American Standard Insurance Company of Wisconsin

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					                    Report

                     of the

                 Examination of

American Standard Insurance Company of Wisconsin

               Madison, Wisconsin

            As of December 31, 2006
                                                 TABLE OF CONTENTS


                                                                                                                                  Page

   I. INTRODUCTION .................................................................................................................. 2

  II. HISTORY AND PLAN OF OPERATION .............................................................................. 4

  III. MANAGEMENT AND CONTROL ........................................................................................ 6

 IV. AFFILIATED COMPANIES .................................................................................................. 8

  V. REINSURANCE ................................................................................................................. 14

 VI. FINANCIAL DATA .............................................................................................................. 15

VII. SUMMARY OF EXAMINATION RESULTS ....................................................................... 23

VIII. CONCLUSION.................................................................................................................... 26

 IX. SUMMARY OF COMMENTS AND RECOMMENDATIONS.............................................. 27

  X. ACKNOWLEDGMENT ....................................................................................................... 28
                         State of Wisconsin / OFFICE OF THE COMMISSIONER OF INSURANCE
Jim Doyle, Governor                                                                            125 South Webster Street • P.O. Box 7873
Sean Dilweg, Commissioner                                                                                Madison, Wisconsin 53707-7873
                                                                                             Phone: (608) 266-3585 • Fax: (608) 266-9935
Wisconsin.gov                                          September 28, 2007                              E-Mail: information@oci.state.wi.us
                                                                                                                  Web Address: oci.wi.gov




                Honorable Sean Dilweg                            Honorable Alfred W. Gross
                Commissioner of Insurance                        Chair, Financial Condition (E) Committee, NAIC
                State of Wisconsin                               Commissioner of Insurance
                125 South Webster Street                         Commonwealth of Virginia
                Madison, Wisconsin 53703                         1300 East Main Street
                                                                 Richmond, Virginia 23219


                Honorable Merle Scheiber                         Honorable Morris J. Chavez
                Secretary, Midwestern Zone, NAIC                 Secretary, Western Zone, NAIC
                Director of Insurance                            Superintendent of Insurance
                State of South Dakota                            State of New Mexico
                445 East Capitol Avenue                          1120 Paseo de Paralta
                Pierre, South Dakota 57501-3185                  Santa Fe, New Mexico 87504


                Commissioners:

                            In accordance with the instructions of the Wisconsin Commissioner of Insurance, a

                compliance examination has been made of the affairs and financial condition of:

                               AMERICAN STANDARD INSURANCE COMPANY OF WISCONSIN
                                               Madison, Wisconsin

                and this report is respectfully submitted.
                                        I. INTRODUCTION

            The previous examination of American Standard Insurance Company of Wisconsin

(hereinafter also the company or ASIC) was conducted in 2002 as of December 31, 2001. The

current examination covered the intervening period ending December 31, 2006, and included a

review of such 2007 transactions as deemed necessary to complete the examination.

            The examination consisted of a review of all major phases of the company's

operations and included the following areas:

            History
            Management and Control
            Corporate Records
            Conflict of Interest
            Fidelity Bonds and Other Insurance
            Employees' Welfare and Pension Plans
            Territory and Plan of Operations
            Affiliated Companies
            Growth of Company
            Reinsurance
            Financial Statements
            Accounts and Records
            Data Processing

            Emphasis was placed on the audit of those areas of the company's operations

accorded a high priority by the examiner-in-charge when planning the examination. Special

attention was given to the action taken by the company to satisfy the recommendations and

comments made in the previous examination report.

            The company is annually audited by an independent public accounting firm as

prescribed by s. Ins 50.05, Wis. Adm. Code. An integral part of this compliance examination was

the review of the independent accountant's work papers. Based on the results of the review of

these work papers, alternative or additional examination steps deemed necessary for the

completion of this examination were performed. The examination work papers contain

documentation with respect to the alternative or additional examination steps performed during the

course of the examination.

Independent Actuary's Review

            ASIC cedes 100% of its direct writings to American Family Mutual Insurance

Company (hereinafter also AFMIC), which is described further in section V of this report titled




                                                 2
“Reinsurance.” Independent actuaries were engaged under a contract with the Office of the

Commissioner of Insurance for the examination of AFMIC. Their review covered the adequacy of

the company’s loss reserves and loss adjustment expense reserves of AFMIC, which includes the

assumed loss reserves from ASIC. The results of their work were reported to the

examiner-in-charge. As deemed appropriate, reference is made in this report to the actuaries'

conclusion.




