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PATRIOT INSURANCE COMPANY
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| Robert Payne Clark | Kathleen Ann Case |
| Dana Frank Connors | Peter Grant Hunt |
| Richard Louis Pattenaude, PhD | David Lee Reinke |
| Gregory St. Angelo, Jr. |
Officers
| Lincoln Jerry Merrill, Jr. | President |
| Donald Wilfred Sirois | Treasurer |
| Richard Louis Pattenaude, Ph.D | Secretary |
Each Director and Officer of the Company is required to complete a conflict of interest statement annually to disclose any material interest or affiliation which is likely to be in conflict with his/her official duties and responsibilities to the Company.
The Company's Articles of Incorporation, Bylaws and Minutes of the Board of Directors' meetings held during the period under examination were reviewed. Review of these records indicated that the Company was operating in accordance with its Articles and Bylaws.
Fidelity Bond and Other Insurance
The Company maintained Employee Dishonesty coverage, which was comparable to Fidelity Bond coverage.
Officers', Employees' and Agents' Welfare and Pension Plans
The Company has a 401(k) retirement plan which covers substantially all employees and under which the Company could match the amount of employee contributions up to 5% of salary.
Territory and Plan of Operation
The Company operates as a mutual property and casualty insurance company under 24-A M.R.S.A. The Company provides various types of individual and group health insurance but primarily writes personal lines property and casualty insurance in Maine, New Hampshire, and Vermont.
The Company administers all operations for Patriot Life Insurance Company, its subsidiary, where it allocates charges for these services, and reconciles the net due to or from the subsidiary on a monthly basis. There is a written management agreement in place between the Company and its subsidiary.
The Company contracted with a Third Party Administrator to service the processing of the dental line of business. The Company sold the dental business in 2006.
The Company files a consolidated Federal Income Tax return and has a written Tax Allocation Agreement in place between the Company and its wholly owned subsidiary, Patriot Life Insurance Company.
| DIRECT PREMIUMS WRITTEN BY STATE | |||
|---|---|---|---|
| 2006 | 2005 | 2004 | |
| Maine | $ 27,577,657 | $ 29,052,626 | $ 28,795,431 |
| New Hampshire | 4,686,224 | 4,556,207 | 4,540,236 |
| Vermont | 3,590,962 | 3,594,603 | 3,288,123 |
| Total | $ 35,854,843 | $ 37,203,436 | $ 36,623,790 |
The Company has multiple-layered reinsurance agreements in place with a base retention of $150,000 for all of the Personal Lines business for the period under examination.
For the small healthcare line of business, the Company cedes 100% of the risk.
Accounts and records were reviewed and tested in order to assess their impact on the Company's financial condition and conformity with related laws.
Examiners performed a general control review and a software security review of the Company’s computer systems, in accordance with Exhibit C in the NAIC Financial Condition Examiners Handbook, for the purpose of assessing controls and identifying exception conditions. The review indicated that the Company does not have a comprehensive Business Continuity/Disaster recovery plan. (See Comment and Recommendation #1)
A review of legal confirmations furnished by outside legal counsel disclosed that the Company is not involved in any actual, pending or threatened litigation that would result in a material judgment against the Company.
During the course of the examination, a separate review of internal controls was not performed; however, internal controls were addressed in this examination during the detail testing of premium, claims, investments, reinsurance and financial reporting.
On July 1, 2007, the Company was acquired by Frankenmuth Insurance Company of Michigan. Prior to the merger, the Company was re-structured into a stock company, Patriot Insurance Company, and became the wholly owned subsidiary of the newly formed Patriot Mutual Holding Company. Patriot Mutual Holding Company was then merged into Frankenmuth Insurance Company.
The accompanying financial statements present fairly, in all material respects, the Company's statutory financial position as of December 31, 2006, statutory results of operations for the period then ended and statutory capital and surplus since the last examination. The financial statements as of December 31, 2005 and December 31, 2004 are unexamined and are presented for comparative purposes only.
