Transcription

REPORT ON EXAMINATIONOF THEUNITED SPECIALTY INSURANCE COMPANYAS OFDECEMBER 31, 2015

TABLE OF CONTENTSSALUTATION . 1SCOPE OF EXAMINATION. 1SUMMARY OF SIGNIFICANT FINDINGS . 3COMPANY HISTORY . 3MANAGEMENT AND CONTROL . 4Insurance Holding Company System. 5Intercompany Management and Service Agreements . 8TERRITORY AND PLAN OF OPERATION . 10REINSURANCE. 12FINANCIAL STATEMENTS . 13Analysis of Assets . 14Statement of Liabilities, Surplus and Other Funds . 15Underwriting and Investment Exhibit - Statement of Income . 16Capital and Surplus Account . 17Reconciliation of Capital and Surplus . 18SCHEDULE OF EXAMINATION ADJUSTMENTS . 19NOTES TO FINANCIAL STATEMENTS . 19SUBSEQUENT EVENTS . 20COMPLIANCE WITH PRIOR REPORT OF EXAMINATION . 21SUMMARY OF RECOMMENDATIONS . 22CONCLUSION . 23I

SALUTATIONMay 3, 2017Honorable Trinidad NavarroDelaware Insurance CommissionerDelaware Department of InsuranceRodney Building841 Silver Lake Blvd.Dover, Delaware 19904Dear Commissioner:In compliance with instructions and pursuant to statutory provisions contained inCertificate of Authority No. 16.012, dated March 30, 2016, an examination has been made of theaffairs, financial condition and management of theUNITED SPECIALTY INSURANCE COMPANYhereinafter referred to as “Company” or “USIC”, incorporated under the laws of the State ofDelaware as a stock company. The Company’s statutory home address is 160 Greentree Drive,Suite 101, Dover, Delaware. The examination was conducted at the administrative office of theCompany located at 1900 L. Don Dodson Drive, Bedford, Texas 76021.The report of this examination is submitted herewith.SCOPE OF EXAMINATIONThe Delaware Department of Insurance (Department) has performed a multi-statecoordinated risk-focused financial examination of the Company with the Texas Department ofInsurance (TDI) as Lead. The last examination was completed as of December 31, 2010. Thisexamination covered the period of January 1, 2011 through December 31, 2015, andencompasses a general review of transactions during the period, the Company’s business policies

United Specialty Insurance Companyand practices, as well as management and relevant corporate matters, with a determination of thefinancial condition of the Company at December 31, 2015. Transactions subsequent to theexamination date were reviewed where deemed necessary.The examination of USIC was performed as part of the multi-state coordinatedexamination of State National Companies, Inc. (SNC) insurance group of companies as ofDecember 31, 2015. The Texas Department of Insurance (TDI) was the Lead State for the SNCholding company group’s program and lender services lines of business. We conducted ourexamination in accordance with the National Association of Insurance Commissioners (NAIC)Financial Condition Examiners’ Handbook (Handbook) and generally accepted statutoryinsurance examination standards consistent with the Insurance Laws and Regulations of the Stateof Delaware. The NAIC Handbook requires that we plan and perform the examination toevaluate the financial condition, assess corporate governance, identify current and prospectiverisks of the company and evaluate system controls and procedures used to mitigate those risks.An examination also includes identifying and evaluating significant risks that could cause aninsurer’s surplus to be materially misstated both currently and prospectively. The examinationincluded assessing the principles used and significant estimates made by management, as well asevaluating the overall financial statement presentation, and management’s compliance withStatutory Accounting Principles. The examination does not attest to the fair presentation of thefinancial statements 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 significant findings of fact, pursuant to the GeneralCorporation Law of the State of Delaware as required by 18 Del. C. §321, along with generalinformation about the insurer and its financial condition. There may be other items identified2

United Specialty Insurance Companyduring the examination that, due to their nature, are not included within the examination reportbut separately communicated to other regulators and/or the Company.During the course of this examination, consideration was given to work performed by theCompany’s external accounting firm, Ernst and Young, LLP, (EY). Certain auditor work papersof their 2015 audit have been incorporated into the work papers of the examiners and have beenutilized in determining the scope, areas of emphasis in conducting the examination, and in thearea of tests of controls, risk mitigation, and substantive testing.SUMMARY OF SIGNIFICANT FINDINGSThis examination had no material adverse findings, significant non-compliance findings,material changes in financial statements, or updates on other significant regulatory informationdisclosed in the previous examination.COMPANY HISTORYThe Company was incorporated on July 8, 2005, under the laws of the State ofDelaware. A Certificate of Authority, issued by the Insurance Commissioner on July 11,2005, authorizes the Company to transact the business of property and casualty.The Company became part of an insurance holding company system at the time ofincorporation as a wholly owned subsidiary of State National Insurance Company, Inc.(SNIC). One hundred percent (100%) of the Company’s stock is held by SNIC, a Texasdomiciled insurer, which in turn is a wholly owned subsidiary of TBA, which in turn is awholly owned subsidiary of SNC, a Delaware corporation, which is the "ultimatecontrolling person" of the Company.3

