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NORTH EAST INSURANCE COMPANY
REPORT OF EXAMINATION
TABLE OF CONTENTS
HOLDING COMPANY STRUCTURE
I hereby certify that the attached report of examination dated November 4, 2005 shows the condition and affairs of the NORTH EAST INSURANCE COMPANY, Scarborough, Maine as of December 31, 2004 and has been filed in the Bureau of Insurance as a public document.
This report has been reviewed.
This _______ day of _____________, 2006
November 4, 2005
Honorable Alessandro Iuppa
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
NORTH EAST INSURANCE COMPANY
at its home office in Scarborough, 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 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, NAIC guidelines, and the laws, rules and regulations prescribed by the Maine Bureau of Insurance.
To the extent deemed appropriate, we utilized workpapers of the independent accountants for the year ending December 31, 2004. In conjunction with these workpapers, we extended testing where deemed appropriate in order to achieve a confidence level commensurate with risk assessed through utilization of the NAIC Examiners Handbook.
The Company’s loss and loss adjustment expense reserves were evaluated by line of business for the period under examination. Loss payments, case reserves, accident dates, report dates and reinsurance credits taken from claim data files and loss reports were verified. Incurred but not reported (IBNR) reserves were also reviewed as to the reasonability of current IBNR reserves.
To the extent deemed necessary, 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 organized as a Maine corporation on August 9, 1965 and began writing property and casualty insurance in Maine in June 1966. The Company was purchased by Preserver Group, Inc., formerly known as Motor Club of America, on September 24, 1999. A wholly-owned New York domestic insurance company subsidiary, American Colonial Insurance Company was merged into the Company in June 2003.
The Company’s principal products are personal and commercial automobile insurance, including both liability and physical damage coverage. The Company also offers Homeowners multi-peril, commercial multi-peril and inland marine insurance.
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.
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, the Bylaws and the Minutes of the meetings of the Board of Directors’, Audit Committee, Finance Committee and of the Shareholders meetings held from the period January 1, 2002 to the completion of fieldwork were reviewed. The Company is managed in accordance with its corporate documents.
The Company writes the following lines of business:
The Company currently writes business primarily in the State of Maine, and less than 1% in New York. This was properly reported on Schedule T in the 2004 Annual Statement.
The Company is protected as a named insured under a blanket fidelity bond in the amount of $1,000,000 which was purchased by its Parent. The bond amount was tested with regard to the National Association of Insurance Commissioners (NAIC) standards and determined to be adequate.
At December 31, 2004, all of the outstanding shares of the Company were owned by Preserver Group, Inc. (Preserver), formerly known as Motor Club of America, a holding company domiciled in the State of New Jersey. An ownership group, consisting of three of the Company’s Directors, owned 100% of Preserver’s outstanding shares.
The Company owns 100% of the stock of subsidiary, North Atlantic Underwriters, Inc., an inactive Maine licensed insurance agency.
The Company has a management services and cost-sharing agreement with its Parent, Preserver Group, Inc., under which the Parent provides certain management services. The Company also has entered into a tax allocation agreement with its Parent. The Company does not have a current fully executed tax allocation agreement with its Parent. (See Comments & Recommendations #1)
Examiners reviewed Schedule F and noted that all significant reinsurers are authorized and in compliance with Title 24-A M.R.S.A. § 731-B. At December 31, 2004, the Company had excess of loss, catastrophe, and commercial umbrella reinsurance contracts in place. The Company provided Interests and Liability Agreements signed by various reinsurers for most of the contracts, but was unable to provide these Agreements for the Catastrophe contract for either 2003 or 2004.
None of the Company’s reinsurance contracts contained an “entire contract clause” as required by SSAP 62, paragraph 8. (See Comments & Recommendations #2)
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, if any, for strengthening internal controls are reported within this report. Other, less material, weaknesses were brought to management’s attention through a separate letter.
The Board of Directors of Preserver Group, Inc., the parent of North East Insurance, authorized North East Insurance to declare a dividend of $250,000 payable to Preserver Group, Inc. at its July 2005 meeting. Michael Clipson Haines was elected Senior Vice President, Chief Financial Officer and Treasurer on July 28, 2005.
