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ACADIA INSURANCE COMPANYREPORT OF EXAMINATION
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This report has been reviewed.
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This _____ day of _______________, 2006
August 3, 2005
Honorable Alessandro Iuppa
Superintendent of Insurance
Maine Bureau of Insurance
34 State House Station
Augusta, ME 04333
Dear Sir:
Pursuant to the provisions of Title 24-A M.R.S.A. § 221 and in conformity with your instructions, a financial examination has been made of the
ACADIA INSURANCE COMPANY
at its home office in Westbrook, Maine. The following report is respectfully submitted.
The Company was last examined as of December 31, 2001 by the State of Maine Bureau of Insurance. This examination covers the period from January 1, 2002 through December 31, 2004.
The examination was performed in conjunction with the examination of the Company’s immediate parent, Berkley Regional Insurance Company (BRIC) for the same time period by the State of Delaware. To a certain extent, where deemed appropriate, reliance was placed on examination procedures performed by the State of Delaware and their findings are included in the relative sections of this examination report.
The examination consisted of a survey of the Company’s business policies and underwriting practices; a review of corporate minutes; a verification of assets and a determination of liabilities at December 31, 2004 in conformity with statutory accounting practices, National Association of Insurance Commissioners’ (NAIC) guidelines, and the laws, rules and regulations prescribed by the Maine Bureau of Insurance.
The independent CPA audit of the Company is performed at a consolidated level with the Company’s ultimate parent, W. R. Berkley Corporation. Due to the fact that the audit was ongoing simultaneously with our examination, we did not utilize work papers of the independent auditors. The examiners have confirmed that the report issued was unqualified and that no adjustments were proposed. Due to the timing of the examination, NAIC database and Examination Jumpstart Reports were not available for review.
This examination relied on the State of Delaware’s contracted actuary for the evaluation of the Company’s loss and loss adjustment expense reserves on a gross basis by line of business for the period under examination. Loss payments, case reserves, accident dates and report dates taken from claim files to statistical loss reports were verified. Incurred but not reported (IBNR) reserves were also reviewed as to the reasonability.
We also reviewed transactions occurring subsequent to our examination date that were material or unusual in nature. The results of the current examination present the financial condition of the Company at December 31, 2004 as determined by the examiners. For purposes of this report, comments on various balance sheet items may be limited to matters involving a 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 Company was incorporated on April 2, 1992 in the State of Maine and began writing business on July 1, 1992. The Company became licensed in New Hampshire and Vermont in 1993 for all lines except workers’ compensation. It became licensed to write workers’ compensation in those states effective January 1, 1995. The Company is currently licensed in 25 jurisdictions as an authorized insurance company and in 1 jurisdiction as an authorized reinsurer. In 2002, the Company discontinued writing personal lines.
In January 2004, the Company sold Cadillac Mountain Insurance Company. In March 2005, the Company sold Chesapeake Bay Property and Casualty Insurance Company, its subsidiary, to an affiliated insurance company. (See Subsequent Events section for further information)
Management of the Company is vested in not less than seven (7) nor more than twenty-one (21) member Board of Directors. The following are the elected members of the Board of Directors and the Officers serving at December 31, 2004.
Directors:
| Eugene G. Ballard | Charles A. Hamblen |
| Robert P. Cole | Ira S. Lederman |
| William R. Berkley | Clement P. Patafio |
| William R. Berkley, Jr. | William C. Thornton |
Officers
| William C. Thornton | President & CEO |
| Charles A. Hamblen | Senior Vice President & Treasurer |
| Kathryn P. Whitmore | Vice President & Secretary |
| Andrew M. Burbank | Vice President |
| Christopher B. Dowd | Vice President |
| Jane Gordon | Vice President |
| Judith E. Plummer | Vice President |
| Stephen Rich | Vice President |
Title 24-A M.R.S.A. § 3413 identifies prohibited pecuniary interest and use of confidential information by directors and officers. The Company requires all directors and officers to complete and sign a “Conflict of Interest Statement” annually. Review of the statements on file demonstrated compliance with Company policy and the Maine Statute.
