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Maine.gov > PFR Home > Insurance Regulation > Company Services > Maine Domestic Companies > Patriot Life Insurance Company 2009 Examination Report

 

May 11, 2011

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

Dear Acting Superintendent:

Pursuant to the provisions of 24-A M.R.S.A. §221 and in conformity with your instructions, a financial examination has been made of the

PATRIOT LIFE INSURANCE COMPANY

The following report is respectfully submitted.


REPORT OF EXAMINATION

PATRIOT LIFE INSURANCE COMPANY

AS OF

DECEMBER 31, 2009

 


ACCEPTANCE OF REPORT OF EXAMINATION

WHEREAS a verified Report of Examination of Patriot Life Insurance Company dated May 11, 2011 was delivered to that insurer on June 7, 2011 and

WHEREAS Patriot Life Insurance Company and Bureau of Insurance staff have agreed to certain modifications with respect to the Report of Examination, and

WHEREAS I find such modifications proper, and

WHEREAS no hearing with respect to the Report of Examination has been requested by Patriot Life Insurance Company,

NOW THEREFORE, I accept the Report of Examination as modified and hereby order it placed on file in the Bureau of Insurance as provided for by 24-A M.R.S.A. §226(3).

 

Dated:

________________________
Eric A. Cioppa
Acting Superintendent

 

 

TABLE OF CONTENTS

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

SUMMARY OF SIGNIFICANT FINDINGS................................................................................................................. 1

PRIOR EXAMINATION........................................................................................................................................ 1
CURRENT EXAMINATION................................................................................................................................... 2

SUBSEQUENT EVENTS............................................................................................................................................. 2

THE COMPANY......................................................................................................................................................... 2

HISTORY........................................................................................................................................................... 2
CORPORATE RECORDS..................................................................................................................................... 3
CORPORATE GOVERNANCE............................................................................................................................... 3
CODE OF CONDUCT AND CONFLICT OF INTEREST............................................................................................ 4
FIDELITY BOND INSURANCE............................................................................................................................. 4
TERRITORY & PLAN OF OPERATION................................................................................................................... 4
TRANSACTIONS WITH AFFILIATES..................................................................................................................... 4
REINSURANCE................................................................................................................................................... 4
STATUTORY DEPOSITS....................................................................................................................................... 4

LITIGATION............................................................................................................................................................... 4

FINANCIAL STATEMENTS.......................................................................................................................................... 5

STATEMENT OF ADMITTED ASSETS, LIABILITIES, AND SURPLUS......................................................................... 6
STATEMENT OF OPERATIONS............................................................................................................................. 7
STATEMENT OF CAPITAL AND SURPLUS.............................................................................................................. 8

CONCLUSION............................................................................................................................................................. 9

 

SCOPE OF EXAMINATION

Patriot Life Insurance Company (hereinafter, “Company”) was last examined as of December 31, 2006, by the State of Maine Bureau of Insurance (hereinafter, “Bureau”). This examination covered the period from January 1, 2007 to December 31, 2009.

The Bureau conducted a limited scope risk-focused examination of the financial condition and affairs of the Company. This examination was conducted in accordance with 24-A M.R.S.A. §221 and the National Association of Insurance Commissioners’ (hereinafter, “NAIC”) Financial Condition Examiners Handbook (hereinafter, “FCEH”) and Guidelines. This examination was performed concurrently with a coordinated examination of Patriot Insurance Company (hereinafter, “PIC”) performed by the Bureau. The Bureau’s examination of PIC was part of a coordinated examination of Frankenmuth Mutual Insurance Company (hereinafter, “FMIC”), the Company’s ultimate parent, which was performed by the Michigan Office of Financial and Insurance Regulation (hereinafter, “OFIR”). The Bureau, for purposes of this examination, utilized certain corporate governance documentation prepared by the OFIR. This examination was conducted in the Bureau offices and on-site at the Company’s main administrative office in Yarmouth, Maine.

The Company was running off a closed book of life business for the period under examination. The scope of this examination was limited to a detailed analysis and/or testing of certain key balance sheet items as of December 31, 2009 and, for purposes of this report, may be limited to matters involving clarification, departures from laws, rules and regulations, and/or significant changes in amounts.

SUMMARY OF SIGNIFICANT FINDINGS

PRIOR EXAMINATION

1. Comment:
The Company is not in compliance with 24-A M.R.S.A. §1156, which limits investments in common stocks to 20% of total admitted assets. Common stock investments of the Company represent 33% of total admitted assets at December 31, 2006.

The Company is also not in compliance with its investment policy which limits investments in common stock to 20% of Statutory Surplus. Common stock investments represent 37% of Statutory Surplus at December 31, 2006.

The investment issues noted above appear to have resulted from a strategic initiative by senior management and the Board of Directors to manage investment assets on an aggregated basis with the Parent which resulted in an over-allocation of common stock to the Company.

