REPORT OF EXAMINATION

North East Insurance Company

as of

December 31, 2009

 

TABLE OF CONTENTS

Scope of Examination............................................................................................................................................... 1
Summary of Significant Findings................................................................................................................................ 2
Prior Examination..................................................................................................................................................... 2
Current Examination................................................................................................................................................. 4
Subsequent Events.................................................................................................................................................... 4
The Company........................................................................................................................................................... 5
History..................................................................................................................................................................... 5
Corporate Records................................................................................................................................................... 5
Corporate Ownership................................................................................................................................................ 5
Corporate Governance.............................................................................................................................................. 7
Code of Conduct and Conflict of Interest................................................................................................................... 7
Fidelity Bond and Other Insurance............................................................................................................................ 7
Territory & Plan of Operation................................................................................................................................... 8
Transactions with Affiliates....................................................................................................................................... 8
Growth of Company................................................................................................................................................. 9
Accounts and Records.............................................................................................................................................. 9
Statutory Deposits..................................................................................................................................................... 9
Reinsurance............................................................................................................................................................. 10
Financial Statements................................................................................................................................................. 10
Statement of Admitted Assets, Liabilities, and Surplus............................................................................................... 11
Statement of Operations........................................................................................................................................... 12
Statement of Capital and Surplus.............................................................................................................................. 13
Conclusion............................................................................................................................................................... 14

 

Scope of Examination

North East Insurance Company (hereinafter, “Company”) was last examined as of December 31, 2004, by the State of Maine Bureau of Insurance (hereinafter, “MBOI”).  This examination considers the period from January 1, 2005, to the close of business on December 31, 2009.

This examination was performed pursuant to the risk-focused approach promulgated by the National Association of Insurance Commissioners (hereinafter, “NAIC”).  This examination consisted of a review of the Company’s operations, administrative practices, valuation of assets, and determination of liabilities at December 31, 2009.  This examination was performed in accordance with NAIC guidelines, the 2009 NAIC Financial Condition Examiners Handbook, (hereinafter, “FCEH”), the 2009 Accounting Practices & Procedures Manual, and the laws, rules, and regulations prescribed or permitted by the State of Maine.  To the extent deemed appropriate, this examination utilized the work-papers of the Company’s independent accountants for the year ending December 31, 2009.  This examination was, to the extent possible, coordinated with the examination of the Tower Insurance Company of New York (hereinafter, “TICNY”), Hermitage Insurance Company, and CastlePoint Insurance Company performed by the New York Insurance Department (hereinafter, “NYID”).  In addition to the State of Maine, other states participating in this examination included Illinois, Massachusetts, New Hampshire and New Jersey.

The NYID examination included an actuarial review of the Tower Group, Inc. (hereinafter, “TG”) pool of which TICNY is the lead.  NYID review of the TG pool included reviews of underwriting, premium collection, loss reserves, claims handling, and reinsurance.  NYID contracted with Noble Consulting Services, Inc. to review general controls of TG’s information technology processes in accordance with the risk-focused examination standards.  Areas reviewed in the NYID examination included a review of corporate minutes, business policies, underwriting practices, reinsurance and aggregate loss and loss expense reserves.

In addition to the NYID examination, the MBOI conducted an examination of the Company for state compliance.  Areas reviewed, specific to the Company, included corporate minutes, business policies, policy issuance, claims handling, and investments.

To the extent deemed necessary, transactions occurring subsequent to the examination date were reviewed.

The results of this examination present fairly the financial condition of the Company as of December 31, 2009.  Comments, for purposes of this report, may be limited to matters involving clarification, departures from laws, rules and regulations, and/or significant changes in amounts.

 

Summary of Significant Findings

Prior Examination

The comments and recommendations included in the report of examination as of December 31, 2004, follow this paragraph.  The status of the issues identified in the previous report of examination have been included as well.

• Comment:

There is no formal written tax sharing agreement between Preserver Group, Inc. (hereinafter, “PGI”) and the Company.

Recommendation:
The Company and its parent, PGI should execute a formal written tax sharing agreement.

Status:
Closed.  Effective April 10, 2007, TG and TICNY acquired PGI (including the Company).  TG executed a formal tax sharing agreement with its affiliates, including the Company, dated September 12, 2008.