                                                3
                            II. HISTORY AND PLAN OF OPERATION

            American Standard Insurance Company of Wisconsin is a stock property and

casualty insurer, organized in 1961 under the provisions of ch. 611, Wis. Stat., as the American

Standard Insurance Company. The company changed its name to that presently used effective in

1962. ASIC is a wholly owned subsidiary of American Family Mutual Insurance Company through

its downstream holding company, AmFam, Incorporated. Collectively AFMIC and subsidiaries are

known as the American Family Mutual Insurance Group. The company is currently licensed in

twenty-three states. During the 5-year period under examination the company obtained a license

to write business in Wyoming during 2005 and commenced writing business in Washington in

2006. In 2006, the company wrote business in 17 of the 23 jurisdictions in which it was licensed.

The distribution of direct premiums written in 2006 by state was as follows:

                       Wisconsin           $ 92,385,916               17.2%
                       Missouri              84,509,422               15.8
                       Arizona               63,290,278               11.8
                       Colorado              61,389,691               11.5
                       Kansas                43,181,420                8.1
                       Indiana               37,042,659                6.9
                       Illinois              35,230,584                6.5
                       All others           118,983,707               22.2

                       Total               $536,013,677             100.0%

            The company is currently licensed in the following states:

                    Arizona                 Colorado                Idaho
                    Illinois                Indiana                 Iowa
                    Kansas                  Minnesota               Missouri
                    Montana                 Nebraska                Nevada
                    New Mexico              North Carolina          North Dakota
                    Ohio                    Oregon                  South Carolina
                    South Dakota            Utah                    Washington
                    Wisconsin               Wyoming

            In the state of Wisconsin, the company is licensed to transact the following lines of

business as defined by s. Ins 6.75 (2), Wis. Adm. Code:

            (a) Fire, Inland Marine, and Other Property
            (b) Ocean Marine
            (d) Liability and Non Auto Incidental Medical Expense
            (e) Automobile and Aircraft
            (n) Miscellaneous




                                                 4
            ASIC is limited to providing insurance for motorcycles and for nonstandard private

passenger automobile risks. ASIC’s direct writings are 100% ceded to AFMIC, which is further

described in section V of this report titled “Reinsurance.” Marketing of the company’s products is

accomplished through AFMIC’s general agency network.

            The following table is a summary of the net insurance premiums written by the

company in 2006. The growth of the company is discussed in the “Financial Data” section of this

report.

                                 Direct         Reinsurance        Reinsurance           Net
 Line of Business               Premium          Assumed              Ceded           Premium

Private passenger auto
  liability                   $344,638,278             $0         $344,638,278             $0
Commercial auto liability              756              0                  756              0
Auto physical damage           191,374,643              0          191,374,643              0

Total All Lines               $536,013,677             $0         $536,013,677             $0




                                                 5
                               III. MANAGEMENT AND CONTROL

Board of Directors

            The board of directors consists of eight members who are elected annually, each of

whom is an officer of AFMIC. Officers are elected at the annual board meetings and are to hold

those positions until the earlier of their resignation or removal by the board of directors. As inside

directors, they receive no additional compensation for serving on the board.

            Currently the board of directors consists of the following persons:

Name and Residence                          Principal Occupation                        Term Expires

David Ralph Anderson              Chairman and Chief Executive Officer of                    2008
Madison, WI                       the American Family Mutual Insurance Group

Vicki Lee Chvala                  Executive Vice President of the American                   2008
Madison, WI                       Family Mutual Insurance Group

James Francis Eldridge            Secretary and Chief Legal Officer of the                   2008
Sun Prairie, WI                   American Family Mutual Insurance Group

Bradley James Gleason             Executive Vice President of the American                   2008
Deerfield, WI                     Family Mutual Insurance Group

Alan Edward Meyer                 Executive Vice President of the American                   2008
Verona, WI                        Family Mutual Insurance Group

Darnell Moore                     Executive Vice President of the American                   2008
Madison, WI                       Family Mutual Insurance Group

Jack Charles Salzwedel            President and Chief Operations Officer of                  2008
Waunakee, WI                      the American Family Mutual Insurance Group

Daniel Robert Schultz             Treasurer and Chief Financial Officer of the               2008
Monona, WI                        American Family Mutual Insurance Group




                                                   6
Officers of the Company

            The officers appointed by the board of directors and serving at the time of this

examination are listed below. Listed compensation is total gross earnings for services rendered to

the American Family Mutual Insurance Group and includes amounts allocated to all affiliates.


                                                                                       2006
                                                                                    Compensatio
         Name                                   Office                                  n

David Ralph Anderson            Chairman and Chief Executive Officer                 $2,035,621
Jack Charles Salzwedel          President and Chief Operations Officer                  835,571
James Francis Eldridge          Secretary and Chief Legal Officer                     1,028,169
Daniel Robert Schultz           Treasurer and Chief Financial Officer                   653,182
Vicki Lee Chvala                Executive Vice President                                892,983
Bradley James Gleason           Executive Vice President                                587,761
Alan Edward Meyer               Executive Vice President                                803,289
Darnell Moore                   Executive Vice President                              1,030,543
Kari Elizabeth Grasee           Vice President, Controller                              210,183
Thomas Syme King                Vice President, Investments                             776,418
James Walter Behrens            Assistant Secretary                                     248,259
Ann Marie Demerath              Assistant Treasurer                                     158,126

Committees of the Board

            Article III, Section 7, of the company's bylaws allow for the formation of certain

committees by the board of directors. There were no committees appointed by the board at the

time of the examination. The committees of the ultimate controlling party, AFMIC, govern the

company.




