INSURANCE DEPARTMENT · 2013. 3. 13. · A comprehensive review was made ofthe financial analysis files and documents . submitted to the Financial Analysis Unit ofthe Department,

STi\TE OF CONNECTICUT INSURANCE DEPARTMENT

ORDER ADOPTING REPORT OF EXAMINATION

I, Thomas B. Leonardi, Insurance Commissioner of the State of Connecticut,

having fully considered and reviewed the Examination Report (the "Report") of

TRENWICK AMERICA REINSURANCE CORPORATION (the "Company") as of

December 31, 2009, do hereby adopt the findings and recommendations contained

therein based on the following findings and conclusions, TO WIT:

1. I, Thomas B. Leonardi, Insurance Commissioner of the State of Connecticut, and as such is charged with the duty of administering and enforcing the provisions of Title 38a of the Connecticut General Statutes (C.G.S.).

2. The Company is a domestic insurer authorized to transact the business of insurance in the State of Connecticut.

3. On January 10,2011, the verified Report of the Company was filed with the Connecticut Insurance Department.

4. In accordance with e.G.S. §38a-14(e)(3), the Company was afforded a period of thirty (30) days within which to submit to the Connecticut Insurance Department a written submission or rebuttal with respect to any matters contained in the Report.

5. On February 9, 2011, the Company filed a written submission indicating that they were in agreement with all the recommendations contained in the Report. A copy of the Report is attached hereto and incorporated herein as Exhibit A.

www.ct.gov/cid P.O. Box 816 • Hartford, CT 06142-0816

An Equal Opportunity Employer

NOW, THEREFORE, it is ordered as follows:

1. That the Report of the Company hereby is adopted as filed with the Insurance Department.

2. That the Company shall comply with all of the recommendations set forth in the Report, and that failure by the Company to so comply shall result in sanctions or administrative action as provided by Title 38a of the C.G.S.

Dated at Hartford, Connecticut, this 14th day of March, 2011.

Thomas B. Leonardi Insurance Commissioner

EXHIBIT A

EXAMINATION REPORT

OF

TRENWICK AMERICA REINSURANCE CORPORATION

AS OF

DECEMBER 31, 2009

BY THE

CONNECTICUT INSURANCE DEPARTMENT

TABLE OF CONTENTS

Salutation 1

Scope of Examination 1

History 2

Organizational Chart 4

Management and Control 5

Related Party Transactions 6

Insurance Coverage 7

Territory and Plan of Operation 7

Reinsurance 7

Information Technology and Controls 8

Accounts and Records 8

Financial Statements 10

Assets 10

Liabilities, Surplus and Other Funds 10

Statement of Income 11

Analysis of Examination Adjustments 12

Losses and Loss Adjustment Expenses 12

Aggregate Write-Ins for Liabilities 15

Common Capital Stock 16

Gross Paid In and Contributed Surplus 16

Unassigned Funds (Surplus) 16

Recommendations 16

Conclusion 17

Signature 18

January 10,2011

The Honorable Thomas B. Leonardi Insurance Commissioner Connecticut Insurance Department 153 Market Street, 7th floor Hartford, Connecticut 06103

Dear Commissioner Leonardi:

In compliance with your instructions and pursuant to the requirements of Section 38a-14 of the General Statutes of the State of Connecticut (CGS), the undersigned has made a financial examination of the condition and affairs of the


(hereafter referred to as the Company or TARCO), a corporation with capital stock, incorporated under the laws of the State of Connecticut and having its statutory home office and administrative office located at 1499 Post Road, Fairfield, Connecticut. The report of such examination is submitted herewith.

SCOPE OF EXAMINATION

The previous examination of the Company was conducted as of December 31, 2006. The current examination, which covers the subsequent three-year period from January 1,2007 through December 31,2009, was conducted at the Company's administrative office.

As part of the examination planning procedures, the Financial Regulation Division of the Connecticut Insurance Department (the Department) reviewed the following materials submitted by the Company:

• Minutes of the meetings of the Board ofDirectors (Board) from 2007 through the latest 2010 meeting.

