Examination Report Template...Brian Setzer . David Terry . James Yablecki . Donna F. Zarcone (Chair)...

Examination Warrant Number 13-03477-11524-R1

Report of Examination of

Bravo Health Pennsylvania, Inc. Philadelphia, Pennsylvania

As of December 31, 2013

Bravo Health Pennsylvania, Inc.

TABLE OF CONTENTS Subject Page Salutation .........................................................................................................................................1 Scope of Examination ......................................................................................................................1 History..............................................................................................................................................2 Management and Control: Capitalization .............................................................................................................................3 Stockholder ................................................................................................................................3 Insurance Holding Company System.........................................................................................3 Board of Directors......................................................................................................................5 Committees ................................................................................................................................5 Officers ......................................................................................................................................8 Corporate Records: Stockholder Minutes ..................................................................................................................8 Board of Director Minutes .........................................................................................................8 Articles of Incorporation ............................................................................................................9 By-Laws .....................................................................................................................................9 Service and Operating Agreements .................................................................................................9 Reinsurance: Ceded .......................................................................................................................................11 Assumed ...................................................................................................................................11 Territory and Plan of Operation .....................................................................................................12 Significant Operating Trends .........................................................................................................13 Accounts and Records....................................................................................................................13 Pending Litigation ..........................................................................................................................13 Financial Statements: Comparative Statement of Assets, Liabilities, Surplus and Other Funds ................................15 Comparative Statement of Income ...........................................................................................16 Comparative Statement of Capital and Surplus .......................................................................17 Comparative Statement of Cash Flow .....................................................................................18 Summary of Examination Changes ...............................................................................................19 Notes to Financial Statements: Investments ..............................................................................................................................19 Policyholder and Claim Reserves ............................................................................................20 Premium Income ......................................................................................................................21 Subsequent Events .........................................................................................................................22 Recommendations: Prior Examination ....................................................................................................................24 Current Examination ................................................................................................................28 Conclusion .....................................................................................................................................29

Harrisburg, Pennsylvania April 30, 2015

Honorable Stephen J. Johnson, CPA Deputy Insurance Commissioner Commonwealth of Pennsylvania Insurance Department Harrisburg, Pennsylvania

Dear Sir:

In accordance with instructions contained in Examination Warrant Number 13-03477-11524-R1, dated March 1, 2013, an examination was made of

Bravo Health Pennsylvania, Inc., NAIC Code: 11524 a Pennsylvania domiciled stock Health Maintenance Organization (“HMO”), hereinafter referred to as “Company.” The examination was conducted at the Company’s administrative office, located at 3601 O’Donnell Street, Baltimore, Maryland, 21224-5238.

A report of this examination is hereby respectfully submitted.

SCOPE OF EXAMINATION The Company was last examined as of December 31, 2008.

This examination covered the five-year period from January 1, 2009 through December 31, 2013, and consisted of a general survey of the Company’s business practices, management, and operations, and an evaluation of the Company’s financial condition as of the latter date. Material subsequent events were also reviewed.

Bravo Health Mid-Atlantic, Inc., a Maryland domiciled affiliate, was examined at the same time in coordination with the Maryland Insurance Administration, with Pennsylvania being the lead state. The Report of Examination of Bravo Health Mid-Atlantic, Inc. will be issued by the Maryland Insurance Administration under separate cover.

Work programs employed in the performance of this examination were designed to comply with the standards promulgated by the Pennsylvania Insurance Department (“Department”) and the National Association of Insurance Commissioners (“NAIC”).

The format of this report is consistent with the current practices of the Department and the examination report format prescribed by the NAIC. It is limited to a description of the Company, a discussion of financial items that are of specific regulatory concern, and a factual disclosure of other significant regulatory information.

For each year during the period under examination, the Company was audited by a Certified Public Accounting (“CPA”) firm. The firm of Ernst & Young, LLP conducted the audits for the years 2009 and 2010. The firm of KPMG, LLP conducted the audit for the year 2011. The firm of PricewaterhouseCoopers, LLP conducted the audits for the years 2012 and 2013. The changes in CPA firms were due to the two acquisitions the Company was subject to during the examination period to ensure alignment of the Company’s CPA firm with that of its

Bravo Health Pennsylvania, Inc. -2-

ultimate parent. For all years, the CPA firms provided unmodified opinions on the Company’s year-end financial statements based on statutory accounting principles. Audits of the financial statements of the Company’s affiliate, Bravo Health Mid-Atlantic, Inc. (“BHMA”), were performed concurrently and also resulted in unmodified opinions. Relevant work performed by the CPA firm during its 2013 annual audit of the Company was reviewed during the examination and incorporated into the examination workpapers as considered appropriate.

HISTORY The Company is a managed care organization incorporated in the Commonwealth of

Pennsylvania on October 3, 2001. The Company is a wholly-owned subsidiary of Bravo Health, LLC (“the Parent” or “Bravo Health”), a Delaware corporation with headquarters in Baltimore, Maryland, which operates as an intermediate holding company shell only.

The Company was granted a certificate of authority to operate as a health maintenance organization (“HMO”) in Pennsylvania on November 25, 2002. The Company began operations as a licensed HMO on December 1, 2002 as Elder Health Pennsylvania HMO, Inc., and operates as an HMO participating in the Federal Medicare Advantage Program. Medicare participation is through a contract with the United States Centers for Medicare and Medicaid Services (“CMS”). The Company is designed to primarily serve Medicare beneficiaries regardless of demographic status.

The Company changed its name on August 30, 2005, from Elder Health Pennsylvania HMO, Inc. to Elder Health Pennsylvania, Inc. The Company changed its name on May 29, 2007, from Elder Health Pennsylvania, Inc. to its current name, Bravo Health Pennsylvania, Inc.

On November 30, 2010, Bravo Health, LLC was purchased by HealthSpring, Inc., a managed care organization (“MCO”) whose primary focus is Medicare and operates Medicare Advantage plans in 12 states, including the territory covered by the Bravo entities. In conjunction with this purchase, HealthSpring, Inc. became the ultimate controlling parent of Bravo Health Pennsylvania, Inc. and Bravo Health Mid-Atlantic, Inc.

Effective January 31, 2012, HealthSpring, Inc. completed a merger with Cigna Corporation, a publicly traded company, in which a Cigna affiliate merged into HealthSpring, Inc., which in turn ultimately became a wholly owned subsidiary of Cigna Corporation.

As of December 31, 2013, the ultimate controlling parent of Bravo Health Pennsylvania, Inc. and Bravo Health Mid-Atlantic, Inc. was Cigna Corporation.

The Company is currently authorized to transact business as an HMO in Pennsylvania as described in 40 P.S. § 1554.


MANAGEMENT AND CONTROL

CAPITALIZATION As of the examination date, December 31, 2013, the Company’s total capitalization was

$101,612,630, consisting of one hundred (100) shares of issued and outstanding common stock with a par value of $0.01 per share, amounting to $1.00, $80,254,721 in gross paid in and contributed surplus and $21,357,908 in unassigned funds (“surplus”).

As an HMO, the total minimum net worth required of the Company to engage in the types of business for which it is licensed, pursuant to 31 Pa. Code § 301.121(b)(2) is equal to the greater of $1,000,000 or three months of uncovered health care expenditures for Pennsylvania enrollees as reported on the most recent financial statement filed with the Commissioner. Accordingly, the Company’s required minimum net worth was $1,000,000. The Company met this requirement.