                                                  7
                                         IV. AFFILIATED COMPANIES

                  American Standard Insurance Company of Wisconsin is a member of a holding

     company system referred to as the “American Family Mutual Insurance Group.” The

     organizational chart below depicts the relationships among the affiliates in the group. A brief

     description of the affiliates follows the organizational chart.

                                            Organizational Chart
                                           As of December 31, 2006


                                             American Family Mutual
                                              Insurance Company


                           American Family           AmFam,               American Family
                           Securities, LLC         Incorporated        Brokerage, Incorporated



American Family        American Standard          American Family          American Family        American Standard
 Life Insurance       Insurance Company          Financial Services,         Insurance           Insurance Company
    Company               of Wisconsin              Incorporated             Company                   of Ohio




     American Family Mutual Insurance Company

                  American Family Mutual Insurance Company is the parent of the holding company

     system referenced above. AFMIC was organized in 1927 and writes primarily auto and

     homeowner’s coverage in 18 states. AFMIC assumes 100% of the business written by its

     downstream property and casualty subsidiaries including ASIC, which will be described in

     section V of this report titled “Reinsurance.” As of December 31, 2006, AFMIC reported assets of

     $11,009,904,394, liabilities of $6,818,334,833, and policyholders’ surplus of $4,191,569,561.

     Operations for 2006 produced a net loss of $103,568,663. AFMIC was examined concurrently

     with the ASIC examination. The results of that examination are described in a separate report.

     AmFam, Incorporated

                  AmFam, Incorporated, was incorporated in 1981 to serve as a downstream holding

     company for the American Family Mutual Insurance Group. As of December 31, 2006, the

     company’s consolidated GAAP basis audited financial statement reported assets of




                                                         8
$5,569,851,000, liabilities of $4,417,535,000 and stockholder’s equity of $1,152,316,000. Of that

amount, all but approximately $18,950,000 was derived from the value of its insurance

subsidiaries.

American Family Brokerage, Incorporated

            American Family Brokerage, Incorporated, was incorporated in 1985 as an insurance

agency and operates within the same states as its parent, AFMIC. Its primary objective is to assist

American Family agents in securing coverage for their clients when the coverage or limits are not

available through the American Family Mutual Insurance Group. As of December 31, 2006, the

company’s GAAP basis audited financial statement reported assets of $3,961,000, liabilities of

$2,449,000, and stockholder’s equity of $1,512,000. Operations for 2006 produced a net income

of $982,000.

American Family Securities, LLC

            American Family Securities, LLC, (hereinafter also AFS) was incorporated on July 14,

2000, with a capital contribution of $250,000 from AFMIC, as a limited liability company whose

sole member is AFMIC. AFS, a non-clearing, registered broker dealer, is the principal underwriter

for American Family Life Insurance Company’s (hereinafter also AFLIC) variable life and annuity

products. On March 23, 2001, AFS was admitted into the National Association of Securities Dealers

(NASD) to sell AFLIC’s variable products. As of December 31, 2006, the company’s GAAP basis

audited financial statement reported assets of $292,000, liabilities of $5,000 and member’s equity of

$287,000. Operations for 2006 produced a net income of $9,000.

American Family Financial Services, Incorporated

            American Family Financial Services, Incorporated, (hereinafter also AFFS) was

acquired by American Family Mutual Insurance Group in 1969. Its original business purpose was

to provide direct loans and leases, primarily to policyholders, through AFMIC's multi-line exclusive

agency force. However, during the period under examination AFFS’s business environment has

changed and so has its purpose. The company has been making fewer loans to policyholders.

This was due to the fact that other lenders (banks, credit unions, etc.) could offer lower lending

rates than AFFS because they have a lower cost of money. AFFS’s borrowing costs, derived




                                                  9
primarily from the issuance of commercial paper and a demand note, is considerably higher than

banks which use checking, savings and certificate of deposit accounts to fund loans.

             At the same time AFFS expanded its lending to its exclusive agency force, since its

agents found it hard to borrow money from other lenders due to their commission-based

compensation. These trends are evident when comparing the commercial mortgage loan

receivable balance as a ratio to total loans outstanding at year-end 2001 to year-end 2006, which

was 7.9% and 35.7%, respectively. At year-end 2006 approximately 80% of AFFS’s commercial

mortgage loans were to its agents.