• Statutory Audit reports from 2007 though 2009, completed by the Company's independent certified public accountants, Marcum, LLP (Marcum).

• Management's Discussion and Analysis from 2007 through 2009. • Statements of Actuarial Opinion from 2007 through 2009. • Annual Statements filed with the Department.

A comprehensive review was made ofthe financial analysis files and documents submitted to the Financial Analysis Unit ofthe Department, as well as reports obtained from the National Association ofInsurance Commissioners (NAIC) database which indicated no material concerns with respect to financial condition or regulatory compltimce issues.

The work papers prepared by Marcum Tn connection with its statutory audit were reviewed and relied upon to the extent deemed appropriate.


The examination was conducted on a full scope, comprehensive basis in accordance with the procedures outlined in the NAIC Financial Examiners Handbook (the Handbook).

The Handbook requires that we plan and perform the examination to evaluate the financial condition and identify prospective risks of the Company by obtaining information about the Company, including corporate governance, identifying inherent risks within the Company, and evaluating system controls and procedures used to mitigate those risks. An examination also includes assessing the principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation, management compliance with Statutory Accounting Principles and Annual Statement Instructions.

All accounts and activities of the Company were considered in accordance with the riskfocused examination process.

The Department retained the services of Deloitte Consulting, LLC (Deloitte) to perform an actuarial review and the insurance services firm of INS Regulatory Insurance Services, Inc. (INS) to assist in the financial examination of the Company.

Comments in this report are generally limited to exceptions noted or to items considered to be of a material nature.

Failure of items in this report to add to totals or for totals to agree with captioned amounts is due to rounding.

HISTORY

TARCO was originally incorporated under the name Excess and Treaty Reinsurance Corporation (ETRE) under the laws of the State of New York on August 23,1977.

ETRE commenced business with paid-in capital of $2.5 million and contributed surplus of $2.5 million. Contributions to ETRE's surplus were made in 1978 and 1979 in the amounts of $3 million and $2 million respectively, by ETRE's sole shareholder, Excess and Treaty Holding Corporation (ETHC). The name ofthe Company was changed from ETRE to TARCO on November 22,1983. ETHC contributed another $8.25 million to surplus in October of 1984.

Upon dissolution ofETHC on December 31,1984, direct stock ownership of TARCO passed to Trenwick America Corporation (TAC), a Delaware corporation.

On January 1, 1985, TARCO merged with Trenwick Reinsurance Company of Connecticut and changed its state of domicile from New York to Connecticut.

On December 27, 1985, Trenwick Group Inc. (TGI), the ultimate parent company of TAC, completed a private offering of securities. Of the net proceeds received, $25 minion was contributed to TARCO's surplus through its parent, TAC, prior to December 31, 1985. On June 16, 1986, TGI completed an initial public bffeiing of securities. Of the net proceeds received, $60 million was contributed to TARCO's surplus through TAC

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TRENWICK AMERICA REINSURANCE CORPORAnON

prior to June 30,1986. TARCO received additional surplus paid from TAC on December 29,1989, totaling $3.5 million. On December 28,1992, TGI completed an initial public offering of 6% convertible debentures. Of the net proceeds received, $60 million was contributed to TARCO's surplus through TAC prior to December 31, 1992.

Effective January 20,1994, the directors of TARCO unanimously adopted a resolution that each outstanding share of common stock be split ten to one. Effective with this split, TARCO transferred and converted $22.5 million of its contributed surplus to cornmon stock which represented the par value of the shares being issued pursuant to the split.

On September 27,2000, TGI, LaSalle Re Holdings Limited (LRH), LaSalle Re Limited (LRL) and Trenwick Group Ltd. (TGL) completed a business combination in which shareholders ofTGI, LRH and LRL exchanged their shares on a one-for-one basis for newly issued shares ofTGL.

