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FARMINGTON MUTUAL FIRE INSURANCE COMPANY

 

REPORT OF EXAMINATION

AS OF

DECEMBER 31, 2006

 

TABLE OF CONTENTS

SCOPE OF EXAMINATION ...................................................................................................................1

HISTORY AND ORGANIZATION ..........................................................................................................2

CORPORATE RECORDS ........................................................................................................................2

MANAGEMENT ......................................................................................................................................2

LINES OF BUSINESS AND TERRITORY ..............................................................................................2

FIDELITY BOND ..................................................................................................................................2

UNDERWRITING RULES AND PRACTICES .........................................................................................3

REINSURANCE .....................................................................................................................................3

ACCOUNTS AND RECORDS .................................................................................................................3

FINANCIAL STATEMENTS ...................................................................................................................3

NOTES TO FINANCIAL STATEMENTS .................................................................................................6

COMMENTS AND RECOMMENDATIONS .............................................................................................7

 

I hereby certify that the attached report of examination dated March 21, 2007 shows the condition and financial affairs of

FARMINGTON MUTUAL FIRE INSURANCE COMPANY

located in West Farmington, Maine as of December 31, 2006 and has been filed in the Bureau of Insurance as a public document.

 

  This report has been reviewed.


_______________________
Stuart E. Turney, CPA
Director of Financial Affairs and Solvency

Dated this _______ day of ____________, 2007

 

STATE OF MAINE
BUREAU OF INSURANCE

It is hereby certified that the annexed report of examination for

Farmington Mutual Fire Insurance Company

has been compared with the original on file in this bureau and that it is a correct transcript there from and of the whole of said original.

 

  In witness whereof, I have hereunto set my
hand and affixed the official seal of this
Office at the City of Gardiner this
__________ day of _____________, 2007

 


_________________________
Eric A. Cioppa
Acting Superintendent of Insurance

 

 

March 21, 2007

Honorable Eric A. Cioppa,
Acting Superintendent
Maine Bureau of Insurance
34 State House Station
Augusta, ME 04333-0034

Dear Sir:

In accordance with your instructions and pursuant to statutory provisions, an examination had been made on the condition and financial affairs of

FARMINGTON MUTUAL FIRE INSURANCE COMPANY

located in West Farmington, Maine (hereinafter, “the Company”). The following report is respectfully submitted.

SCOPE OF EXAMINATION

The procedures in this examination considered the two year period from January 1, 2004 to the close of business on December 31, 2005 and included an examination for the one year period ended December 31, 2006. In accordance with the Examiner’s Handbook, the examination included significant transactions and/or events occurring subsequent to December 31, 2006 that were noted during the course of this examination.

The examination consisted of a survey of the Company’s business policies, review of the Articles of Incorporation, Bylaws, operational practices, Board of Directors’ meeting minutes, verification of assets and a determination of liabilities at December 31, 2006 in conformity with statutory accounting practices, NAIC guidelines and the laws, rules and regulations prescribed or permitted by the Maine Bureau of Insurance, where applicable.

The accompanying financial statements present fairly, in all material respects, the Company’s financial position as of December 31, 2006 and results of operations for the period then ended. The financial statements as of December 31, 2005 and December 31, 2004, prepared by management, are unexamined and presented for comparative purposes only.

HISTORY AND ORGANIZATION

The Company was incorporated in 1895 and commenced writing business during that year. The Company merged with Wilton Mutual Fire Insurance Company in 1972 with the successor company being Farmington Mutual Fire Insurance Company.

CORPORATE RECORDS

As noted in the examination process, the Company’s Articles of Incorporation, Bylaws, and Minutes of the Board of Directors’ meetings held during the period under examination were reviewed.

There was no documentation in the Annual Meeting minutes authorizing the change made to the amount of the policy fee. There was documentation in the Board of Directors’ Meeting minutes of this change. The Company is in non-compliance with Article XII of its Bylaws which subjects any changes to the Bylaws to be put forth in the Annual Meeting, or any Special Meeting called for that purpose. (See Comment and Recommendation #1)

MANAGEMENT

Management of the Company is vested in a seven-member Board of Directors. The following are the duly elected members of the Board of Directors and Officers serving as of December 31, 2006.

Directors

Rebecca Houle David Gould
Adrian Harris Vivian Kennedy
Laura T. Kwon Donna L. Lane

Paul Fredric

 

Officers:

Donna L. Lane President
Adrian Harris Vice President
Laura T. Kwon Secretary & Treasurer

LINES OF BUSINESS AND TERRITORY

The Company is authorized to issue fire and lightning policies in the State of Maine.

FIDELITY BOND

The Company is protected as a named insured under a fidelity bond in the amount of $100,000. The bond amount was tested with regard to NAIC standards and was determined to be adequate. The Company also has Directors and Officers liability insurance.

UNDERWRITING RULES AND PRACTICES

The Company issues fire and lightning policies for a three year period under an assessment plan. The Company requires every insured to provide a premium note to the Company. The amount of the note is determined based on risk and is currently 10% - 15% of the insured amount. The Company charges premiums based on the amount of the note and assesses members based on the insured amount.

Policies in-force as of December 31, 2006 were overstated by 75% and the face value of the premium notes was overstated by 67%. The misstated amounts were reported on Schedule C in the Annual Statement. (See Comment and Recommendation #2)

REINSURANCE

The Company had two reinsurance contracts in-force during the period under examination. The first cover, a facultative reinsurance contract, provides for the Company to cede up to $100,000, and more if accepted by the reinsurer, above a Bureau of Insurance pre-approved retention, which is presently $22,000. The Company is currently ceding insurance written over $22,000 to this reinsurer. The second cover, an aggregate reinsurance contract, allows for reinsurance of 90% of the ultimate net loss in excess of an amount equal to the greater of $7,700 or $7.00 per $1,000 of average net in-force insurance. The Company is in non-compliance with the facultative reinsurance agreement by ceding reinsurance on property specifically excluded in that agreement. (See Comment and Recommendation #3)

The Company assumes reinsurance from another mutual fire assessment company in the amount of 50% of the insured amount up to a maximum of $5,000 per risk.

ACCOUNTS AND RECORDS

The Company records its books and records manually, primarily on a cash basis, and the books and records are maintained at the workplace of the Secretary/Treasurer. The Annual Statements are prepared on a cash basis.

FINANCIAL STATEMENTS

The accompanying financial statements properly present in all material respects, the Company’s statutory financial position as of December 31, 2006 and results of operations for the period then ended. The financial statements for December 31, 2005 and December 31, 2004 are unexamined and are presented for comparative purposes only.

BALANCE SHEET

at

  12/31/2006 12/31/2005
(unexamined)
12/31/2004
(unexamined)
Assets      
Cash & Investments (Note 1) $ 182,780 $ 210,600 $ 203,478
Total Assets 182,780 210,600 203,478
       
Liabilities      
Unearned Premium (Note 2) 6,479 5,942 6,520
Misc.     (569)
Total Liabilities 6,479 5,942 5,951
       
Policyholder Surplus 176,301 204,658 197,527
Total Liabilities & Policyholders Surplus $ 182,780 $ 210,600 $ 203,478

INCOME STATEMENT

for the years ended

  12/31/2006 12/31/2005
(unexamined)
12/31/2004
(unexamined)
Revenue      
Net Premium Income $ 13,104 $ 10,882 $ 12,462
Policy fees 300 135 195
Other Income - 12,407 -
Investment Income 6,532 4,274 2,971
Total Revenue 19,936 27,698 15,628
       
Expenses      
Agents' Compensation 2,238 1,575 2,085
Field Supervisory Expenses 392 701 752
Salaries & Fees 8,037 8,080 8,160
Rent 1,200 600 600
General Office Maintenance 279 760 622
Furniture & Fixtures 800 - 300
Inspections, Surveys, Reports - - 181
Taxes, Licenses & Fees 3,093 3,197 3,188
Postage & Telephone 139 764 768
Legal Expenses 30 10 10
Advertising & Printing 140 137 134
Insurance 3,529 4,753 5,132
Net Paid Losses 27,879 - 27,634
Total Expenses 47,756 20,577 49,566
       
Net Income $ (27,820) $ 7,121 $ (33,938)
       
SURPLUS ACCOUNT RECONCILIATION
       
  12/31/2006 12/31/2005 12/31/2004
Surplus - Beginning 204,658 197,527 231,527
Net Income (27,820) 7,122 (33,937)
Change in Unearned Premium (537) 578 (632)
Misc Surplus Adjustment   (569) 569
Surplus - Ending $ 176,301 $ 204,658 $ 197,527

 

NOTES TO FINANCIAL STATEMENTS

Note 1 – Cash and Investments: $182,780

The balance reported on the Annual Statement consists of the following categories:

Cash $ 1,408
Certificates of Deposit 181,372
Total Cash and Investments $ 182,780

Note 2 – Unearned Premium: $6,479

Title 24-A M.R.S.A. Chapter 51 §3624 requires mutual assessment companies to maintain an unearned premium reserve equal to 50% of the cash premium or advance assessment on its policies in force.

COMMENTS AND RECOMMENDATIONS

1) Comment:

As noted in the Corporate Records section, the Board of Directors made changes to the Bylaws which is in non-compliance with Article XII of the Bylaws. Article XII states that the Bylaws may only be amended at Annual Meetings or at Special Meetings called specifically for that purpose.

Recommendation:

The Company needs to comply with all corporate documents in managing the Company.

2) Comment:

As noted in the Underwriting Rules and Practices section, the Company is over-stating Policies In-Force and the face value of Premium Notes as of December 31, 2006 on Schedule C in the Annual Statement as submitted to the Bureau of Insurance. It appears that the “amount insured” on line four did not include the expired policies that were renewed during the 2006 plan year.

Recommendation:

The Company should ensure that the Policies In-Force and the Premium Notes are reported accurately on the Annual Statement.

3) Comment:

As noted in the Reinsurance section, the Company is reinsuring lumber mill risks under its facultative reinsurance agreement which specifically excludes Lumber Mill and Lumber Yard risks.

Recommendation:

The Company needs to cede risks in compliance with its reinsurance agreements. Failure to do so may result in a material uncovered loss for both the Company and the insured.

 

STATE OF MAINE


COUNTY OF KENNEBEC, SS

Michael R. Nadeau, CPA, CFE, CISA, AES being duly sworn according to law, deposes and says that, in accordance with the authority vested in him by Eric A. Cioppa, Acting Superintendent of Insurance, pursuant to the Insurance Laws of the State of Maine, he has made an examination of the condition and financial affairs of

FARMINGTON MUTUAL FIRE INSURANCE COMPANY

of West Farmington, Maine as of December 31, 2006 and that the foregoing report of examination, subscribed to by him, is true to the best of his knowledge and belief.


___________________________________
Michael R. Nadeau, CPA, CFE, CISA, AES
Examiner-In-Charge

 

Subscribed and sworn to before me
This _______day of ___________, 2007

 

_________________________
Patricia A. Galouch, Notary Public
My Commission Expires:

 

Last Updated: October 22, 2013

September 20, 2007