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FARMINGTON MUTUAL FIRE INSURANCE COMPANY
REPORT OF EXAMINATION AS OF DECEMBER 31, 2006
TABLE OF CONTENTS SCOPE OF EXAMINATION ...................................................................................................................1 HISTORY AND ORGANIZATION ..........................................................................................................2 CORPORATE RECORDS ........................................................................................................................2 MANAGEMENT ......................................................................................................................................2 LINES OF BUSINESS AND TERRITORY ..............................................................................................2 FIDELITY BOND ..................................................................................................................................2 UNDERWRITING RULES AND PRACTICES .........................................................................................3 REINSURANCE .....................................................................................................................................3 ACCOUNTS AND RECORDS .................................................................................................................3 FINANCIAL STATEMENTS ...................................................................................................................3 NOTES TO FINANCIAL STATEMENTS .................................................................................................6 COMMENTS AND RECOMMENDATIONS .............................................................................................7
I hereby certify that the attached report of examination dated March 21, 2007 shows the condition and financial affairs of FARMINGTON MUTUAL FIRE INSURANCE COMPANY located in West Farmington, Maine as of December 31, 2006 and has been filed in the Bureau of Insurance as a public document.
Dated this _______ day of ____________, 2007
STATE OF MAINE It is hereby certified that the annexed report of examination for Farmington Mutual Fire Insurance Company has been compared with the original on file in this bureau and that it is a correct transcript there from and of the whole of said original.
March 21, 2007 Honorable Eric A. Cioppa, Dear Sir: In accordance with your instructions and pursuant to statutory provisions, an examination had been made on the condition and financial affairs of FARMINGTON MUTUAL FIRE INSURANCE COMPANY located in West Farmington, Maine (hereinafter, “the Company”). The following report is respectfully submitted. The procedures in this examination considered the two year period from January 1, 2004 to the close of business on December 31, 2005 and included an examination for the one year period ended December 31, 2006. In accordance with the Examiner’s Handbook, the examination included significant transactions and/or events occurring subsequent to December 31, 2006 that were noted during the course of this examination. The examination consisted of a survey of the Company’s business policies, review of the Articles of Incorporation, Bylaws, operational practices, Board of Directors’ meeting minutes, verification of assets and a determination of liabilities at December 31, 2006 in conformity with statutory accounting practices, NAIC guidelines and the laws, rules and regulations prescribed or permitted by the Maine Bureau of Insurance, where applicable. The accompanying financial statements present fairly, in all material respects, the Company’s financial position as of December 31, 2006 and results of operations for the period then ended. The financial statements as of December 31, 2005 and December 31, 2004, prepared by management, are unexamined and presented for comparative purposes only. The Company was incorporated in 1895 and commenced writing business during that year. The Company merged with Wilton Mutual Fire Insurance Company in 1972 with the successor company being Farmington Mutual Fire Insurance Company. As noted in the examination process, the Company’s Articles of Incorporation, Bylaws, and Minutes of the Board of Directors’ meetings held during the period under examination were reviewed. There was no documentation in the Annual Meeting minutes authorizing the change made to the amount of the policy fee. There was documentation in the Board of Directors’ Meeting minutes of this change. The Company is in non-compliance with Article XII of its Bylaws which subjects any changes to the Bylaws to be put forth in the Annual Meeting, or any Special Meeting called for that purpose. (See Comment and Recommendation #1) Management of the Company is vested in a seven-member Board of Directors. The following are the duly elected members of the Board of Directors and Officers serving as of December 31, 2006.
LINES OF BUSINESS AND TERRITORY The Company is authorized to issue fire and lightning policies in the State of Maine. The Company is protected as a named insured under a fidelity bond in the amount of $100,000. The bond amount was tested with regard to NAIC standards and was determined to be adequate. The Company also has Directors and Officers liability insurance. UNDERWRITING RULES AND PRACTICES The Company issues fire and lightning policies for a three year period under an assessment plan. The Company requires every insured to provide a premium note to the Company. The amount of the note is determined based on risk and is currently 10% - 15% of the insured amount. The Company charges premiums based on the amount of the note and assesses members based on the insured amount. Policies in-force as of December 31, 2006 were overstated by 75% and the face value of the premium notes was overstated by 67%. The misstated amounts were reported on Schedule C in the Annual Statement. (See Comment and Recommendation #2) The Company had two reinsurance contracts in-force during the period under examination. The first cover, a facultative reinsurance contract, provides for the Company to cede up to $100,000, and more if accepted by the reinsurer, above a Bureau of Insurance pre-approved retention, which is presently $22,000. The Company is currently ceding insurance written over $22,000 to this reinsurer. The second cover, an aggregate reinsurance contract, allows for reinsurance of 90% of the ultimate net loss in excess of an amount equal to the greater of $7,700 or $7.00 per $1,000 of average net in-force insurance. The Company is in non-compliance with the facultative reinsurance agreement by ceding reinsurance on property specifically excluded in that agreement. (See Comment and Recommendation #3) The Company assumes reinsurance from another mutual fire assessment company in the amount of 50% of the insured amount up to a maximum of $5,000 per risk. The Company records its books and records manually, primarily on a cash basis, and the books and records are maintained at the workplace of the Secretary/Treasurer. The Annual Statements are prepared on a cash basis. The accompanying financial statements properly present in all material respects, the Company’s statutory financial position as of December 31, 2006 and results of operations for the period then ended. The financial statements for December 31, 2005 and December 31, 2004 are unexamined and are presented for comparative purposes only. at
INCOME STATEMENT for the years ended
The balance reported on the Annual Statement consists of the following categories:
Title 24-A M.R.S.A. Chapter 51 §3624 requires mutual assessment companies to maintain an unearned premium reserve equal to 50% of the cash premium or advance assessment on its policies in force. 1) Comment: As noted in the Corporate Records section, the Board of Directors made changes to the Bylaws which is in non-compliance with Article XII of the Bylaws. Article XII states that the Bylaws may only be amended at Annual Meetings or at Special Meetings called specifically for that purpose. Recommendation: The Company needs to comply with all corporate documents in managing the Company. 2) Comment: As noted in the Underwriting Rules and Practices section, the Company is over-stating Policies In-Force and the face value of Premium Notes as of December 31, 2006 on Schedule C in the Annual Statement as submitted to the Bureau of Insurance. It appears that the “amount insured” on line four did not include the expired policies that were renewed during the 2006 plan year. Recommendation: The Company should ensure that the Policies In-Force and the Premium Notes are reported accurately on the Annual Statement. 3) Comment: As noted in the Reinsurance section, the Company is reinsuring lumber mill risks under its facultative reinsurance agreement which specifically excludes Lumber Mill and Lumber Yard risks. Recommendation: The Company needs to cede risks in compliance with its reinsurance agreements. Failure to do so may result in a material uncovered loss for both the Company and the insured.
STATE OF MAINE
Michael R. Nadeau, CPA, CFE, CISA, AES being duly sworn according to law, deposes and says that, in accordance with the 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 financial affairs of FARMINGTON MUTUAL FIRE INSURANCE COMPANY of West Farmington, Maine as of December 31, 2006 and that the foregoing report of examination, subscribed to by him, is true to the best of his knowledge and belief.
Subscribed and sworn to before me
_________________________
Last Updated: October 1, 2008 |
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