In 2001, the transfer of the statutory equity value of Chartwell Insurance Company (Chartwell) and The Insurance Corporation of New York (INSCORP) was made from TAC to TARCO. In 2002, Chartwell was merged into TARCO.

On August 20, 2003, TAC filed for protection under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court). Also on August 20,2003, TGL filed insolvency proceedings in the Supreme Court of Bermuda and in the Bankruptcy Court.

On June 29,2004, Trenwick America Services Corporation (TASCO) was incorporated in Connecticut as a wholly-owned subsidiary of TARCO for the purpose of providing management services.

On October 27,2004, a "Second Amended Plan of Reorganization for TAC under Chapter 11 of the Bankruptcy Code" was filed whereby TAC would be reorganized and succeeded by Trenwick America, LLC (TALLC), a Delaware limited liability company and the new parent company. On June 20, 2005, the Connecticut Insurance Commissioner approved the Company's sale to Phoenix Partners, L.P. and Tejas Incorporated. On August 9, 2005, the New York Superintendent approved this transaction as well. This change in ownership became effective on August 15,2005.

On May 13, 2008, the Department approved a Run-Off Plan (the Plan), which runs through December 31, 2010. The Plan was amended once during the examination period (November 10, 2009) and once subsequent to the examination period (May 11, 2010). Both amendments related to the Run-Off Management Agreement with Princeton Partnership, LLP, and were approved by the Department. The principal transactions under the Plan include commutations of assumed reinsurance contracts in order to accderate the liquidation of the Company. While commutations are negotiated with various ceding companies, TARCO continues to process premium and loss activity on its remaining contracts in the normal course of business. All applicable transactions related to the Plan, in particular commutations, are subject to approval by the Department. TARCO' s wholly owned subsidiary INSCORP, was recently placed into liquidation by the New York Insurance Department. TARCO has been carrying its investment in

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INSCORP and TASCO in accordance with statutory accounting which records an investment in a subsidiary on the equity basis.

Pursuant to Article 74 of the New York Insurance Law (Insurance Law), on June 30, 2009, the Supreme Court of the State of New York, County of New York (Receivership Court), issued an Order of Rehabilitation (Rehabilitation Order), placing INSCORP into Rehabilitation and appointing then Superintendent of Insurance of the State of New York (Superintendent), rehabilitator of INSCORP (INSCORP in Rehabilitation). The Rehabilitation Order directed the Rehabilitator to, among other things, take possession of INSCORP in Rehabilitation's property, conduct its business, and take such steps toward the removal of the causes and conditions that made the Rehabilitation Order necessary. The New York Liquidation Bureau (NYLB) is the entity that carries out the responsibilities of the Rehabilitator.

On February 23, 2010, the Superintendent requested the Receivership Court to convert the Rehabilitation Order to a Liquidation Order. On March 10, 2010, the Receivership Court granted the Superintendent's request and INSCORP was placed into liquidation. The NYLB will carry out the responsibilities of the liquidation.

The capitalization of TARCO at December 31,2009, consisted of 1.25 million shares of common stock issued and outstanding with a par value of $20 per share.

ORGANIZATIONAL CHART

The following is the Company's organizational chart as of December 31,2009:

Trenwick America, LLC Delaware

Trenwick America Reinsurance Canterbury Financial Group CorporationIncorporated... ConnecticutConnecticut - (Inactive)

I I I

Trenwick America Services The Insurance Corporation of New Corporation York in Rehabilitation Connecticut New York

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MANAGEMENT AND CONTROL

Annual Shareholders Meetings

The bylaws provide that there shall be an annual meeting of the shareholders for the election of directors and for the transaction of such other business that may come before such meeting. Special meetings of the shareholders may be called by the president or a vice president, or by resolution of the Board. The presence at any meeting, in person or by proxy, of the holders of record of a majority of the shares issued and outstanding and entitled to vote shall constitute a quorum for the transaction ofbusiness.