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND SURPLUS
December 31, 2006, 2005 and 2004
| 2006 | 2005 (unexamined) |
2004 (unexamined) |
|
| Admitted Assets: | |||
| Bonds (Note 1) | $ 32,903,483 | $ 28,867,097 | $ 22,783,680 |
| Common stocks (Note 2) | 7,679,539 | 7,529,504 | 7,442,596 |
| Cash and short-term investments (Note 3) | 2,465,415 | 3,714,272 | 6,216,274 |
| Investment income due and accrued | 433,599 | 324,872 | 217,990 |
| Uncollected premiums in the course of collection (Note 4) | 863,079 | 1,101,712 | 1,367,533 |
| Deferred premiums, agents' balances and installments booked but deferred and not yet due (Note 5) |
6,511,213 | 6,990,389 | 7,089,797 |
| Amounts recoverable from reinsurers | 92,255 | 384,900 | 221,013 |
| Net deferred tax asset | 1,170,800 | 254,500 | 526,800 |
| Electronic data processing equipment and software | 34,823 | 16,441 | 92,443 |
| Receivables from parent, subsidiaries and affiliates | 52,432 | 112,590 | 90,791 |
| Aggregate write-ins for other than invested assets | 6,888 | 11,912 | 7,117 |
| Total Admitted Assets | $ 52,213,526 | $ 49,308,189 | $ 46,056,034 |
| Liabilities and Surplus | |||
| Losses (Note 6) | $ 10,335,588 | $ 11,124,832 | $ 9,832,403 |
| Loss adjustment expenses (Note 6) | 2,058,388 | 1,793,137 | 1,546,130 |
| Commissions payable | 811,706 | 803,550 | 635,256 |
| Other expenses (excluding taxes, licenses and fees) | 812,960 | 730,934 | 561,548 |
| Taxes, licenses and fees (excluding federal and foreign income taxes) | 70,870 | 18,292 | 113,180 |
| Current federal and foreign income taxes | 566,620 | (2,755) | 5,378 |
| Unearned premiums (Note 7) | 14,492,360 | 15,180,310 | 14,828,874 |
| Advance premium | 213,061 | 322,324 | - |
| Ceded reinsurance premiums payable (Note 8) | (117,267) | (7,598) | 423,133 |
| Funds held by company under reinsurance treaties | - | - | 15,127 |
| Remittances and items not allocated | 13,756 | 5,358 | 166,005 |
| Aggregate write-ins for liabilities | 89,009 | 9,926 | 1,593 |
| Total liabilities & other funds | $ 29,347,051 | $ 29,978,310 | $ 28,128,627 |
| Unassigned funds (surplus) | $ 22,866,475 | $ 19,329,879 | $ 17,927,407 |
| Surplus as regards to policyholders | $ 22,866,475 | $ 19,329,879 | $ 17,927,407 |
| Total Liabilities and Surplus | $ 52,213,526 | $ 49,308,189 | $ 46,056,034 |
STATUTORY STATEMENT OF OPERATIONS
Years Ended December 31, 2006, 2005 and 2004
| 2006 | 2005 (unexamined) |
2004 (unexamined) |
|
| Revenue: | |||
| Premiums earned | $ 33,405,183 | $ 33,989,017 | $ 33,162,264 |
| Deductions: | |||
| Losses incurred | $ 18,763,923 | $ 20,033,318 | $ 19,468,150 |
| Loss expenses incurred | 2,928,539 | 2,966,769 | 2,817,298 |
| Other underwriting expenses | 10,666,445 | 10,654,571 | 10,837,617 |
| Total underwriting deductions | $ 32,358,907 | $ 33,654,658 | $ 33,123,065 |
| Net underwriting gain or (loss) | $ 1,046,276 | $ 334,359 | $ 39,199 |
| Investment Income: | |||
| Net investment income earned | $ 795,746 | $ 531,412 | $ 390,108 |
| Net realized capital gain/(loss) | (84,791) | 65,153 | 111,509 |
| Net investment gain or (loss) | $ 710,955 | $ 596,565 | $ 501,617 |
| Other Income: | |||
| Net loss from premium balances charged off | $ (96,832) | $ (352,312) | $ (38,348) |
| Finance and service charges not included in premiums | 371,741 | 316,297 | 232,005 |
| Aggregate write-ins for miscellaneous income | 716,156 | 34,454 | 35,306 |
| Total other income | $ 991,065 | $ (1,561) | $ 228,963 |
| Net income before dividends, federal and foreign tax | $ 2,748,296 | $ 929,363 | $ 769,779 |
| Federal and foreign income taxes incurred | 606,902 | (14,338) | 490 |
| Net income | $ 2,141,394 | $ 943,701 | $ 769,289 |