STOCKHOLDER All of the outstanding shares of the Company are directly owned by Bravo Health, LLC,

a non-publicly traded, Delaware insurance holding company. During the examination period, the Company declared and paid the following dividends to its sole shareholder Bravo Health. The dividends in 2009 and 2010 were extraordinary, and were approved by the Pennsylvania Insurance Department.

Dividends Dividends Year Declared Paid 2009 $ 40,000,000 $ 40,000,000 2010 $ 41,000,000 $ 41,000,000 2011 $ 5,000,000 $ 5,000,000 2012 0 0 2013 $ 18,000,000 $ 18,000,000

INSURANCE HOLDING COMPANY SYSTEM The Company meets the requirements for filing an Insurance Company Holding

Company System Registration Statement, in accordance with 40 P.S. §991.1401-991.1413. The Company is under the indirect control of a publicly traded entity domiciled in Delaware, Cigna Corporation (“Cigna”), which is the ultimate controlling parent of all companies within the Cigna group. The Cigna group includes entities providing health & life insurance, health care, investment advisory services, and financial and administrative services. The Company has executed agreements with other Cigna affiliates for services and transactions that include: lines of credit, administrative and management services, investment advisory services, network and pharmaceutical rebates, and consolidated taxes.

During the period under examination, annual registration statements and amendments thereto were filed timely by the Company.

The Company has no investments in subsidiaries reported during the examination period.


The Cigna holding company structure includes approximately 300 entities. Selected companies in the Cigna holding company structure as of December 31, 2013 are depicted in the following chart:

o Cigna Corporation, Delaware Cigna Holdings, Inc., Delaware

Connecticut General Corporation, Connecticut

HealthSpring, Inc., Delaware

NewQuest, LLC, Texas

HealthSpring of Alabama, Inc., insurer, Alabama

Bravo Health, LLC, Delaware

Bravo Health Pennsylvania, Inc., insurer, Pennsylvania Bravo Health Mid-Atlantic, Inc., insurer, Maryland

HealthSpring of Florida, Inc., insurer, Florida

HealthSpring Management, Inc., Tennessee

HealthSpring of Tennessee, Inc., insurer, Tennessee

HealthSpring Life and Health Insurance Company, Inc., insurer, Texas

https://www.snl.com/Interactivex/snapshot.aspx?ID=4375605






BOARD OF DIRECTORS Management of the Company is vested in its Board of Directors (“Board”), which was

comprised of the following members as of the examination date, December 31, 2013:

Name and Address Principal Occupation

James Patrick Foley (Chairman)

Birmingham, AL

Scott Christian Huebner

Seabrook, TX

Brian David Setzer

Nashville, TN

Robert Lambdin Dawson

Birmingham, AL

Donald John Mazzagatti

Philadelphia, PA

President,

HealthSpring of Alabama, Inc. & NewQuest Management of Alabama, LLC

President of Operations, Co-CEO

HealthSpring, Inc.

Business Finance Officer,

Cigna Corporation

EVP & Chief Marketing Officer,

HealthSpring, Inc.

Member Director, Retired

The Company is subject to the conflict of interest policy of Cigna Corporation that covers all directors, officers, employees and contractors of Cigna Corporation and its wholly owned or controlled subsidiaries and affiliates. Employees and directors are required to disclose actual or potential conflicts of interest by completing an ethics affirmation statement and questionnaire at the time of employment and/or appointment. Thereafter, actual or potential conflicts of interest must be disclosed as they arise by reporting to the respective manager or compliance officer, and at the time of the annual ethics refresher training, which includes the requirement that an affirmation statement and questionnaire be completed.

COMMITTEES The Company’s By-laws state that the Board of Directors may through adoption of a

resolution by a majority of the whole Board, establish one or more Committees as it deems necessary or desirable. The Board has elected to designate the Audit Committee of an affiliate, Connecticut General Corporation & Cigna Worldwide Insurance Company, to serve in this capacity for the Company. In addition, the Company’s ultimate controlling parent, Cigna, has established an Audit Committee consisting solely of independent members of the Cigna Board of Directors. No other Committees had been established by the Board.


The designated Audit Committee members as of December 31, 2013 were as follows:

Connecticut General Corporation & Cigna Worldwide Insurance Company Audit Committee

Cigna Corp Audit Committee

Mary Hoeltzel (Chair)

John Limongelli

Eric Palmer

Jeffrey Rigg

Brian Setzer

David Terry

James Yablecki

Donna F. Zarcone (Chair)

Michelle D. Gass

Roman Martinez IV

James E. Rodgers

Joseph P. Sullivan

The requirements for the structure of boards of directors and committees thereof in accordance with the Pennsylvania Holding Company Law are delineated below:

• 40 P.S. § 991.1405(c)(3)(i), “Not less than one-third of the directors of a domestic insurer shall be persons who are not officers or employees of such insurer or of any entity controlling, controlled by or under common control with such insurer and who are not beneficial owners of a controlling interest in the voting stock of such insurer or any such entity. At least one such person must be included in any quorum for the transaction of business at any meeting of the board of directors. (ii) Not less than one-third of the members of each committee of the board of directors of any domestic insurer shall be persons who are not officers or employees of such insurer or of any entity controlling, controlled by or under common control with such insurer. At least one such person must be included in any quorum for the transaction of business at any meeting of each committee.”

• 40 P.S. § 991.1405(c)(4), “The board of directors of a domestic insurer shall establish a committee comprised solely of directors who are not officers or employees of the insurer or of any entity controlling, controlled by or under common control with the insurer and who are not beneficial owners of a controlling interest in the voting stock of the insurer or any such entity. The committee shall have responsibility for recommending the selection of independent certified public accountants and reviewing the insurer's financial condition, the scope and results of the independent audit and any internal audit. The committee may also have the responsibilities described in paragraph (4.1) if one or more committees described in paragraph (4.1) are not separately established.”

• 40 P.S. § 991.1405(c)(4.1), “The board of directors of a domestic insurer shall establish one or more committees comprised solely of directors who are not officers or employees of the insurer or of any entity controlling, controlled by or under common control with the insurer. The committee or committees shall have responsibility for recommending candidates to be nominated by the board of


directors, in addition to any other nominations by voting shareholders or policyholders, for election as directors by voting shareholders or policyholders, evaluating the performance of officers deemed to be principal officers of the insurer and recommending to the board of directors the selection and compensation of the principal officers.”

• 40 P.S. § 991.1405(c)(5), “The provisions of paragraphs (3), (4) and (4.1) shall not apply to a domestic insurer if the person controlling such insurer is an insurer, an attorney in fact for a reciprocal exchange, a mutual insurance holding company or a publicly held corporation having a board of directors and committees thereof which already meet the requirements of paragraphs (3), (4) and (4.1).”

The Company is compliance with 40 P.S. § 991.1405(c)(3) & (4.1).

The Company, through a unanimous written consent of its directors, on April 15, 2013 designated the Audit Committee of an affiliate, Connecticut General Corporation (“CGC”). Based on our review of the members of the CGC committee, it was determined that several members of the Audit Committee of CGC are officers or employees of the Company, or entities controlling, controlled by or under common control with the Company. As such, the Audit Committee designated by the Board does not satisfy the independence requirements of 40 P. S. § 991.1405, paragraph 4 as specified above.