It was noted in review of the Board minutes that annual meetings of the shareholders were not held during the period under examination. It is recommended that the Company hold annual meetings of the shareholder in compliance with the bylaws.

Board of Directors

The business, property and affairs of the corporation shall be managed by or by the direction of the Board. Special meetings of the Board may be called by the president or a vice president. A majority of the number of directorships at the time shall constitute a quorum for the transaction of business.

The Board may by resolution or resolutions adopted by the directors holding a majority of directorships, designate one or more committees, each committee to consist of three or more directors of the corporation to perform such duties as the Board shall determine.

The bylaws state that the Company shall be managed by a Board of not less than three nor more than nine directors to be elected annually. Regular meetings of the Board shall be held at such time and place as may be determined by the Board. The annual meeting of shareholders shall be held in each year at such time and place as shall be designated by the Board, within or without the state of Connecticut.

Members of the Board serving the Company at December 31, 2009, were as follows:

Name Business affiliation

John Jay Dwyer Retired Executive Aetna Life and Casualty

Joann McNiff Managing Member Joann McNiff, Esq.

Craig Wilson Biddle Business Consultant National Insurance Partners

Jean McMonigle Waggett Retired Executive Terra Nova (Bermuda) Holdings Ltd.

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Officers

The officers of the corporation shall be elected by the Board. The bylaws, as amended, indicated the officers of the corporation shall be a chairman of the Board and vice chairman of the Board, who shall be elected from among the members of the Board, and president, executive vice present, a secretary and a treasurer. All shall hold office until the next annual election of officers and until his successor shall have been duly elected and qualified.

At the Board Meeting held June 11, 2008, the officers of the Company were elected. The elected officers did not include a vice chairman of the Board. It is recommended that the Company appoint a vice chairman of the Board in compliance with the bylaws.

Officers serving the Company at December 31, 2009, were as follows:

Name Title

Joann McNiff Chairman of the Board

Bruce Charles Shulan President, Chief Executive Officer

Rudy Dimmling Secretary, Executive Vice President

Nicole Suzanne Morris Treasurer, Chief Financial Officer

RELATED PARTY TRANSACTIONS

Run-Off Administrative Services Agreement

TARCO is party to a Run-Off Administrative Services Agreement (RASA) whereby TASCO provides certain management, advisory, administrative, consulting, accounting and other services to TARCO and its affiliates. These companies are billed for the actual direct costs attributable to the services performed and the indirect and overhead costs are allocated to each entity. The written administrative service agreement was approved by the Department.

Tax Sharing Agreement

TARCO files a consolidated federal income tax return with the following companies:

• TALLC • TASCO • INSCORP • Canterbury Financial Group, Inc.

The method of income tax allocation among the companies is subject to a written agreement that was approved by the Department on March 24,2006. Allocation of the consolidated tax liability is apportioned among the member companies in accordance

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with the ratio of the members' taxable income in proportion to the consolidated taxable income of the group.

INSURANCE COVERAGE

The Company has no employees, but uses employees ofTASCO pursuant the terms of the RASA described above.

The Company maintains fiduciary liability insurance through the U.S. Specialty Insurance Company in an amount that exceeds the suggested minimum as outlined in the Handbook.

In addition to the fiduciary liability insurance coverage, the following insurance coverages were also in place at December 31, 2009:

Federal Insurance Company General liability, property coverage, commercial excess umbrella.

Great Northem Insurance Company Commercial automobile

AXIS Surplus Insurance Company Directors, officers and corporate liability msurance

TERRITORY AND PLAN OF OPERATION

As of December 31, 2009, the Company was licensed in twenty (20) jurisdictions, and was an accredited/authorized reinsurer in twenty (20) other jurisdictions. No new business was written during the peliod under examination since the Company is in runoff.

