial analysis was conducted in accordance with accepted loss reserving standards and principles.

DeWeese based its review on infonnation provided by the Company which included but was not limited to:

• The Actuarial Report as of December 31, 2010 (detailed calculations supporting the actuarial data to the Underwriting and Investment Exhibit Part 2 - 20 Summary of the Annual Statement (U and I));

• The 2010 reconciliation of the claims used in setting the IBNR reserve with the Company's general ledger;

• The Company's documented actuarial practices and procedures; • The 2010 Statements of Actuarial Opinion and Actuarial Opinion Summaries;

and • The 2010 Annual Statement and other infonnation requested and obtained during

the course of the review through discussions and meetings with key personnel of the Company.

DeWeese relied on the Division's review of the Company's underlying data concluding that there were no indications of any significant inaccuracies in the data reported to the U and I.

The scope of DeWeese's actuarial analysis is outlined below:

1. An assessment of reserve risk, including but not limited to:

a. Detailed review of the work papers and documentation supporting the carried liabilities.

b. Review of the primary reserve risks and the controls in place to mitigate those risks and the frequency of reporting actuarial indications to management, by line of business and in the aggregate.

c. Review and evaluation of the Company's reconciliation of the data used in the actuarial analysis of the reserve liabilities to the U and I as well as a review of the integrity and the appropriateness of data segmented for actuarial evaluation.

d. Meeting with appropriate reserve actuaries and/or other officers of the Company to assess the appropriateness of methodologies and the quality of assumptions, including but not limited to case reserve adequacy,

13

CONNECTlCARE INSURANCE COMPANY, INC.

expected loss ratios, claim emergence patterns, and anticipated recoveries.

2. An assessment of pricing and underwriting risk, including but not limited to:

a. Meeting with appropriate ratemaking actuaries and/or other officers of the Company to assess the appropriateness of methodologies and the quality of assumptions, including but not limited to trend, loss development, expenses, catastrophes, large losses, and profit.

b. A high level evaluation of price monitoring processes and controls. c. The reporting of pricing and underwriting considerations to management.

3. An assessment ofliquidity risk, including but not limited to:

a. A qualitative review of the Company's process for assessment of catastrophe exposure and risk concentration.

b. Reporting assessments to management.

Reserve Risk

The Company's business is predominantly comprehensive, with a small amount of dental-only business. The Company also reported paid claims in runoff in 2010 for the Federal Employees Health benefits Plan (FEHBP). The Company divides its liabilities into two business segments (group and individual) and four service types (inpatient, outpatient, physician, and pharmacy). The unpaid claims liabilities are determined by a standard actuarial development method or a development method supplemented by a method using authorized days of inpatient care. DeWeese reconciled the statutory reserve by method and confirmed that the calculations are accurate and the methodologies and assumptions used were reasonable.

DeWeese's estimate of the reserves and IBNR were within a reasonable tolerance of the amounts held by the Company. The methodologies and assumptions used by the Company are consistent with prevailing actuarial practices, and the statutory reserves determined at year-end are actuarially reasonable. DeWeese found that the Company analyzed its 2010 CAE by function and assigned percentages to several of these functions that represent CAE reserves. DeWeese determined that the Company's methodology is conservative and in line with sound industry practices.

Pricing and Underwriting Risk

DeWeese reviewed the Company's processes and controls used to mitigate the pricing and underwriting risk which included but was not limited to: compliance with underwriting guidelines; ratemaking activities; and the frequency of and process for reporting pricing and underwriting considerations to management. DeWeese determined that the mitigating controls were appropriate for the risk assumed and the methodologies and assumptions used in the calculation were standard and reasonable. In addition, DeWeese found that the pricing and underwriting practices were consistent with the guidelines and with standard practices.

14


Liquidity Risk

The Company's liquidity risk relates to catastrophe exposure. Based on DeWeese's review it appears there is regular monitoring by the Company of its capital adequacy. In addition, DeWeese reviewed and found that the Company's liquidity risk mitigation practices are appropriate for the assumed risk.

Conclusion Based on the procedures performed by DeWeese, no material concerns were noted relating to the appropriateness of the reserve risk, pricing and underwriting risk, and liquidity risk. The overall reserves were reasonable in total.

COMMON CAPITAL STOCK $500,000

As of December 31, 2010, the Company has 100 shares of common stocks with a stated value of $5,000 per share issued to ConnectiCare Capital.

During the review of capital and surplus it was noted that the Company did not disclose in the Notes to Financial Statements, note number 13, of the Annual Statement the value ofthe common capital stock of$5,000 per share. Statements of Statutory Accounting Principles (SSAP) No. 72, paragraph 19(a) of the NAIC Accounting Practices and Procedures Manual (the Manual), states that "the number of shares of each class of capital stock authorized, issued and outstanding as of the balance sheet date and the par value or stated value of each class" shall be disclosed in the financial statement. It is recommended that the Company comply with the requirement of SSAP No. 72 of the Manual.

GROSS PAID IN AND CONTRIBUTED SURPLUS $11,000,000

In 2009, ConnectiCare Holding contributed $10,000,000 in surplus to the Company to maintain adequate capital surplus. The following exhibit reflects the balance of this account during the five-year period under review:

2010 $11,000,000 2009 $11,000,000 2008 $1,000,000 2007 $1,000,000 2006 $1,000,000

UNASSIGNED FUNDS (SURPLUS) $3,174,127

In 2010, the Company cancelled its contract with the FEHBP. The following exhibit reflects the balance of this account during the five-year period under review:

2010 $3,174,127 2009 $(2,383,567 2008 $5,447,186 2007 $5,253,312 2006 $4,728,088

15


The increase in unassigned surplus during the examination period was attributable to strong earnings.

RECOMMENDATIONS

PAGE

4 MANAGEMENT AND CONTROL

• It is recommended that the Company comply with the Instructions relating to the reporting its SERP in the notes to financial statement of the Annual Statement.

• It is recommended that the Company comply with the requirement of Section 38a-54-3 paragraph (d) of the CGS. It is noted that the Board has since passed a resolution designating the Audit & Finance Committee (AFC) of the Board of Directors of ConnectiCare Holding as its AFC.

6 INVESTMENTS

It is recommended that the Company institute proper controls to ensure compliance with Section §3 8a-l 02e of the CGS. It is noted that the Company has since amended the Charter for the AFC of ConnectiCare Holding to include the authorization and approval of any loan or investment transactions.

15 COMMON CAPnAL STOCK

It is recommended that the Company comply with the requirement ofSSAP No. 72 of the Manual.

SUBSEQUENT EVENT

Effective January 26,2011, ConnectiCare of New York, Inc., merged into HIP.

CONCLUSION

The results of this examination disclosed that as of December 31, 2010, the Company had admitted assets of$29,092,681, liabilities of$14,418,554, and capital and surplus of $14,674,127. During the period under examination, admitted assets increased by $19,623,941, liabilities increased $10,998,582, and surplus as regards policyholders increased by $8,625,359.

It was determined that the Company's assets were fairly stated in accordance with guidance outlined in the Manual. Assets were acceptable under Section 38a-l 02 of the CGS. The liabilities established were adequate to cover the Company's obligations to policyholders.

16


SIGNATURE

In addition to the undersigned, Chiffon King, AFE, Lisa Pagliaro, AFE, Joseph Marcantonio, AFE, CISA, Mark Murphy, CFE, and Jim Jakielo, FSA, MAAA, of the Connecticut Insurance Department, and the professional services firms of McGladrey and DeWeese participated in this examination.

I, Wayne Shepherd, CFE, do solemnly swear that the foregoing report of examination is hereby represented to be a full and true statement of the condition and affairs of the subject insurer as of December 31,2010, to the best of my information, knowledge and belief.

Respectfully submitted,

Wayne epherd, CFE Examiner-In Charge State of Connecticut Insurance Department

State of Connecticut ss

County of Hartford

Subscribyd and sworn before me,_Pc" ,l--nC lfd (6u..:+-t.e/ , Notary Public, on this 3 rC dayofOd:okre,... ,2011.

.P (~ ~ c_ ell .. f!;:&t....k:-R~L.. Notary Public of the Superior Court

My Commission Expires ~t?f>to "",b.y ::;, ~ , t3I

17

Documents

INSURANCE DEPARTMENT · 15 Gross Paid In and Contributed Surplus 15 Unassigned Funds (Surplus) 15 Recommendations 16 Subsequent Event 16 ... the procedures outlined in the NArC Financial