• Comment:

The catastrophe reinsurance contracts provided for 2003 and 2004 did not include all of the interests and liability agreements for all of the reinsurers.  Additionally, several of the reinsurance contracts were not executed timely.  None of the reinsurance contracts contained an “entire contract clause” as required by SSAP No. 62 ¶8.

Recommendation:
It is recommended that the Company maintain complete timely executed copies of all reinsurance agreements to ensure compliance with SSAP No. 62 ¶23, and that all contracts contain an “entire contract clause” as required by SSAP No. 62 ¶8.

Status:
Closed.  The Company provided the missing interest and liability agreements and indicated that it would try to execute reinsurance contracts as quickly as possible noting that the drafting of such agreements by reinsurers takes time.  The Company further stated that it would ensure that all future agreements include an “entire contract clause”.

• Comment:

One of the custodial agreements did not include an indemnification clause as required by the FECH, Part I, §IV (J).  Custodial agreements should at least contain an indemnification of the Company by the custodian in the event that securities are lost.  Additionally, custodial agreements should provide for the prompt replacement of any lost securities.

Recommendation:
The Company should execute a revised custodial agreement including the indemnification clause, and ensure that all custodial agreements are in compliance with the FECH.

Status:
Closed.  A new custodial agreement, executed July 17, 2007, in place during 2009 was in compliance with the FECH.

• Comment:

The bank reconciliation of the Company’s primary checking account listed approximately 690 old outstanding checks issued before June 30, 2001, that should have been escheated to the State of Maine as required by 33 M.R.S.A. §1953.  This requirement is also published in the Office of the Treasurer “Unclaimed Property 2005-2006 Holder Report Forms & Instructions”.

Recommendation:
The Company should submit unclaimed property timely to the State of Maine to be in compliance with state statutes.

Status:
Closed.  The Company filed unclaimed property reports during the period of this examination.

• Comment:

The Company is not accounting for advance premiums in the 2004 Annual Statement, which causes both the premium receivable and the liabilities to be understated.  Not reporting the advance premium as a liability is not in compliance with SSAP No. 53 ¶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 No. 6 ¶9.

Recommendation:
The Company should ensure that the annual statement reporting is accurate and that the annual statements include advance premium as a liability in compliance with SSAP No. 53.  Also, the Company needs to develop an aged receivable report from which it can report admitted and non-admitted assets on the annual statement in compliance with SSAP No. 6 ¶9.

Status:
Closed.  The Company has reported an advance premium liability in all subsequent annual statements.

• Comment:

The Company is reporting deferred tax assets and deferred tax liabilities as separate items on the annual statement, which is not in compliance with SSAP No. 10 ¶7.

      Recommendation:
The Company needs to review the presentation on the annual statement to ensure compliance with presentation requirements pursuant to SSAP No. 10 ¶7, which requires deferred tax assets and deferred tax liabilities to be offset and presented as a single amount.

Status:
Closed.  The Company has reported deferred taxes in all subsequent annual statements pursuant to SSAP No.10 ¶7.

Current Examination

The significant comments and recommendations related to the current examination follow:

1.   Comment
The MBOI relied on the NYID to review the net loss reserves as carried by the TG pool.  The NYID determined that, as of December 31, 2009, the TG pool carried loss & loss adjustment expense reserves of $693,000,000.  The NYID determined that the reserves carried by the TG pool were deficient by $43,100,000.  The deficiency represented 6.2% of the pooled carried reserves.  Based on this evaluation, the Company’s carried loss & loss adjustment expense reserves of $27,000,000 were deficient by $1,700,000.

Recommendation:
The Company should review its claim reserving methodology.

2.   Comment:
Pursuant to the amended and restated pooling agreement dated January 1, 2009, the Company became a participating member of the pooled business.  The pooling agreement was further amended effective February 5, 2009, April 1, 2009, and December 31, 2009.  None of aforementioned amendments reference the inclusion of the added participants retroactive to January 1, 2009; however, based on the financial statements of all pool participants the pooling was recorded as if these amendments were retroactive to January 1, 2009, and not in accordance with the agreement(s).

Recommendation:
Amendments to pooling agreements should include the effective date and retroactive date when applicable.