             As noted above, AFFS finances its loan portfolio primarily through the sale of

commercial paper. AFMIC has agreed to guarantee the debt of AFFS, in order to allow the

company to receive the best possible interest rates. In 1998 the board of directors of AFMIC

authorized an increase in the guarantee limit to $375 million, as approved by this office. As of

December 31, 2006, AFFS outstanding guaranteed debt totaled $79,973,206. In addition, AFMIC,

ASIC, and AFLIC may lend AFFS additional funds through the use of short-term notes not to

exceed at any one time $100,000,000, $10,000,000 and $20,000,000, respectively, as approved by

this office. At December 31, 2006, there were no outstanding short-term notes issued by AFFS

owed to an affiliate.

             As of December 31, 2006, the company’s GAAP basis audited financial statement

reported assets of $160,215,000, liabilities of $141,526,000, and stockholder’s equity of

$18,689,000. Operations for 2006 produced net loss of $43,000.

             As of November 1, 2007, AFFS has discontinued writing new loans of any kind and is

considering various options for the servicing and run-off of its existing loan portfolio.

American Family Life Insurance Company

             American Family Life Insurance Company was incorporated in 1957. The company is

currently licensed in 26 states and writes primarily ordinary life insurance products, including

traditional, universal life and to a lesser extent variable universal life and annuities. As of

December 31, 2006, AFLIC reported assets of $3,685,060,233, liabilities of $3,252,832,866 (both

amounts include $179,738,716 from separate accounts), and surplus of $432,227,367.




                                                   10
Operations for 2006 produced net income of $61,131,953. AFLIC was examined concurrently with

the AFMIC examination. The results of the examination are described within a separate report.

American Family Insurance Company

            American Family Insurance Company (hereinafter also AFIC) was incorporated in

Ohio in 1995 and writes business only in that state. AFIC was founded for the purposes of

operating efficiencies and state tax savings. AFIC cedes 100% of its direct writings to AFMIC

under a quota share agreement approved by this office. AFIC writes lines of business identical to

American Family Mutual Insurance Company and markets its business through AFMIC’s agents.

As of December 31, 2006, AFIC reported assets of $73,695,175, liabilities of $62,659,779 and

surplus of $11,035,396. Operations for 2006 produced net income of $996,245. AFIC was

examined concurrently with AFMIC as of December 31, 2006, and the results of that examination

were expressed in a separate report issued by the Ohio Department of Insurance.

American Standard Insurance Company of Ohio

            American Standard Insurance Company of Ohio (hereinafter also ASICO) was

incorporated in 1995 and writes business only in Ohio. ASICO was founded for the purposes of

operating efficiencies and state tax savings. ASICO writes lines of business identical to ASIC’s

and cedes 100% of these direct writings to AFMIC under a quota share agreement approved by

this office. Insurance is sold through AFMIC’s agents. As of December 31, 2006, ASICO reported

assets of $17,113,493, liabilities of $11,373,899 and surplus of $5,739,594. Operations for 2006

produced a net income of $360,817. ASICO was examined concurrently with AFMIC as of

December 31, 2006, and the results of that examination were expressed in a separate report

issued by the Ohio Department of Insurance.

Agreements with Affiliates

            ASIC has no employees of its own and all of its operations are conducted by

employees of AFMIC, in accordance with the business practices and internal controls of that

organization. In addition to ongoing common management and control by this upstream affiliate,

various written agreements and undertakings affect the company’s relationship to its affiliates.




                                                 11
The affiliated reinsurance agreement between ASIC and AFMIC are described in section V of the

report titled “Reinsurance.” A brief summary of the other agreements follows:

            Effective December 12, 1995, AFMIC developed an inter-company cost allocation

agreement for the reimbursement of expenses paid by AFMIC on behalf of its affiliates. Allocated

cost is based on the actual cost of providing the service multiplied by the affiliate’s proportionate

share of the benefit conferred. All cost allocations are determined by the group’s Controller

Division and are considered final. All parties to this agreement are allowed to express their

opinion to the group’s Controller Division of the allocation affecting each of them and the

Controller Division is to consider such opinions carefully in determining cost allocation.

            In connection with the affiliated quota share reinsurance agreements as described in

section V of this report titled “Reinsurance,” AFMIC (hereinafter also Buyer) and ASIC (hereinafter

also Seller) entered into an agreement for the sale of its premiums receivable. This contract was

approved by this office and became effective on January 1, 2000. Under the terms of this

agreement, the Buyer agrees to purchase the Seller’s premiums receivable at the end of the

month, with no discount, beginning January 2000. Settlements are to be made within five days of

the transfer. The motivation for the sale of premiums receivable by the Seller was that the routine

intercompany balances were becoming so large that it could not settle them with AFMIC by using

only its short-term investments, and ASIC did not want to liquidate its long-term investments to settle

intercompany accounts.