It is recommended that the Company, through the actions of its Board of Directors, ensure that its designated audit committee meets the requirements of 40 P. S. § 991.1405. In addition to the above requirements, the Company’s By-laws and 40 P.S. § 1557

require that the Board of Directors consist of one third “Subscriber Directors,” which the By-laws define as a director selected from a pool of subscribers of the health maintenance organization who are representatives of subscribers shared interest, and who shall have no affiliation with the Corporation, through employment or otherwise (other than as a subscriber), and shall not be controlled by or have an ownership interest in the Corporation, and shall not be the beneficial owners of a controlling interest in the shares of the Corporation, or its affiliates subject to control through ownership or contract by such Corporation. As of the examination date, December 31, 2013, only one of the Company’s five Board members was a subscriber member. As a result the Company was not in compliance with its By-laws or 40 P.S. § 1557.

It is recommended that the Company comply with its By-laws and 40 P.S. § 1557 by changing the composition of the Board to include at least one third Subscriber Directors.


OFFICERS As of the examination date, December 31, 2013, the following officers were appointed

and serving in accordance with the Company’s By-laws:

Name Title

James Patrick Foley President Matthew Shawn Morris Co-Chief Executive Officer Scott Christian Huebner Co-Chief Executive Officer Brian David Setzer Chief Financial Officer Gregory James Allen Vice President & Secretary Dirk Oliver Wales, MD Medical Director Barry Richard McHale Vice President & Treasurer Scott Ronald Lambert Vice President & Assistant Treasurer Rhiannon Ashley Bernier Assistant Secretary David Lowell Terry Chief Actuary John Lewis Biggers Chief Operating Officer Robert Lambdin Dawson Vice President Jumana Nadeem Siddiqui Assistant Treasurer Anna Krishtul Assistant Secretary Richard Alan Appel Compliance Officer Brett Sanders Vice President of Finance Maureen Hardiman Ryan Vice President & Assistant Treasurer Kevin James Oleksak Assistant Secretary Casey Patrick McKeon Vice President of Operations

As of the date of this Report, there had been significant changes to the composition of the Company’s Board. See the subsequent event section of this Report for further comments.

CORPORATE RECORDS

STOCKHOLDER MINUTES The Company’s By-laws, Article II Section 2 states that an annual meeting of the

shareholders is not required but may, in the sole discretion of the Board of Directors be held, when they shall elect by a plurality vote a Board of Directors. Review of the Actions of the Sole Shareholder in Lieu of a Meeting noted that appointments to the Board were made through resolution of the Sole Shareholder, Bravo Health, LLC.

BOARD OF DIRECTOR MINUTES The Company’s Board of Directors meetings appear to have been held in accordance

with its Articles of Incorporation and By-laws. The meetings were well attended, with quorums present for all meetings during the examination period.

In addition, the Company’s minutes appear to document substantial compliance with all actions required of the Board by the Company’s Articles of Incorporation and By-laws for the period under examination.


ARTICLES OF INCORPORATION There were no amendments to the Company’s Articles of Incorporation during the period

under examination.

BY-LAWS There were no amendments to the Company’s By-laws during the period under

examination.

SERVICE AND OPERATING AGREEMENTS The Company is party to many inter-company agreements they have deemed necessary to

the operation of an HMO. In exchange for the various managerial, administrative, and financial support services provided by these affiliates, the Company paid the following amounts for the examination period:

2013 2012 2011 2010 2009

Amounts Paid $155,257,533 $155,526,905 $148,207,340 $79,101,006 $23,042,682

A summary of the inter-company service and operating agreements follows:

Lines of Credit The Company and Cigna Corporation entered into a Line of Credit Agreement with

Promissory Note effective as of January 31, 2012. Pursuant to this agreement, the Company agrees to provide Cigna Corporation a line of credit in the amount of the $30,000,000. Cigna Corporation shall pay the Company the aggregate unpaid principal amount of all loans made by the Company to Cigna Corporation pursuant to this agreement. This agreement was approved by the Pennsylvania Insurance Department.

The Company and Cigna Holdings, Inc. entered into a Line of Credit Agreement with Promissory Note effective as of January 31, 2012. Under this agreement, Cigna Holdings, Inc. shall provide the Company with a line of credit in the amount of $30,000,000 to ensure that the Company can meet its financial obligations. The Company shall pay to Cigna Holdings, Inc. the aggregate unpaid principal amount of all loans made by Cigna Holdings, Inc. to the Company pursuant to agreement. This agreement was approved by the Pennsylvania Insurance Department.

Amended and Restated Administrative Services Agreement The Company has no employees. For the provision of the functions necessary to operate

a Medicare Advantage plan, the Company and Bravo Health, LLC (f/k/a Bravo Health, Inc.) entered into an Administrative Services Agreement effective as of December 1, 2010. Under this agreement, Bravo Health, LLC provides management services necessary for the administration of the Company’s operations and business. The agreement was amended effective November 20, 2012, to add HealthSpring, Inc. as a party, and to incorporate provisions for administrative


services related to payroll and shared expenses. The agreement and amendment was approved by the Pennsylvania Insurance Department.

During the review of this agreement it was noted that the amounts paid for services can fluctuate up to 15% of premium revenue for service of Medicare Advantage products and up to 10% for Prescription Drug Plans (“PDP”). The Company advised the examiners that the management agreement recognizes that for the Company to be competitive and profitable over the long-term there is a need to have some flexibility in the management fee when there are new or unfavorable trends or unusual or unexpected circumstances occurring in the various markets or in the industry. It was noted that over the course of the examination period, the Company’s management fee percentage has fluctuated significantly with no documentation or support for these changes. As a result, the payment structure under this administrative services agreement does not meet the fair and reasonableness requirements of 40 P.S. § 991.1405(a)(1)(i-iii).

It is recommended that the Company amend its Administrative Services Agreement payment exhibit to comply with 40 P.S. § 991.1405(a)(1)(i-iii) and provide the Department with documentation for fairness and reasonableness of its terms.

Investment Advisory Services Agreement Effective January 31, 2012, the Company entered into an agreement with Cigna

Investments, Inc. for the provision of investment advisory services. This agreement was approved by Pennsylvania Insurance Department.

The agreement meets the fair and reasonable standards in 40 P.S. §991.1405(a)(1).

Amended and Restated Consolidated Federal Income Tax Agreement The Company is party to an Amended and Restated Consolidated Federal Income Tax

Agreement by and among Cigna Corporation and its subsidiaries, effective as of January 31, 2012. The Agreement provides for the filing of consolidated income tax returns. This agreement was approved by the Pennsylvania Insurance Department.


Network Access Agreement Cigna health plan affiliates, including Bravo Health Pennsylvania, entered into an

agreement with Connecticut General Life (“CG”) pursuant to which the Cigna health plans are allowed access to provider networks of CG and networks of other health plans that are parties to the agreement. This agreement was effective December 31, 2013. The agreement was approved by the Pennsylvania Insurance Department.



Pharmacy Rebate Affiliate Agreement This agreement is between Bravo Health Pennsylvania, affiliated health plans and

HealthSpring Life and Health Company, to account for pharmacy rebate allocations amongst the parties.