The Articles of Incorporation, Bylaws and Minutes of the Board of Directors’ meetings held from the period January 1, 2002 to the completion of fieldwork were reviewed. It was noted that the Company did not hold its fourth quarter Board of Directors’ meeting as required by Article V Section 1 of the Company’s Bylaws; the Company has not held an Annual Shareholders Meeting as required by Article II Section 2 of the Company’s Bylaws; Minutes to the Board of Directors’ meetings for the period of January 10, 2002 through April 1, 2004 were not approved; and, at the Board of Directors’ meeting held January 12, 2005, the Board failed to approve the financial statements of the Company. (See Comment and Recommendation)
The Company writes the following lines of business:
| Fire | Allied Lines |
| Commercial Multiple Peril | Inland Marine |
| Workers’ Compensation | Other Liability |
| Other Commercial Auto Liability | Commercial Auto Physical Damage |
| Surety & Fidelity | Boiler and Machinery |
| Ocean Marine | Products liability |
| Burglary and theft |
The Company maintains the following insurance coverages:
| Business Auto | Commercial Property |
| Commercial General Liability | Financial Institutions Bond |
| Commercial Umbrella Liability | |
| Workers’ Compensation & Employers’ Liability |
The Company is protected as a named insured under a blanket fidelity bond in the amount of $15,000,000 which was purchased by W.R. Berkley Corporation. The bond amount was tested with regard to the NAIC standards and determined to be in excess of the minimum suggested.
All of the above coverages were written by insurance companies authorized in the State of Maine.
As of December 31, 2004, the Company was a wholly owned subsidiary of BRIC, and its ultimate parent, W.R. Berkley Corporation
At December 31, 2004, the Company owned 100% of the stock Chesapeake Bay Property and Casualty Insurance Company (formerly Acadia Compensation Insurance Company and hereinafter known as “Chesapeake Bay”.) Chesapeake Bay was inactive in insurance operations and reported only investment income for the year ended December 31, 2004.
The Company has management agreements with its subsidiary, Chesapeake Bay, under which the Company provides certain management services.
The Company also has a data processing service agreement with its affiliate, Berkley Technology Services.
The Company has entered into an investment management agreement with its affiliate, Berkley Dean, pursuant to which all investment activities are managed.
The Company also has entered into a tax allocation agreement with its parent, W.R. Berkley Corporation.
The examiner reviewed the above agreements and determined that the Company is adhering to the terms in all material respects.
The Company cedes 100% of its operations to BRIC, its immediate Parent. The Report of Examination of BRIC as of December 31, 2004 by the State of Delaware confirmed the assumption of business from the Company.
A review of letters furnished by outside legal council revealed that the Company is not involved in any actual, pending or threatened non-claims litigation at this time that would result in a material judgment against the Company.
Examiners conducted a review of the Company's internal controls. All reportable weaknesses identified during the examination were reviewed and recommendations for strengthening internal controls are reported within this report. Other, less material, weaknesses were brought to management’s attention through a separate letter.
On March 31, 2005 the Company sold its insurance company subsidiary, Chesapeake Bay Property and Casualty Insurance Company, to BRIC.
The following financial statements show the Company’s financial position at December 31, 2004 as determined by this examination.