            Effective April 29, 2002, AFMIC and its affiliates entered into a restated tax allocation

agreement for the purpose of filing federal income tax returns on a consolidated basis. Under this

agreement, AFMIC prepares and files a consolidated U.S. federal income tax return that includes

all affiliates of the holding company group. The agreement sets forth the rights and obligations of

the parties to the agreement with respect to the determination and settlement of federal income tax

liabilities as well as the allocation of American Family Mutual Insurance Group’s consolidated U.S

federal income tax liability and tax benefits in accordance with a rational, systematic formula. The

agreement provides for computation of tax, settlement of balances between affiliates, tax sharing,

filing the return, audits and other adjustments, and other administrative requirements. The




                                                  12
agreement calls for the settling of estimated U.S. federal tax payments within 30 days of filing of

those payments. Final settlement is due within 30 days of the filing of the consolidated U.S. federal

tax return. The agreement has a provision for members entering or departing the group and

provides for successors.




                                                 13
                                             V. REINSURANCE

             As noted in the “History and Plan of Operation” section, ASIC cedes 100% of its direct

writings to AFMIC. This arrangement is represented by a signed contract, which includes all

necessary provisions and a proper insolvency clause. Effective October 1, 1999, the contract was

restated and signed by both parties due to changes made to its reporting, settlement and

insolvency provisions. In 2006, this business represents approximately 9% of AFMIC’s gross

written premium. ASIC’s business writings are primarily nonstandard personal lines automobile

business.

             In connection with the affiliated reinsurance agreement, AFMIC and ASIC entered

into an agreement for the sale of ASIC’s premium receivable, which was described in section IV of

this report titled “Affiliated Companies.”




                                                   14
                                      VI. FINANCIAL DATA

            The following financial statements reflect the financial condition of the company as

reported to the Commissioner of Insurance in the December 31, 2006, annual statement. Also

included in this section are schedules that reflect the growth of the company, NAIC Insurance

Regulatory Information System (IRIS) ratio results for the period under examination, and the

compulsory and security surplus calculation. Adjustments made as a result of the examination

are noted at the end of this section in the area captioned "Reconciliation of Surplus per

Examination."




                                                 15
                   American Standard Insurance Company of Wisconsin
                                        Assets
                                As of December 31, 2006

                                                                          Net
                                                         Nonadmitted    Admitted
                                          Assets           Assets        Assets

Bonds                                   $263,978,691         $0        $263,978,691
Cash, cash equivalents, and short-
  term investments                        31,789,288          0          31,789,288
Receivables for securities                    31,903          0              31,903
Investment income due and accrued          3,982,321          0           3,982,321
Premiums and considerations:
  Deferred premiums, agents'
    balances, and installments booked
    but deferred and not yet due          (5,612,141)         0          (5,612,141)
Reinsurance:
  Amounts recoverable from
    reinsurers                            25,355,113          0          25,355,113
Guaranty funds receivable or on
  deposit                                          10         0                 10
Receivable from parent, subsidiaries,
  and affiliates                          35,686,808          0          35,686,808
Write-ins for other than invested
  assets:
  Miscellaneous receivables                      5,401        0               5,401

Total Assets                            $355,217,394         $0        $355,217,394




                                            16
                    American Standard Insurance Company of Wisconsin
                           Liabilities, Surplus, and Other Funds
                                  As of December 31, 2006

Other expenses (excluding taxes, licenses, and fees)                   $     173,474
Taxes, licenses, and fees (excluding federal and
  foreign income taxes)                                                       799,831
Net deferred tax liability                                                    251,368
Advance premium                                                             1,132,966
Ceded reinsurance premiums payable (net of ceding
  commissions)                                                             22,064,633
Amounts withheld or retained by company for account
  of others                                                                    10,809
Remittances and items not allocated                                            (8,813)
Drafts outstanding                                                         57,919,252
Payable to parent, subsidiaries, and affiliates                            32,112,970
Write-ins for liabilities:
   All other liabilities                                                    2,162,428

Total liabilities                                                       116,618,918

Common capital stock                                   $ 3,000,000
Gross paid in and contributed surplus                    3,000,000
Unassigned funds (surplus)                             232,598,476

Surplus as regards policyholders                                        238,598,476

Total Liabilities and Surplus                                          $355,217,394




                                            17
                     American Standard Insurance Company of Wisconsin
                                  Summary of Operations
                                     For the Year 2006

Investment Income
Net investment income earned                                $12,488,088
Net realized capital gains (losses)                             (40,017)
Net investment gain (loss)                                                  $12,448,071

Net income (loss) before federal and foreign income taxes                    12,448,071
Federal and foreign income taxes incurred                                       680,181

Net Income                                                                  $11,767,890


                     American Standard Insurance Company of Wisconsin
                                         Cash Flow
                                     For the Year 2006