REINSURANCE

Since 2003, when TARCO began running off its business, the Company has successfully reduced its reinsurance liabilities through the natural process of ongoing settlements and through aggressive reinsurance commutation initiatives. As an indication of the order of magnitude of this reduction in liabilities, gross loss and loss adjustment expense (LAE) reserves have decreased from $1,037.5 million to $ 205.5 million and net loss and LAE reserves have decreased from $626.1 million to $91.0 million between December 31, 2002 and December 31, 2009.

Assumed Reinsurance

TARCO provided reinsurance to insurers of property and casualty risks located primarily in the United States. The Company generally obtained its business through brokers and reinsurance intermediaries. TARCO wrote both treaty and facultative reinsurance for multiple lines ofbusiness on an excess of loss and quota share basis from the late 1970s through mid-2003. Assumed business consists of agreements originally written by TARCO and those originally written by Chartwell.

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The majority of the remaining assumed reinsurance liabilities are from accident and health business which was placed with various fronted underwriting pools within which TARCO kept a relatively small retention of five or ten percent.

Ceded Reinsurance

The majority of the ceded reinsurance recoverables are retrocessions related to the accident and health business which was placed with the various fronted underwriting pools as noted in the preceding paragraph.

INFORMAnON TECHNOLOGY AND CONTROLS

An evaluation of information technology (IT) controls was conducted to gain familiarity with the existing controls, policies and procedures established by the IT area. The Company's responses to the Handbook's Information Technology Planning Questionnaire (ITPQ) were evaluated and the Company's IT control environment was tested to assess the degree of reliance that could be placed on internal controls and to establish the appropriate approach to the examination of the Company's financial records.

A review of the IT controls was performed over the Trenwick Reinsurance System (TRS) and the PeopleSoft systems (PeopleSoft). TRS serves as Trenwick's primary contract administration and claim processing system and PeopleSoft serves as the Company's ledger, accounts payable, and expense system. These systems are accessed through the Company's local area network.

The review ofthe Company's IT general controls in accordance with the 2010 version of the Financial Condition Examiners Handbook Exhibit C, Parts One and Two was completed. The examination focused on the current IT environment with testing concentrated on the key control procedures in effect during 2009, as well as incorporating the procedures in effect during the on-site review.

There were no material findings which affected the Division's overall reliance in the Company's IT controls.

As the Company is in run-off, the scope of the IT examination was limited to compliance review. No control deficiencies were noted which would impair the overall effectiveness of the IT control environment. However, it was noted that the Disaster Recovery Plan (DRP) does not accurately reflect the current location, computing environment and needs ofthe Company. It is recommended the Company review and revise their DRP to accurately reflect the current needs and requirements of the organization.

ACCOUNTS AND RECORDS

The Company utilizes a third-party general ledger and accounting system (PeopleSoft), which is updated by manual journal entry input and system interface. As the Company is in run-off, it no longer processes premiums. Loss and reinsurance accounts are updated based upon an interface entry generated by TRS. On a monthly basis, the loss and cash

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entries are generated from TRS, balanced to TRS reports and uploaded into the PeopleSoft general ledger.

Investments are maintained on the Portfolio Management Software (PAM) investment system. Investment journal entries are summarized monthly by State Street Investment Services, reviewed by the Company and entered into PeopleSoft. These journal entries represent the changes that occurred to the accounts during the month.

General ledger account balances were reconciled and traced to amounts reported in the Annual Statement as of December 31, 2009. No exceptions were noted.

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FINANCIAL STATEMENTS

The following statements reflect the assets, liabilities, surplus and other funds and income statement as of December 31, 2009, as determined by the examination:

ASSETS

Assets Non-admitted

Assets Net Admitted

Assets Bonds Cash, cash equivalents and short-tern1 investments Receivable for securities

$88,890,317 20,284,436

12,435

$88,890,317 20,284,436

12,435 Subtotals, cash and invested assets 109,187,188 109,187,188 Investment income due and accrued Premiums and considerations:

Uncollected premiums and agents' balances in

686,815 686,815

the course of collection (557,059 $222,783 (779,842~ Accrued retrospective premium