Recommendation:
The Company should comply with 24-A M.R.S.A. §1156 as well as the Company’s investment policy and communicate the investment policy to all parties involved in the management of the investment portfolio. All stock investments were sold during 2007.

Status:
The Company did not report any equity investments at December 31, 2009.

2. Comment:
The asset valuation reserve (hereinafter, “AVR”) amount incorrectly excluded deferred taxes. The exclusion of deferred taxes results in the AVR being overstated by $80,621 and deferred tax liability understated by the same amount. Netting deferred tax assets and liability results in a $74,321 net deferred tax liability and eliminates the $6,300 net deferred tax asset.

The Company’s audited statutory financial statements were adjusted to reflect these changes; however, no examination adjustments were made as the amounts are not considered to be material or misleading.

Recommendation:
The Company should ensure that the AVR is calculated and reported correctly.

Status:
The Company’s immaterial AVR appeared to be reasonably stated at December 31, 2009.

CURRENT EXAMINATION
None noted.

SUBSEQUENT EVENTS

PIC acquired 100,000 shares of the Company’s common stock for $2,000,000 on July 1, 2010. The Company changed its domiciliary state from Maine to Michigan on October 11, 2010. The Company was acquired by FMIC for $7,286,000 on October 27, 2010. The Company sold 35,000 shares of common stock to FMIC for $3,500,000 on October 27, 2010. The Company entered into a guaranty agreement with FMIC on February 16, 2011.

THE COMPANY

HISTORY
The Company was incorporated on September 21, 1995 in the State of Maine and commenced operations on October 1, 1995. The Company assumed the insurance assets, related liabilities, duties and responsibilities of Maine National Life Insurance Company (hereinafter, “MNL”). The officers and directors of MNL, with the consent of the Maine Superintendent of Insurance, then voluntarily liquidated MNL. Patriot Mutual Insurance Company owned all outstanding common stock of MNL and owned all outstanding stock of the Company.

On July 1, 2007, the Company’s parent was acquired by and became a wholly owned subsidiary of FMIC. The Company is a wholly owned subsidiary of Patriot Insurance Company, with FMIC, the ultimate Parent.

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.

CORPORATE GOVERNANCE
The Company is governed and overseen by its board of directors and the management team of the Company.

As of December 31, 2009, the Company’s board of directors consisted of 16 individuals. The Company’s board of directors approves the strategic direction of the Company’s business and financial objectives, monitors the effectiveness of management’s implementation of policies, and plans and provides oversight and support in achieving corporate objectives.

As of December 31, 2009, the board of directors of the Company consisted of the following members:

Name Title
Gerald Lynn Stanton Chairman
John Stewart Benson Director
Kathleen Ann Case Director
Morrall Manuel Claramunt Director
Robert Payne Clark Director
Dana Frank Connors Director
Robert Clark Gowdy Director
David Frederick Honold Director
Brian Scott McLeod Director
Lincoln Jerry Merrill, Jr. Director
Richard Louis Pattenaude, Ph. D. Director
David Allen Pendleton Director
David Lee Reinke Director
Gregory St. Angelo, Jr. Director
James Edward Wilds Director
Drew Randall Zehnder Director

 

Officers of the Company, as listed in the 2009 statutory annual statement, follow:

Name Title
Lincoln Jerry Merrill, Jr. President & CEO
Kevin Allen Marti Senior Vice President & COO
Brian Scott McLeod Vice President, Treasurer & Secretary
Charles Dilworth Brakeley, Jr. Vice President
Alan Robert Small Vice President

 

CODE OF CONDUCT AND CONFLICT OF INTEREST
Title 24-A M.R.S.A. §3413 identifies potential conflict of interest areas. As such, the Company requires that each director and officer of the Company complete a conflict of interest statement annually. The conflict of interest statement discloses any material interest or affiliation(s) which are likely to be in conflict with his/her official duties and responsibilities to the Company.

The conflict of interest guidelines are included in the Company’s code of business conduct and ethics. All directors, officers and employees are required to sign a compliance certificate when hired/appointed that certifies that they have read, understand, and will adhere to the code of business conduct and ethics, and the conflict of interest policy. All directors and officers are also required to sign a compliance certificate annually.

FIDELITY BOND INSURANCE
The Company is protected by a fidelity bond in compliance with the NAIC recommended levels of coverage.

TERRITORY & PLAN OF OPERATION
The Company is licensed to transact business as a life insurer in the state of Maine and currently only writes ordinary life insurance contracts.

TRANSACTIONS WITH AFFILIATES
The Company has separate management agreements with FMIC and Patriot Insurance Company for the allocation of certain administration costs.

REINSURANCE
The Company does not participate in any reinsurance contracts.