The following financial statements show the Company’s financial position at December 31, 2004 as determined by this examination.
December 31, 2004
December 31, 2004
Bonds are stated at amortized value, and at December 31, 2004, consisted of the following:
Company ownership of bonds was confirmed through direct confirmations from custodians to the independent CPA firm, who provided us with copies. Amortized values were tested and no material exceptions were found.
As required by Title 24-A M.R.S.A. § 412, the Company maintains the required security deposit with the Treasurer of Maine. It was noted that the Company also maintains a deposit with the States of New York and Louisiana.
During review of the custodial agreements, it was noted that the agreement with one of the Custodians does not include an indemnification clause as required by the NAIC Examiners Handbook, Part I, Section IV, (J). (See Comments & Recommendations #3)
Common stocks at December 31, 2004 consisted of the following:
All North Atlantic Underwriters, Inc. stock listed above is that of a wholly owned subsidiary. The Company properly accounts for its common stock investment in its subsidiary using the statutory equity method.
Copies of certifications confirming bank balances at year-end were provided by the independent CPA firm who received confirmations directly from the custodians. The Company properly reports cash and short-term investments in compliance with SSAP 2.
The bank reconciliation of the Company’s primary checking account listed approximately 690 old outstanding checks that should have been escheated to the State of Maine as required by Title 33 M.R.S.A. § 1953. (See Comments & Recommendations #4)
The Company did not adjust the receivable accounts for Advance Premium received on policies not yet effective, thereby causing both the receivable and liabilities to be understated by the amount of Advance Premium. Not reporting the advance premium as a liability is not in compliance with SSAP 53, paragraph 13.
Receivables over 90 days old were noted during the testing of premiums receivable. As they were not written off, and appeared on the receivable report, they should have been identified and reported as non-admitted on the Annual Statement. The Company was unable to provide an aged receivable report and could not quantify the amount of receivables over 90 days which should be reported as non-admitted. This is not in compliance with SSAP 6, paragraph 9. (See Comments & Recommendations #5 for non-compliance with both SSAP 53 & SSAP 6)
The Company improperly reported deferred tax assets and liabilities as separate amounts. Per SSAP 10 (7), deferred tax assets and liabilities should be offset and presented as a single amount. (See Comments & Recommendations #6)
Examiners reviewed the Company’s claim files for the period under examination and ensured the Schedule P data appeared to be properly slotted. The Bureau of Insurance contracted with Practical Actuarial Solutions, Inc. to perform an actuarial analysis of the Company’s loss and loss adjustment expense reserves. Based on this actuarial analysis, 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 Actuarial Opinion)
Testing was performed on this balance and it is deemed to be fairly stated.
Examiners reviewed the Company’irly stated based on the inter-company tax sharing allocation. There was no properly executed written agreement with the Parent, as noted above.
The Company recognizes premium using the daily pro rata method. Unearned Premiums were tested and appear to be reasonably stated.
Examiners tested a sample of ceded premium transactions and traced to applicable reinsurance contracts, and the balance carried by the Company appears reasonably stated.
The Company’s authorized capital is $12,000,000 represented by 12,000,000 shares of common stock with a par value of $1.00 per share. The amount issued and outstanding as of December 31, 2004 was 3,049,089 shares for capital of $3,049,089.
STATE OF MAINE
Michael R. Nadeau, 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
NORTH EAST INSURANCE COMPANY
of Scarborough, 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:
Margaret S. Boghosian, CPA, CFE
Subscribed and sworn to before me this ______ day of _______________, 2006
My Commission Expires:
NORTH EAST INSURANCE COMPANY
I, Jeffrey P. Kadison, am associated with Practical Actuarial Solutions, Inc. I am a member of the American Academy of Actuaries and meet their qualification standards for rendering statements of actuarial opinion regarding property and casualty insurance company statutory annual statements, I am an Associate of the Casualty Actuarial Society. I was requested by the Maine Bureau of Insurance (the Bureau) to render this opinion on the loss and loss adjustment expense reserves of North East Insurance Company (North East or the Company). The loss and loss adjustment expense reserves are the responsibility of the North East’s management; my responsibility is to render an opinion on the reasonableness of the loss and loss adjustment expense reserves based on my review.