REINSURANCE CEDED

At December 31, 2013 the Company maintained a reinsurance contract directly with RGA Reinsurance Company. The Company’s retention and the reinsurance limits are as follows:

Type of contract: HMO Excess Risk Reinsurance Agreement Reinsurer: RGA Reinsurance Company Reinsured: Bravo Health Pennsylvania, Inc. Effective date: December 1, 2013 Term: 12 months Business covered: Medicare & Medicare Dual Eligible Members – Eligible Services Deductible: $1,000,000 as to each member during the Agreement Term;

$2,000,000 maximum reinsurance coverage payable as to any one member per lifetime

Coinsurance: 100% of Covered Expenses excess of the Specified Deductible

The reinsurance contract contains appropriate insolvency and arbitration clauses and meets the test of risk transfer.

In 2014, this contract was renewed with similar terms.

The Company did not utilize a Reinsurance Intermediary during the execution of this contract.

In addition to the Reinsurance Agreement, the Company and RGA executed another agreement for the same term as the reinsurance agreement giving the Company access to the ROSE and ROSEBUD programs of RGA. These programs provide the Company access, for no or for an immaterial fee, to care management education, pregnancy screenings and services, and access to various service networks if the Company chooses.

ASSUMED

The Company did not assume any business during the examination period. As of the examination date, the Company had no assumed business.


TERRITORY AND PLAN OF OPERATION The Company is licensed in Pennsylvania and New Jersey, and provides managed care

services to approximately 77,000 residents of southeastern and southwestern Pennsylvania and 6,000 residents of New Jersey. The contracts to serve beneficiaries in New Jersey were discontinued effective January 1, 2014. The Company’s membership base includes members that are both community based and, to a lesser extent, institutionalized in nursing facilities.

The Company operates as an approved Medicare Advantage plan through contracts with the Centers for Medicare & Medicaid Services (“CMS”). The Company receives fixed capitation payments, on a per member per month basis, for providing coverage of Medicare Part A (hospital insurance) and Part B (medical insurance). While a Company operating as a Medicare Advantage plan is required to provide at least the same level of benefits as Medicare Part A and Part B, Medicare Advantage plans may establish different out-of-pocket costs, additional coverage, and dictate how services are administered.

The Company offers Medicare Advantage Part C and D (“MA-CD”) coverage exclusively. The Company’s product offerings include Medicare Advantage - Prescription Drug (“MA-PD”) plans, providing Medicare Part C (“A & B”) and Part D benefits in one coordinated product. In addition, the Company offers stand-alone prescription drug plans.

Prescription drug benefits under Medicare Advantage plans vary in terms of coverage levels and out-of-pocket costs. All Part D plans are required by law to offer standard coverage or its actuarial equivalent. In addition to standard coverage plans, the Company offers supplemental benefits in excess of standard coverage.

The Company’s sales and marketing team uses traditional venues, such as direct mail, newspaper and telemarketing to reach its target market. Bravo Health, LLC, through the Amended and Restated Administrative Services Agreement, provides dedicated sales staff to the Company to promote its Medicare Advantage products to individuals. All sales personnel, whether, employed by Bravo Health, LLC or contracted, participate in a rigorous screening process and a comprehensive training program.

Following the acquisition by HealthSpring, Inc. the Company’s operating strategy changed by adopting the HealthSpring provider strategy, which engages physicians by providing information and capabilities to help drive better health outcomes for members. This strategy has continued through the Cigna acquisition as the HealthSpring business operations continued to run as a separate business from the Cigna legacy business. In order to engage physicians, the Company began cultivating risk-sharing relationships, known as Independent Physician Associations (“IPA”s), with providers. Through these IPA arrangements, physicians are provided financial incentives when achieving certain Company established service and financial metrics. Achievement of these metrics provides the Company the ability to meet various regulatory standards, such as medical loss ratio (“MLR”) requirements, as well as service standards, such as STAR ratings.


SIGNIFICANT OPERATING TRENDS The following indicates the growth of the Company during the period covered by this

examination:

ACCOUNTS AND RECORDS

The Company’s records are maintained at its administrative office in Baltimore, Maryland. The record-keeping functions are managed by Bravo Health through an inter-company services agreement. The Company also maintains certain corporate records in its Philadelphia, Pennsylvania and Nashville, Tennessee offices.

All Claims, Membership and Provider Data are maintained on the QNXT application. All clinical data such as Authorizations are maintained in CCMS. There is an automated interface between QNXT and CCMS to update membership and provider data in CCMS and update Authorization data in QNXT. All financial data is maintained in PeopleSoft. Financial data from QNXT to PeopleSoft is managed with manual interfaces.

The Company, at the HealthSpring level, has a defined and documented framework that provides: a consistent company-wide process for IT continuity management, a planning process that creates the rules and structures to document, test and execute the IT disaster recovery and business continuity plans, the identification of critical resources, noting key dependencies, the monitoring and reporting of the availability of critical resources, alternative processing, and the principles of backup and recovery. Change control procedures are in place to ensure that the IT continuity plan is kept up-to-date and continually reflects actual business requirements. HealthSpring’s business continuity plan was tested in 2014 along with the current business impact analysis, the backup strategy, and the change management procedures. Procedures were operating effectively.

PENDING LITIGATION Representation letters from the Company indicate that the Company is a not a party to

any pending litigation whose outcome could have a material effect on its financial condition as of the date of this examination report.

2013 2012 2011 2010 2009

Admitted Assets 263,326,683$ 257,605,695$ 214,888,214$ 182,994,067$ 154,055,722$ Liabilities 161,714,053$ 121,569,514$ 110,584,663$ 102,669,267$ 82,433,440$ Capital and Surplus Funds 101,612,630$ 136,036,181$ 104,303,551$ 80,324,800$ 71,622,282$ Net Premium Income 1,070,171,127$ 1,069,493,822$ 1,023,394,552$ 848,674,705$ 624,455,426$ Benefits to Members 923,702,337$ 880,230,143$ 830,792,378$ 682,263,900$ 486,826,814$ Net Investment Income 3,421,414$ 4,002,073$ 3,583,035$ 2,904,856$ 3,045,322$ Net Income (16,437,458)$ 18,808,787$ 14,267,187$ 19,305,395$ 9,576,465$


FINANCIAL STATEMENTS The financial condition of the Company, as of December 31, 2013, and the results of its

operations for the five-year period under examination, is reflected in the following statements:

Comparative Statement of Assets, Liabilities, Surplus and Other Funds; Comparative Statement of Income; Comparative Statement of Capital and Surplus; Comparative Statement of Cash Flow


Comparative Statement of Assets, Liabilities, Surplus and Other Funds As of December 31,

2013 2012 2011 2010 2009

Bonds 183,470,272$ 143,711,349$ 139,877,275$ 142,086,052$ 58,975,201$ Cash, cash equivalents and short-term investments 18,576,677 64,478,385 29,819,328 14,622,008 39,888,337 Receivable for securities 1,172,105 0 0 0 0 Subtotal, cash and invested assets 203,219,054 208,189,734 169,696,603 156,708,060 98,863,538 Investment income due and accrued 1,738,169 1,131,025 1,034,544 1,095,820 633,584 Premiums and considerations: Uncollected premiums and agents' balances in course of collection 28,760,835 25,717,403 25,092,182 1,354,726 191,256 Amounts receivable relating to uninsured plans 0 0 1,496,596 0 0 Current federal and foreign income tax recoverable and interest thereon 116,513 2,308,781 4,623,813 0 0 Net deferred tax asset 9,618,952 11,598,941 3,779,380 3,933,548 1,296,182 Electronic data processing equipment and software 0 0 0 0 181,368 Receivable from parent, subsidiaries and affiliates 5,044,449 0 0 1,859,590 231,759 Health care and other amounts receivable 10,986,490 7,954,033 8,128,064 18,042,323 52,658,035 Aggregate write-ins for other than invested assets 3,842,221 705,778 1,037,032 0 0 Total 263,326,683$ 257,605,695$ 214,888,214$ 182,994,067$ 154,055,722$