STATUTORY DEPOSITS
As required by 24-A M.R.S.A. §412, the Company maintains the required security deposit with the Treasurer of Maine.

LITIGATION

The Company is not aware of potential lawsuits or other legal action beyond the ordinary course of business which would be considered material in relation to the financial position of the Company. The Company’s representations in this regard were confirmed through external audit work-papers as provided by OFIR.

FINANCIAL STATEMENTS

The accompanying financial statements fairly present, in all material respects, the Company’s statutory financial position as of December 31, 2009, and statutory results of operations for the period then ended. The financial statements as of December 31, 2008 and 2007 are unexamined and are presented for comparative purposes only.

STATEMENTS OF ADMITTED ASSETS, LIABILITIES, AND SURPLUS
AS OF DECEMBER 31, 2009, 2008 AND 2007

  2009 2008 2007
Assets   (unexamined) (unexamined)
Bonds $ 5,469,184 $ 6,456,523 $ 4,080,838
Common Stocks - - -
Cash & Short-term investments 1,685,961 582,087 3,059,845
Contract loans 10,525 13,688 13,906
Investment income due and accrued 51,982 71,398 32,773
Premiums - Uncollected and Agents Balances 62 - -
Premiums - Deferred 174 351 440
Reinsurance - Recoverable - - -
Current Federal and Foreign Income Tax 39,904 - -
Net Deferred Tax Asset - 924 6,283
EDP Equipment and Software 1,231 - -
Receivables from parent and affiliates - 23,951 -
Aggregate Write-Ins 63 52 53
Total assets $ 7,259,086 $ 7,148,974 $ 7,194,138
       
Liabilities      
Reserves $ 152,479 $ 159,777 $ 162,361
Advance premiums 17 26  
Interest maintenance reserve 103,823 111,565 116,736
General expenses 42,694 38,672 29,894
Taxes, licenses and fees 10,216 6,956 28
Current federal and foreign taxes - 620 11,000
Net deferred tax liability 1,480 - -
Asset valuation reserve 5,191 2,409 -
Payable to parent, subsidiaries and affiliates 136,864 3,825 80,750
Aggregate write-ins - - -
Total liabilities 452,764 323,850 400,769
       
Surplus      
Common capital stock 2,500,000 2,500,000 2,500,000
Gross Paid-in and contributed surplus 2,722,461 2,722,461 2,722,461
Unassigned funds 1,583,861 1,602,663 1,570,908
Surplus 6,806,322 6,825,124 6,793,369
Liabilities and surplus $ 7,259,086 $ 7,148,974 $ 7,194,138

 

STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007

  2009 2008 2007
Revenue   (unexamined) (unexamined)
Premiums for life $ 1,305 $ 1,508 $ 1,379
Net investment income 265,700 282,080 241,809
Amortization of interest maintenance reserve 7,742 6,643 5,307
Total Revenue 274,747 290,231 248,495
       
Expenses      
Death benefits 4,000 6,910 6,500
Surrender benefits and withdrawals 3,757 - 1,545
Change in aggregate reserves (7,298) (2,584) (4,051)
General expenses and taxes 256,900 111,188 106,147
Total Expenses 257,359 115,514 110,141
       
Net gain before dividends and taxes 17,388 174,717 138,354
Federal income taxes (9,000) 136,208 18,000
Net gain from operations 26,388 38,509 120,354
Net realized capital gain/(loss) - - 322,864
Net income $ 26,388 $ 38,509 $ 443,218

 

STATEMENT OF CAPITAL AND SURPLUS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007

  2009 2008 2007
    (unexamined) (unexamined)
Surplus, December 31 prior year $ 6,825,124 $ 6,793,369 $ 6,159,628
       
Net Income 26,388 38,509 443,218
Change in net unrealized capital gains/(losses) - - (237,274)
Change in net deferred income tax (3,135) (4,628) (1,091)
Change in nonadmitted assets (39,273) 283 1,074
Change in asset valuation reserve (2,782) (2,409) 427,814
Dividends to stockholders - - -
Change in surplus for the year (18,802) 31,755 633,741
       
Surplus, December 31 current year $ 6,806,322 $ 6,825,124 $ 6,793,369

 

CONCLUSION

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

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

 

STATE OF MAINE
COUNTY OF KENNEBEC, SS

Stuart E. Turney, being duly sworn according to law deposes and says that, in accordance with 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 affairs of the

PATRIOT LIFE INSURANCE COMPANY

of Yarmouth, Maine as of December 31, 2009, 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:

James C. Williams, CPA, CFE
Margaret S. Boghosian, CPA, CFE
Debra L. Blaisdell, AFE
Audrey L. Wade, CFE

 

________________________
Stuart E. Turney, CPA, AFE

 

Subscribed and sworn to before me
This _____day of _________, 2011

 

_______________________
Notary Public
My Commission Expires:

 

Last Updated: October 22, 2013