 

Subsequent Events

Effective July 1, 2009, TG and its 100% owned subsidiaries, CastlePoint National Insurance Company, formerly known as SUA Insurance Company, and TICNY, announced the acquisition of the personal lines division of OneBeacon Insurance Group.  The transaction, completed in 2010, included the acquisition of Massachusetts Homeland Insurance Company, York Insurance Company of Maine (hereinafter,“York”), and two management companies.  Effective that same day, the Company entered into a 100% intercompany quota share reinsurance agreement with York.  The Company assumed York’s net in-force, new and renewal premium and net loss and loss adjustment expense reserves for personal lines business.

Effective March 19, 2010, the Company paid a $4,700,000 extraordinary dividend to its stockholder.

During 2010, the Company began writing surplus lines in California.

 

The Company

History

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 became a wholly-owned subsidiary of PGI as a result of the September 24, 1999, acquisition by PGI.  PGI, formerly known as Motor Club of America, is a New Jersey insurance holding company.  The Company’s wholly-owned subsidiary, American Colonial Insurance Company, a New York insurance company, was merged into the Company in June 2003.  Effective April 10, 2007, PGI and its subsidiaries were acquired by TG.

The Company’s statutory home office is in South Portland, Maine with main administrative offices in New York, New York.

Corporate Records

The Company’s articles of incorporation, by-laws, and minutes of the board of directors’ meetings held during the period under examination were reviewed.

Corporate Ownership

The Company owns 100% of the stock of North Atlantic Underwriters, Inc., a Maine licensed insurance agency.  North Atlantic Underwriters, Inc. became licensed in California on November 12, 2009, as a surplus lines agency.

At December 31, 2009 the Company was 100% owned by PGI.  At December 31, 2009, PGI was 62.5% owned by TG and 37.5% TICNY.

The organizational structure of TG at December 31, 2009, follows:

 

 

 

 

 

 

 

• TG owns the remaining 62.5%
• Effective December 2010, ownership of the Company was transferred to TICNY in exchange for TICNY’s 37.5% ownership of PGI.
• Renamed CastlePoint National Insurance Company.
• Renamed CastlePoint Risk management of Florida Corp.
• CastlePoint Reinsurance Company, LTD owns the remaining 50%.

 

 

 

 

 

 

Corporate Governance

The Company has a board of directors comprised of TG management.  The board of directors approves the strategic direction of the Company’s business and financial objectives, monitors the effectiveness of management’s implementation of policies and plans, and provides oversight and support in achieving corporate objectives.

At December 31, 2009, the Company’s board of directors, listed in the 2009 statutory annual statements, consisted of seven individuals.

At December 31, 2009, the Company’s officers, listed in the 2009 statutory annual statements, consisted of four individuals.

Code of Conduct and Conflict of Interest

Title 24-A M.R.S.A. §3413 identifies certain areas of potential conflicts of interest including prohibited pecuniary interests of officials and others and prohibited use of confidential information.  The Company requires that each employee, officer and director read and understand its code of business conduct and ethics (hereinafter, “Code”).  All employees sign an acknowledgement which states that they have read a copy of the Code as a condition of employment.

Fidelity Bond and Other Insurance

A blanket fidelity bond protects the Company.  The $5,000,000 fidelity bond maintained by the Company satisfies the NAIC suggested amount of $500,000.  The Company maintains other insurance policies including directors’ and officers’ liability, commercial package, business auto, workers compensation, employed lawyers, agents errors and omissions, court bond and license, and permit bond coverage.

Territory & Plan of Operation

The Company is licensed to write business in the District of Columbia, Louisiana, Maine, Nevada, New York, Rhode Island, and Utah.  The Company is also licensed to write surplus and excess lines in the state of North Dakota.

The Company primarily provides personal and commercial automobile, liability and physical damage, and commercial multi-peril in the states of Maine and New York.

Transactions with Affiliates

The Company entered a management and cost sharing agreement with PGI effective January 1, 2002.  Pursuant to the agreement, PGI provided management services and personnel to the Company for certain business purposes.  Management services included, but were not limited to, the issuance of policies of insurance, the collection of premiums, the payment of commissions, the adjustment of claims, the establishment and management of bank accounts, the supervision of the investment portfolio, and the general performance of acts incidental to the Company’s business activities.  The Company reimbursed PGI for amounts disbursed on its behalf pursuant to commissions, claims, and return premiums.  The Company also reimbursed PGI for 105% of expenses allocated to the Company.

