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 INSURANCE COMPANY
The following report is respectfully submitted.
REPORT OF EXAMINATION
PATRIOT INSURANCE COMPANY
AS OF
DECEMBER 31, 2009
ACCEPTANCE OF REPORT OF EXAMINATION
WHEREAS a verified Report of Examination of Patriot Insurance Company dated May 11, 2011 was delivered to that insurer on June 7, 2011 and
WHEREAS Patriot 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 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................................................................................................................................... 1
SUBSEQUENT EVENTS............................................................................................................................................. 2
THE COMPANY......................................................................................................................................................... 2
HISTORY........................................................................................................................................................... 2
CORPORATE RECORDS..................................................................................................................................... 2
CORPORATE OWNERSHIP................................................................................................................................. 2
CORPORATE GOVERNANCE............................................................................................................................... 2
CODE OF CONDUCT AND CONFLICT OF INTEREST............................................................................................ 3
FIDELITY BOND INSURANCE............................................................................................................................. 3
TERRITORY & PLAN OF OPERATION................................................................................................................... 4
TRANSACTIONS WITH AFFILIATES..................................................................................................................... 4
REINSURANCE................................................................................................................................................... 4
ACCOUNTS AND RECORDS................................................................................................................................. 4
STATUTORY DEPOSITS....................................................................................................................................... 4
LITIGATION............................................................................................................................................................... 4
FINANCIAL STATEMENTS.......................................................................................................................................... 4
STATEMENT OF ADMITTED ASSETS, LIABILITIES, AND SURPLUS......................................................................... 5
STATEMENT OF OPERATIONS............................................................................................................................. 6
STATEMENT OF CAPITAL AND SURPLUS.............................................................................................................. 7
COMMENTS ON THE FINANCIAL STATEMENTS........................................................................................................ 8
RESERVES.......................................................................................................................................................... 8
CONCLUSION............................................................................................................................................................. 8
SCOPE OF EXAMINATION
Patriot 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.
This examination was performed pursuant to the risk-focused approach promulgated by the National Association of Insurance Commissioners (hereinafter, “NAIC”), and consisted of a review of the Company’s operations, administrative practices, valuation of assets, and determination of liabilities at December 31, 2009, in conformity with statutory accounting practices, NAIC guidelines including the 2010 Financial Condition Examiners Handbook (hereinafter “FCEH”), and the laws, rules, and regulations prescribed or permitted by the State of Maine. This examination was a coordinated examination with the Michigan Office of Financial & Insurance Regulation, (hereinafter, “OFIR”), which concurrently examined the Company’s parent, Frankenmuth Mutual Insurance Company (hereinafter, “FMIC”), a Michigan domestic insurance company. BDO Seidman LLP (hereinafter, “BDO”) performed the 2009 external audit of FMIC and all insurance affiliates. OFIR made use of BDO work-papers to the extent deemed appropriate. The Bureau utilized the work of OFIR’s examination of FMIC when appropriate in order to enhance the effectiveness and efficiency of this examination.
Areas reviewed in this examination included claims administration and loss reserves, underwriting and premium policies, reinsurance contracts, investments, and risk-based-capital requirements. To the extent deemed necessary, transactions occurring subsequent to the examination date were reviewed.
The results of this examination present the financial condition of the Company as of December 31, 2009. Comments on various balance sheet items, 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
As noted in the report of examination as of December 31, 2006, the Company did not have a business continuity/disaster recovery plan in place.
It was noted that, as of the date of this report of examination, the Company had a business continuity/disaster recovery plan in place.
CURRENT EXAMINATION
None noted.
SUBSEQUENT EVENTS
Effective January 1, 2010, a 100% net quota share reinsurance agreement was commuted and replaced by a pooling arrangement with FMIC, whereby the Company and all affiliates cede 100% of “net insurance” to FMIC thereby pooling net premiums, net losses, and net expenses. The Company in turn assumes 8% of the pooled business. The Company received bonds valued at $12,213,000 in settlement of the aforementioned transaction. Effective October 27, 2010, the Company sold all of its stock in Patriot Life Insurance Company, a wholly-owned subsidiary, to FMIC for $7,286,000. Effective November 1, 2010, the Company sold 25,000 shares of its common stock to FMIC for $7,500,000.