Reinsurance: 180,470 180,470 0

Amounts recoverable from reinsurers Funds held by or deposited with reinsured

863,943 863,943

companies 2,541,815 886,635 1,655,180 Net deferred tax asset 139,462,255 139,462,255 0 Receivables from parent, subsidiaries and affiliates 32,932,274 32,932,274 0 Aggregate write-ins for other than invested assets 31,060,683 684,700 30,375,983

Total $316,358,384 $174,369.117 $141,989,267

LIABILITIES, SURPLUS AND OTHER FUNDS

Losses $82,847,389

10,335,739Reinsurance payable on paid losses and loss adjustment expenses

14,110,593Loss adjustment expenses

1,659,501Commissions payable, contingent commissions and other similar charges 340,357Other expenses (excluding taxes, licenses and fees) 117,663Ceded reinsurance premiums payable 142,891Funds held by company under reinsurance treaties

1,474,501Provision for reinsurance 75,185

Payable to parent, subsidiaries and affiliates

Net adjustments in assets and liabilities due to foreign exchange rates 42,320

Aggregate write-ins for liabilities 2,564,648

Total liabilities 113,710,787

Cornmon capital stock 25,000,000

Gross paid in and contributed surplus 328,772,100

Unassigned funds (surplus) (325,493,620)

Total capital and surplus 28,278,480

Total liabilities, surplus and other funds 1]41.989.267

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STATEMENT OF INCOME

UNDERWRITING INCOME

Premiums earned ($501,504)

Deductions:

Losses incurred 1,378,120

Loss adjustment expenses incurred 792,106

Other underwriting expenses incurred 494,075

Total underwriting deductions 2,664,301

Net underwriting gain (loss) (3,165,805)

INVESTMENT INCOME

Net investment income earned 2,826,339

Net realized capital gains (losses) 101,278

Net investment gain (loss) 2,927,617

OTHER INCOME

Aggregate write-ins for miscellaneous income (2,320,182)

Net income, after dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes (2,558,370)

Federal and foreign income taxes incurred o Net income (2,558,370)

CAPITAL AND SURPLUS ACCOUNT

Surplus as regards policyholders, December 31 prior year 30,501,806 Net income (2,558,370)

Change in net unrealized capital gains or (losses) (415,017)

Change in net unrealized foreign exchange capital gain (loss) (24,276)

Change in net deferred income tax 213,501

Change in non-admitted assets 1,747,219

Change in provision for reinsurance 9,101 Examination adjustments - net (1,195,485) Net change in capital and surplus for the year (2,223,327)

SUl1'1us as regards policyholders, December 31 current year

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ANALYSIS OF EXAMINATION ADJUSTMENTS

I Account

I. Amount per Company

Amount per Examination

Surplus Adjustment Increase!(Decrease)

Loss Adjustment Expenses $8,129,987 $14,110,593 ($5,980,606) Aggregate Write-Ins for Liabilities

$7,349,769 $2,564,648 $4,785,121

I Total ($1,195.485)

LOSSES AND LOSS ADJUSTMENT EXPENSES $96,957,982 (Company $ 90,977,376)

The following items are included in the captioned account:

Losses $82,847,389 LAE 14,110,593

$96,957,982

The Division engaged Deloitte to conduct a comprehensive actuarial analysis of the loss and LAE reserves of the Company as of December 31,2009. The actuarial analysis was conducted in accordance with accepted loss reserving standards and principles. Deloitte based its review on information provided by the Company, which included:

• The Actuarial Report as of December 31, 2009.

• The 2009 Statements of Actuarial Opinion and Actuarial Opinion Summaries.

• The 2009 Annual Statement and other information requested and obtained during the course of the review through discussions and meetings with key personnel of the Company.

Deloitte relied upon the Division's review of the Company's underlying data concluding that there were no indications of any significant inaccuracies in the data reported in Schedule P of the Annual Statement.