STATUTORY STATEMENT OF CAPITAL AND SURPLUS
Years Ended December 31, 2006, 2005 and 2004
| 2006 | 2005 (unexamined) |
2004 (unexamined) |
|
| Capital and Surplus, Beginning of Year | $ 19,329,879 | $ 17,927,407 | $ 16,061,561 |
| Net income | 2,141,394 | 943,701 | 769,289 |
| Change in unrealized capital gains | 187,280 | 24,029 | 241,719 |
| Change in net deferred income tax | (716,899) | (722,461) | (517,912) |
| Change in non-admitted assets | 2,129,193 | 1,366,599 | 1,372,750 |
| Aggregate write-ins for gains and losses in surplus | (204,372) | (209,396) | - |
| Change in surplus as regards to policyholders | $ 3,536,596 | $ 1,402,472 | $ 1,865,846 |
| Capital and Surplus, End of Year | $ 22,866,475 | $ 19,329,879 | $ 17,927,407 |
| Note 1 – Bonds | $ 32,903,483 |
| Cost | Par Value | Market Value | Amortized or Statement Value |
|
| U.S. Government | $ 20,134,213 | $ 19,706,793 | $ 19,858,498 | $ 19,961,585 |
| Other government | 532,799 | 505,000 | 521,761 | 528,116 |
| Industrial | 12,404,969 | 12,415,000 | 12,393,717 | 12,413,782 |
| $ 33,071,981 | $ 32,626,793 | $ 32,773,976 | $ 32,903,483 |
The Company's ownership of the bonds was confirmed by obtaining confirmations from depositories for those securities held under custodial arrangements.
Included in the Bonds balance, as required by 24-A M.R.S.A. §412, is the Company's security deposit with the Treasurer of Maine.
| Note 2 - Common Stock | $ 7,679,539 |
| Common Stock | Cost | Market Value |
| Unaffiliated | $ 1,217,034 | $ 1,519,911 |
| Patriot Life | 6,159,628 | 6,159,628 |
| $ 7,376,662 | $ 7,679,539 |
The Company is properly reporting its investment in unaffiliated common stock at market value, with the corresponding unrealized gain charged to surplus as required. The Company's ownership of stocks represents 100% ownership of 250,000 shares of its wholly owned subsidiary, Patriot Life Insurance Company, which is properly reported using the statutory equity method.
| Note 3 - Cash and Short-Term Investments | $ 2,465,415 |
Cash and short-term investment balances were confirmed with various depositories and custodians and reconciled with the Company's general ledger as of December 31, 2006. Short-term investments consist of money market funds.
| Note 4 - Uncollected Premiums in the Course of Collection | $ 863,079 |
The Company has written off a substantial amount of premiums considered uncollectible. The uncollected premiums are aged properly and the premiums due over 90 days have been properly non-admitted in compliance with SSAP 6.
| Note 5 – Deferred Premiums and Agents’ Balances and Installments Booked but Deferred and Not Yet Due | $ 6,511,213 |
Premiums not yet due are properly reported as deferred premiums.
| Note 6 - Losses & Loss Adjustment Expense | Loss Reserves LAE Reserves |
$ 10,335,588 $ 2,058,388 |
The Bureau of Insurance contracted with Alliance Actuarial Services, 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 Actuarial Opinion)
| Note 7 – Unearned Premiums | $ 14,492,360 |
This account was detailed tested and found to be fairly stated at December 31, 2006.
| Note 8 – Ceded Reinsurance Premiums Payable | $ (117,267) |
The audited financial statements prepared by an outside CPA firm differ from the Annual Statement and the Examination Report financial statements because the audited statements include a reclassification of $210,098 in overpaid ceded reinsurance payable from the liability to an asset with other reinsurance recoverables. That reclassification to the financial statements was not made in this report because there was no effect on surplus, and the amount of the reclassification was immaterial.