THE COMPANY
HISTORY
The Company was incorporated in 1966 as a subsidiary of Blue Cross and Blue Shield of Maine (hereinafter, “BCBSME”) providing products not offered by BCBSME. The Company became fully independent in 1999 as a result of the acquisition of BCBSME by Anthem Insurance Companies, Inc.
On January 1, 2002, the Company became licensed to write property and casualty personal lines and contracted to acquire substantially all of the Maine, New Hampshire and Vermont property and casualty personal lines business from Acadia Insurance Company.
Effective July 1, 2007, Patriot Mutual Holding Company (“Patriot”) merged into FMIC, with the FMIC being the surviving company and owner of Patriot’s two wholly owned subsidiaries, the Company and Patriot Life Insurance Company. Additionally, each membership interest in Patriot as of the effective date was converted into a membership interest in FMIC by virtue of the merger and FMIC amended it Articles of Association accordingly.
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 OWNERSHIP
The Company is owned 100% by its parent, FMIC.
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 |
As of December 31, 2009, the officers of the Company consisted of the following individuals:
| Name |
Title |
| Lincoln Jerry Merrill, Jr. |
President & CEO |
| Brian Scott McLeod |
Vice President, Treasurer & Secretary |
| Charles Dilworth Brakeley, Jr. |
Vice President |
| Cynthia Otis DeLong |
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. The terms and the amount of the fidelity bond were reviewed for compliance with NAIC guidelines.
TERRITORY & PLAN OF OPERATION
The Company is licensed to transact business as a property and casualty insurer in the states of Maine, New Hampshire and Vermont. The Company’s primary lines of business are homeowners multiple peril, auto physical damage, private passenger auto liability, commercial multiple peril, commercial auto liability, other liability, and workers’ compensation.
TRANSACTIONS WITH AFFILIATES
The Company is a party to a written tax sharing agreement with FMIC and other affiliates. The agreement provides that the portion of the consolidated tax liability allocated to the Company is based on its separate tax return liability.
The Company has a management service agreement for the allocation of certain administrative costs with FMIC.
REINSURANCE
The Company participates in a quota share arrangement with FMIC and cedes 100% of its direct business to FMIC after inuring reinsurance.
ACCOUNTS AND RECORDS
As part of the information systems review, reliance was placed on review of the Company’s response to the NAIC prescribed Information Systems Questionnaire received by the OFIR. Interviews with Company staff were conducted by the OFIR to gather supplemental information and to corroborate the Company’s responses to the questionnaire. Included in the scope of the OFIR review were management and organization controls, logical and physical security controls, changes to applications, system and program development, contingency planning, and operations and processing controls.
STATUTORY DEPOSITS
As required by 24-A M.R.S.A. §412, the Company has maintained 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 workpapers 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 |
$ 30,277,628 |
$ 30,325,709 |
$ 31,372,130 |
| Common Stocks |
6,806,322 |
6,825,124 |
6,793,369 |
| Cash & Short-term investments |
4,261,569 |
6,227,699 |
4,514,583 |
| Investment income due and accrued |
375,204 |
409,920 |
406,336 |
| Premiums - Uncollected and Agents Balances |
1,675,748 |
1,642,788 |
2,131,959 |
| Premiums - Deferred |
10,053,435 |
9,779,424 |
6,058,981 |
| Reinsurance - Recoverable |
6,714,597 |
5,209,978 |
3,442,989 |