 Premiums collected net of reinsurance                                      $(3,335,728)
 Net investment income                                                       13,248,265
 Total                                                                        9,912,537
 Benefit- and loss-related payments                          $(1,402,385)
 Commissions, expenses paid, and
  aggregate write-ins for deductions                            (389,267)
 Federal and foreign income taxes paid
  (recovered)                                                   680,181
 Total deductions                                                            (1,111,471)
 Net cash from operations                                                    11,024,008

 Proceeds from investments sold,
  matured, or repaid:
    Bonds                                     $14,421,599
    Total investment proceeds                                 14,421,599
 Cost of investments acquired (long-term
  only):
    Bonds                                       5,998,594
    Miscellaneous applications                     29,978
    Total investments acquired                                 6,028,572
 Net cash from investments                                                    8,393,027

 Cash from financing and miscellaneous
  sources:
    Other cash provided (applied)                             (1,715,714)
 Net cash from financing and
  miscellaneous sources                                                      (1,715,714)
 Reconciliation:
 Net change in cash, cash equivalents,
  and short-term investments                                                 17,701,321
 Cash, cash equivalents, and short-term
  investments:
    Beginning of year                                                        14,087,965

    End of Year                                                             $31,789,286




                                               18
                    American Standard Insurance Company of Wisconsin
                      Compulsory and Security Surplus Calculation
                                   December 31, 2006

Assets                                                                 $355,217,394
Less security surplus of insurance subsidiaries                                   0
Less liabilities                                                        116,618,918

Adjusted surplus                                                        238,598,476

Annual premium:
  Lines other than accident and health                     $ 0
  Factor                                                    20%

Compulsory surplus (subject to a minimum of
 $2 million)                                                              2,000,000

Compulsory Surplus Excess (or Deficit)                                 $236,598,476


Adjusted surplus (from above)                                          $238,598,476

Security surplus: (140% of compulsory surplus, factor
 reduced 1% for each $33 million in premium written
 in excess of $10 million, with a minimum factor of
 110%)                                                                    2,800,000

Security Surplus Excess (or Deficit)                                   $235,798,476




                                                  19
                       American Standard Insurance Company of Wisconsin
                              Reconciliation and Analysis of Surplus
                        For the Five-Year Period Ending December 31, 2006

            The following schedule is a reconciliation of total surplus during the period under

examination as reported by the company in its filed annual statements:

                               2006           2005                 2004             2003             2002

Surplus, beginning of
 year                      $226,835,581    $215,145,375      $203,832,770        $193,098,163    $182,702,844
Net income                   11,767,890      11,702,747        11,478,507          10,774,999      10,126,371
Change in net deferred
 income tax                      (4,995)        (12,541)           (362,518)         159,607            255,837
Change in nonadmitted
 assets                               0                 0           196,616          (200,000)           13,111

Surplus, End of Year       $238,598,476    $226,835,581      $215,145,375        $203,832,770    $193,098,163




                       American Standard Insurance Company of Wisconsin
                             Insurance Regulatory Information System
                        For the Five-Year Period Ending December 31, 2006

            The company’s NAIC Insurance Regulatory Information System (IRIS) results for the

period under examination are summarized below. There were no unusual results.

       Ratio                                 2006           2005          2004        2003        2002

  #1   Gross Premium to Surplus              225%           256%          298%        326%        323%
  #2   Net Premium to Surplus                  0              0             0           0           0
  #3   Change in Net Premiums Written          0              0             0           0           0
  #4   Surplus Aid to Surplus                  0              0             0           0           0
  #5   Two-Year Overall Operating
         Ratio                                 0              0             0           0           0
  #6   Investment Yield                      4.3            4.4           4.5         4.9         5.0
  #7   Gross Change in Surplus                 5              5             6           6           6
  #8   Net Change in Adjusted Surplus
         (established in 2005)                 5             5             0            0           0
  #9   Liabilities to Liquid Assets           41            45            52           56          58
 #10   Agents’ Balances to Surplus             0             0             0            0           0
 #11   One-Year Reserve
         Development to Surplus                0             0             0            0           0
 #12   Two-Year Reserve Development
         to Surplus                            0             0             0            0           0
 #13   Estimated Current Reserve
         Deficiency to Surplus                 0             0             0            0           0




                                                   20
                 Growth of American Standard Insurance Company of Wisconsin

                                                              Surplus As
                       Admitted                                Regards                  Net
        Year            Assets             Liabilities       Policyholders            Income

       2006         $355,217,394         $116,618,918         $238,598,476         $11,767,890
       2005          354,031,844          127,196,263          226,835,581          11,702,747
       2004          353,211,962          138,066,587          215,145,375          11,478,507
       2003          333,402,455          129,569,686          203,832,769          10,774,999
       2002          328,509,934          135,411,773          193,098,162          10,126,371
       2001          274,546,561           91,843,717          182,702,844          10,068,872


