STATE OF CONNECTICUT - catalog.state.ct.us · marketing committee, corporate governance committee,...

STATE OF CONNECTICUT INSURANCE DEPARTMENT

ORDER ADOPTING REPORT OF EXAMINATION

I, Thomas R. Sullivan, Insurance Commissioner of the State of Connecticut,

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

Litchfield Mutual Fire Insurance Company ("the Company") as ofDecember 31,2008,

do hereby adopt the findings and recommendations contained therein based on the

following findings and conclusions,

TO WIT:

1. I, Thomas R. Sullivan, as the Insurance Commissioner of the State of Connecticut, and as such is charged with the duty of administering and enforcing the provisions ofTitle 38a of the Connecticut General Statutes;

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

3. On March 18,2010 the verified Report ofthe Company was filed with the Connecticut Insurance Department.

4. In accordance with Conn. Gen. Statutes §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 April 9, 2010, the Company notified the Department of certain responses and comments on certain items contained in the Report.

6. Following review of the Report, it was deemed necessary and appropriate to modify 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 Examination Report of the Company hereby is adopted as filed with the Insurance Department.

2. 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 Connecticut General Statutes.

Dated at Hartford, Connecticut this 19th day of April 2010.

Thomas R. Sullivan, Insurance Commissioner

EXHIBIT A

ASSOCIATION EXAMINATION REPORT

OF THE

LITCHFIELD MUTUAL FIRE INSURANCE COMPANY

AS OF

DECEMBER 31,2008

BY THE STATE OF CONNECTICUT INSURANCE DEPARTMENT

TABLE OF CONTENTS Page

Salutation 1

Scope of Exarrrination 1

History 3

OrgmrizationalChmrt 3

Management and Control 3

Insurance Coverages 6

Territory and Plan of Operation 6

Reinsurance 6

Infonnation Technology and Controls 8

Accounts and Records 8

Financial Statements 9 Assets 9 Liabilities, Surplus and Other Funds 10 Statement ofIncome 11

Losses and Loss Adjustment Expenses 12

Surplus Notes 13

Unassigned Funds (Surplus) 13

Conclusion 13

Signature 14

March 18,2010

r:?e Honorable Alfred W. Gross IChair, Financial Condition (E) Committee ICommissioner, Virginia State Corporation Commission IBureau of Insurance IP.O. Box 1157 Richmond, Virginia 23218

The Honorable Paulette Thabault Secretary, Northeastern Zone Insurance Commissioner Vennont Insurance Division Department of Banking, Insurance, Securities and Health Care Administration 89 Main Street Montpelier, Vennont 05620-3101

The Honorable Thomas R. Sullivan Insurance Commissioner State of Connecticut 153 Market Street, 6th Floor Hartford, Connecticut 06103

Dear Commissioners:

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


(hereinafter referred to as the Company) a mutual corporation incorporated under the laws of the State of Connecticut and having its statutory home office located at 21 South Street, Litchfield, Connecticut.

SCOPE OF EXAMINAnON

The previous examination of the Company was conducted as of December 31, 2006. The current examination, which covers the period from January 1, 2007 to December 31, 2008, was conducted at the administrative offices of the Patrons Insurance Group, 769 Hebron Avenue, Glastonbury, Connecticut.

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

LITCHFIED MUTUAL FIRE INSURANCE COMPANY

• Audit reports by the Company's independent certified public accountants, Emst & Young, LLP (E&Y).

• Board ofDirector (Board) minutes from 2007 and 2008. • Committee minutes from 2007 and 2008.

A review of the 2007 and 2008 independent audit reports indicated no material concerns with respect to financial condition or regulatory compliance. A comprehensive review was made of the financial analysis files and documents submitted to the Financial Analysis Unit of the Division as well as Examination Jumpstart and Financial Analysis and Solvency Tracking System reports obtained from the National Association of Insurance Commissioners (NAIC) database.

Work papers prepared by E&Y in connection with its annual statutory audit were reviewed and relied upon to the extent deemed necessary.