The scope of Deloitte's actuarial analysis is outlined below:

1. An assessment of reserve risk, including but not limited to: (a) Meeting with Company officers responsible for determining the carried

liabilities for loss and LAE, unearned premiums and premium deficiency and any asset for accrued retrospective premiums. Identifying and describing the processes used and the documentation supporting those processes and decisions.

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(b) A review of the primary reserve risks, the frequency of and the process for reporting actuarial indications to management, by line of business and in the aggregate. A review of the controls in place to mitigate those risks.

(c) An evaluation ofthe reconciliation ofthe actuarial data to the annual statement and general ledger for the Company.

(d) Meeting with appropriate reserve actuaries and/or other officers of the Company to assess the appropriateness of methodologies and the quality of assumptions, including but not limited to case reserve adequacy, expected loss ratios, claim emergence patterns, and anticipated recoveries.

(e) An evaluation of reserve segments that may increase the risk that actual losses or other contractual payments reflected in the corresponding reserves will be greater than the carried liabilities.

2. An assessment of liquidity risk, including but not limited to:

(a) A qualitative review of the Company's process for assessment of catastrophic exposure and risk concentration.

(b) Reporting assessments to management.

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Annual Statement Line Breakdown of Loss and LAE Reserves per Examination

The table below summarizes the net loss and LAE reserves pursuant to the examination by major statutory line of business as of December 31,2009:

D - Workers' compensation $18,887 $2,604 $21,491 22%

H - Other liability - 11,273 2,052 13,325 14% occurrence

L - Other 13,497 2,842 16,339 17%

N - Reinsurance - NPA 3,669 966 4,635 5% property

a - Reinsurance - NPA 31,040 4,484 35,524 37% liability

All Other Lines 4,482 1,162 5,644 5%

Total $82,848 $14,110 $96,958 100%

The concentration in the reinsurance - nonproportional assumed (NPA) lines reflects the Company's historical operations as a reinsurer and is also a function of statutory reporting requirements. These statutory reporting based groupings are generally much less than completely appropriate for loss and LAE liability evaluation since they do not properly address the actuarial principle of homogeneity.

The Company's internal actuarial analysis differentiates its exposures into segments that reflect the Company's historical approach to managing and evaluating its business. The results of this segmentation are reflected by the Company in its reported results. It is the Division's opinion that this approach provides the most complete and appropriate valuation of the Company's loss and LAE liabilities.

Reserve Risk Factors in reviewing reserve risk included: potentially non-homogenous reserve segments used; declining volume of data due to commutations; proportion of claims under dispute; lack of historical actuarial perspective; a history of adverse development; and exposure to

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long tailed casualty business including workers' compensation and asbestos and environmental losses. Some of this risk may be mitigated in the future as the external actuarial finn becomes more knowledgeable about the Company's remaining book of business and controls are enhanced to ensure the quality of the data. The current analysis process implemented by the Company is an improvement upon the prior process as there is more transparency in the development of the data segmentation and reserve analysis.

As of December 31,2009, the Company recorded $3,769,394 as unallocated loss adjustment expenses (ULAE). ULAE reserves are intended to provide for the run-off of the held loss and LAE reserves. The Company had reported ULAE incurred of $3.2 million and $2.8 million for the calendar years 2009 and 2008, respectively. The review ofULAE by Deloitte indicated that ULAE reserves should be in the range of$5.2 million and $14.3 million. It was noted that the mid-point ofthe range is $9.75 million. It is recommended that the amount reported as assumed ULAE reserves as of December 31, 2009, be increased by $5,980,606 to reflect the mid-point of the range calculated by the Division's actuarial consultant.

Liquidity Risk Factors in reviewing liquidity risk included: the run-off nature of the Company; operating expenses that appear high relative to the current revenue; and the amount of remaining surplus. The total expenses for the Company were $7.2 million in 2009 and budgeted to be $6.3 million for 2010. Net investment income for 2009 was $2.6 million.

Conclusion Based on the procedures performed, the material concerns noted relating to reserve risk and liquidity risk have been mitigated.