Comment:
As noted in the Information Systems section, the Company does not have a Business Continuity/Disaster Recovery plan in place.
Recommendation:
The Company should develop and implement a Business Continuity/Disaster Recovery plan.
STATE OF MAINE
COUNTY OF KENNEBEC, SS
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, has made an examination of the condition and financial affairs of
PATRIOT INSURANCE COMPANY
(f.k.a. Patriot Mutual Insurance Company)
located in Brunswick, 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. The following examiners from the Bureau of Insurance assisted:
Margaret S. Boghosian, CPA, CFE
Faith A. Talbot, AFE
Analisa M. Gallant
Audrey L. Wade
______________________________
Michael R. Nadeau, CPA, CFE, CISA, AES
Examiner-In-Charge
Subscribed and sworn to before me
This 17 day of January, 2008
Patricia A. Galouch
_______________________________
Notary Public
My commission expires: March 2, 2014
ACTUARIAL OPINION
ALLIANCE ACTUARIAL SERVICES, INC.
Statement of Actuarial Opinion
Patriot Mutual Insurance Company
For the Year Ended December 31,2006
IDENTIFICATION
I, Richard Lo, am a Consulting Actuary associated with the firm of Alliance Actuarial Services, Inc. I am a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries and meet the Academy's qualification standards for signing statements of actuarial opinion on property and casualty loss reserves. I was engaged by the Maine Bureau of Insurance (the "Bureau") to perform an actuarial examination of Patriot Mutual Insurance Company ("PMIC" or the "Company") and to render this opinion with regard to loss and loss adjustment expense reserves of the Company as of December 31, 2006.
SCOPE OF OPINION
I have examined the reserves listed in Exhibit A, as shown in the Annual Statement of the Company, as prepared for filing with state regulatory officials, as of December 31, 2006. The items on which I am expressing an opinion are listed in Exhibit A and reflect the Loss Reserve Disclosure items listed in Exhibit B.
My examination of the loss and loss adjustment expense reserves was based upon data and related information provided by the Company. In this regard, I relied on Donald Sirois, Vice President, CFO and Treasurer of the Company, and Mr. Michael R. Nadeau, the Bureau's examiner-in-charge of the PMIC examination, as to the accuracy and completeness of the data. I evaluated the data used directly in my analysis for reasonableness and consistency. In other respects, my examination included the use of such actuarial assumptions and methods and such tests of calculations as I considered necessary.
My opinion was limited to Items listed in Exhibit A and does not pertain to any income statement or other balance sheet items. For instance, I have formed no opinion regarding the value, validity or cash flow characteristics of the Company's assets.
This opinion is intended to be used solely by the Bureau in its examination of the Company as of December 31, 2006 and is not intended for any other purpose.
OPINION
In my opinion, the amounts carried in the balance sheet on account of the items identified in Exhibit A (for losses and loss adjustment expenses combined):
A. Meet the requirements of the insurance laws of Maine;
B. Are stated in accordance with accepted loss reserving standards and principles; and
C. Make a reasonable provision for the aggregate of unpaid loss and loss expense obligations of the Company under the terms of its policies and agreements.
RELEVANT COMMENTS
Risk of Material Adverse Deviations
Since the emergence and settlement of claims are subject to uncertainty, actual future developments will vary, perhaps significantly, from the amounts carried on the balance sheet. Furthermore, the amounts carried on the Company's balance sheet may not provide for the extraordinary future emergence of either new classes of losses or post-contractual expansions of policy coverage, nor for extraordinary future development of reserves that may have been established specifically for these events.
Based on my understanding of the use of this opinion, I evaluated materiality in the context of 10% of statutory surplus at December 31, 2006. I did not evaluate materiality in any other context. In this opinion, I considered the potential for adverse deviation of $2.3 million to be material. In my opinion, potential variability of the reserves in excess of this threshold would be of interest to the Bureau. I believe several risk factors could result in material adverse deviation from the carried net reserve amounts. These risk factors include:
Reinsurance Collectibility
Based on a review of the Company's ceded reinsurance balances as shown in Schedule F - Parts 3 and 4, there are no material reinsurance recoverables on paid losses that are over 90 days past due. The Company also represented to me that it knows of no uncollectible reinsurance cessions and on disputed reinsurance balances. There are no material reinsurance recoverables with assuming companies that were rated vulnerable (B or lower) by A.M.Best or that were reported to be in liquidation or receivership.