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

Concurrent examinations were made of the following Connecticut and non-Connecticut domestic property and casualty companies within the State Automobile Mutual Insurance Company group (the Group or State Auto), collectively referred to as the State Auto Pool:

State Automobile Mutual Insurance Company (OH) State Auto Property & Casualty Insurance Company (IA) Milbank Insurance Company (SD) Farmers Casualty Insurance Company (IA) State Auto Insurance Company of Ohio (OH) Meridian Citizens Mutual Insurance Company (IN) Patrons Mutual Insurance Company of Connecticut (CT) State Auto Insurance Company ofWisconsin (WI) State Auto Florida Insurance Company (FL) Beacon National Insurance Company (TX) Meridian Security Insurance Company (IN)

The state of Ohio was designated as the lead state for this coordinated examination. Examiners from the states of Ohio, Indiana, Connecticut, South Dakota, Iowa and Wisconsin participated in this examination.

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.

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HISTORY

The Company incorporated on May I, 1833. On July 15, 1833, the Connecticut General Assembly granted the Company a charter. The charter, as amended by the 1955 General Assembly (Special Act Number 456), empowers the Company to write fire, allied lines, marine and liability insurance. The Company is specifically empowered to accept and cede reinsurance on any such risks or hazards. The Company may exercise such powers outside of Connecticut to the extent permitted by the laws of the particular jurisdiction.

The charter also provides that each person who is insured by, in or with the Company shall be a Member during the period that his policy is in full force. The Company issues assessable policies and the charter limits the liability to the amount of the policy premiums. The charter gives the Board the power to declare dividends; such dividends to be applied in the reduction ofrenewal premiums or to be paid in cash on the policies. It should be noted that the Company is not currently issuing these types of policies.

As of January I, 1999, the Patrons Mutual Insurance Company of Connecticut (PMI) acquired control of the Company by entering into a management services agreement and a reinsurance pooling agreement.

On December 14, 2007, both the Company and PM! completed an affiliation agreement with State Automobile Mutual Insurance Company (SAM). Under this agreement SAM assumed operational authority of the Patrons Mutual Group which includes the Company and PM!. SAM became licensed in Connecticut effective May 2008.

ORGANIZATIONAL CHART

The following is an organizational chart of the Company and its affiliates:

State Automobile Mutual Insurance Company

Patrons Mutual Insurance Company ofConnecticut

Litchfield Mutual Fire Insurance Company

(Connecticut)(Ohio) (Connecticut)

MANAGEMENT AND CONTROL

The bylaws provide that an annual meeting ofpolicyholders shall be held at the principal office of the Company or at such other place as the Board may designate, on a day within the first six months of the calendar year in Connecticut for the election of directors and for the transaction of such other business as may properly come before the Members. At all Member meetings, the Members present shall constitute a quorum.

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The bylaws provide that the Company is managed by a Board of twelve directors. The Board shall be divided into three classes, with five directorships in Class I, four directorships in Class n and three directorships in Class m. The tenn ofoffice of directors in one class shall expire at each annual meeting ofMembers.

The Board may, by resolution adopted by the majority, appoint from its members an executive committee, an audit committee, an investment committee and such other committees as may from time to time be deemed necessary or appropriate. Each committee shall consist of not less than the minimum number ofdirectors required by law and shall have the power and authority as may be delegated to it by the Board. During the period under examination there was a merger and acquisition committee, marketing committee, corporate governance committee, finance committee and nominating committee.

Members of the Board serving the Company at December 31, 2008, were as follows:

Director Title and Principal Business Affiliation

Mark A. Blackburn Senior Vice President and ChiefOperating Officer State Auto

Joel E. Brown Vice President and Director, Personal Insurance State Auto

Steven E. English Vice President and Chief Financial Officer State Auto

Peter R. L. Faber Retired

Kevin Feeney Retired

Joseph L. Grochmal President and Chief Executive Officer Noble View, LLC

Paul E. Nordman Vice President and Director, Business Insurance State Auto

Cynthia A. Powell Vice President and ChiefAccounting Officer State Auto

Robert P. Restrepo, Jr. President, Chairman and Chief Executive Officer State Auto

William Siclari Vice President Litchfield Mutual Fire Insurance Company

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Jerome J. Whalen Retired

James A. Yano Vice President, Secretary and General Counsel State Auto

The following individuals were serving the Company as officers as of December 31,2008:

Officer Title

Robert P. Restrepo, Jr. President

James A. Yano Secretary

Cynthia A. Powell Treasurer

Erin A. Allende Vice President

ilene G. Burke Vice President

Susan L. Chiovitti Vice President

Michael F. Lyons Vice President

Krista Swanson Vice President

William Siclari Vice President

Fred A. Taverne Vice President

Investment Management Agreement

Effective December 14,2007, the Company became a party to an investment management agreement with Stateco Financial Services (Stateco). This agreement provides Stateco with full discretion as to investment decisions for the Company consistent with the investment policy set by the investment committee of the Board. The Company is charged a fee for these investment management services. This fee is calculated as a percent of the average fair value of the investment portfolio of the Company.

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INSURANCE COVERAGES

The Company is insured under a fiduciary liability insurance policy issued through Fidelity and Deposit Company of Maryland to SAM. SAM and its affiliates are listed as named insureds. The limit exceeds the suggested minimum limits of insurance pursuant to the Handbook.

In addition, the Company is listed as a named insured on various policies issued to SAM. Coverages include, but are not limited to business auto, property, property damage, general liability, and workers' compensation.

TERRITORY AND PLAN OF OPERATION

The Company is a mutual property and casualty insurer licensed to transact business in Connecticut. The Company principally underwrites personal lines, commercial package and farm insurance. Business is written through more than 200 independent agencies.

REINSURANCE

Inter-Company Pooling Agreement

Effective January 1, 2008, a revised reinsurance pooling agreement was approved by the Division whereby PMI and the Company will share in the SAM reinsurance pooling agreement. This arrangement provides that all premiums, loss expenses, underwriting expenses, premiums in the course of collection and reinsurance recoverable on loss payments ofthe companies, net reinsurance with nonaffiliates, be pooled and then allocated to each company based on percentages outlined in the arrangement.

Pooling Percentages State Automobile Mutual Insurance Company 19.0 State Auto Property & Casualty Insurance Company 59.0 Milbank Insurance Company 17.0 State Auto Insurance Company ofWisconsin 0.0 Farmers Casualty Insurance Company 3.0 State Auto Insurance Company ofOhio 1.0 State Auto Florida Insurance Company 0.0 Meridian Security Insurance Company 0.0 Meridian Citizens Mutual Insurance Company 0.5 Beacon National Insurance Company 0.0 Patrons Mutual Insurance Company of Connecticut 0.4 Litchfield Mutual Fire Insurance Company 0.1

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Assumed Reinsurance Program

'The Company assumes a small volume ofbusiness through participation in The Connecticut Fair Plan (the Fair Plan), a mandatory underwriting pool. Participation by the Company is based upon the amount ofvoluntary business written as a percentage of the total state market. 'The Company receives all accounting information necessary for its preparation of the financial statements and exhibits from the Fair Plan.

Ceded Reinsurance Program

Each member of the State Auto Pool is party to working reinsurance treaties for property, casualty and workers compensation lines with several reinsurers arranged through a reinsurance intermediary. Under the property per risk excess ofloss treaty, each member is responsible for the first $3.0 million ofeach covered loss, and the reinsurers are responsible for 100% of the excess over $3.0 million up to $20.0 million of covered loss.

'The terms of the casualty excess of loss program provide that each company in the State Auto Pool is responsible for the first $2.0 million of a covered loss. 'The reinsurers are responsible for 100% of the excess over $2.0 million up to $5.0 million ofcovered loss. Also, certain unusual claim situations involving bodily injury liability, property damage, uninsured motorist and personal injury protection are covered by an arrangement that provides $10.0 million ofcoverage in excess of a $5.0 million retention for each loss occurrence. This layer of reinsurance sits above the $3.0 million excess of$2.0 million arrangement.

'The terms of the workers' compensation excess ofloss program provide that each company in the State Auto Pool is responsible for the first $2.0 million of covered loss. The reinsurers are responsible for 100% of the excess over $2.0 million up to $10.0 million of covered loss. Net retentions under this contract may be submitted to the casualty excess of loss program, subject to a limit of $2.0 million per loss occurrence.