            Gross             Gross           Gross          Gross                            Gross
           Liability         Liability       Liability      Property         Gross           Property
           Premium           Losses            Loss         Premium         Property           Loss
Year        Written            Paid         Percentage       Written       Losses Paid      Percentage

2006      $344,639,034 $230,503,999             66.9%      $191,374,643 $118,348,800           61.8%
2005      368,877,097 250,589,315               67.9       211,881,353   115,995,213           54.8
2004      400,562,856 258,540,749               64.5       240,818,735   132,910,106           55.2
2003      410,570,865 255,001,140               62.1       253,022,283   147,774,234           58.4
2002      389,432,711 240,103,722               61.7       234,367,631   145,351,008           62.0
2001      319,886,189 204,622,477               64.0       194,252,296   141,368,153           72.8


               As previously discussed in section V of this report titled “Reinsurance,” ASIC cedes

100% of its writings to AFMIC and therefore doesn’t have a net underwriting gain or loss. The

company has experienced surplus growth over the past five years of 30.6% and is primarily

attributable to a steady increase in investment gains over this period. Gross premium growth was

significant during 2002 and 2003; however in 2004, 2005 and 2006 premium writings have been in

decline and is primarily due to fairly soft market conditions for personal line property casualty

insurers, which caused competition to be strong and left very little room for companies to achieve

market share growth. The table above shows above average gross loss percentages relating to

the catastrophe wind and hail storms that hit the group’s main area of operation during 2001 and

2006.




                                                   21
Reconciliation of Surplus per Examination

           No adjustments were made to surplus as a result of the examination. The amount of

surplus of $238,598,476 reported by the company as of December 31, 2006, is accepted.



Examination Reclassifications

                                                          Debit             Credit

Deferred premiums agents’ balances and
 installments booked but deferred and not yet due      $5,612,141         $
Ceded reinsurance premiums payable                                        5,612,141




                                              22
                          VII. SUMMARY OF EXAMINATION RESULTS

Compliance with Prior Examination Report Recommendations

            There were six specific comments and recommendations in the previous examination

report. Comments and recommendations contained in the last examination report and actions

taken by the company are as follows:

1.   Financial Reporting – Schedule Y—It is recommended that the company report in
     Schedule Y of its statutory annual statements all transactions among affiliates relating to the
     cost-sharing and income tax allocation agreements in compliance with s. Ins 40.03 (5), Wis.
     Adm. Code.

     Action—Compliance

2.   Affiliated Balances—It is recommended that the company report all affiliated reinsurance
     transactions on Schedule F and the appropriate lines on the balance sheet as prescribed by
     the NAIC Annual Statement Instructions – Property and Casualty.

     Action—Compliance

3.   Invested Assets—It is recommended that the company amend the custodial agreement to
     include the language recommended by the NAIC’s Financial Condition Examiners
     Handbook, to replace references to Midwest Securities with the current trust company, and
     to replace the custodian with the current one.

     Action—Compliance

4.   Remittances and Items not Allocated—It is recommended that the company comply with the
     NAIC’s Accounting Practices and Procedures Manual SSAPs 53 and 67 and the NAIC’s
     Annual Statement Instructions – Property and Casualty for the reporting of Remittances and
     Items not Allocated.

     Action—Compliance

5.   Amounts Withheld or Retained by Company for Account of Others—It is recommended that
     the company comply with the NAIC’s Accounting Practices and Procedures Manual SSAP 67
     and the NAIC’s Annual Statement Instructions – Property and Casualty for the reporting of
     cash receipts that cannot be identified for a specific purpose.

     Action—Compliance

6.   Advance Premium Accounting—It is recommended that the company record only the portion
     of the premium actually received as advance premium in compliance with the NAIC’s
     Accounting Practices and Procedures Manual SSAPs 6 and 53.

     Action—Compliance




                                                 23
Summary of Current Examination Results

            This section contains comments and elaboration on those areas where adverse

findings were noted or where unusual situations existed. Comment on the remaining areas of the

company's operations is contained in the examination work papers.

Affiliated Agreements

            Each of AFMIC's subsidiary companies, including ASIC, do not have any employees;

all day-to-day operations are performed by AFMIC's employees as described in section IV of this

report titled “Affiliated Companies.” It was discovered during the review of the group's affiliated

agreements that there were no service agreements executed by each of the affiliate’s boards

allowing for or authorizing the delegation of duties to AFMIC in regards to their day-to-day

operations in accordance with s. 611.67 (2), Wis. Stat. The group does establish a fair allocation

of expenses between affiliates, including those expenses created by services provided by AFMIC

on behalf of its affiliates, through an affiliated cost sharing agreement, which was not disapproved

by this office. It is recommended that the company create and execute a service agreement with

its ultimate parent company that describes the delegation of its board's management authority

over day-to-day operations in accordance with s. 611.67 (2), Wis. Stat.

