CASCO INDEMNITY COMPANY

REPORT OF EXAMINATION

AS OF

DECEMBER 31, 2007

TABLE OF CONTENTS

SCOPE OF EXAMINATION .............................................................................................2

DESCRIPTION OF THE COMPANY ................................................................................2

COMPANY HISTORY ............................................................................................3
MANAGEMENT AND CONTROL ............................................................................3
CORPORATE RECORDS .......................................................................................3
FIDELITY BOND AND OTHER INSURANCE ........................................................4
OFFICERS' AND EMPLOYEES' WELFARE AND PENSION PLANS ......................4
TERRITORY AND PLAN OF OPERATION ............................................................4
BUSINESS IN FORCE BY STATES .......................................................................4
DIRECT LOSSES PAID BY STATE .......................................................................5
REINSURANCE .....................................................................................................5
ACCOUNTS AND RECORDS .................................................................................5

FINANCIAL STATEMENTS .............................................................................................6

NOTES TO FINANCIAL STATEMENTS .........................................................................10

ACTUARIAL OPINION .................................................................................................14

I hereby certify that the attached report of examination dated August 14, 2008 shows the condition and financial affairs of

CASCO INDEMNITY COMPANY

located in Saco, Maine as of December 31, 2007 and has been filed in the Bureau of Insurance as a public document.

Dated this _______ day of _____________, 2008

August 14, 2008

Honorable Mila Kofman
Superintendent
Bureau of Insurance
34 State House Station
Augusta, ME 04333-0034

Dear Superintendent:

Pursuant to your instructions and in accordance with the provision of 24-A M.R.S.A. §221, the Maine Bureau of Insurance (hereinafter, “Bureau”) conducted an examination of the condition and financial affairs of

CASCO INDEMNITY COMPANY

(hereinafter, "Company"), as of December 31, 2007.

The examination, performed at the Company’s home office in Saco, Maine, was made in accordance with the standards and procedures established by the Bureau and the National Association of Insurance Commissioners (hereinafter, “NAIC”) and accordingly, included tests of the accounting records and other procedures considered necessary under the circumstances.

The accompanying financial statements have been prepared in accordance with statutory accounting practices prescribed or permitted by the NAIC and the Bureau. These practices differ in certain respects from generally accepted accounting principles (hereinafter, “GAAP”).

For purposes of this report, comments on various items may be limited to matters involving departure from laws, rules or regulations, a significant change in the amount of the item, or where an explanation, comment and/or recommendation is warranted.

The following report is respectfully submitted.

SCOPE OF EXAMINATION

The Bureau conducted a routine statutory examination of the Company covering the period of January 1, 2005 to December 31, 2007. The full-scope examination was performed using the risk-focused approach. The following matters were reviewed to assess their impact on financial condition and conformity with related laws.

DESCRIPTION OF THE COMPANY

The Company, a property/casualty insurer, is domiciled in the State of Maine with corporate office located in Saco, Maine. The Company was last examined as of December 31, 2004 by the Bureau.

The Company is a wholly owned subsidiary of NE Corporation, an insurance holding company domiciled in the State of Maine.

Company History

The Company was incorporated on June 27, 1985 in the State of Maine and commenced writing business during that year.

The Company was founded by several New England based mutual property insurers to write private passenger automobile liability and physical damage in all New England states. The Company started writing commercial auto liability and a limited amount of personal umbrella in 1997. The personal umbrella coverage is only offered in conjunction with the underlying coverage of a Casco Indemnity Company personal auto policy and a member company homeowners’ policy.

Management and Control

Management of the Company is vested in seven (7) members of the Board of Directors. The following is a list of the duly elected seven-member Board of Directors and the Officers serving as of December 31, 2007:

Directors

Officers

Each Director and Officer of the Company is required to complete a conflict of interest statement annually to disclose any material interest or affiliation which is likely to be in conflict with his/her official duties and responsibilities to the Company.