2013 2012 2011 2010 2009Claims unpaid 112,227,712$ 98,722,184$ 96,818,556$ 82,032,735$ 70,224,102$ Accrued medical incentive pool and bonus amounts 5,658,094 4,688,565 2,409,527 2,494,976 1,580,883 Unpaid claims adjustment expenses 1,928,755 1,724,729 1,745,165 1,619,708 2,745,945 Aggregate health policy reserves 23,308,580 9,544,592 1,379,910 52,110 215,920 General expenses due or accrued 266,834 1,074,862 909,931 5,125,574 6,954,904 Current federal and foreign income tax payable and interest thereon 0 0 0 3,385,832 0 Amounts withheld or retained for the account of others 776,369 376,033 54,228 0 0 Amounts due to parent, subsidiaries and affiliates 14,395,018 1,945,902 4,127,023 0 0 Liability for amounts held under uninsured plans 3,038,079 3,349,133 2,996,812 6,937,644 35,044 Aggregate write-ins for other liabilities 114,612 143,512 143,512 1,020,688 676,642 Total liabilities 161,714,053 121,569,512 110,584,664 102,669,267 82,433,440 Common capital stock 1 1 1 1 1 Gross paid in and contributed surplus 80,254,721 80,254,721 75,254,721 80,254,721 121,254,721 Unassigned funds (surplus) 21,357,908 55,781,459 29,048,829 70,078 (49,632,440) Total capital and surplus 101,612,630 136,036,181 104,303,551 80,324,800 71,622,282 Totals 263,326,683$ 257,605,693$ 214,888,215$ 182,994,067$ 154,055,722$


Comparative Statement of Income For the Year Ended December 31,

2013 2012 2011 2010 2009Net premium income 1,070,171,127$ 1,069,493,822$ 1,023,394,552$ 848,674,705$ 624,455,426$ Aggregate write-ins for other health care related revenues 0 0 (2,303,880) 0 0 Total revenues 1,070,171,127 1,069,493,822 1,021,090,672 848,674,705 624,455,426 Hospital/medical benefits 792,331,759 757,313,749 692,110,199 581,360,223 434,124,938 Other professional services 14,181,761 9,090,819 28,715,865 14,306,576 1,963,516 Emergency room and out-of-area 29,730,737 28,674,275 26,150,489 15,720,721 10,588,885 Prescription drugs 77,540,503 76,194,600 80,758,521 67,105,917 38,082,193 Incentive pool, withhold adjustments and bonus amounts 9,917,578 8,956,700 3,057,304 3,770,463 2,067,282 Subtotal (hospital and medical) 923,702,337 880,230,143 830,792,378 682,263,900 486,826,814 Net reinsurance recoveries 0 6,850 138,533 74,577 167,382 Total hospital and medical 923,702,337 880,223,293 830,653,845 682,189,323 486,659,432 Claims adjustment expenses, including cost containment expenses 27,798,230 24,388,554 14,617,488 15,053,908 7,163,272 General administrative expenses 130,133,029 139,889,369 153,564,076 117,904,802 109,101,050 Increase in reserves for life accident and health contracts 11,512,375 0 0 0 0 Total underwriting deductions 1,093,145,971 1,044,501,216 998,835,409 815,148,033 602,923,754 Net underwriting gain or (loss) (22,974,844) 24,992,606 22,255,263 33,526,672 21,531,672 Net investment income earned 3,421,414 4,002,073 3,583,035 2,904,856 3,045,322 Net realized capital gains or (losses) 22,747 297,805 38,962 297,569 (219,359) Net investment gains or (losses) 3,444,161 4,299,878 3,621,997 3,202,425 2,825,963 Net gain or (loss) from agents' or premium balances charged off (2,489,541) (2,480,841) 0 0 0 Aggregate write-ins for other income or expenses 0 0 (96,391) 0 0 Net income or (loss) before federal income taxes (22,020,223) 26,811,643 25,780,869 36,729,097 24,357,635 Federal income taxes incurred 5,582,765 8,002,856 11,513,682 17,423,702 14,781,170 Net income (loss) (16,437,458)$ 18,808,787$ 14,267,187$ 19,305,395$ 9,576,465$


Comparative Statement of Capital and Surplus For the Year Ended December 31,


Comparative Statement of Cash Flow For the Year Ended December 31,

2013 2012 2011 2010 2009Cash from Operations

Premiums collected net of reinsurance 1,066,889,767$ 1,077,033,283$ 998,681,016$ 847,347,425$ 624,355,912$ Net investment income 4,512,395 6,055,668 5,668,711 3,874,898 3,281,956 Total 1,071,402,162 1,083,088,951 1,004,349,727 851,222,323 627,637,868 Benefit and loss related payments 912,258,637 874,892,219 807,556,447 638,141,255 514,681,423 Commissions, expenses paid and aggregate write-ins for deductions 159,396,075 160,304,193 159,395,973 129,011,681 115,244,883 Federal and foreign income taxes paid (recovered) (7,762,784) 5,848,180 19,544,307 14,198,099 14,781,170 Total deductions 1,063,891,928 1,041,044,592 986,496,727 781,351,035 644,707,476 Net cash from operations 7,510,234 42,044,359 17,853,000 69,871,288 (17,069,608)

Cash from InvestmentsProceeds from investments sold, matured or repaid: Bonds 41,071,340 62,485,469 30,469,327 32,972,517 19,253,288 Net gain or (loss) on cash, cash equivalents and short term investments (1,261) 0 1,036 0 0 Miscellaneous proceeds 0 0 0 0 213,008 Total investment proceeds 41,070,079 62,485,469 30,470,363 32,972,517 19,466,296 Cost of investments acquired (long-term only): Bonds 82,492,128 68,011,458 30,226,045 117,057,848 18,851,645 Miscellaneous applications 1,172,105 0 0 0 213,008 Total investments acquired 83,664,233 68,011,458 30,226,045 117,057,848 19,064,653 Net cash from investments (42,594,154) (5,525,989) 244,318 (84,085,331) 401,643

Cash from Financing and Miscellaneous SourcesCash provided (applied): Dividends to stockholders 18,000,000 0 5,000,000 41,000,000 40,000,000 Other cash provided or (applied) 7,182,212 (1,859,313) 2,100,002 29,947,714 30,747,397 Net cash from financing and miscellaneous sources (10,817,788) (1,859,313) (2,899,998) (11,052,286) (9,252,603)

Reconciliation of cash and short-term investments:Net change in cash and short-term investments (45,901,708) 34,659,057 15,197,320 (25,266,329) (25,920,568) Cash and short-term investments: Beginning of the year 64,478,385 29,819,328 14,622,008 39,888,337 65,808,905 End of the year 18,576,677$ 64,478,385$ 29,819,328$ 14,622,008$ 39,888,337$


SUMMARY OF EXAMINATION CHANGES No changes to the Company’s financial statements were necessary as a result of this

examination.