December 31, 2004
| ASSETS | |
| Bonds (Note 1) | $ 33,631,287 |
| Preferred stock (Note 2) | 4,627,500 |
| Common stock (Note 3) | 21,863,897 |
| Mortgage loans on real estate - First liens (Note 4) | 6,390,000 |
| Cash and other short-term investments (Note 5) | (3,248,103) |
| Other invested assets | 579,763 |
| Subtotal cash and invested assets | $ 63,844,344 |
| Investment income due and accrued | $ 532,338 |
| Premiums and agents' balances in course of collection (Note 6) | 14,868,062 |
| Premiums and agents' balances booked but deferred and not yet due (Note 6) |
76,258,775 |
| Net deferred tax asset | 1,020,000 |
| EDP equipment | 649,868 |
| Aggregate write-ins for other than invested assets | 8,117,054 |
| Total Assets | $ 165,290,441 |
| LIABILITIES, SURPLUS & OTHER FUNDS | |
| Losses (Note 7) | $ - |
| Loss adjustment expenses (Note 7) | - |
| Commissions payable, contingent commissions (Note 8) | 17,174,125 |
| Other expenses (excluding taxes, licenses and fees) | 5,043,633 |
| Taxes, licenses and fees (excluding federal and foreign) | 3,906,640 |
| Advance premiums | 580,006 |
| Ceded reinsurance premiums payable (Note 9) | 76,617,916 |
| Amounts withheld or retained for the account of others | 176,566 |
| Payable to parent, subsidiary or affiliate | 1,656,455 |
| Total Liabilities | $ 105,155,341 |
| Common capital stock | $ 5,000,000 |
| Gross paid in and contributed surplus | 48,301,000 |
| Unassigned funds | 6,834,100 |
| Total Surplus | $ 60,135,100 |
| Total Liabilities and Surplus | $ 165,290,441 |
STATEMENTS OF INCOME and CAPITAL & SURPLUS
December 31, 2004
STATEMENT OF INCOME
| Net investment income earned | $ 2,611,820 |
| Net realized capital gains/(losses) | 4,021,203 |
| Net investment gain/(loss) | $ 6,633,023 |
| Miscellaneous income | $ 17,191 |
| Total other income/(expense) | $ 17,191 |
| Net Income | $ 6,650,214 |
| STATEMENT OF CAPITAL & SURPLUS | |
| Surplus as regards to policyholders at 12/31/03 | $ 36,490,780 |
| Net income | $ 6,650,214 |
| Net unrealized capital gains or (losses) | 1,336,258 |
| Change in net deferred income tax | (2,615,328) |
| Change in nonadmitted assets | 4,273,176 |
| Surplus adjustments - Paid in | 14,000,000 |
| Change in surplus as regards to policyholders | $ 23,644,320 |
| Surplus as regards to policyholders at 12/31/04 | $ 60,135,100 |
| Note 1 – Bonds | $33,631,287 |
Bonds are stated at amortized value and, at December 31, 2004, consisted of the following:
| Cost | Par Value |
Market Value |
Amortized Value |
|
|---|---|---|---|---|
| Government | $ 16,086,106 | $ 15,131,347 | $ 16,382,837 | $ 15,575,288 |
| States and Territories | 1,648,820 | 1,500,000 | 1,685,105 | 1,627,394 |
| Subdivisions of States | 2,182,155 | 2,000,000 | 2,259,940 | 2,149,736 |
| Special Revenue | 10,210,143 | 10,303,007 | 10,520,668 | 10,251,852 |
| Industrial & Misc loans | 4,094,298 | 3,711,443 | 4,303,172 | 4,027,017 |
| TOTAL | $ 34,221,522 | $ 32,645,797 | $ 35,151,722 | $ 33,631,287 |
As required by Title 24-A M.R.S.A. § 412, the Company has maintained the required security deposit with the Treasurer, State of Maine. It was noted that the Company also maintains deposits with the states of Arizona, Delaware, Massachusetts, New Mexico, Oklahoma and Virginia.
Company ownership of bonds was confirmed through direct confirmation with custodians and from the Treasurer, State of Maine. Amortized values were tested and no material exceptions were found.
| Note 2 – Preferred Stock | $4,627,500 |
Preferred stocks, at December 31, 2004, consisted of the following:
| Cost | Market Value |
|
|---|---|---|
| Banks, Trusts, Insurance | $ 3,209,780 | $ 3,415,000 |
| Industrial, Misc | 1,075,000 | 1,212,500 |
| TOTAL | $ 4,284,780 | $ 4,627,500 |
| $21,863,897 |
Common stocks, at December 31, 2004, consisted of the following:
| Book Value |
Market Value |
|
|---|---|---|
| Parent, Subsidiaries | ||
| Maine Compensation Services, Inc. | $ 1,000 | $ 1,000 |
| Chesapeake Bay Property & Casualty | 21,862,897 | 21,862,897 |
| TOTAL | $ 21,863,897 | $ 21,863,897 |
All stock listed above is that of affiliated companies. The Company accounts for investments in Chesapeake Bay on a statutory equity basis and its investment in Maine Compensation Services, Inc. on a GAAP equity basis. The examination of the Company’s subsidiaries consisted of confirming assets and ultimate liabilities as all subsidiary business is ceded to the Company.