I have examined the Company’s reserves listed on Table A, which are included in their Financial Statements as prepared for filing with regulatory officials in the state of Maine as of December 31, 2004. My review was limited to the items shown on Table A and did not include any income statement items or other balance sheet items. I have not examined North East’s assets and I have not formed an opinion as to their validity or value. I have assumed that North East’s reserves are backed by valid assets that have suitable maturity schedules to meet North East’s cash flow requirements.
In forming my opinion on the reserves, I relied upon the data prepared by Francis Fenwick, Vice President, North East, as to the accuracy and completeness of the data. I evaluated the data used in my analysis for reasonableness and consistency. My evaluation did not reveal any data points that fell outside of the range of reasonable possibilities that would materially affect my analysis. I have assumed that North East used its best effort to supply accurate and complete data and did not knowingly provide any inaccurate data. In other respects, my examination included the use of such actuarial assumptions and methods and such tests of the calculations, as I considered necessary.
In my opinion, the amounts carried in the “Scope” paragraph on account of the items identified
Risk of Material Adverse Development
In my opinion, North East has a reasonable likelihood of experiencing material adverse development. I have defined materiality standard as 10% of the Company’s net worth on the basis of Generally Accepted Accounting Principles. Given North East’s statutory surplus of $14,379,689, my definition of materiality is $1,437,969.
This risk of material adverse development emanates from the following risk factors:
Other risk factors may exist that may in the future he deemed to have had a significant impact on North East’s loss and loss adjustment expense reserves.
The issues listed above indicate that there is material uncertainty in the estimates of loss reserves. This implies that actual results are likely to deviate, perhaps materially, from the estimates included on Table A. In addition to the possibility of adverse loss development, there is also a reasonable likelihood of material favorable development.
Salvage and Subrogation
The Company records reserves reflecting anticipated salvage and subrogation. According to the Company, net loss reserves reflect anticipated salvage and subrogation recoveries of $338,417.
The Company does not discount its’ loss and loss adjustment expense reserves.
Asbestos and Environmental
Management has stated to me that the Company does not have exposure to either asbestos or environmental impairment liability.
Extended Loss and Expense Reserves
The Company does not carry reserves for extended loss and expense.
Disclosure of Items for Unearned Premium Reserves for Long Duration Contracts
The Company does not write long duration contracts, which include those contracts with terms greater than 13 months that the insurer cannot cancel or increase the premium during its life.
Pools and Associations
The Company participates in the American Mutual Reinsurance Company (AmReco) in rehabilitation, which is a voluntary pool. The Company’s participation in this pool is for accident years 1973 through 1975 and is less than 1% of the pool in each year. The Company includes its participation in the appropriate line of business. The Company records its share of the reported reserves without adjustment for reporting lag. The assumed loss and LAE reserves equal $48,000.
Retroactive Reinsurance and Financial Reinsurance
Management has stated to me that the Company has not entered into any retroactive reinsurance or financial reinsurance.
I have reviewed the Company’s ceded reinsurance losses as shown in Schedule F, Part 3. All ceded balances are being reinsured by companies rated A or better by A.M. Best. Management has stated that there are no disputed balances or uncollectible funds other than those disclosed in Note #23 to the Financial Statements. I have performed no additional analysis to verify the financial condition of North East’s reinsurers or the adequacy of the collateralized balances. Given the information cited above, I have assumed that all reported reinsurance recoverables will be valid and collectible.
An actuarial report, including underlying workpapers supporting the findings expressed in this Opinion will be provided to the Bureau to be retained for a period of seven years at its offices.
In evaluating whether the reserves make a reasonable provision for unpaid losses and loss adjustment expenses, it is necessary to project future loss and loss adjustment expense emergence and 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.
DISTRIBUTION AND USE
This Opinion is provided for the use of regulatory authorities and may not be used or distributed for any other purpose.
November 28, 2005
EXHIBIT A - SCOPE
EXHIBIT B - DISCLOSURES
Last Updated: August 22, 2012
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