Corporate Records

The Articles of Incorporation, Bylaws and Minutes of the Board of Directors’ meetings held during the period under examination were reviewed. Review of these records indicate that the Sixth Article and Section 4.2 of the Bylaws are not in compliance with 24-A M.R.S.A. §3411. The Articles of Incorporation and Bylaws were amended on January 31, 2003 changing the number of directors to “not less than three (3) and not more than seven (7)”. Title 24-A M.R.S.A. §3411 (1) states: “The affairs of every domestic insurer shall be managed by a Board of Directors consisting of not less than 7 directors or more than 21 directors”.
(See Comments and Recommendation #1)

Fidelity Bond and Other Insurance

The Company is adequately protected under a blanket fidelity bond in the amount of $1,000,000. The Company’s other insurance includes usual and customary coverage for property, casualty, and workers’ compensation coverage.

Officers’ and Employees’ Welfare and Pension Plans

The Company sponsors a noncontributory defined contribution pension plan. Employees are eligible to participate after attaining age 21 and completion of one-half year of service. The Company’s contribution is equal to 10% of participants’ compensation for the year.

The Company administers a 401(k) plan for its employees with the same eligibility criteria as the pension plan. The Company currently provides no matching contributions.

The Company has an annual profit sharing plan, to be distributed to all active employees at the end of the year up to a maximum of 15% of total salaries earned by each employee, when pre-tax operating income meets or exceeds $150,000.

Territory and Plan of Operation

The Company insures property and casualty risks located in Connecticut, Maine, New Hampshire, Rhode Island, and Vermont, and as of early 2007, became licensed in South Carolina.

Rhode Island, 26% in New Hampshire, 10% in Maine, 9% in Connecticut, and the remaining 3% in the State of Vermont.

Business In Force by States

Direct Losses Paid by State

Reinsurance

Assumed: The Company is required to participate in certain underwriting pools in states where it is licensed to write automobile insurance. Participants in the pool share in the underwriting results of the pools, generally based on each member’s share of the industry as a whole.

Ceded: Ceded reinsurance is principally with one highly rated reinsurance carrier (GenRe) and certain related parties (Hingham and Phenix), all authorized companies in the State of Maine.

The Company has a Quota Share Agreement with related parties Hingham (55.2%) and Phenix (44.8%) wherein the reinsurers are liable for 25% of the first $150,000 of the loss as respects to each occurrence on automobile business.

The Company has an Excess of Loss Agreement with GenRe wherein the Company’s net retention for automobile business is $150,000 with coverage up to $1,850,000 in excess of its net retention. The three layers of coverage are as follows:

First Excess:	$50,000 in excess of $150,000
Second Excess:	$300,000 in excess of $200,000
Third Excess:	$1,500,000 in excess of $500,000

The Catastrophe endorsement in the Excess of Loss Agreement covers Automobile Physical Damage Business wherein the Company’s retention is the first $250,000 of each occurrence plus 5% of each subsequent layer. The two reinsurance layers provide coverage for 95% of the next $2,000,000 ultimate net loss in excess of the Company retention.

The Company has a Personal Umbrella Policy with GenRe. The limit of liability of the reinsurer is 95% of the first $1,000,000 each occurrence; and 100% of the difference, if any, between the policy limit and the first $1,000,000 each occurrence. Company retention is 5% of the first $1,000,000 each occurrence.

Accounts and Records

Accounts and records were reviewed and tested in order to assess their impact on the Company’s financial condition and conformity with related laws.

FINANCIAL STATEMENTS

The accompanying financial statements present fairly, in all material respects, the Company’s statutory financial position as of December 31, 2007, statutory results of operations for the period then ended and statutory capital and surplus since the last examination. The financial statements as of December 31, 2006 and December 31, 2005 are unexamined and are presented for comparative purposes only.

STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND SURPLUS

December 31, 2007, 2006 and 2005

STATUTORY STATEMENT OF OPERATIONS

Years Ended December 31, 2007, 2006 and 2005

STATUTORY STATEMENT OF CAPITAL AND SURPLUS

Years Ended December 31, 2007, 2006 and 2005

NOTES TO FINANCIAL STATEMENTS

Note 1 - Bonds

All bonds were rated highest quality and high quality (1 and 2) by the NAIC and are stated at amortized cost. Pursuant to 24-A M.R.S.A. §412, the Company has maintained the required security deposit with the Treasurer of Maine. The Company also maintains a security deposit in Massachusetts, New Hampshire and South Carolina in conjunction with licensing in those states.

Note 2 - Common Stocks

Common stock is stated at market value in accordance with valuations promulgated by the NAIC. Unrealized capital gains and losses on investments reported at market value are recorded directly in surplus.

