Examination Reports : Bureau of Insurance

THE GORHAM FARMERS CLUB

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 ..............................................................................................3
FIDELITY BOND ..................................................................................................................................3
UNDERWRITING RULES AND PRACTICES .........................................................................................3
REINSURANCE .....................................................................................................................................3
ACCOUNTS AND RECORDS .................................................................................................................4
FINANCIAL STATEMENTS ....................................................................................................................4
NOTES TO FINANCIAL STATEMENTS .................................................................................................7
COMMENTS AND RECOMMENDATIONS ..............................................................................................7

I hereby certify that the attached report of examination dated March 19, 2006 shows the condition and affairs of THE GORHAM FARMERS CLUB, Gorham, Maine as of December 31, 2006 and has been filed in the Bureau of Insurance as a public document.

This report has been reviewed.

_______________________
Kendra L. Godbout, CPA, CFE
Director of Financial Analysis

This ____ day of May, 2007

STATE OF MAINE

BUREAU OF INSURANCE

IT IS HEREBY CERTIFIED THAT THE ANNEXED REPORT OF EXAMINATION FOR

The Gorham’s Farmers Club

has been compared with the original on file in this bureau and that it is a correct transcript therefrom 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 Augusta this

____day of May, 2007

_________________________
Eric A. Cioppa
Acting Superintendent
Bureau of Insurance

March 19, 2006

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

Dear Sir:

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

THE GORHAM FARMERS CLUB

of Gorham, Maine; hereinafter referred to as the “Company”. The following report is respectfully submitted.

SCOPE OF EXAMINATION

The examination covered the period from January 1, 2004 to the close of business on December 31, 2006.

The examination consisted of a survey of the Company’s business policies, review of the Articles of Incorporation, Bylaws, operational practices, and Board of Directors’ meeting minutes, and 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.

HISTORY AND ORGANIZATION

The Company was incorporated in the State of Maine in 1861 for the purpose of insuring real and personal property against loss by fire or lightning. The Articles of Incorporation limit the writing of insurance to members only. The Company is tax-exempt under IRS Code Section 501 (c) (15).

CORPORATE RECORDS

The Company’s Articles of Incorporation, Bylaws, and Minutes of the Board of Directors’ meetings held during the period under examination were reviewed. The Company is not in compliance with the Bylaws in the following areas:

The Company had no fidelity bond coverage as of 12/31/06. (See Fidelity Bond section and Comment and Recommendation #1)

MANAGEMENT

Management of the Company is vested in a nine-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
Jane Eddington	Calvin H. Hamblen
Albert E. Mosher Jr.	Everett Paulsen
Marcena Phillips	Alva D. Smith
William Stiles	Elton Smith
Ken Waterhouse

Officers
Elton Smith	President
Everett Paulsen	Vice-President
Marcena Phillips	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 has had no fidelity bond coverage since January 2002. For this Company, the NAIC suggested amount of the bond is between $15,000 and $25,000. The bond should cover the President, Treasurer and Secretary of the Company. The Company’s Bylaws Article II Sec.7 states that “satisfactory” bonds are required for the Secretary and the Treasurer. (See Comment and Recommendation #1)

UNDERWRITING RULES AND PRACTICES

The Company issues fire and lightning policies for a one to five-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 8% - 20% of the insured amount. The Company charges premium equal to 4.5% of the amount of the promissory note.

The amount of insurance that the Company may write is limited by its Bylaws to two-thirds (2/3) of the real value of the property. The Company’s retention per risk is limited by M.R.S.A. Title 24-A Chapter 51 § 3623 to 10% of surplus and 8% of outstanding premium notes. The amount of retention is also limited to $20,000 per risk by one of the Company’s reinsurance contracts.

REINSURANCE

During the period under examination, the Company had two reinsurance contracts in-force. The Company has a reciprocal reinsurance agreement with another mutual fire assessment company, whereby each insurer retains no more than $20,000 of risk, and cedes no more than $20,000 of risk to the other insurer. Under this reciprocal agreement, each company retains all policies of $5,000 or less. In addition, a facultative reinsurance agreement provides for the Company to cede up to two times the retention amount, or more, if accepted by the reinsurer. Currently, the Company is ceding all amounts in excess of $40,000 to this reinsurer.

ACCOUNTS AND RECORDS

The Company maintains its books and records on a manual basis, and they are in the care of the Secretary/Treasurer at the Secretary/Treasurer’s home. The Annual Statement was prepared on an accrual basis.

FINANCIAL STATEMENTS

The following financial statements show the results of the Company’s operations for the year ending December 31, 2006 as determined by this examination.

BALANCE SHEET

DECEMBER 31, 2006

Assets
Cash and Investments (Note 1)	$ 397,521
Premiums/Assessments Receivable	924
Deduct ceded reinsurance balances payable	(431)
Total Assets	$ 398,014


Liabilities and Surplus
Unearned Premium Reserve (Note 2)	$ 4,356
Estimated amount due or accrued for taxes	320
All other liabilities	(1,078)
Total Liabilities	$ 3,598
Surplus as Regards to Policyholders	394,416
Total Liabilities and Surplus	$ 398,014

INCOME STATEMENT

DECEMBER 31, 2006

Income
Net Premium Income	$ 8,712
Investment Income	12,326
Total Revenue	$ 21,038


Expenses
Director & Officer Fees	$ 4,770
Taxes, Licenses and Fees	320
Postage, telephone, exchange & express	143
Advertising, subscriptions, printing & stationery	700
Miscellaneous	137
Total Expenses	$ 6,070

Net Income	$ 14,968

NOTES TO FINANCIAL STATEMENTS

Note 1 - Cash and Investments:

$397,521

The balance reported on the Financial Statements consists of the following:

Cash	$ 12,075
Certificates of Deposit	385,446
Total Cash and Investments	$ 397,521

Note 2 - Unearned Premium:

$4,356

Title 24-A M.R.S.A. § 3624 requires mutual assessment companies to maintain an unearned premium reserve equal to 50% of cash premiums and advance assessments of its policies in-force.

COMMENTS AND RECOMMENDATIONS

Comment: As discussed in the Fidelity Bond section, the Company currently has no fidelity bond coverage. According to NAIC standards, the Company should be protected by a fidelity bond in the range of $15,000 to $25,000 covering all individuals with access to Company books and records. The Company’s Bylaws Article II Section 7 states that “satisfactory” bonds are required from the Secretary and the Treasurer.

Recommendation: The Company needs to purchase fidelity bond protection as outlined above.
Comment: The Company has more than $100,000 deposited in both Key Bank and Gorham Savings Bank. The FDIC only insures up to $100,000 per business, even if the business has more than one account with the financial institution.

Recommendation: The Company should diversify its investments among several custodians to ensure that no one bank holds more than $100,000.

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 conditions and affairs of

THE GORHAM FARMERS CLUB

of Gorham, 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 May, 2007

____________________________
Patricia A. Galouch, Notary Public

My Commission Expires: