MEDICAL MUTUAL INSURANCE COMPANY

OF MAINE

 

REPORT OF EXAMINATION

AS OF DECEMBER 31, 2008

 

STATE OF MAINE

BUREAU OF INSURANCE

IT IS HEREBY CERTIFIED THAT THE ANNEXED REPORT OF EXAMINATION FOR

MEDICAL MUTUAL INSURANCE COMPANY OF MAINE

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 Gardiner this

fourteenth day of April, 2010

_________________________
Mila Kofman
Superintendent of Insurance

 

I hereby certify that the attached report of examination dated December 30, 2009 describes the condition and affairs of the Medical Mutual Insurance Company of Maine as of December 31, 2008, and has been filed in the Bureau of Insurance as a public document.

 

This report has been reviewed.

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

Dated this fourteenth day of April, 2010

TABLE OF CONTENTS

SCOPE OF EXAMINATION

SUMMARY OF SIGNIFICANT FINDINGS

PRIOR EXAMINATION
CURRENT EXAMINATION

SUBSEQUENT EVENTS

THE COMPANY

HISTORY AND STRUCTURE
SURPLUS NOTE
DIVIDENDS
CORPORATE RECORDS
MANAGEMENT AND CONTROL
FIDELITY BOND
CONFLICT OF INTEREST
PENSION AND OTHER BENEFITS PLANS
TERRITORY AND PLAN OF OPERATION
GROWTH OF COMPANY
LOSS EXPERIENCE
REINSURANCE
ACCOUNTS AND RECORDS
STATUTORY DEPOSITS

FINANCIAL STATEMENTS

STATEMENT OF ADMITTED ASSETS, LIABILITIES AND SURPLUS
STATEMENT OF OPERATIONS
STATEMENT OF CAPITAL AND SURPLUS

COMMENTS ON FINANCIAL STATEMENT ITEMS

BONDS
RESERVES

CONCLUSION

APPENDIX A--STATEMENT OF ACTUARIAL OPINION

 

December 30, 2009

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

RE: Medical Mutual Insurance Company of Maine Statutory Examination of the Period Ended December 31, 2008

Dear Superintendent:

Pursuant to your instructions and in accordance with the provision of 24-A M.R.S.A. §221, an examination, as of December 31, 2008, has been made on the condition and financial affairs of

MEDICAL MUTUAL INSURANCE COMPANY OF MAINE

The examination was performed at the home office of Medical Mutual Insurance Company of Maine in Portland, Maine. The following report is respectfully submitted.

SCOPE OF EXAMINATION

The Maine Bureau of Insurance (hereinafter, “BOI”) has performed a full scope single-state examination of Medical Mutual Insurance Company (hereafter, “Company”). The examination covered the period January 1, 2006 through December 31, 2008. The last examination performed by the BOI was completed as of December 31, 2005.

The examination was conducted in accordance with the National Association of Insurance Commissioners’ (hereinafter, “NAIC”) 2009 Financial Condition Examiners Handbook (hereinafter, “FCEH”). The FCEH requires that the examination be planned and performed in a manner that evaluates the financial condition of the Company and identifies prospective risks of the Company. Through the examination process information about the Company including corporate governance is obtained. Inherent risks within the Company are identified and assessed. System controls and control procedures used to mitigate those risks are identified and evaluated. The examination also includes assessment of accounting principles used and significant estimates made by management, as well as evaluation of the overall financial statement presentation, management’s compliance with Statutory Accounting Principles (hereinafter, “SAP”) and annual statement instructions.

All accounts and activities of the Company were considered in accordance with the risk-focused examination process.

SUMMARY OF SIGNIFICANT FINDINGS

Prior Examination

In the prior examination report as of December 31, 2005, the following recommendations were made:

1. Contingent liabilities should be reported in Note 14 of the Annual Statement in accordance with Statement of Statutory Accounting Principle (hereinafter, “SSAP”) No. 5.

   The Company is reporting contingent liabilities in Note 14 of the Annual Statement pursuant to SSAP No. 5.

2. Deferred taxes should be calculated and reported in the Note 9 of the Annual Statement in accordance with SSAP No. 10.

   The Company is calculating and reporting deferred taxes in Note 9 of the Annual Statement pursuant to SSAP 10.

Current Examination

The Company appears to be substantially in compliance with 24-A M.R.S.A., and the Company’s by-laws except for the findings noted below.

Finding:
The Company’s engagement letter does not meet the criteria for such agreements pursuant to 24-A M.R.S.A. §221 (1) as set forth in the FCEH. Specifically, the engagement letter for the 2008 audit contained the following indemnification clause: “The Company hereby indemnifies [unnamed Certified Public Accountant] and its principals and employees and holds them harmless for all claims, liabilities, losses and costs arising in circumstances where there has been a know misrepresentation by members of the Company’s management, regardless of whether such person was acting in the Company’s interest. This indemnification will survive termination of this letter.”

Recommendation:
An Engagement Letter, related to future audits, that complies with the FCEH, should be drafted and executed. Reference page 2-80 of the FCEH.

 

SUBSEQUENT EVENTS

The subsequent events period for the examination was December 31, 2008 through the date of this report of examination incorporated herein and there were no subsequent events noted.

THE COMPANY

History and Structure

The Company was organized under the general laws of the State of Maine on March 20, 1978 and was licensed to transact business on September 1, 1978 by the superintendent of insurance. During 1992, the Company became licensed to write medical malpractice insurance in New Hampshire and Vermont, and began to actively write business in New Hampshire during 1992 and in Vermont in 1995.

In 1997, the Company formed MMIC Services Company, LLC (hereinafter, “MMIC”), a wholly owned subsidiary to provide accounting and data processing services to the Company. MMIC formed a wholly owned subsidiary, Medical Provider Management Company (hereinafter, “MPMC”) in 1997 to provide managerial, planning, financial, and other services to health care practices in New England.

In 2002, MMIC formed a wholly owned subsidiary, Specialty Insurance Placement Services, LLC (hereinafter, “SIPS”) to provide placement of insurance products other than medical malpractice for the Company’s insureds.

Operations of MPMC were discontinued on June 30, 2003. Assets of MPMC were distributed to MMIC and the Company. In 2004, the Company’s board of directors voted to discontinue operations of Technology Services Division of MMIC effective December 31, 2005. The Company’s investment in subsidiary companies at December 31, 2008, reflects its investment in SIPS. The Company’s subsidiary ownership structure follows:

Surplus Note

A $10 million surplus note was issued on March 1, 2006 in exchange for cash. The term of the note is 30 years with a final maturity date of March 15, 2036. The rate is fixed at 8.82% for the first five years. Thereafter, the rate is variable based on the 3 Month LIBOR rate plus 375 basis points. After the fifth year the Company may elect to redeem any principle amount, in multiples of $1,000, on each interest payment due date.

Dividends

Dividends are paid to policyholders as declared by the Company’s board of directors. The Company’s board of directors declared dividends to policyholders of $3,857,596, $3,959,567 and $0 in 2008, 2007 and 2006, respectively. Unpaid dividends (see balance sheet account “Dividends (policyholders)”) at December 31, 2008, 2007 and 2006 were $1,026,434, $1,096,833 and $0, respectively.

Corporate Records

The minutes of the board of directors and board committees were reviewed for compliance with Company by-laws and to assess corporate governance. The review indicated that the Company appears to be conducting its affairs in accordance with the statutes of the State of Maine and in accordance with its charter and by-laws.

Management and Control

The by-laws state that the board of directors shall consist of not less than seven persons and no more than twenty-one persons and that the board of directors is authorized to increase or decrease the number of directors within this range. At least 60% of the directors must be members or authorized representatives of the members of the corporation. Title 24-A M.R.S.A §3411 (1) requires that 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. The Company was found to be in compliance with this statute.

The Company’s board of directors elected by policy holders and serving at December 31, 2008 consisted of the following individuals:

Directors
Scott B. Bullock	Bruce L. Churchill, MD	Mark S. Cooper, MD
William F. D’Angelo, MD	Cynthia A. DeSoi, MD	Thomas D. Hayward, MD
William L. Medd, MD	Jeremy R. Morton, MD	Herbert Paris
Katherine S. Pope, MD	Domenic J. Restuccia	John P. Sauter, MD
Terrance J. Sheehan, MD	O. Robert Stevens, MD	James M. Totten, CPA

 

The board of directors has an audit committee and a compensation committee. The members of the committees were as follows:

Audit Committee
Bruce Churchill, MD	Cynthia DeSoi, MD	James Totten, CPA

 

Compensation Committee
Scott B. Bullock	Thomas D. Hayward, MD	Mark S. Cooper, MD

 

Officers elected by the board of directors and serving at December 31, 2008 consisted of the following individuals:

Officers
William L. Medd, MD, Chairman	Terrance J. Sheehan, MD, President
Mark S. Cooper MD, Treasurer	Cynthia A. DeSoi, MD, Secretary
Dominic J. Restuccia, EVP/CFO	Michael L. McCall, SVP Operations
John Doyle, VP Marketing/Communications

 

Fidelity Bond

The Company is indemnified up to $1,000,000, an amount in compliance with the NAIC, by a financial institution bond issued by an insurance company licensed by the State of Maine. The Company also protects itself from subject perils through the following insurance coverage’s:

Insurance Coverage
Business Automobile	Commercial Crime	Commercial Umbrella
Directors & Officers	Employment Practices Liability	Errors & Omissions
Package Policy	Workers Compensation

 

Conflict of Interest

The Company requires each director and officer 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 with the Company. The conflict of interest statements were reviewed and are in compliance with Company policy.

Pension and Other Benefit Plans

The Company sponsors a 401(k) plan covering substantially all employees of the Company and affiliated companies. The plan has two components, employee funding and employer discretionary contributions. The Company has no legal obligation to pay benefits under the employer discretionary part of the plan.

The Company sponsors a non-qualified supplemental pension plan for employees who have earnings in excess of federally allowed limits for contributions to the defined contribution plan. Participants in the plan are general creditors of the Company.

The Company sponsors a non-qualified deferred compensation plan for employees and directors. The plan allows participants to defer receipt of compensation until a future date. Participants of the plan are general creditors of the Company.

Territory and Plan of Operation

The Company was formed to transact medical professional liability insurance for health care providers including health care facilities and institutions, physicians licensed to practice medicine and other medical personnel, and to transact liability insurance generally for such persons, facilities and institutions. The Company is licensed and writes business in Maine, New Hampshire and Vermont.

Growth of Company

The following table presents certain comparable data that the Company reported for the period under examination:

December 31,
	2008	2007	2006
		(unexamined)	(unexamined)
Risk-Based Capital Analysis
Total Adjusted Capital	$79,763,921	$82,727,305	$72,317,799
Authorized Control Level	$7,871,912	$7,040,076	$7,111,148
Risk-Based Capital Percent	1013%	1175%	1017%
Operating Leverage Analysis
Net Premiums	$40,630,161	$42,243,562	$43,489,354
Surplus	$79,763,921	$82,727,305	$72,317,799
Operating Leverage Ratio	0.51	0.51	0.60

 

Loss Experience

The Bureau of Insurance contracted with Pinnacle Actuarial Resources, Inc. (hereinafter, “PAR”) to perform an actuarial analysis of the Company’s loss and loss adjustment expense reserves. Based on the PAR actuarial opinion, the Company’s estimates for gross and net unpaid loss and loss adjustment expenses appear to be reasonably stated in all material aspects. (See Appendix A for the Statement of Actuarial Opinion)

Reinsurance

Examiners reviewed all reinsurance contracts in effect for the period under examination and determined that all reinsurers are authorized by the State of Maine pursuant to 24-A M.R.S.A. §731-B. The table below describes the Company’s reinsurance agreements in place at December 31, 2008:

Professional Liability, Primary Liability, and Umbrella Excess Liability
Description	Company Retention	Reinsured Amount
First Layer	$750,000 per claim	$1,250,000 per claim
Second Layer	-	Up to $10,000,000 per insured
Clash (abates the risk of a malpractice claim involving multiple insureds)	$1,500,000 per loss event	$3,500,000 per loss event
LAE	$1,000,000 per loss event	Maximum all loss events $4,000,000
Managed Health Care Liability and Business Errors and Omissions Liability
Description	Company Retention	Reinsured Amount
First & Only Layer	$100,000 per claim or insured	$900,000 per claim or insured

The Bureau of Insurance contracted with PAR to perform an analysis of the reinsurance treaties. PAR concluded that the Company’s reinsurance treaties appropriately transfer risk.

Accounts and Records

The NAIC’s “Exhibit C – Evaluation of Controls in Information Systems (IS)” was used to evaluate the Company’s information system controls. Included in the scope of this review were management and organization controls, logical and physical security, changes to applications, contingency planning, operations and network and internet controls. Interviews with Company staff were conducted to gather supplemental information and corroborate the Company’s responses.

The financial reporting activities are conducted at the Company’s office located at One City Center in Portland Maine.

Statutory Deposits

The Company has on deposit with the State of Maine, a US Treasury Note, thereby, satisfying the requirements of 24-A M.R.S.A. §412.

FINANCIAL STATEMENTS

The accompanying financial statements fairly present, in all material respects, the Company’s statutory financial position as of December 31, 2008 and statutory results of operations for the period then ended. The financial statements as of December 31, 2007 and December 31, 2006 are unexamined and are presented for comparative purposes only.

STATEMENT OF ADMITTED ASSETS, LIABILITIES AND SURPLUS

As of December 31, 2008, 2007 and 2006

	2008	2007	2006
		(unexamined)	(unexamined)
Admitted Assets:
Bonds	$ 167,312,364	$ 150,653,959	$ 144,512,148
Common Stocks	16,060,431	24,613,844	28,407,750
Cash, Cash Equivalents and Short-term Investments	2,266,800	14,951,043	9,393,524
Other Invested Assets	1,000	1,000	1,000
Receivables for Securities	106,989	-	-
Investment Income Due and Accrued	1,746,573	1,849,249	1,636,734
Premiums, uncollected and agents’ balances in course of collection	35,171	116,638	480,723
Deferred Premiums, booked but not yet due	16,066,495	16,246,299	15,471,096
Amounts Recoverable from Reinsurers	313,582	4,107,557	26,868
Current Federal and Foreign Income Tax Recoverable and interest thereon	2,145,645	-	-
Net Deferred Tax Asset	2,909,948	3,301,768	2,943,393
Electronic Data Processing Equipment and Software	291,583	301,296	164,601
Receivables from Parent, Subsidiaries and Affiliates	32,829	48,061	-
Aggregate Write-Ins for Other than Invested Assets	538,365	73,589	341,443
Total Admitted Assets	$ 209,827,775	$ 216,264,303	$ 203,379,280
Liabilities and Surplus:
Losses	$ 72,167,772	$ 68,441,838	$ 67,819,108
Loss Adjustment Expenses	22,752,451	24,780,036	27,330,759
Commissions Payable	168,261	146,873	103,912
Other Expenses (excluding taxes, licenses and fees)	655,226	598,837	783,155
Taxes, Licenses and Fees (excl. fed and for income taxes)	58,324	111,446	265,902
Current Federal and Foreign Income Tax	-	2,861,463	1,047,304
Unearned Premiums	26,023,890	27,156,412	25,919,341
Advance Premiums	413,497	616,340	394,693
Dividends (policyholders)	1,026,434	1,096,833	-
Ceded Reinsurance Premiums Payable	4,259,802	5,267,037	5,281,147
Amounts Withheld or Retained on account of others	190	113	88
Aggregate Write-Ins for Liabilities	2,538,007	2,459,770	2,116,072
Total Liabilities	$ 130,063,854	$ 133,536,998	$ 131,061,481
Surplus Notes	$ 10,000,000	$ 10,000,000	$ 10,000,000
Unassigned Funds (Surplus)	69,763,921	72,727,305	62,317,799
Total Surplus	79,763,921	82,727,305	72,317,799
Total Liabilities and Surplus	$ 209,827,775	$ 216,264,303	$ 203,379,280

 

STATEMENT OF OPERATIONS

Years Ended December 31, 2008, 2007 and 2006

	2008	2007	2006
		(unexamined)	(unexamined)
Underwriting Income:
Premiums Earned	$ 41,762,683	$ 41,006,491	$ 42,996,084
Deductions:
Losses Incurred	20,956,484	16,730,523	14,650,751
Loss Expenses Incurred	6,832,248	4,847,289	13,894,267
Other Underwriting Expenses Incurred	9,942,400	9,348,038	9,569,932
Aggregate Write-Ins for Underwriting Deductions	431	810	14,973
Total Underwriting Deductions	37,731,563	30,926,660	38,129,923
Net Underwriting Gain/(Loss)	4,031,120	10,079,831	4,866,161
Investment Income:
Net Investment Income Earned	7,100,003	7,667,482	6,576,282
Net Realized Capital Gains/(Losses) less tax	826,804	(1,327,705)	13,020
Net Investment Gain/(Loss)	7,926,807	6,339,777	6,589,302
Other Income:
Finance and Service Charges not included in Premiums	53,750	55,850	59,980
Aggregate Write-Ins for Misc. Income	33,176	17,343	18,540
Total Other Income	86,926	73,193	78,520
Net Income before Dividends to Policyholders	12,044,853	16,492,801	11,533,983
Dividends (policyholders)	3,857,596	3,959,567	-
Net Income after Dividends to Policyholders	8,187,257	12,533,234	11,533,983
Federal and Foreign Income Taxes Incurred	2,017,913	4,585,791	1,285,844
Net Income	$ 6,169,344	$ 7,947,443	$ 10,248,139

 

STATEMENT OF CAPITAL AND SURPLUS

Years Ended December 31, 2008, 2007 and 2006

	2008	2007	2006
		(unexamined)	(unexamined)
Capital and Surplus Account
Surplus as regards policyholders, December 31 prior year	$ 82,727,305	$ 72,317,799	$ 49,536,824
Net Income	6,169,344	7,947,443	10,248,139
Change in net unrealized capital gains/(losses) less tax	(9,188,145)	1,277,301	3,090,709
Change in net deferred income tax	(391,820)	358,375	(1,127,157)
Change in nonadmitted assets	548,197	876,150	575,341
Change in surplus note			10,000,000
Aggregate write-ins for gains/(losses) in surplus	(100,960)	(49,763)	(6,057)
Change in surplus as regards policyholders	(2,963,384)	10,409,506	22,780,975
Surplus as regards policyholders, December 31, current year	$ 79,763,921	$ 82,727,305	$ 72,317,799

 

COMMENTS ON FINANCIAL STATEMENT ITEMS

Bonds

The Company’s bond portfolio is carried at amounts prescribed by the NAIC. Bonds with an NAIC designation of 2 or less are carried at amortized cost and bonds with a designation of 3 or greater are carried at lower of amortized cost or fair value.

The cost, par value, market value and amortized value of bonds at December 31, 2008 by security type are as follows:

	Cost	Par Value	Market Value	Amortized Value
U.S. Government	$ 14,025,109	$ 15,941,095	$ 15,212,563	$ 14,027,009
Political Subdivision	10,139,185	9,500,000	10,340,720	10,067,025
Special Revenue	64,062,357	62,211,719	64,880,886	63,773,161
Public Utilities	1,629,763	1,625,000	1,607,504	1,630,887
Industrial & Misc.	78,215,434	77,998,217	74,602,316	77,814,282
Total	$ 168,071,848	$ 167,276,031	$ 166,643,989	$ 167,312,364

 

Gross recorded unrealized gains and unrealized losses at December 31, 2008 by security type are as follows:

	Amortized Value	Gross Unrealized Gains	Gross Unrealized Losses	Market Value
U.S. Government	$ 14,027,009	$ 1,202,896	$ (17,342)	$ 15,212,563
Political Subdivision	10,067,025	316,055	(42,360)	10,340,720
Special Revenue	63,773,161	1,576,865	(469,140)	64,880,886
Public Utilities	1,630,887	-	(23,383)	1,607,504
Industrial & Misc.	77,814,282	1,282,452	(4,494,418)	74,602,316
Total	$ 167,312,364	$ 4,378,268	$ (5,046,643)	$ 166,643,989

 

The cost, par value, market value and amortized value of bonds at December 31, 2008 by NAIC quality distribution are as follows:

	Cost	Par Value	Market Value	Amortized Value
Designation
NAIC Class 1	$ 159,649,318	$ 159,066,031	$ 159,396,003	$ 158,929,261
NAIC Class 2	8,422,530	8,210,000	7,247,986	8,383,103
NAIC Class 3 - 6	-	-	-	-
Totals	$ 168,071,848	$ 167,276,031	$ 166,643,989	$ 167,312,364

 

The cost, par value, market value and amortized statement value of bonds at December 31, 2008 by maturity distribution are shown below. The maturity dates have not been adjusted for possible calls or prepayments.

	Cost	Par Value	Market Value	Amortized Value
Maturity Distribution
1 Year or less	$ 6,174,125	$ 6,000,000	$ 5,937,080	$ 10,903,268
Over 1 Year through 5 Years	28,991,329	28,554,368	28,307,004	43,933,144
Over 5 Years through 10 Years	53,892,350	52,049,443	53,685,770	63,682,545
Over 10 Years through 20 Years	22,755,166	24,529,028	23,107,039	20,294,436
Over 20 Years	56,258,878	56,143,192	55,607,096	28,498,971
Totals	$ 168,071,848	$ 167,276,031	$ 166,643,989	$ 167,312,364

 

Reserves

PAR was retained by the Maine Bureau of Insurance to review the reasonableness of unpaid loss and loss adjustment expense reserves as of December 31, 2008. PAR found that “In aggregate, the Company’s stated reserves are within a reasonable range of reserve estimates; hence the stated reserve amounts make a reasonable provision for the liabilities associated with the specific reserves.” Below is a summarization of PAR’s range estimates for total gross and total net loss and loss adjustment expense reserves.

Reserve Description	Recorded by Company	Low Estimate	Central Estimate	High Estimate
Gross Loss Reserve	$ 92,348,000
Gross LAE Reserve	$ 23,361,000
Total Gross Reserves	$ 115,709,000	$ 95,397,000	$ 113,624,000	$ 131,850,000
Net Loss Reserve	$ 72,168,000
Net LAE Reserve	$ 22,752,000
Total Net Reserves	$ 94,920,000	$ 77,521,000	$ 91,432,000	$ 105,343,000

 

CONCLUSION

The Company’s financial condition is reflected in statements and supporting exhibits contained in this report. The basis of preparation of such statements conforms to the laws, rules and regulations prescribed and/or permitted by the Maine Bureau of Insurance.

Acknowledgement of cooperation and assistance extended to the examiners by all Company personnel is hereby expressed.

 

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, he has performed an examination on the conditions and affairs of

MEDICAL MUTUAL INSURANCE COMPANY OF MAINE

at One City Center, Portland, Maine office as of December 31, 2008, and that the foregoing report of examination, subscribed to by him, is true to the best of his knowledge and belief. The following examiner from the Bureau of Insurance assisted:

Debra L. Blaisdell

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

 

Subscribed and sworn to before me

this fourteenth day of April, 2010

 

__________________________
Notary Public

 

My commission expires:

 

APPENDIX A--STATEMENT OF ACTUARIAL OPINION

December 18, 2009

MEDICAL MUTUAL INSURANCE COMPANY OF MAINE

FOR THE YEAR ENDING DECEMBER 31, 2008

Identification

I, John E. Wade, am a Consulting Actuary with the firm of Pinnacle Actuarial Resources, Inc. I am a member in good standing and an Associate of the Casualty Actuarial Society. I am also a member in good standing of the American Academy of Actuaries and meet its qualification standards for rendering this Statement of Actuarial Opinion. On July 30, 2009 the Maine Bureau of Insurance (MBoI) requested me to render this opinion on the reserves of the Medica1 Mutual Insurance Company of Maine (the company).

Scope

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, 2008. The items in this Scope paragraph on which I am expressing an opinion, reflect the Loss Reserve Disclosure items 8 through 13 in Exhibit B.

In forming my opinion on the loss and loss adjustment expense reserves, I relied upon data prepared by responsible officers or employees of the company. In this regard, I relied primarily upon Mr. Kevin Atinsky, Actuary of Medical Mutual Insurance Company of Maine. I began my analysis after being notified by Mr. Michael Nadeau, Examiner In-Charge for the Maine Bureau of Insurance, that the underlying data was credible. I evaluated that data for reasonableness and consistency. I also reconciled that data to Schedule P - Part 1 of the company’s current Annual Statement. In other respects, my examination included the use of such actuarial assumptions and methods used and such tests of the calculations as I considered necessary.

My review was limited to items in Exhibit A and did not include an analysis of any other balance sheet items. I have not examined the assets of the company and I have formed no opinion as to the validity or value of these assets. My opinion on the reserves is based upon the assumption that all reserves are backed by valid assets, which have suitably scheduled maturities and/or adequate liquidity to meet the cash flow requirements.

Opinion

This is a “Reasonable Opinion”.

In my opinion, the amounts carried in Exhibit A on account of the items identified:

1. meet the requirements of the insurance laws of Maine;
2. are consistent with reserves computed in accordance with accepted loss reserving standards and principles;
3. make a reasonable provision in the aggregate for all unpaid loss and loss expense obligations of the company under the terms of its contracts and agreements; and
4. make a reasonable provision for the unearned premium reserves for the extended losses and expenses of the company under the terms of its contracts and agreements.

In the aggregate, the Company’s stated reserves are within a reasonable range of my independent reserve estimates; hence the stated reserve amounts make a reasonable provision for the liabilities associated with the specified reserves.

This opinion applies to loss and loss adjustment expense reserves combined. 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.

Relevant Comments

a. Risk of Material Adverse Deviation

There is a significant risk of material adverse deviation for the company.

I believe that the company has a significant risk of material adverse deviation as of December 31, 2008. The materiality threshold I used for this determination was 10% of 2008 policyholder surplus, or approximately $8,000,000.

I chose this materiality standard after a review of the company’s historical financial performance and in consideration of the following facts:

• The company’s capital is more than five times the “Company Action Level” standard under the NAIC’s Risk-Based Capital formula
• 10% of policyholder surplus is an often used standard by regulators and appointed actuaries
• 10% of carried net loss reserves is greater than 10% of policyholder surplus and it is my preference to use the lower figure among these two commonly-used measures

The Company has booked reserves within a reasonable range of actuarial estimates. The primary risk factors facing the Company are concentration of writings in medical professional liability with extended reporting and settlement patterns, the volatility and size of potential liabilities, and the limited spread of risk. The unique nature and variability of these types of claim pose the potential for material adverse deviation. The absence of other risk factors from this listing does not imply that additional factors will not be identified in the future as having been a significant influence on the Company’s reserves. Therefore, there is a risk of material adverse deviation.

b. Other Disclosures in Exhibit B

The company does not reduce its loss reserves for anticipated salvage and subrogation recoverable as of December 31, 2008. The company does not discount its loss and loss adjustment expense reserves. I have reviewed the company’s exposure to asbestos and environmental claims. In my opinion, there is a remote chance of material liability since reported claim activity levels are minimal and the company writes only medical professional liability coverage. The company does not participate in any pools. Reserve exposure with respect to pools is considered to be immaterial.

The Company writes extended loss and expense contracts, which provide insureds with automatic reporting endorsement coverage in the event of death, disability or retirement. The Company accrues this liability as an unearned premium reserve.

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).

The company is not required to record a premium deficiency reserve.

c. Reinsurance

Based on discussions with company management and its description of the company’s ceded (and/or assumed) reinsurance, I am not aware of any reinsurance contract (having a material effect on the loss or loss expense reserves) that either has been or should have been accounted for as retroactive reinsurance or financial reinsurance.

My opinion on the loss and loss adjustment expense reserves net of ceded reinsurance assumes that all ceded reinsurance is valid and collectible. The company has represented to me that it knows of no uncollectible reinsurance cessions (other than those disclosed in Note #22 to the Financial Statements). I have reviewed the Company’s ceded reinsurance balances as shown in Schedule F - Part 3 and have found that 100.0% of the total $22,293,000 reinsurance recoverables are with authorized mandatory pools or companies rated A (Superior) or higher by A.M. Best.

Therefore, reinsurance collectability does not appear to be a material issue. I have not anticipated any contingent liabilities that could arise if the reinsurers do not meet their obligations to the company as reflected in the data and other information provided me.

I have reviewed the Part 2 - Property and Casualty Interrogatory #9 regarding the risk transfer elements of its reinsurance contracts. I have reviewed the Reinsurance Attestation Supplement to the Annual Statement and discussed the company’s reinsurance prograrn with management. I have performed an independent evaluation of the risk transfer elements of individual contracts. I rely on management’s representations that the credit for reinsurance is consistent with SSAP No. 62 - Property and Casualty Reinsurance.

d. IRIS Ratios

I reviewed the results of the three NAIC IRIS Tests, which are relevant to loss reserves, as calculated by the company’s management. These tests are listed as follows:

1. One-Year Reserve Development to Policyholders’ Surplus
2. Two-Year Reserve Development to Policyholders’ Surplus
3. Estimated Current Reserve Deficiency to Policyholders’ Surplus

No exceptional values resulted for any of those three IRIS tests.

e. Methods and Assumptions

This is my first review of MMICM’s reserves. I make no comment regarding the actuarial assumptions and methods previously employed.

Range of Reserves

I have established the following reasonable range of reserves around my actuarial central estimate.

	Low	Actuarial Central Est.	High
Direct & Assumed	$95,397	$113,624	$131,850
Net	$77,521	$91,432	$105,343

 

Variability

In evaluating whether the reserves make a reasonable provision for unpaid losses and loss adjustment expense, it is necessary to project future loss and loss adjustment expense payments. It is certain that actual future losses and loss adjustment expenses will not develop exactly as projected and may, in fact, vary significantly from the projections. Further, my projections make no provision for extraordinary future emergence of new classes of losses or types of losses not sufficiently represented in the company’s historical data base or which are not yet quantifiable.

Actuarial Report

An actuarial report and any underlying actuarial work papers supporting the findings expressed in this Statement of Actuarial Opinion have been provided to the Maine Bureau of Insurance. We will retain a copy of the report and work papers for a period of seven years in our administrative offices.

This statement of opinion is solely for the use of, and only to be relied upon by the MBoI.

 

_________________________________
John E. Wade, ACAS, MAAA
Pinnacle Actuarial Resources, Inc.
374 Meridian Parke Lane, Suite C
Greenwood, Indiana 46142
(317) 889-5760
December 18, 2009

Exhibit A: SCOPE

Loss Reserves:	Amount
1. Reserve for Unpaid Losses (Liabilities, Surplus and Other Funds page, Line 1)	$ 72,167,772
2. Reserve for Unpaid Loss Adjustment Expenses (Liabilities, Surplus and Other Funds page, Line 3)	$ 22,752,451
3. Reserve of Unpaid Losses - Direct and Assumed (Schedule P, Part 1, Totals from Cols. 13 and 15)	$ 92,348,000
4. Reserve for Unpaid Loss Adjustment Expenses - Direct and Assumed (Schedule P, Part 1, Totals from Cols 17, 19 and 21)	$ 23,361,000
5. The Page 3 write-in item reserve, “Retroactive Reinsurance Reserve Assumed”	$ 0
6. Other Loss Reserve items on which the Appointed Actuary is expressing an Opinion (list separately)	$ 0
Premium Reserves:
7. Reserve for Direct and Assumed Unearned Premiums for Long Duration Contracts	$ 0
8. Reserve for Net Unearned Premiums for Long Duration Contracts	$ 0
9. Other Premium Reserve items on which the Appointed Actuary is expressing an Opinion (list separately)	$ 5,064,288

 

Exhibit B: DISCLOSURES

1.	Name of the Appointed Actuary	Last: Wade	First: John	Mid: E.
2.	The Appointed Actuary’s Relationship to the Company. Enter E or C based upon the following: E if an Employee C if a Consultant		C
3.	The Appointed Actuary is a Qualified Actuary based upon what qualification? Enter F, A, M, or O based upon the following: F if a Fellow of the Casualty Actuarial Society (FCAS) A if an Associate of the Casualty Actuarial Society (ACAS) M if not a member of the Casually Actuarial Society, but a Member of the American Academy of Actuaries (MAAA) approved by the Casualty Practice Council, as documented with the attached approval letter. O for Other		A
4.	Type of Opinion, as identified in the OPINION paragraph. Enter R, I, E, Q, or N based upon the following: R if Reasonable I if Inadequate or Deficient Provision E if Excessive or Redundant Provision Q if Qualified. Use Q when part of the OPINION is Qualified. N if No Opinion		R
5.	Materiality Standard expressed in US dollars (Used to Answer Question #6)	$ 7,976,392
6.	Is there a Significant Risk of Material Adverse Deviation?		Yes [ x ]	No [ ]
7.	Statutory Surplus	$ 79,763,921
8.	Anticipated net salvage and subrogation included as a reduction to loss reserves as reported in Schedule P	$ 0
9.	Discount included as a reduction in loss reserves and loss expense reserves as reported in Schedule P
	9.1 Nontabular Discount	$ 0
	9.2 Tabular Discount	$ 0
10.	The net reserves for losses and expenses for the company’s share of voluntary and involuntary underwriting pools’ and associations’ unpaid losses and expenses that are included in reserves shown on the Liabilities, Surplus and Other Funds page, Losses and Loss Adjustment Expenses lines	$ 0
11.	The net reserves for losses and loss adjustment expenses that the company carries for the following liabilities included on the Liabilities, Surplus and Other Funds page, Losses and Loss Adjustment Expenses lines. *
	11.1 Asbestos, as disclosed in the Notes to Financial Statements	$ 0
	11.2 Environmental, as disclosed in the Notes to Financial Statements	$ 0
12.	The total claims made extended loss and expense reserve (Schedule P Interrogatories).
	12.1 Amount reported as loss reserves	$ 0
	12.2 Amount reported as unearned premium reserves	$ 5,064,288
13.	Other items on which the Appointed Actuary is providing Relevant Comment (list separately)	$ 0
	Premium Deficiency Reserve	$ 0

 

* The reserves disclosed in item 11 above, should exclude amounts relating to contracts specifically written to cover asbestos and environmental, exposures. Contracts specifically written to cover these exposures include Environmental Impairment Liability (post 1986), Asbestos Abatement, Pollution Legal Liability, Contractor’s Pollution Liability, Consultant’s Environmental Liability, and Pollution and Remediation Legal Liability.

 

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