Note 3 - Cash, Cash Equivalents, and Short-Term Investments

Bank balances at year-end were confirmed through direct correspondence with various depositories.

Note 4 - Premiums and Considerations

Premiums and Considerations at December 31, 2007 consisted of:

Premiums and agents’ balances due to the Company at December 31, 2007 were verified during the exam.

Note 5 – Reinsurance Recoverable

Recoverable was due from member companies and settlement of balances were verified subsequent to year-end.

Note 6 – Losses & Loss Adjustment Expense

The Bureau of Insurance contracted with Alliance Actuarial Services, Inc. to perform an actuarial analysis of the Company’s loss and loss adjustment expense reserves on both a net basis and a gross basis. Based on this analysis, the Company’s estimates for gross and net unpaid loss and loss adjustment expenses appear reasonably stated. See Appendix A for Actuarial Opinion.

Note 7 – Commissions Payable, Contingent Commission and Other

Testing was performed on this balance and it is deemed to be fairly stated.

Note 8 – Net Deferred Tax Liability

Net Deferred Tax Liability was verified and determined to be in compliance with SSAP No. 10.

Note 9 – Unearned Premium

The Company is utilizing the daily pro rata method in accordance with SSAP No. 53, ¶7. The unearned premium amount was recalculated using the 2007 written premium file and the daily pro rata method.

Note 10 – Ceded Reinsurance Premiums Payable

Ceded reinsurance premiums payable at December 31, 2007 was verified and appear to be reasonably stated.

COMMENTS AND RECOMMENDATIONS

1. Comment: The Sixth Article of Incorporation and Section 4.2 of the Bylaws are not in compliance with 24-A M.R.S.A. §3411 (1). The Articles of Incorporation and Bylaws were amended on January 31, 2003 changing the number of directors to “not less than three (3) and not more than seven (7)”. Title 24-A M.R.S.A. §3411 (1) states: “The affairs of every domestic insurer shall be managed by a Board of Directors consisting of not less than 7 directors or more than 21 directors”.

   Recommendation:The Company is required to amend the Sixth Article of Incorporation and Section 4.2 of the Bylaws to comply with 24-A M.R.S.A. §3411 (1). Furthermore, the Company must promptly deliver the amendments to the Superintendent in accordance with 24-A M.R.S.A. §3310 (3) and §3359 (3).

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 Mila Kofman, Superintendent of Insurance, pursuant to the Insurance Laws of the State of Maine, has made an examination of the condition and financial affairs of

CASCO INDEMNITY COMPANY

located in Saco, Maine as of December 31, 2007, and that the foregoing report of examination, subscribed to by him, is true to the best of his knowledge and belief. The following examiners from the Bureau of Insurance assisted:

Jill C. Tobey, CPA, CFE
Faith A. Talbot, AFE
Debra L. Blaisdell
Analisa M. Gallant

Respectfully submitted,

__________________________

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

Subscribed and sworn to before me

this ______ day of ______________, 2008

_____________________________
Notary Public
My commission expires:

APPENDIX A

ACTUARIAL OPINION

ALLIANCE ACTUARIAL SERVICES, INC.
765 Match Circle, Harleysville, PA 19438 PHONE: 215-256-6505 FAX: 215-256-6506

Statement of Actuarial Opinion
Casco Indemnity Company
For the Year Ended December 31, 2007

IDENTIFICATION

I, Richard Lo, am a Consulting Actuary associated with the firm of Alliance Actuarial Services, Inc. I am a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries and meet the Academy's qualification standards for signing statements of actuarial opinion on property and casualty loss reserves. I was engaged by the Maine Bureau of Insurance (the “Bureau”) to perform an actuarial examination of Casco Indemnity Company (“CASCO” or the “Company”) and to render this opinion with regard to loss and loss adjustment expense reserves of the Company as of December 31, 2007.

SCOPE OF OPINION

I have examined the reserves listed in Exhibit A, as shown in the Annual Statement of the Company, as prepared for filing with state regulatory officials, as of December 31, 2007. The items on which I am expressing an opinion are listed in Exhibit A and reflect the Loss Reserve Disclosure items listed in Exhibit B.