NOTES TO FINANCIAL STATEMENTS

INVESTMENTS As of December 31, 2013, the Company’s invested assets were distributed as follows:

The Company’s bond and short-term investment portfolio had the following quality and

maturity profiles:

As of December 31, 2013, total Cash & Investments made up 77.17% of total admitted assets for the Company. Throughout the exam period, the Bonds and Cash & Short Term Investment accounts consistently represented a significant portion of the Company’s total assets. Though year-over-year balances of Bonds and Cash & Short Term Investments increased, following the same trend as total admitted assets, the overall percentage of Cash & Investments has remained relatively constant, with any change in asset allocation attributable to changes in the company’s investment and liquidity management strategies.

Amount PercentageBonds 183,470,272$ 90.3%Cash (9,131,399) -4.5%Cash equivalents 1,099,913 0.5%Short-term investments 26,608,163 13.1%Receivable for securities 1,172,105 0.6%Totals 203,219,054$ 100.0%

NAIC Designation Amount Percentage1 - highest quality 112,824,880$ 53.4%2 - high quality 96,931,278 45.9%3 - medium quality 1,422,188 0.7%Totals 211,178,346$ 100.0%

Years to Maturity Amount Percentage1 year or less 47,568,235$ 22.5%2 to 5 years 117,968,257 55.9%6 to 10 years 43,865,426 20.8%11 to 20 years 1,723,790 0.8%over 20 years 52,638 0.0%Totals 211,178,346$ 100.0%


The Company does not have any investments in subsidiaries, affiliates or controlled entities within its investment portfolio.

For the period under examination, the Company experienced positive operating results from its investment portfolio. There were no adverse developments identified within the Company’s investment operations.

The Company has a written investment policy, documented within the Investment Advisory Agreement with its affiliated investment advisor, Cigna Investments, Inc., as required by 40 P.S. § 504.1(c), and is following this policy relative to the maintenance of its investment portfolio and asset allocations.

However, the examiners review of the meeting minutes of the Board of Directors, for the examination period, disclosed that the Board of Directors have not reviewed and updated the Investment Policy at least annually, which is not in compliance with 40 P.S. § 504.1(c).

It is recommended that the Board of Directors review and update the Investment Policy on at least an annual basis to ensure compliance with 40 P.S. § 504.1(c).

In addition to the investment activity, the Examiners reviewed the custodial agreements between the Company and custodians J.P. Morgan and BNY Mellon. During this review, it was noted that while the provisions contained in the current J.P. Morgan agreement are in compliance with 31 Pa. Code § 148a.3(b), it was noted that there are a few required provisions that are not included in the agreement therefore the agreement is not in compliance. Further, the review of the agreement with BNY Mellon was determined not to be in compliance with 31 Pa. Code § 148a.3(b).

It is recommended that the Company amend these agreements to include all the required provisions to comply with 31 Pa. Code § 148a.3(b). See the comments under “Recommendations – Current Examination” below for the specific provisions missing from each agreement.

POLICYHOLDER AND CLAIM RESERVES As of December 31, 2013 the Company reported claims unpaid of $112,227,712, accrued

medical incentive pool and bonus amounts of $5,658,094, unpaid claims adjustment expenses of $1,928,755, and aggregate health policy reserves of $23,308,580 in its 2013 Annual Statement.

For the years 2009 to 2013, the Company’s Reserves were certified by the Company’s Appointed Actuary, David Terry, FSA, MAAA.

Through its contract examiner, Baker Tilly Virchow Krause, LLP, the Pennsylvania Insurance Department utilized the services of Lewis & Ellis, Inc. (“L&E” or “examining actuaries”), to assist in the financial examination of the Company. L&E evaluated the reasonableness of the liabilities recorded by the Company for claims unpaid, accrued medical incentive pool and bonus amounts, unpaid claims adjustment expenses, and aggregate policy/claim reserves as of December 31, 2013.


The examining actuaries performed the following procedures:

(1) Validated that the actuarial analysis addressed all of the Company’s claim liabilities.

(2) Confirmed that the reserve calculations did not include any material computational errors.

(3) Confirmed that the statement of Actuarial Opinion followed NAIC Annual Statement instructions.

The examining actuaries did not identify any material issues while performing these procedures.

Based on their review of the actuarial support, L&E believes that the Company’s Appointed actuary used reasonable methods to arrive at selected unpaid claim reserves. L&E also noted there was a favorable runoff experience subsequent to December 31, 2013. The actuaries concluded the overall selected ratio of unpaid claims adjustment expenses to claims unpaid reserves is reasonable.

Procedures were performed to validate the amounts for completeness and accuracy. No material discrepancies were noted or detected in the claim reserves reported by the Company as of December 31, 2013.

Based on the exam procedures performed, the Department concurred with the Company’s Appointed Actuary’s conclusion that the Company’s December 31, 2013 reserves make a reasonable provision for all actuarial reserves and related actuarial values which ought to be established. The Policyholder and Claim Reserves were accepted as reported.

PREMIUM INCOME As a Medicare Advantage Plan, net premium income is due monthly from CMS and is

recognized as premium revenue during the period in which the Company is obligated to provide services to members. Premiums collected in advance are deferred and recorded as advance payments.

Medicare Advantage premium revenue is subject to adjustment based on the health risk of the plan members. This adjustment is determined through CMS risk adjustment payment methodology, which requires plans to capture, collect, and report diagnosis code information to CMS. Risk adjustment settlement occurs twice during a given fiscal year; once during the third quarter by updating risk scores for the current year based on prior year dates of service (the Initial CMS Settlement) and subsequent to year end (the Final Settlement). The Company estimates and records on a monthly basis both the Initial CMS Settlement and the Final CMS Settlement, periodically updating as necessary as additional diagnosis code information is reported to CMS and adjusted to actual amounts when adjustment settlements are received from CMS, or the Company receives notification from CMS of the settlement amounts.

As a result of the variability of factors, including the plan risk scores, that determine such estimations, the actual amount of CMS’s retroactive risk premium settlement adjustment could be materially different than the Company’s estimates. The Company’s risk adjustment payments are subject to review and audit by CMS, which can potentially take several years to resolve. There can be no assurance that any retroactive adjustment to previously recorded income or expenses will not have a material effect on future net income.


The Company recognizes net premium income for the Part D prescription drug plan payments received from CMS for which it assumes risk. Payments from CMS include amounts for premiums, amounts for risk corridor adjustments and amounts for reinsurance and low-income cost subsidies. The low-income subsidies, for which the Company assumes no risk, are accounted for as amounts receivable relating to uninsured plans or liability for amounts held under uninsured plans on the balance sheet. Part D premium revenue is recognized ratably over the contract period.

SUBSEQUENT EVENTS Bravo Health, LLC made a capital contribution to the Company in the amount of

$10,000,000 to fund operations and working capital needs in accordance with the organization's cash management strategy. Notice of this transaction was filed with the Pennsylvania Insurance Department on February 20, 2014, and approved on March 3, 2014. The capital contribution was paid to Bravo Health Pennsylvania, Inc. upon approval by the Pennsylvania Insurance Department.

Subsequent to the examination date, the Company executed Independent Practice Association (“IPA”) arrangements with Broad Spectrum and Ben Franklin on February 1, 2015 and January 1, 2015, respectively.

