PATRIOT MUTUAL INSURANCE COMPANY

REPORT OF LIMITED-SCOPE EXAMINATION
AS OF
MARCH 31, 2005

I hereby certify that the attached limited-scope report of examination dated May 26, 2005 shows the condition and affairs of PATRIOT MUTUAL INSURANCE COMPANY of Brunswick, Maine as of March 31, 2005 and has been filed in the Bureau of Insurance as a public document.

This report has been reviewed. _____________________________ Eric A. Cioppa Deputy Superintendent

Dated this day of , 2005

TABLE OF CONTENTS

SCOPE OF EXAMINATION
INTERNAL CONTROL REVIEW
FINDINGS
PREMIUM ASSETS
COMMENTS AND RECOMMENDATIONS
CONCLUSION

May 26, 2005

Alessandro A. Iuppa
Superintendent
Bureau of Insurance
34 State House Station
Augusta, ME 04333

Dear Sir:

Pursuant to the provision of Title 24-A M.R.S.A. § 221 and in conformity with your instructions, a full-scope financial examination was made of

PATRIOT MUTUAL INSURANCE COMPANY

hereinafter referred to as the "Company" for the period January 1, 2001 through December 31, 2003 at its home office in Brunswick, Maine. An Exam Report dated June 21, 2004 was issued with the results of that examination, as well as a Management Comment Letter dated June 21, 2004.

Due to the findings in that examination in the area of premium billing in both internal controls and system controls, a limited-scope examination, targeted to the premium billing area, was performed in conformity with your instructions. It should be noted that this report is a limited-scope examination and is not intended to communicate all matters of importance for an understanding of the Company’s financial condition. The following report is respectfully submitted.

SCOPE OF EXAMINATION

This examination is limited in scope to the premium systems as it relates to the Company’s premium receivable as of March 31, 2005. The examination was specifically limited to a review of the Company’s premium systems as identified in the Examination Report.

The examination consisted of a survey of the Company's business policies and underwriting and billing practices; a verification of the “Uncollected premiums and agents’ balances in the course of collection”; the “Deferred premiums, agents’ balances and installments booked by deferred and not yet due”; and the reported “Non-Admitted Assets” included in each of the aforementioned assets as of March 31, 2005 in conformity with statutory accounting practices, NAIC guidelines, and the laws, rules and regulations prescribed or permitted by the Bureau of Insurance. The examination also consisted of a detailed review of premium and billing processing transactions on a sample testing basis, testing both operational and system controls.

INTERNAL CONTROL REVIEW

During the course of the examination, a separate review of internal controls was not performed, however, internal controls specific to premium operations and systems were addressed in this limited-scope examination during the detail testing of premium outstanding at March 31, 2005.

FINDINGS

It should be noted since the full-scope examination, the Company has taken steps to prevent and identify deficiencies in the premium billing system through the institution of additional internal controls such as reconciling daily cash receipts to the premium receivables; reviewing a premium billing exception report; contracting with an independent consultant to assist in the oversight of the Company’s premium billing system; and filling a vacant controller position. These measures have improved the Company’s controls over the premium billing system. Detail testing of premiums receivable indicates that the billing and collection of policies issued subsequent to the full-scope examination has improved considerably with favorable trending. For example, improvement was noted for policies with effective dates subsequent to July 1, 2004 with continued improvement for policies with effective dates after January 1, 2005.

However, it is noted that certain known system problems remain outstanding such as premiums processed through the Company’s IDS system and subsequently interfaced into the Phoenix system do not properly age the receivable; and also, cancelled policies do not properly age the receivable. These are known system problems that require the immediate attention of Company management. (See Comment and Recommendation)

PREMIUM ASSETS

The following are the premium assets as of March 31, 2005 as determined by this targeted examination.

Premium Assets as of March 31, 2005	Assets	Non-admitted Assets	Net Admitted Assets
Uncollected premiums in the course of collection	1,490,706	263,867	1,226,839
Deferred premiums, booked but not yet due	6,632,462		6,632,462
Totals	8,123,168	263,867	7,859,301

COMMENTS AND RECOMMENDATIONS

As previously noted, the Company has a system interface that does not properly age premiums receivable and the Company does not have a consistent procedure to account for cancelled policies i.e. collect, write-off or non-admit the outstanding receivable. The Company needs to address the aging of premiums receivables to be in compliance with the Accounting Practices and Procedures Manual, SSAP No. 6, paragraph 9.

CONCLUSION

Based on this review of the Company’s premium billing system, it is concluded that the Company has made considerable effort to identify and correct system deficiencies and, as a result, the accuracy and reliability of the Company premium system has improved considerably. No material deficiencies were detected during this limited-scope examination.

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

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 A. Iuppa, Superintendent of Insurance, pursuant to the Insurance Laws of the State of Maine, he has made a limited-scope examination, targeted to premiums handling and reporting of

PATRIOT MUTUAL INSURANCE COMPANY

of Brunswick, Maine as of March 31, 2005, 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
Jennifer L. Reichenbach

________________________________
James C. Williams, CPA, CFE
Director of Financial Affairs & Solvency

Subscribed and sworn to before me

This day of , 2005

________________________________ Notary Public

My commission expires:

 

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