| Note 4 – Mortgage Loans on Real Estate – First Liens | $6,390,000 |
On April 1, 2004, the Company sold land and property in Westbrook, Maine to Berkley Holdings Corporation for $7,100,000. The Company received $710,000 in cash and provided a mortgage loan of $6,390,000 to Berkley Holdings Corporation. The Company realized a gain on the transaction of $3,407,948. Pursuant to the terms of the loan, Berkley Holdings Corporation pays $31,151 as interest to the Company monthly. The principal amount of the loan is payable on April 1, 2014.
| Note 5 – Cash and Other Short-term Investments | $(3,248,103) |
Certifications confirming bank balances at year-end were received through direct correspondence with the various depositories and reconciled with balances reported in the Company’s general ledger as of December 31, 2004 with no exceptions.
Note 6 – Premiums and Agents’ Balances
| Premiums and agents’ balances in course of collection | $14,868,062 |
| Premiums and agents’ balances booked but deferred and not yet due | $76,258,775 |
Amounts due to the Company from agents were verified during the examination. The balaJanuary 2, 2008 at year-end 2004.
| Note 7 – Losses and Loss Adjustment Expenses | $ 0 |
The Company does not retain any business for its own account and cedes 100% of its business to its parent, BRIC. Accordingly, the reserves for losses and loss adjustment expenses are accurately stated. INS Consultants, Inc. was retained by the Delaware Insurance Department to conduct a review of BRIC’s reserve methodologies and adequacy including business assumed from the Company. Based on their review BRIC’s reported loss and loss adjustment expense reserves at December 31, 2004 (including business assumed from the Company) were reasonable.
| Note 8 – Commissions Payable & Contingent Commissions | $17,174,125 |
Liabilities for commissions payable and contingent commissions were tested and were adequate at December 31, 2004.
| Note 9 – Ceded Reinsurance Premiums Payable | $76,617,916 |
This balance is the same as reported by the Company at December 31, 2004. This balance consists primarily of ceded premium due the Company’s parent in accordance with its 100% quota share reinsurance agreement. This balance was detail tested during the examination with no material differences noted.
Comment: As discussed in the Corporate Records section the Company:
a) did not hold its fourth quarter Board of Directors’ Meeting as required by Article V Section 1 of the Company’s Bylaws;
b) has not held an Annual Shareholders’ Meeting as required by Article II Section 2 of the Company’s Bylaws;
c) the Board did not approve the Minutes to the Board of Directors’ Meetings for the period of January 10, 2002 through April 1, 2004; and
d) the Board failed to accept the financial statements of the Company as presented at the Board of Directors’ Meeting held January 12, 2005.
Recommendation: The Company should adhere to its Articles and Bylaws and hold meetings when required. The Board of Directors should be diligent in accepting the financial statements and approving the Minutes to its meetings.
STATE OF MAINE
COUNTY OF KENNEBEC, SS
James C. Williams, CPA, CFE, being duly sworn according to law, deposes and says that in accordance with the authority vested in him by Alessandro Iuppa, 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
ACADIA INSURANCE COMPANY
of Westbrook, Maine as of December 31, 2004, 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:
Graham S. Payne, EIC
Margaret S. Boghosian, CPA, CFE
Jennifer L. Reichenbach
Heather E. Warren
Bryan J. Avant
_____________________________________
James C. Williams, CPA, CFE
Subscribed and sworn to before me this _____ day of _______________, 2006
| _________________________________ Notary Public |
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Last Updated: October 1, 2008
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