In addition to the workers' compensation reinsurance program described above, each company in the State Auto Pool is party to an agreement which provides an additional layer of excess of loss reinsurance for workers' compensation losses involving multiple workers. Subject to $10.0 million ofretention, reinsurers are responsible for 100% of the excess over $10.0 million up to $20.0 million ofcovered loss. This coverage is subject to a "Maximum Any One Life" limit of$10.0 million.

In addition, the State Auto Pool has secured other reinsurance to limit the net cost of large loss events for certain types of coverage. Included are umbrella liability losses which are reinsured. up to a limit of $10.0 million with maximum $0.6 million retention. 'The State Auto Pool also makes use of facultative reinsurance for unique risk situations and participates in involuntary pools and associations in certain states.

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For catastrophe losses incurred by the State Auto Pool and State Auto National Insurance Company traditional reinsurance coverage is maintained providing reinsurance limits of $1 00 million excess of $55 million. The reinsurance is structured in two layers, the first providing coverage of$25 million excess of$55 million and the second providing an additional $75 million excess of$80 million.

INFORMATION TECHNOLOGY AND CONTROLS

An information technology (IT) general controls review was performed in accordance with the Handbook.

The evaluation of IT controls focused on the following areas: management and organizational controls; logical and physical security; changes to applications; contingency planning; operations; application and processing; commerce; and network and internet controls.

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

ACCOUNTS AND RECORDS

General ledger account balances were reconciled and traced to the amounts reported in the annual statement for 2008.

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FINANCIAL STATEMENTS

The following statements reflect the assets, liabilities, surplus and other funds, and income statement as of December 31, 2008, as reported by the Company and as determined by the examination:

ASSETS

Assets Nonadmitted

Assets

Net Admitted

Assets Bonds Common stocks Real estate:

Properties occupied by the Company Cash, cash equivalents and short-term investments Investment income due and accrued Premiums and considerations:

Uncollected premiums and agents' balances in course of collection Deferred premiums, agents' balances and installments booked but deferred and not yet due

Reinsurance: Amounts recoverable from reinsurers

Current federal and foreign income tax recoverable and interest thereon

Net deferred tax asset Electronic data processing equipment and software Furniture and equipment, including healthcare delivery

assets Receivable from parent, subsidiaries and affiliates

$3,570,598 384,013

29,418 1,031,761

35,016

109,899

484,399

66,270

623,287 481,299

1,710

5,543 692,418

$163

347,792

5,543

$3,570,598 384,013

29,418 1,031,761

35,016

109,899

484,236

66,270

623,287 133,507

1,710

692,418 Totals $7.515631 $353.49& $7.162 133

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LITCHFIELD MUTUAL FIRE INSURANCE CaMPANY

LIABILITIES, SURPLUS AND OTHER FUNDS

Losses Reinsurance payable on paid losses and loss adjustment expenses Loss adjustment expenses Commissions payable, contingent commissions and other similar charges Taxes, licenses and fees Unearned premiums Advance premium Ceded reinsurance premiums payable Payable to parent, subsidiaries and affiliates Aggregate write-ins for liabilities Total liabilities

Surplus notes Unassigned funds (surplus) Surplus as regards policyholders Totals

$ 761,864 232,132 176,166 190,926 25,569

620,770 66,542

647,886 58,159 18,463

2,798,477

2,100,000 2,263,656 4.363,656

$7 162 133

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STATEMENT OF INCOME

UNDERWRITING INCOME

Premiums earned $1,341,082 DEDUCTIONS

Losses incurred 856,819 Loss adjustment expenses incurred 156,454 Other underwriting expenses incurred (9,963) Aggregate write-ins for underwriting deductions (197) Total underwriting deductions 1,003,113 Net underwriting gain (loss) 337,969

INVESTMENT INCOME Net investment income earned 151,646 Net realized capital gains (losses) 99,243 Net investment gain (loss) 250,889