Significant turnover and change in the Board composition occurred during and subsequent to the examination period. As of December 31, 2014, the Board of Directors for the Company is comprised of the three (3) primary members; Mr. Dawson, Mr. Morris and Mr. Sanders. Additionally, the Company’s Board of Directors maintained a Member Director, Mr. Mazzagatti. The Company’s Board composition changed significantly, subsequent to the examination date. See below for the Board membership as of the date of this Report:

Name Position/Primary Occupation Robert Dawson Executive Vice President & Segment Lead, Cigna Matthew Morris Vice President – Segment Operations, Cigna Ryan McGroarty Chief Financial Officer, Cigna-HealthSpring Donald Mazzagatti Member Director Dorothy Rex Member Director

We were advised that additional changes will occur effective May 1, 2015. Robert Dawson and Matthew Morris will be replaced by Casey McKeon and Brent Jason Sanders. Mr. McKeon will assume the responsibilities of the Chairman of the Board.


In addition to the changes to the Board of Directors, the Company has experienced significant departures and turnover at the management level. See the following changes occurring within the Company’s management subsequent to the examination date, December 31, 2013:

Position December 31, 2013 Current

President James P. Foley Robert L. Dawson

Chief Executive Officer Matthew S. Morris Matthew S. Morris

Co-Chief Executive Officer Scott C. Huebner

Chief Financial Officer Brian D. Setzer Ryan B. McGroarty

Vice President & Secretary Gregory J. Allen Gregory J. Allen

Medical Director Dirk O. Wales, MD Dirk O. Wales, MD

Vice President & Treasurer Barry R. McHale Scott R. Lambert

Vice President & Assistant Treasurer Scott R. Lambert

Assistant Secretary Rhiannon A. Bernier Rhiannon A. Bernier

Chief Actuary David L. Terry David L. Terry

Chief Operating Officer John L. Biggers John L. Biggers

Vice President Robert L. Dawson

Assistant Treasurer Jumana N. Siddiqui Jumana N. Siddiqui

Assistant Secretary Anna Krishtul Anna Krishtul

Compliance Officer Richard A. Appel Richard A. Appel

Vice President of Finance Brett Sanders Brett Sanders

Vice President & Assistant Treasurer Maureen H. Ryan Maureen H. Ryan

Assistant Secretary Kevin J. Oleksak Kevin J. Oleksak

Vice President of Operations Casey P. McKeon Casey P. McKeon

President – Government Pharmacy Services

David B. Holliday


In addition to the changes documented above, the Company disclosed that subsequent to the date of this report two additional changes to the management team will occur. As of March 30, 2015, David Terry retired from the organization and was removed as Chief Actuary. Gregory Malone was appointed in Mr. Terry’s place with the title of Appointed Actuary as of that date. As a result of Robert Dawson’s retirement, the following additional changes will take effect on May 1, 2015:

• Casey McKeon’s title will change form Vice President of Operations to President • Brent Sanders’ title will change from Vice President of Finance to Vice President

RECOMMENDATIONS

PRIOR EXAMINATION The prior examination report contained the following recommendations:

1. It is recommended the Company comply with Pennsylvania Insurance Company Law, 40 P.S.§ 991.1405(c)(4.1): which shall have responsibility for recommending candidates to be nominated by the board of directors, in addition to any other nominations by voting shareholders or policyholders, for election as directors by voting shareholders or policyholders, evaluating the performance of officers deemed to be principal officers of the insurer and recommending to the board of directors the selection and compensation of the principal officers.

As of December 31, 2013 the Company was in compliance.

2. It is recommended that the Company comply with its audit committee charter which states that there will be three outside directors as members.


3. It is recommended that the Company maintain shareholder minutes and properly record the election of the Board of Directors in the future as required by their By-laws and Title 15 § 1725.


4. It is recommended that the Company’s Board of Directors review and approve investment transactions and reinsurance transactions to comply with Pennsylvania Insurance Company Law 40 P.S. § 991.1405 (a)(1)(iii).


5. It is recommended that the Company’s Board of Directors establish the salaries of the major officers of the Company in the future in accordance with the Company’s By-laws.


6. It is recommended that the Company properly report changes to its Articles of Incorporation and By-laws within future Annual Statements.



7. It is recommended that language be included within the intercompany written agreement framework to address the proper accounting and application of plan payments to the respective subsidiaries, as well as a recommendation to address the proper resolution of erroneous cash transfers between subsidiaries according to Pennsylvania Insurance Company Law, 40 P.S. § 991.1405(a)(1).


8. It is recommended that the Company report the prepaid expenses which is included in line 21, “Receivable from Parent, Subsidiaries, and Affiliates” as non-admitted assets and charged against unassigned funds (surplus) in future quarterly and annual statements to comply with SSAP No.29.


9. It is recommended that the Company amend the current administrative services agreement to include a more clearly defined settlement provision and or modify accounting procedures to ensure timely and proper settlement of intercompany expense balances, on a monthly basis and particularly at the end of reporting periods in accordance with good business practices.


10. It is recommended that the Company forward all IDS agreements that were not previously filed along with any new agreements, subsequent to December 31, 2008, to both the Department and the Pennsylvania Department of Health in accordance with Pennsylvania Insurance Law, 40 PS § 1558, 31 Pa Code § 301.312 (a) and 31 Pa Code § 301.313 for filings upon contract changes.


11. It is recommended that the Company properly list its IDS vendors on "Exhibit 7 Part 2 - Summary Of Transactions With Intermediaries" of the Annual Statement in the future to come into compliance with Pennsylvania Insurance Company law 40 P.S. § 443(a)(2).


12. It is recommended that as a matter of good business practice, that the Company fully develop, perform and document regular (at least annually) complete testing of its Disaster Recovery / Business Continuity Plan. In addition, expansion and updating the plan should be documented as an on-going process.


13. It is recommended that the Company ensure that all of its funds are maintained within the Commonwealth of Pennsylvania as required by 31 Pa. Code § 301.65(a).


14. The Company has a custodian agreement with US Bank, the following recommendations relate to this agreement:

It is recommended that the current custody agreement with US Bank, which is with Bravo Health Inc. be replaced with a separate custody agreement prepared between U.S. Bank and Bravo Health Pennsylvania, Inc. in accordance with 31 Pa. Code § 148a.3(a)(1)


It is recommended that the Company remove certain language in paragraph 12.3 of the Custodial Agreement since it is in violation of 31 Pa. Code §148 (b)(2).

It is recommended that the following language be included in the Custodian Agreement as required by 31 Pa. Code §148 (b) (12):

The custodian shall provide the Department with written notice if the agreement is terminated or if 100% of the assets are withdrawn from one or more custodial accounts established under the agreement. The notice shall be directed to the attention of the Deputy Insurance Commissioner for the Office of Regulation of Companies and provided within 24 hours of the custodian's receipt of the insurer's notice terminating the agreement or within 24 hours of the withdrawal of 100% of the assets in one or more custodial accounts established under the agreement. The notice shall include the date of termination or 100% withdrawal and a list of the securities held on that date.

It is recommended that the Company include the following language in the Custodian Agreement as required by 31 Pa. Code §148 (b)(9):

The Custodian shall provide a statement that it has secured and will maintain adequate insurance protection as required by the custodian’s banking regulator to cover its duties and activities as custodian of the insurer’s assets.

It is recommended that the Company replace the language in paragraph 14 of the Custodian Agreement with language as specified in 31 Pa. Code §148 (b)(10).