AGGREGATE WRITE-INS FOR LIABILITIES (Company $ 7,349,769)

$2,564,648

The captioned liability consists of the following:

Retrospective premium reserves Other liabilities

$ 664,648 1,900,000

$2,564,648

Other liabilities are reported as a write-in on Page 3, line 2302 of the Company's Annual Statement. As of the examination date, the bulk ofthis reserve had been carried forward from previous years and no longer qualifies to be reported as a liability under SSAP No. 5 of the NAIC Accounting Practices and Procedures Manual (Manual). It was determined that this reserve should be adjusted to represent the amount necessary to extinguish the negative equity position ofTASCa as of December 31, 2009 ($1,800,000) and the amount that had been recorded for other documented liabilities ($100,000). It is recommended that the Company report other liabilities of $1,900,000, as of December 31, 2009, in accordance with the Manual.

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COMMON CAPITAL STOCK $25,000,000 (Company $25,000,000)

The Company has 1,250,000 shares of common capital stock authorized and outstanding with a par value of $20. All shares are owned by TALLC.

GROSS PAID IN AND CONTRIBUTED SURPLUS $328,772,1 00 (Company $328,772,100)

During the period under examination there were no changes to the balance of this account.

UNASSIGNED FUNDS (SURPLUS) ($325,493,620) (Company ($324,298,135))

The following is a reconciliation of surplus during the period under examination:

(in millions)

Surplus as of December 31, 2006 Net income Change in net unrealized capital gains or (losses) Change in net deferred income tax Change in nonadmitted assets Change in provision for reinsurance Aggregate write-ins for gains and losses in surplus Examination adjustments - net Change in surplus Surplus as of December 31, 2009

($313.3) (14.7) 108.2

2.1 0.2 1.7

(108.6) 0.2)

02.3) ($325.5)

RECOMMENDATIONS Page

5 MANAGEMENT AND CONTROL It is recommended that the Company hold annual meetings of the shareholder in compliance with the bylaws.

12 LOSSES AND LOSS ADJUSTMENT EXPENSES It is recommended that the amount reported as assumed ULAE reserves as of December 31, 2009, be increased by $5,980,606 to reflect the mid-point of the range calculated by the Division's actuarial consultant.

15 AGGREGATE WRITE-INS FOR LIABILITIES It is recommended that the Company report other liabilities of $1 ,900,000 as of December 31, 2009, in accordance with the Manual.

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CONCLUSION

The results of the examination disclosed that as of December 31, 2009, the Company had admitted assets of$141,989,267, liabilities of$I13,71O,787, and capital and surplus of $28,278,480. During the period under examination, admitted assets decreased by $79,850,330, liabilities decreased by $67,629,207, and capital and surplus decreased by $12,221 ,123.

It was determined that the Company's assets were fairly stated in accordance with guidance outlined in the Manual. Assets were acceptable under Section 38a-l 02 of the CGS. The liabilities established were adequate to cover the Company's obligations to policyholders.

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SIGNATURE

In addition to the undersigned, the following participated in this examination: Mark Murphy, CFE; and Richard Marcks, FCAS, MAAA; as well as the professional service firms INS; and Deloitte.

I, Gerald Burke, CFE, do solemnly swear that the foregoing report of examination is hereby represented to be a full and true statement of the condition and affairs of the subject insurer as of December 31,2009, to the best of my information, knowledge and belief.

Respecjfully sUbmit~

,~J1) (VL---/ ,Gerald Burke, CFE " "

Examiner In-Charge Insurance Certified Financial Examiner State of Connecticut Insurance Department

State of Connecticut ss. Hartford County of Hartford

Subscribed and sworn to before me, J{~1l UJ rn· rYl{' Tel '-+!"../{ , Notary Public on this 1Oth day of January, 2011.

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Documents

INSURANCE DEPARTMENT · 2013. 3. 13. · A comprehensive review was made ofthe financial analysis files and documents . submitted to the Financial Analysis Unit ofthe Department,