OTHER INCOME Net gain (loss) from agents' or premium balances charged off (2,569) Finance and service charges not included in premiums 4,796 Aggregate write-ins for miscellaneous income (28) Total other income 2,199 Net income before dividends to policyholders, after capital gains tax and before all

other federal and foreign income taxes 591,057 Dividends to policyholders 357 Net income, after dividends to policyholders, after capital gains tax and before all

other federal and foreign income taxes 590,700 Federal and foreign income taxes incurred 100,811 Net income $489,889

CAPITAL AND SURPLUS ACCOUNT Surplus as regards policyholders, December 31 prior year $4,186,358 Net income 489,889 Change in net unrealized capital gains or (losses) (183,564) Change in net deferred income tax 213,641 Change in nonadmitted assets (342,668) Change in surplus as regards policyholders for the year 177.298 Surplus as regards policyholders, December 31 current year $4.363,656

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LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) $938,030

The captioned liabilities consist of the following:

Losses $761,864 LAE 176,166

$938030

The Ohio Department of Insurance (Ohio DOl) conducted an actuarial analysis of the loss and LAE reserves of the Company to evaluate the processes, procedures, methods and assumptions used to determine the reasonableness of the carried reserves of the State Auto Pool. The actuarial analysis was conducted in accordance with accepted loss reserving standards and principles.

In performing the loss and LAE reserve analysis, the Division relied upon the following documents provided by the Company:

• Actuarial reports for the State Auto Pool; • The methods and assumptions used in the various analyses; • The individual results by line as well as the aggregate result.

The following table shows the carried reserve amounts for the Company by statutory lines of business:

Annual Statement Line of LOB Business as% (LOB) Loss LAE Total of Total

Private Passenger Auto Liability 203,431 26,437 229,868 25%

Commercial Multiple Peril 85,258 29,117 114,375 12%

Other Liability - Occurrence 118,121 52,080 170,201 18%

Workers' Compensation 98,420 22,901 121,321 13%

Commercial Auto Liability 98,101 16,191 114,292 12%

All Other 158,533 29,437 187,970 20%

Total 761 864 176166 93 o 0 100%

Based upon the analysis ofthe Ohio DOl, it was concluded that the carried net loss and LAE reserves were reasonable.

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SURPLUS NOTES $2,100,000

On December 23, 1999, the Division approved a subordinated surplus note between the Company and PM! in the amount of $2.1 million. The surplus note remained outstanding during the examination period.

UNASSIGNED FUNDS (SURPLUS) ~4.363,656

The following is a reconciliation ofunassigned funds (surplus) during the period under examination:

Unassigned Funds (Surplus) as ofDecember 31,2006 $4,831,410 Net Income 287~538

Change in Net Unrealized Capital Gains or (Losses) (250,322) Change in Net Deferred Income Tax (175,614) Change in Nonadmitted Assets (329,356) Unassigned Funds (Surplus) as ofDecember 31,2008 $4.363.656

CONCLUSION

The results of this examination disclosed that as ofDecember 31, 2008, the Company had admitted assets of$7,162,133, liabilities of $2,798,477 and surplus as regards policyholders of $4,363,656. During the period under examination, admitted assets decreased $10,858,934, liabilities decreased $10,391,180 and surplus as regards policyholders decreased $467,754.

It was determined that the Company's assets were fairly stated in accordance with guidance outlined in the NAIC Accounting Practices and Procedures Manual. Assets were acceptable under Section 38a-102 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 members of the Division participated in the examination: William Arfanis, CFE, Mark Murphy, CFE, Richard J. Marcks, FSA, MAAA and Lisa Pagliaro, APE.

I, Robeli Linnell, Jr., 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, 2008, to the best of my infonnation, knowledge and belief.

ct

J"-'-H--1/--

Robert inn 11, Jr., CFE Insurance Accredited Financial Examiner State of Connecticut Insurance Department

State of Connecticut ss I-/~J'~ f cL

County of Hartford

Subscribed and sworn to before me, N0A0 «t (Y1. mM <:jeC. Notary Public/Commissioner of the Superior Court, on this I ,?\f.b daibf Yb;£ C~ ,2010

n~14 bJ~~ .. Notary Pubhc

My Commission Expires __-<.!?_1_3_t:)_lc_d-_d_J_eJ _

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