| Current Federal and Foreign Income Tax |
195,000 |
- |
513,518 |
| Net Deferred Tax Asset |
121,510 |
100,118 |
177,632 |
| EDP Equipment and Software |
76,011 |
140,998 |
134,377 |
| Receivables from parent and affiliates |
500 |
- |
80,750 |
| Aggregate Write-Ins |
32,150 |
42,461 |
744,028 |
| Total assets |
$ 60,589,674 |
$ 60,704,219 |
$ 56,370,652 |
| |
|
|
|
| Liabilities |
|
|
|
| Reinsurance payable |
$ 6,340 |
$ - |
$ - |
| Commissions payable |
2,045,798 |
1,549,670 |
740,520 |
| Other expenses |
949,472 |
382,446 |
832,685 |
| Taxes, licenses and fees |
181,025 |
317,028 |
- |
| Current federal and foreign taxes |
- |
58,475 |
- |
| Advance Premiums |
389,997 |
344,617 |
294,025 |
| Ceded reinsurance premiums payable |
7,436,813 |
7,003,481 |
5,672,636 |
| Funds held by Company-reinsurance |
26,430,543 |
26,557,526 |
23,996,181 |
| Amounts withheld for account of others |
34,873 |
88,905 |
13,844 |
| Remittances not allocated |
- |
- |
39,356 |
| Payable to parent, subsidiaries and affiliates |
536,280 |
203,549 |
124,387 |
| Aggregate write-ins |
- |
- |
32,470 |
| Total liabilities |
38,011,141 |
36,505,697 |
31,746,104 |
| |
|
|
|
| Surplus |
|
|
|
| Common capital stock |
5,000,000 |
5,000,000 |
5,000,000 |
| Unassigned funds |
17,578,533 |
19,198,522 |
19,624,548 |
| Surplus |
22,578,533 |
24,198,522 |
24,624,548 |
| Liabilities and surplus |
$ 60,589,674 |
$ 60,704,219 |
$ 56,370,652 |
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
| |
2009 |
2008 |
2007 |
| |
|
(unexamined) |
(unexamined) |
| Premiums earned |
$ - |
$ - |
$ (8,254) |
| Underwriting deductions |
4,008,946 |
2,217,836 |
(486,793) |
| Net underwriting gain/(loss) |
(4,008,946) |
(2,217,836) |
478,539 |
| |
|
|
|
| |
|
|
|
| Net investment income earned |
1,278,190 |
1,440,747 |
916,467 |
| Net realized capital gains (losses); net of taxes |
41,181 |
(69,660) |
219,251 |
| Net investment income |
1,319,371 |
1,371,087 |
1,135,718 |
| |
|
|
|
| Other income |
174,230 |
282,813 |
329,934 |
| |
|
|
|
| Net income before federal income taxes |
(2,515,345) |
(563,936) |
1,944,191 |
| Federal income taxes |
(877,000) |
(95,000) |
(443,059) |
| Net income |
$ (1,638,345) |
$ (468,936) |
$ 2,387,250 |
STATEMENT OF CAPITAL AND SURPLUS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
| |
2009 |
2008 |
2007 |
| |
|
(unexamined) |
(unexamined) |
| Surplus, December 31 prior year |
$ 24,198,522 |
$ 24,624,548 |
$ 22,866,475 |
| |
|
|
|
| Net Income |
(1,638,345) |
(468,936) |
2,387,250 |
| Change in net unrealized capital gains/(losses) |
(18,802) |
31,754 |
137,563 |
| Change in net deferred income tax |
1,994 |
(50,613) |
(1,318,987) |
| Change in nonadmitted assets |
35,164 |
61,769 |
552,247 |
| Change in paid in surplus |
- |
- |
- |
| Dividends to stockholders |
- |
- |
- |
| Change in surplus for the year |
(1,619,989) |
(426,026) |
1,758,073 |
| |
|
|
|
| Surplus, December 31 current year |
$ 22,578,533 |
$ 24,198,522 |
$ 24,624,548 |
COMMENTS ON THE FINANCIAL STATEMENTS
RESERVES
The Bureau utilized the services of the Bureau’s in-house Property and Casualty actuary to review the Company’s net loss reserves in accordance with its reinsurance contracts specifically as it relates to a valid transfer of risk. The Company did not carry a net loss reserve as of the examination date as 100% of loss reserves are ceded to FMIC net of inuring reinsurance. The Bureau’s actuary determined that the Company was in compliance with the reinsurance contract and that the reinsurance arrangement resulted in a valid transfer of risk.
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 INSURANCE COMPANY
located in 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, CIE
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:
