Paul R. LePage

GOVERNOR

STATE OF MAINE

DEPARTMENT OF PROFESSIONA L

AND FINANCIAL R EGULATION

BUREAU OF INSU RANCE

34 STATE Hou sE STATION

AuGUSTA, MAINE

04333-0034

December 28, 2016

Eric A. Cioppa, Superintendent Maine Bureau of Insurance 34 State House Station Augusta, ME 04333-0034

Dear Superintendent:

Eric A. Cioppa

SUPERINTENDENT

Pursuant to the provisions of 24-A M.R.S.A. §221 and m conformity with your instructions, a financial examination has been made of

STATE MUTUAL INSURANCE COMPANY

at its primary administrative office in Concord, New Hampshire. The following report is respectfully submitted.

PHONE: (207) 624-8475

PRINTED ON RECYCLED I'API::R

OFFICES LOCATED AT: 76 NORTHERN AVENUE, GARDINER, MAINE 04345 WWW.MAlNE.GOV / INSU RA NC E

TTY users call Maine Relay 711 Customer Complaint: 1-800-300-5000 FAX: (207) 624-8599

REPORT OF EXAMINATION

STATE MUTUAL INSURANCE COMPANY

ASOF

DECEMBER 31,2015

ACCEPTANCE OF REPORT OF EXAMINATION

WHEREAS a verified Report of Examination of State Mutual Insurance Company dated December 28,2016, was delivered to that insurer on February 24,2017 and

WHEREAS no hearing with respect to the Report of Examination has been requested by State Mutual Insurance Company,

NOW THEREFORE, I accept the Report of Examination as modified and hereby order it placed on file in the Bureau oflnsurance as provided for by 24-A M.R.S.A. §226(3).

Dated: J- '}.J - 11

TABLE OF CONTENTS

SCOPE OF EXAMINATION ..................... .... .................................................................................. .... 1

SUMMARY OF SIGNIFICANT FINDINGS ........................... ....... ...... .............................................. 2

PRIOR EXAMINATION COMMENTS ... .. ......... ........... .. ... ... ........ ................................................... 2

CURRENT EXAMINATION COMMENTS ................... ...... ... ...... ......... ..... ... ...... ... ..... .... ....... .......... 2

THE COMPANY .............................................................................................................................. 2

HISTORY .................... ........ ....... .. .... .... ..... ....... .. ...... ........... .......... ............. ... ....... ... .................. .... 2

MANAGEMENT AND CONTROL ........... .......... ................... ......... ................................................ 2

CORPORATE R ECORDS ..... ... ............... .. .... .... ..... ........ ................. ................................ .. .............. 3

CORPORATE GOVERNANCE ... ... .. ........... ............. ..... .............................................................. .... 3

TRANSACTIONS W ITH AFFILIATES .......................................... .. ............... .. .............................. 4

TERRITORY & PLAN OF OPERATION .................. .... ....... ........... .. .............................................. 4

REINSURANCE ············· ·············· ············ ····· ····· ·· ········ ···· ·· ··········· ················································ 4

FINANCIAL STATEMENTS ............................................................................................................ 4

STATEMENT OF ADMITTED ASSETS, LIABILITIES, AND SURPLUS ................. ............. ........... 5

STATEMENT OF OPERATIONS .... .. ................ .. .... .......... .... .... ...... ................ ....... .. ....................... 6

STATEMENT OF CAPITAL AND SURPLUS ................................ .. .. ............................ .................. 7

COMMENTS ON THE FINANCIAL STATEMENTS ........................................................................ 8

NOTE 1- CAPITAL AND SURPLUS .... ... .... .. ....... ............. .... ................................. ........... ....... .... 8

SUBSEQUENT EVENTS .................................................................................................................. 8

AFFILIATION WITH AUTO-OWNERS INSURANCE COMPANY .................................................. 8

SETTLEMENT OF SURPLUS NOTES ........................................................................... ....... .......... 9

SUMMARY OF RECOMMENDATIONS .......................................................................................... 9

SCOPE OF EXAMINATION

State Mutual Insurance Company ("State Mutual" or "Company") was last examined as of December 31 , 2010, by the State of Maine Bureau of Insurance ("MBOI") . This examination covered the period from January 1, 2011 to December 31 , 2015.

This examination was performed pursuant to the risk-focused approach promulgated by the National Association of Insurance Commissioners ("NAIC"), in conformity with statutory accounting practices, NAIC guidelines, the 2016 Financial Condition Examiners Handbook and the laws, rules, and regulations prescribed or permitted by the State of Maine. The examination consisted of a review of the Company's operations, controls, and corporate governance, valuation of assets, and determination of liabilities at December 31 , 2015. The examination also included the identification and evaluation of significant risks that could cause the Company's surplus to be materially misstated both currently and prospectively.

This examination was coordinated with the State of New Hampshire Insurance Department ("NHID"), which concurrently examined Concord General Mutual Insurance Company ("Concord General") a New Hampshire domestic insurance company, the Company' s affiliate through common management, and Sunapee Mutual Fire Insurance Company ("SUN"), also a New Hampshire domestic insurance company, and with the State of Vermont Insurance Department ("VID") which concurrently examined Green Mountain Insurance Company ("GM") and Vermont Accident Insurance Company ("VA"), both Vermont domestic insurance companies. These companies, along with State Mutual, are members of the Concord Group. The examination was conducted at the Concord General offices in Concord, New Hampshire, which are the main administrative offices of State Mutual and all companies within the Concord Group. Crowe Horvath LLP, ("CH") performed the 20 15 external audit of Concord General and all insurance affiliates. CH work papers were uti lized for this examination to the extent deemed appropriate. The MBOI utilized the work ofNHID's examination of Concord General and SUN when appropriate in order to enhance the effectiveness and efficiency of this examination.

All accounts and activities of the Company were considered in accordance with the risk-focused examination process. The examination does not attest to the fair presentation of the financial statements included herein. Comments on various balance sheet items, for purposes of this report, may be limited to matters involving clarification, departures from laws, rules and regulations, and/or significant changes in amounts. To the extent deemed necessary, transactions occurring subsequent to the examination date were reviewed .

This examination report includes significant findings of fact , pursuant to 24-A M.R.S. §225 (1 ), and general information about the Company and its financial condition. There may be other items identified during the examination that, due to their nature, are not included herein, and are instead separately reported to other regulators and/or the Company.

SUMMARY OF SIGNIFICANT FINDINGS

PRIOR EXAMINATION COMMENTS

None noted.

CURRENT EXAMINATION COMMENTS

None noted.

HISTORY

THE COMPANY

State Mutual was incorporated in Gorham, Maine on May 15, 1899, as the Dirigo Mutual Fire Insurance Company and subsequently moved to Portland, Maine. On July 1, 1934, State Mutual changed its name to State Mutual Fire Insurance Company. On January 19, 1965, State Mutual changed its name to State Mutual Insurance Company. State Mutual ' s statutory home office was moved to Auburn, Maine on July 1, 1965.

MANAGEMENT AND CONTROL

State Mutual is a mutual insurance company under the control of Concord General through common management, a reinsurance agreement, under which 1 00% of the insurance operations are ceded to Concord General and 0% is assumed back by State Mutual, and a management services agreement, under which all operations are administered by Concord General.

The organization charts below show Concord General and all affiliates:

Concord General Mutual Insurance Company (NH)

I

Green Mountain Insurance Company, Inc. (VT)

I I

Vermont Accident Insurance Company, Inc. (VT)

2

I

Peoples Service Insurance Company (NH)

Concord General controls the following companies through management and reinsurance agreements:

Concord General Mutua l Insurance Company (NH)

Sunapee Mutual Insurance Company (NH)

State Mutua l Insura nce Com pany (ME)

Weare Mutua l Fire Insurance Company (NH)

Bow Mutual Fire Insurance Company (NH)

C ORPORATE R ECORDS

The Company's articles of incorporation, bylaws, and minutes of the board of directors meetings held during the period under examination were reviewed.

C ORPORATE GOVERNANCE

State Mutual is governed and overseen by its board of directors and the management team of State Mutual.

As of December 31, 2015, the board of directors of State Mutual consisted of the following members:

Na me Linda Joy Day Richard Dale Bartlett J Dudley Colcord Warren Christopher McLean, Jr. George Haro ld Morehouse Gordon Alvan Rehnborg, Jr. Pau l Elmer Vio lette

T it le Chair Director Director Director Director Director Director

3

As of December 31, 2015, the officers of State Mutual consisted of the following individuals:

Name Linda Joy Day John Everett Goodwin Daniel Rodgers Warren Christopher McLean Jr. Michael Philip Nolin Jr. Thomas John McConnell Richard Earl Welch, Jr.

Title Chair & President Secretaty & Clerk Vice President- Treasurer Vice President- Administration Vice President- Underwriting Vice President- Claims Vice President- Corporate Planning

TRANSACTIONS WITH AFFILIATES

The Company has an Insurance Management Agreement with Concord General, effective January 1, 1996, and amended effective January 1, 2008. Under this agreement, Concord General provides management, administrative and consulting services to the Company.

The Company is also party to a Reinsurance Agreement with Concord General, effective January 1, 1997, and amended January 1, 2007. A description of the agreement can be found in the Reinsurance section of this report.

TERRITORY & PLAN OF OPERATION

State Mutual is licensed to transact business in the State of Maine. State Mutual primarily writes homeowners multiple peril coverage.

REINSURANCE All policies of State Mutual are reinsured as written with Concord General under a written reinsurance agreement entered into on January 1, 1997, and amended January 1, 2007. Under this agreement, Concord General agrees to reinsure and assume, and State Mutual agrees to cede and transfer to Concord General, automatically from inception, all liabilities incurred under or in connection with all contracts and policies of insurance issued by State Mutual. State Mutual agrees to pay to Concord General all premiums on business written by State Mutual, and Concord General agrees to pay all losses and loss expenses. The conditions of the reinsurance shall, in all cases, be identical with the conditions of the original insurance.

FINANCIAL STATEMENTS

The Statement of Admitted Assets, Liabilities and Surplus, the Statement of Operations, and the Statement of Capital and Surplus are as presented by management and audited by the Company's external auditors. It should be noted that these financial statements have not been audited by the MBOI and thus the MBOI does not express an opinion on the financial statements as a whole.

4

STATEMENT OF ADMITTED ASSETS, LIABILITIES, AND SURPLUS

AS OF DECEMBER 31,2015

Assets

Bonds

Common stocks

Cash

Investment income due and accrued Total assets

Liabilities

Current federal and foreign income taxes Net deferred tax liability

Total liabilities

Surplus

Aggregate write-ins for special surplus funds Unassigned funds

Policyholders' surplus

Total liabilities and surplus

5

$

$

$

1,087,307

1,194,611

153,870

14,305 2,450,093

4,561 171 ,008

175,569

137,000 2,137,524

2,274,524

2,450,093

STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2015

Premiums earned $ Total underwriting deductions $ Total underwriting gain (loss) $

Net investment income earned $

Net realized capital gains/(losses) $

Net investment income $

Net income before federal income taxes $

Federal income taxes $

Net income $

6

6 1,884

5,688

67,572

67,572

3,625 63 ,947

STATEMENT OF CAPITAL AND SURPLUS

YEAR ENDED DECEMBER 31, 2015

Surplus, December 3 I, 2014

Net Income

Change in net unrealized capital gains/(losses)

Change in net deferred income tax Net change in surplus

Surplus, December 3 I, 2015

7

$

$

2,224,336

63,947

(16,989)

3,230 50,188

2,274,524

COMMENTS ON THE FINANCIAL STATEMENTS

NOTE 1 -CAPITAL AND SURPLUS

The following table describes the capital and surplus changes for the five year period since the MBOI's last examination ofthe company, dated December 31 , 2010:

Capital and surplus, December 31, 2010

Net income

Change in net unrealized capital gains or (losses), net of capital gains tax

Change in net deferred income tax

Capital and surplus, December 31, 2015

SUBSEQUENT EVENTS

AFFILIATION WITH AUTO-OWNERS INSURANCE COMPANY

$

$

1,711,122

610,401

(41,855)

(5, 144)

2,274,524

On November 14, 2016, State Mutual ' s Board of Directors approved a proposed Affiliation

Agreement between Concord General and Auto-Owners Insurance Company ("Auto-Owners"),

subject to approval of the New Hampshire, Maine, Vermont and Michigan Insurance Departments,

and the approval of the affected policyholders.

On December 22, 2016, a Form A - Statement Regarding the Acquisition of Control of or Merger

with Domestic Insurers, dated December 16, 2016 was filed with the Maine Bureau of Insurance for State Mutual by Auto-Owners, a mutual insurance company domiciled in the State of Michigan. This Form A relates to the acquisition of control by Auto-Owners of Concord General and all of its

affiliates and subsidiaries (Concord Group). State Mutual is affiliated with Concord General

through common management, a reinsurance agreement, and a management services agreement.

The Form A indicates that Auto-Owners will acquire control of Concord Group through an

Affiliation Agreement, which is attached to the form, and that the existing reinsurance and

management services agreements between Concord General and State Mutual will continue in

effect. As of the issuance of this report, the Form A is under review.

Also on December 22, 2016, Auto-Owners, on behalf of State Mutual, filed a Form D - Prior Notice

of a Transaction Involving an Affiliate, dated December 16, 2016, with the MBOI. This Form D

relates to proposed intra-holding company agreements that would become effective upon the

acquisition of control by Auto-Owners of Concord General, State Mutual ' s controlling affiliate, and

requests the MBOI's approval of the proposed agreements. As of the issuance of this report, the

Form D is under review.

8

SETTLEMENT OF SURPLUS NOTES

At December 31 , 2015 , the Company reported a special surplus funds balance of $137,000 for Guaranty Fund Certificates which represented the balance owed to Concord General for a series of

surplus notes that were issued by State Mutual between 1961 and 1964. In 1976, all of the notes were endorsed over to Concord General when they were purchased from the original note holders. On December 6, 2016, with the approval of the MBOI and the NHID, State Mutual paid Concord General the $137,000 balance to settle the surplus notes.

No other significant material items came to our attention for inclusion in the report of examination.

SUMMARY OF RECOMMENDATIONS

There are no report level recommendations.

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STATE OF MAINE

COUNTY OF KENNEBEC, SS

Vanessa 1. Leon, being duly sworn according to law deposes and says that, in accordance with authority vested in her by Eric A. Cioppa, Superintendent of Insurance, pursuant to the Insurance Laws of the State of Maine, she has made an examination of the condition and affairs of the

STATE MUTUAL INSURANCE COMPANY

of Auburn, Maine as of December 3 1, 2015 , and that the foregoing report of examination subscribed to by her is true to the best of her knowledge and belief. The following examiners from the Bureau assisted:

Audrey L. Wade, CFE, CISA Rebecca 1. Nelson

Subscribed and sworn to before me This {).\ 1 \-- day of f'\~.r··c~ , 2017

Notary Public My Commission Expires:

KARMA LOMBARD Notary Public, Maine

My Commi&&ion Expirli• June l.2, 2023

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