The custodian shall be obligated to indemnify the insurer for any loss of securities occasioned by the negligence or dishonesty of the custodian's officers or employees, or by burglary, robbery, holdup, theft or mysterious disappearance, including loss by damage or destruction. The agreement may provide that the custodian will not be liable for failure to take an action required under the agreement in the event and to the extent that the taking of the action is prevented or delayed by war (whether declared or not and including existing wars), revolution, insurrection, riot, civil commotion, act of God, accident, fire, explosion, stoppage of labor, strikes or other differences with employees, laws, regulations, orders or other acts of any governmental authority, or any other cause whatever beyond its reasonable control.

As of December 31, 2013, the Company was no longer a party to this agreement. The Company executed a new custodial agreement with JP Morgan effective December 12, 2012. However, all provisions required by P31 Pa. Code §148a were not included in the agreement. See “Recommendations - Current Examination” below.

15. The Company has a custodian agreement with BNY Mellon, the following recommendations relate to this agreement:

It is recommended that the current custody agreement with BNY Mellon Bank, which is with Bravo Health Inc. be replaced with a separate custody agreement prepared between BNY Mellon Bank and Bravo Health Pennsylvania, Inc. in accordance with 31 Pa. Code §148a.3(a)(1).


It is recommend that the Company replace the wording in the Custodial Agreement (Paragraph 7) to conform with 31 Pa. Code §148a.3(b)2 which states that the Custodian may not have a security interest or lien in any securities held under the agreement.

It is recommended that the Company include the following language as required by 31 Pa. Code §148a.3(b)(12):

The custodian shall provide the Department with written notice if the agreement is terminated or if 100% of the assets are withdrawn from one or more custodial accounts established under the agreement. The notice shall be directed to the attention of the Deputy Insurance Commissioner for the Office of Regulation of Companies and provided within 24 hours of the custodian’s receipt of the insurer's notice terminating the agreement or within 24 hours of the withdrawal of 100% of the assets in one or more custodial accounts established under the agreement. The notice shall include the date of termination or 100% withdrawal and a list of the securities held on that date.

It is recommended that the Company included the following language as required by 31 Pa. Code §148a.3(b)(9):

The Custodian shall provide a statement that it has secured and will maintain adequate insurance protection as required by the custodian’s banking regulator to cover its duties and activities as custodian of the insurer’s assets.

It is recommended that the Company replace the following language in the opening sentence of paragraph 12 as required by 31 Pa. Code §148a.3(b)(10):

The custodian shall be obligated to indemnify the insurer for all loss of securities occasioned by the negligence or dishonesty of the custodian’s officers or employees, or by burglary, robbery, holdup, theft or mysterious disappearance, including loss by damage or destruction.

It is recommended that the Company replace the following language in the opening sentence of paragraph 12(c) as required by 31 Pa. Code §148a.3(b)(10):

The custodian will not be liable for failure to take an action required under the agreement in the event and to the extent that the taking of the action is prevented or delayed by war (whether declared or not and including existing wars), revolution, insurrection, riot, civil commotion, act of God, accident, fire, explosion, stoppage of labor, strikes or other differences with employees, laws, regulations, orders or other acts of any governmental authority or any other cause whatever beyond its reasonable control.

As of December 31, 2013, the Company’s agreement with BNY Mellon was not in compliance with 31 Pa. Code §148a.3(a) & (b). See “Recommendations - Current Examination” below.


16. It is recommended that the Company acquire and forward to the Insurance Department proper custodial affidavits for both its US Bank and BNY Mellon Custodian Accounts in accordance with 31 Pa. Code § 148.3 (b) (17).

As of December 31, 2013, the Company was in compliance.

17. It is recommended that the Company properly report the balance for Electronic Data Processing Equipment and Software in accordance with SSAP 16, Electronic Data Processing Equipment and Software, paragraphs 2 and SSAP No. 4, Assets and Nonadmitted Assets, and SSAP 79, Electronic Data Processing Equipment and Software, paragraph 3 and SSAP No. 19, Furniture, Fixtures and Equipment; Leasehold Improvements Paid by the Reporting Entity as Lessee; Depreciation of Property and Amortization of Leasehold Improvements.”; as well as Pennsylvania Insurance Company Law, 40 P.S. § 443 (a)(2) in future annual statements.


18. It is recommended that the Company properly elect its President in the future in accordance with its By-laws.


CURRENT EXAMINATION As a result of the current examination the following recommendations are being made:

1. It is recommended that the Company, through the actions of its Board of Directors, ensure that its designated audit committee meets the requirements of 40 P. S. § 991.1405. (See “Board of Directors”, page 5 and 6).

2. It is recommended that the Company comply with its Bylaws and 40 P.S. § 1557 by changing the composition of the Board to include at least one third Subscriber Directors. (See “Board of Directors”, page 6 and 7).

3. It is recommended that the Company amend its Administrative Services Agreement payment exhibit to comply with 40 P.S. § 991.1405(a)(1)(i-iii) and provide the Department with documentation for fairness and reasonableness of its terms. (See “Service and Operating Agreements – Amended and Restated Administrative Services Agreement”, page 9).

4. It is recommended that the Board of Directors review and update the Investment Policy on at least an annual basis to ensure compliance with 40 P.S. § 504.1(c). (See “Investments”, page 18 and 19).

5. It is recommended that the Company amend the custodial agreements to include all the required provisions to comply with PA 31 § 148a.3(b). Specifically, it is recommended that that the Company replace the wording in the Custodial Agreement & Rider (Paragraph 9.1(b)) to conform with PA 31 § 148a.3(b)(12) which states that the custodian shall notify the Commissioner within 24 hours of receipt of notice of termination or withdrawal of 100% of the assets in one or more of the accounts. It is further recommended that the Company replace the wording in the Custodial Agreement (Paragraph 7) to conform with the PA 31 § 148a.3(b)(2) which states that the Custodian


may not have a security interest or lien in any securities held under the agreement. (See "Investments", page 19).

CONCLUSION

As a result of this examination, the financial condition of Bravo Health Pennsylvania, Inc. as of December 31 , 2013, was determined to be as follows:

Amount Percentage

Admitted assets $ 263,326,683 100.0 %

Liabilities $ 161 ,714,053 62.1 % Capital and Surplus 101 ,612,630 37.9 % Total liabilities, capital and surplus $ 263,326,683 100.0 %

Since the previous examination, made as of December 31, 2008, the Company's assets have increased by $107,168,423, its liabilities have increased by $76,714,059, and its surplus has increased by $30,454,364.

The Information Technology portion of the exam was conducted by Phil Schmoyer, CFE, CISA and Emily Cheng, CPA, CFE of Baker Tilly Virchow Krause, LLP. The financial examination was conducted Emily Cheng, CPA, CFE, Jennifer Cox, Lester C. Schott, CPA, CFE, Philip Talerico, CPA and Phil Schmoyer, CFE, CISA of Baker Tilly Virchow Krause, LLP, with the latter in charge.

~·~DTTe B. Szady, C ~ &:;;:;u Jte:::;•tions David R. Evans,

1 JE

Examination Manager bl

se~~~~~ Examiner-in-Charge

The CFE designation has been conferred by an organization not affiliated with the federal or any state government However the CFE designation is the only designation recognized by the NAlC

for the purposes of directing statutory Association examinations of insurance companies

Examination Report Template...Brian Setzer . David Terry . James Yablecki . Donna F. Zarcone (Chair)...

Documents

Transcript of Examination Report Template...Brian Setzer . David Terry . James Yablecki . Donna F. Zarcone (Chair)...