Effective May 1, 2009, the Company entered a service and expense sharing agreement with TICNY.   Pursuant to the agreement, TICNY performs all the functions related to the conduct of property and casualty business on behalf of the Company.  Fees for services provided are allocated in accordance with NY Department’s Regulation 30 and in accordance with the Company’s allocated percentage participation in the Pooling Agreement then in effect.

Effective September 12, 2008, the Company entered an income tax allocation agreement with TG and each of its subsidiaries.  Tax allocations are based upon separate return calculations with current credit for any net operating losses or other items utilized in the consolidated return.

Effective January 1, 2008, the Company became a party to an amended and restated pooling agreement with TICNY.  Pursuant to the agreement, all business written directly or assumed is ceded to TICNY.  TICNY is required as part of this agreement to establish a pool for all business assumed from all affiliated companies subject to this agreement.  As part of such cession, TICNY negotiates, obtains, and maintains such reinsurance as it deems appropriate with respect to the insurance liability under all of the policies written or assumed by TICNY (including business assumed pursuant to this agreement).  The pooled business, net of the aforementioned reinsurance, is ceded to the participating companies based on a pre-determined participation percentage.  The agreement allows for a change in the participation percentage from time to time.  Effective January 1, 2008, through December 31, 2009, the Company’s participation percentage was 5%.  Effective December 31, 2009, the Company’s participation percentage was changed to 4%.

Growth of Company

The period of examination covers the period commencing January 1, 2005, through December 31, 2009.  Direct, assumed, ceded, and net written premiums for the period are illustrated in the table below:

During the period of January 1, 2005, through April 10, 2007, the Company was 100% owned by PGI and was operating as an independent subsidiary.  Effective April 10, 2007 PGI (including the Company) was acquired by TG.

Direct premiums written have declined each year except 2006.  “Assumed affiliates” represents reinsurance assumed from affiliates as a result of the Company’s participation in the TG pool which commenced January 1, 2008.  “Ceded affiliates” represents reinsurance ceded to affiliates as a result of the TG pool participation.  “Ceded affiliates” also includes a quota share cession to CastlePoint Reinsurance Company, Ltd. which commenced in 2007.  The significant growth in net written premium during 2009 is attributable to the additions of Hermitage Insurance Company and SUA Insurance Company (subsequently renamed CastlePoint National Insurance Company) to the TG pool during the year.

Accounts and Records

As described under the “Scope of Examination” section, this examination was a coordinated examination with the NYID.  The NYID, the lead state, performed an examination of TICNY.  NYID contracted with Noble Consulting Services, Inc. to perform a review general controls of the TICNY’s information technology in accordance with the risk-focused examination process.  Reliance was placed on the Noble Consulting Services, Inc. review of management, organizational controls, logical and physical security controls, changes to applications and program development, contingency planning, and operations and processing controls.

Statutory Deposits

The Company reported the following security deposits as of December 31, 2009:

 

Reinsurance

The Company is a participant in an intercompany pooling agreement.  As such, the Company cedes 100% of its gross premiums written and losses to the pool manager, TICNY.  As stated in the annual statement, TICNY is responsible for the cession to non-affiliated reinsurers.  TICNY retrocedes the net liability under all business written or assumed by the pool to the pool participants pursuant to the pool agreement.

The following table shows participants’ pool percentages based on the effective dates of the amended agreements:

 

Financial Statements

 

The accompanying financial statements present fairly, in all material respects, the Company’s statutory financial position as of December 31, 2009, and statutory results of operations for the period then ended.  The financial statements as of December 31, 2008, 2007, 2006, and 2005 are unexamined and are presented for comparative purposes only.

 

Statement of Admitted Assets, Liabilities, and Surplus

as of December 31, 2009, 2008, 2007, 2006, and 2005

 

Statement of Operations

Years Ended December 31, 2009, 2008, 2007, 2006, and 2005

 

Statement of Capital and Surplus

Years Ended December 31, 2009, 2008, 2007, 2006, and 2005

 

 

 

Conclusion

The Company’s financial condition, as reported by management, is reflected in the statements and supporting exhibits contained in this report.