My examination of the loss and loss adjustment expense reserves was based upon data and related information provided by the Company. In this regard, I relied on Jack Donilon, Sr. Vice President and Treasurer of the Company, and Mr. Michael R. Nadeau, the Bureau’s examiner-in-charge of the CASCO examination, as to the accuracy and completeness of the data. I evaluated the data used directly in my analysis for reasonableness and consistency. In other respects, my examination included the use of such actuarial assumptions and methods and such tests of calculations as I considered necessary.

My opinion was limited to Items listed in Exhibit A and does not pertain to any income statement or other balance sheet items. For instance, I have formed no opinion regarding the value, validity or cash flow characteristics of the Company’s assets.

This opinion is intended to be used solely by the Bureau in its examination of the Company as of December 31, 2007 and is not intended for any other purpose.

OPINION

In my opinion, the amounts carried in the balance sheet on account of the items identified in Exhibit A (for losses and loss adjustment expenses combined):

A. Meet the requirements of the insurance laws of Maine;

B. Are stated in accordance with accepted loss reserving standards and principles; and

C. Make a reasonable provision for the aggregate of unpaid loss and loss expense obligations of the Company under the terms of its policies and agreements.

RELEVANT COMMENTS

Risk of Material Adverse Deviations

Since the emergence and settlement of claims are subject to uncertainty, actual future developments will vary, perhaps significantly, from the amounts carried on the balance sheet. Furthermore, the amounts carried on the Company’s balance sheet may not provide for the extraordinary future emergence of either new classes of losses or post-contractual expansions of policy coverage, nor for extraordinary future development of reserves that may have been established specifically for these events.

Based on my understanding of the use of this opinion, I evaluated materiality in the context of 10% of statutory surplus at December 31, 2007. I did not evaluate materiality in any other context. In this opinion, I considered the potential for adverse deviation of $1.2 million to be material. In my opinion, potential variability of the reserves in excess of this threshold would be of interest to the Bureau. At this time, my assessment is that the Company does not have a significant potential for a material adverse deviation from the carried net reserve amounts.

Reinsurance Collectibility

Based on a review of the Company’s ceded reinsurance balances as shown in Schedule F - Part 3. All of the unaffiliated assuming companies were rated A or better by A.M. Best and or balances are collateralized. The Company also represented to me that it knows of no uncollectible reinsurance cessions and on disputed reinsurance balances. I have performed no additional work to verify the financial condition of the assuming reinsurance companies or the adequacy of the collateralized balances. Relying on the information cited in this paragraph, I have treated the reported net reinsurance recoverables as collectible for the purpose of this Opinion.

Retroactive Reinsurance and Financial Reinsurance

The Company has informed me that it does not currently participate in any reinsurance that has or should have been accounted for as retroactive or financial reinsurance. I have reviewed the reinsurance agreements and they constitute a valid transfer of risk.

NAIC IRIS Ratios

The loss and loss adjustment expense reserves identified in Exhibit A did not create any exceptional values for NAIC IRIS Tests 10, 11, or 12.

Discounting

The Company does not discount loss and loss expense reserves.

Salvage and Subrogation

The data underlying my review and the resulting estimates are net of salvage and subrogation. The Company has booked $612,000 for all lines of business as the amount of salvage and subrogation recoverables in the Annual Statement.

Pools and Associations

The Company participates in a number of voluntary and involuntary pooling arrangements. The Company includes its pool participation in individual lines of business and in Reinsurance lines of business. The Company’s practice is to record its share of the reported reserves for these pools and associations without any adjustment for reporting lag. Aggregate loss and LAE reserves held for all pools and associations are $48,408.

Unearned Premium for Long Duration Contracts

The Company writes no policies or contracts related to single or fixed premium policies with coverage periods of thirteen months or greater which are non-cancelable and not subject to premium increase (excluding financial guaranty contracts, mortgage guaranty policies, and surety contracts).

Extended Loss and Expense Reserves

The Company writes no business that would require extended loss and expense reserves.

Asbestos and Environmental Exposures

Management has informed me that the Company does not have exposure to asbestos and environmental impairment liability.

Terrorist Attack Exposure

Management has informed me that the Company does not have exposure to terrorist attack claims. In my opinion, the risk of material liability from this exposure is remote as of December 31, 2007.

DOCUMENTATION

An actuarial report supporting the findings expressed in this Statement of Actuarial Opinion will be provided to the Bureau.

Exhibit A: SCOPE

Loss Reserves:

Premium Reserves:

Exhibit B: DISCLOSURE