Retroactive Reinsurance and Financial Reinsurance
The Company has informed me that it does not currently participate in any reinsurance that has or should have been accounted for as retroactive or financial reinsurance. I have reviewed the reinsurance agreement and that it constitutes a valid transfer of risk.
NAIC IRIS Ratios
The loss and loss adjustment expense reserves identified in Exhibit A did not create any exceptional values for NAIC IRIS Tests 10, 11, or 12.
Discounting
The Company does not discount loss and loss expense reserves.
Salvage and Subrogation
The data underlying my review and the resulting estimates are net of salvage and subrogation. The Company has not quantified salvage and subrogation recoverables in the Annual Statement.
Pools and Associations
The Company does not have any net obligations associated with voluntary or involuntary pools or associations.
Unearned Premium for Long Duration Contracts
The Company writes no policies or contracts related to single or fixed premium policies with coverage periods of thirteen months or greater which are non-cancelable and not subject to premium increase (excluding financial guaranty contracts, mortgage guaranty policies, and surety contracts).
Extended Loss and Expense Reserves
The Company writes no business that would require extended loss and expense reserves.
Asbestos and Environmental Exposures
Management has informed me that the Company does not have exposure to asbestos and environmental impairment liability.
Terrorist Attack Exposure
Management has informed me that the Company does not have exposure to terrorist attack claims. In my opinion, the risk of material liability from this exposure is remote as of December 31, 2006.
DOCUMENTATION
An actuarial report supporting the findings expressed in this Statement of Actuarial Opinion will be provided to the Bureau.
______________________________
Richard W. Lo, FCAS, MAAA, FCA
Alliance Actuarial Services, Inc.
765 Match Circle
Harleysville, PA 19438
(215) 256-6505
Date: June 12, 2007
Exhibit A: SCOPE
Loss Reserves
| A. Reserve for Unpaid Losses (Liabilities, Surplus, and Other Funds page, Line 1) |
$10,335,588 |
| B. Reserve for Unpaid Loss Adjustment Expenses (Liabilities, Surplus, and Other Funds page, Line 2) |
$ 2,058,388 |
| C. Reserve for Unpaid Losses - Direct and Assumed (Schedule P, Part 1, Totals from Cols. 13 and 15) |
$11,818,000 |
| D. Reserve for Unpaid Loss Adjustment Expenses Direct and Assumed (Schedule P, Part 1, Totals from Cols. 17, 19 and 21) |
$ 2,058,000 |
| E. The Total Claims Made Extended Loss and Expense Reserve (Schedule P Interrogatories) |
$ 0 |
Exhibit B: DISCLOSURE
| 1. Materiality Standard (US$) | $2,286,648 |
| 2. Statutory Surplus | $ 22,866,475 |
| 3. Anticipated net salvage and subrogation included as a reduction to loss reserves as reported in Schedule P | NA* |
4. Discount included as a reduction to loss reserves and loss expense reserves as reported in Schedule P: 4(a) Nontabular discount |
$ 0 |
| 5. The net reserves for losses and expenses for the Company's share of voluntary and involuntary underwriting pools' and associations' unpaid losses and expenses that are included in reserves shown on the Liabilities, Surplus and Other Funds page, Losses and Loss Adjustment Expense Lines | $ 0 |
6. The net reserves for losses and loss adjustment expenses that the Company carries for the following Expense Lines: 6(a) Asbestos, as disclosed in the Notes to Financial Statements |
$ 0 |
7. The total claims made extended loss and expense reserve (Schedule P Interrogatories): 7(a) amount reported as loss reserves |
$ 0 |
* The data underlying my review and the resulting estimates are net of salvage and subrogation. The Company has not quantified salvage and subrogation recoverables in the Annual Statement.
Last Updated: July 10, 2008
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