Deferred Premiums, Agents’ Balances and Installments                                              $0
 Booked but Deferred and Not Yet Due

            The company originally reported a negative deferred premium balance (credit

balance) of $5,612,141 on line 13.2 “Deferred premiums, agents’ balances and installments

booked but deferred and not yet due” of the asset side of the balance sheet, in its 2006 Annual

Statement. The balance reported reflects the change in the amount of premiums receivable from

the previous month that is to be sold to AFMIC under the premiums receivable sales agreement

that was created in connection with the affiliated quota share reinsurance agreement as

discussed in sections IV and V of this report titled “Affiliated Companies” and “Reinsurance,”

respectively. According to the NAIC Annual Statement Instructions-Property & Casualty, line 13.2

of the asset side of the balance sheet is to exclude all ceded reinsurance balances payable.

SSAP No. 62, paragraph 42, describes that ceded reinsurance premiums payable shall be




                                                  24
classified as a liability. According to the NAIC Annual Statement Instructions-Property & Casualty,

Line 12 “Ceded reinsurance premiums payable” of the liability side of the balance sheet is to

contain "Reinsurance premiums associated with those in course of payment, premium

installments booked but deferred and not yet due and accrued retrospective ceded premiums." It

is this office’s understanding that the balance in question more closely relates to being a premium

ceded reinsurance liability and therefore the company is not in compliance with the Annual

Statement Instructions. It is recommended that the company report its balance relating to the sale

of its premiums receivable as ceded reinsurance premiums payable in accordance with NAIC

Annual Statement Instructions-Property & Casualty.

Ceded Reinsurance Premiums Payable                                                   $27,676,774

            As a result of the examination, the above balance was increased from $22,064,633 to

$27,676,774 as a result of the reclassification described above under the heading, “Deferred

Premiums, Agents; Balances and Installments Booked but Deferred and Not Yet Due.”




                                                25
                                       VIII. CONCLUSION

            Reported policyholders’ surplus has increased from $182,702,844 as of year-end

2001 to $238,598,476 as of year-end 2006. This represents an increase of 30.6% during the

period under examination. Gross premium growth was fairly significant in 2002 and 2003;

however, in the last three years premium writings have declined due to soft market conditions for

personal line property and casualty insurers. All of the company’s business writings are ceded to

AFMIC, the ultimate controlling entity of the holding company structure, under a 100% Quota

Share reinsurance agreement; therefore, no underwriting gain or loss is recorded by ASIC.

Operating earnings were profitable for the period under examination due to steady investment

income.

            The examination of American Standard Insurance Company of Wisconsin resulted in

two recommendations, none of which were repeat recommendations, no adjustments to surplus,

and one reclassification of account balances. The examination recommendations pertain to not

having a formal written service agreement with its ultimate parent company for services provided

and annual statement reporting guidelines in regard to ceded reinsurance premiums payable,

which resulted in the reclassification of $5,612,141 from “Deferred premiums, agents’ balances

and installments booked but deferred and not yet due” to the aforementioned balance sheet line.




                                                26
              IX. SUMMARY OF COMMENTS AND RECOMMENDATIONS

1.   Page 24 - Affiliated Agreements—It is recommended that the company create and
               execute a service agreement with its ultimate parent company that describes
               the delegation of its board's management authority over day-to-day
               operations in accordance with s. 611.67 (2), Wis. Stat.

2.   Page 25 - Deferred Premiums, Agents; Balances and Installments Booked but Deferred
               and Not Yet Due—It is recommended that the company report its balance
               relating to the sale of its premiums receivable as ceded reinsurance
               premiums payable in accordance with NAIC Annual Statement Instructions-
               Property & Casualty.




                                           27
                                    X. ACKNOWLEDGMENT

            The courtesy and cooperation extended during the course of the examination by the

officers and employees of the company are acknowledged.

            In addition to the undersigned, the following representatives of the Office of the

Commissioner of Insurance, State of Wisconsin, participated in the examination:

                      Name                                     Title

              Rick H. Anderson               Insurance Financial Examiner
              Jerry C. DeArmond              Insurance Financial Examiner Advanced
                                               Loss Reserve Specialist
              Andy M. Fell                   Insurance Financial Examiner
              David A. Grinnell              Insurance Financial Examiner
              Thomas R. Houston              Insurance Financial Examiner
              Randy F. Milquet               Insurance Financial Examiner Advanced
                                               Data Processing Audit Specialist
              Frederick H. Thornton          Insurance Financial Examiner Advanced
                                               Exam Planning & Quality Control Specialist


                                                  Respectfully submitted,



                                                  John E. Litweiler
                                                  Examiner-in-Charge




                                                 28