United Specialty Insurance CompanyMANAGEMENT AND CONTROLPursuant to the General Corporation Law of the State of Delaware, as implemented bythe Company’s Certificate of Incorporation and bylaws, all corporate powers and its businessproperty and affairs are managed by, or under the direction of, its Board of Directors (Board).The Board as of December 31, 2015, was comprised of seven members, each elected orappointed in accordance with the Company’s bylaws. Each Director shall hold their office untilhis successor is elected and qualified or until resignation or removal.DirectorsThe Board of Directors, duly elected in accordance with the Company’s bylaws andserving as of the period ending December 31, 2015 is as follows:DirectorPrincipal OccupationTerry Lee LedbetterChairman; President and CEODavid Donaldson HaleTreasurer and Chairman of the AuditCommitteeLonnie Kossuth LedbetterRetired (Former Chairman and CEO)Lonnie Kossuth Ledbetter IIISecretary; EVP Lender ServicesBradford Luke LedbetterEVP, Program ServicesMary Brock BillingsleyDirector of Product Analysis and Quality andInternal Audit OfficerFerdinand Herbert ReicheltCPA, Independent, RetiredThe bylaws of the Company state the principal officers shall be a President, Treasurer,and a Secretary, and such officers or assistant officers or agents for the Board may vary fromtime to time.4

United Specialty Insurance CompanyOfficersAs of December 31, 2015, the Company’s principal officers and their respective titles areas follows:OfficerTitleTerry Lee LedbetterChairman of the Board, Presidentand CEODavid Donaldson HaleTreasurer and Chairman of theAudit CommitteeLonnie Kossuth Ledbetter IIISecretary and EVP LenderServicesDavid Martin CleffAssistant Secretary and EVPGeneral CounselThe minutes of the meetings of the Board of Directors, which were held during the periodof the examination were reviewed and determined to be in accordance with the Company’sbylaws.The attendance at such meetings, the elections of directors and officers and theapprovals of investment transactions were reviewed and noted.Inspection of the Company’s files indicated that the Conflict of Interest Statement and theEthics Code were distributed, completed and returned during the examination period.Insurance Holding Company SystemThe Company is a member of an insurance holding company system as defined in18 Del. C. §5001 (4) “Insurance Holding Company System”. The Company’s Holding CompanyRegistration Statements were properly filed with the Delaware Insurance Department for theyears under examination.The Company is a wholly owned subsidiary of SNIC.SNIC is a wholly ownedsubsidiary of State National Intermediate Holdings, Inc. (SNIH) and is ultimately owned bySNC. SNC was ultimately controlled by a Revocable Trust for which Lonnie Ledbetter and5

United Specialty Insurance CompanyTerry Ledbetter are majority Trust Grantors with other family members as minority TrustGrantors.On June 25, 2014, SNC completed the sale of an aggregate of 31,050,000 shares of itscommon stock in a transaction referred to as the Private Placement. The shares of common stockwere sold to unrelated investors (mostly institutional investors), none of whom acquired 10% ormore of the outstanding common stock of SNC.Prior to the completion of the PrivatePlacement, co-founders and brothers Lonnie K. Ledbetter and Terry L. Ledbetter, through trustsestablished by each of them (collectively, the "Ledbetter Family"), each held approximately 50%of the economic interest in the outstanding common stock of SNC. SNC used approximately 190,600,000 of the net proceeds from the Private Placement to purchase and redeem 21,030,294shares of common stock from the Ledbetter Family. The resulting controlling shareholders ofSNC following the Private Placement continued to be the Ledbetter Family. SNC subsequentlyfiled a resale registration statement with the Securities and Exchange Commission for the benefitof the holders of the shares of the Private Placement and SNC's common stock began trading onNovember 3, 2014 on the NASDAQ Global Select Market under the symbol "SNC".As of December 31, 2015, 28.485 percent of the outstanding common stock of SNCrepresents shares held by Terry Ledbetter individually and by trusts and a private foundation forwhich Terry Ledbetter is the grantor. All other investors individually hold less than 10 percentof the outstanding common stock of SNC.The following chart reflects ownership of USIC and other affiliates by its ultimate parent:6

United Specialty Insurance CompanyTerry Ledbetter(Individual)Public Investorseach owning 10%28.49%71.51%State NationalCompanies, Inc.(Delaware)SNC Financial Group,LLC(Nevada)SNC Financial LP, LLC(Nevada)1% General Partner99% Limited PartnerTBA Insurance Group,Ltd.(Texas)State National IntermediateHoldings, Inc.(Texas)State National InsuranceCompany, Inc.(Texas)National SpecialtyInsurance Company(Texas)United SpecialtyInsurance Company(Delaware)7

United Specialty Insurance CompanyIntercompany Management and Service AgreementsThe Company was a party to numerous inter-company agreements, which were disclosedby the Company in its Form B Registration Statement filings with the Delaware Department ofInsurance. The agreements of significance are summarized as follows:Agreement for Management ServicesEffective April 1, 2006, by Addendum 4, the Company entered into an existingagreement (dated December 29, 1999) and addendums for management services with TBAInsurance Group, Ltd. (TBA), its upstream parent, which included SNIC and NSIC. TBAprovides management services to all of the insurance companies for the oversight of theCompanies’ underwriting operations.Addendum 5 changed the termination date provision to the original agreement. Theaddendum with a stated effective date of December 31, 2004 was approved with the Texas andDelaware Departments on November 14, 2006 and April 5, 2012 respectively.Fees incurred by the Company for such services were approximately 14,914,151 and 3,598,059 for 2015 and 2014 respectively. The change in fees in 2015 was primarily due to achange in 2014 to include CUNA contract modification expense. For the other prior years ofexamination, it was noted that the fees were in the same range.Age