Report of the Examination of Millers Classified Insurance Company Alton, Illinois As of December 31, 2007
TABLE OF CONTENTS
Page I. INTRODUCTION .................................................................................................................. 1 II. HISTORY AND PLAN OF OPERATION .............................................................................. 4 III. MANAGEMENT AND CONTROL ........................................................................................ 6 IV. AFFILIATED COMPANIES .................................................................................................. 8 V. REINSURANCE ................................................................................................................. 11 VI. FINANCIAL DATA .............................................................................................................. 14 VII. SUMMARY OF EXAMINATION RESULTS ....................................................................... 23 VIII. CONCLUSION.................................................................................................................... 25 IX. SUMMARY OF COMMENTS AND RECOMMENDATIONS.............................................. 26 X. ACKNOWLEDGMENT ....................................................................................................... 27
State of Wisconsin / OFFICE OF THE COMMISSIONER OF INSURANCE
Jim Doyle, Governor Sean Dilweg, Commissioner Wisconsin.gov
October 3, 2008
125 South Webster Street • P.O. Box 7873 Madison, Wisconsin 53707-7873 Phone: (608) 266-3585 • Fax: (608) 266-9935 E-Mail: ociinformation@wisconsin.gov Web Address: oci.wi.gov
Honorable Alfred W. Gross Chair, Financial Condition (E) Committee, NAIC Commissioner of Insurance Commonwealth of Virginia 1300 East Main Street Richmond, Virginia 23219 Honorable Merle Scheiber Secretary, Midwestern Zone, NAIC Director of Insurance State of South Dakota 445 East Capitol Avenue Pierre, South Dakota 57501-3185 Honorable Sean Dilweg Commissioner of Insurance State of Wisconsin 125 South Webster Street Madison, Wisconsin 53703
Commissioners: In accordance with your instructions, a compliance examination has been made of the affairs and financial condition of: MILLERS CLASSIFIED INSURANCE COMPANY Alton, Illinois and this report is respectfully submitted.
I. INTRODUCTION The previous examination of Millers Classified Insurance Company (hereinafter MCIC or the company) was conducted in 2003 as of December 31, 2002. The current examination covered the intervening period ending December 31, 2007, and included a review of such 2008 transactions as deemed necessary to complete the examination. The examination was conducted in accordance with the NAIC Financial Condition Examiners Handbook, which sets forth guidance for planning and performing an examination to
evaluate the financial condition and identify prospective risks of an insurer. This approach includes the obtaining of information about the company including corporate governance, the identification and assessment of inherent risks within the company, and the evaluation of system controls and procedures used by the company to mitigate those risks. The examination also included an assessment of the principles used and significant estimates made by management, as well as an evaluation of the overall financial statement presentation and management’s compliance with statutory accounting principles, annual statement instructions, and Wisconsin laws and regulations. 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.
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Independent Actuary's Review An independent actuarial firm was engaged under a contract with the Office of the Commissioner of Insurance. The actuary reviewed the adequacy of the company’s loss and loss adjustment expense reserves. The actuary’s results were reported to the examiner-in-charge. As deemed appropriate, reference is made in this report to the actuary’s conclusion.
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II. HISTORY AND PLAN OF OPERATION The company was organized in 1985 as Classified Insurance Company of Wisconsin, as part of the Classified Financial Corporation holding company system. The company was licensed and commenced business on January 1, 1986, when it assumed the direct personal lines of American Star Insurance Company, which was at that time an affiliate. In February 1988, the company changed its name to Classified Insurance Company, Inc. The company was purchased from Classified Financial Corporation by Millers Mutual Insurance Association of Illinois (Millers Mutual), a mutual property and casualty insurer domiciled in the state of Illinois, in 1990. Millers Mutual was also the ultimate parent of Millers General Insurance Company. On January 1, 1995, the company merged with Millers General Insurance Company (Millers General) with Millers General being the surviving company. Prior to the merger, on November 1, 1994, Millers General redomesticated from Illinois to Wisconsin. After the merger, Millers General changed its name to that currently used. In 2007, the company wrote direct premium in the following states: Wisconsin Missouri Illinois Iowa Total $ 4,606,644 4,489,552 4,280,282 414,128 $13,790,606 33.4% 32.6 31.0 3.0 100.0%
In addition to these states, the company is also licensed in Colorado, Kansas, North Dakota, Ohio, and South Dakota. The major products marketed by the company include homeowner’s multiple peril, private passenger auto liability, and auto physical damage. The major products are marketed through direct response methods and the company’s affiliated agency, D.R. Sparks Insurance Services, which operates using a general market agency format for certain offices under the assumed name of Affiliated Insurance Specialists, now Egisure, as well as certain offices which operate under a Supplemental Marketing Plan (SMP) format using the assumed names Egiserve or Millers Insurance Agency. In 2007, direct response represented 51.1% of written premiums
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while the agency represented 48.9% of which SMP represented 8.9%. Personal service representatives employed by the company service all new and existing business. The following table is a summary of the net insurance premiums written by the company in 2007. The growth of the company is discussed in the “Financial Data” section of this report. Direct Premium $ 28,515 11,448 3,808,026 124,278 88,047 49,331 4,848,074 4,832,887 $13,790,606 Reinsurance Assumed $4,835 1,730 Reinsurance Ceded $ 5,899 2,366 624,119 10,195 21,025 46,864 244,343 98,812 $1,053,623 Net Premium $ 27,451 10,812 3,183,907 114,083 67,022 2,467 4,603,731 4,734,075 $12,743,548
Line of Business Fire Allied lines Homeowner’s multiple peril Inland marine Earthquake Other liability – occurrence Private passenger auto liability Auto physical damage Total All Lines
0 $6,565
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III. MANAGEMENT AND CONTROL Board of Directors The board of directors consists of five members. All directors are elected annually to serve a one-year term. Officers are elected at the board's annual meeting. Members of the company's board of directors may also be members of other boards of directors in the holding company group. The board members currently receive no compensation for serving on the board; however, directors’ fees are allocated to Millers Classified through a service agreement with its parent, Millers First Insurance Company. Currently the board of directors consists of the following persons: Name and Residence Steven L. Berg Chesterfield, Missouri William C. Bouchein St. Louis, Missouri Thomas W. Hurd Carmel, Indiana James T. Little University City, Missouri George S. Milnor Alton, Illinois Principal Occupation Vice President, CFO, Secretary and Treasurer, Millers First Insurance Company Vice President, BMC, Inc. Term Expires 2009
2009
Vice President, JBS United, Inc.
2009
Professor, Washington University
2009
President and CEO, Millers First Insurance Company
2009
Officers of the Company The officers serving at the time of this examination are as follows: 2007 Compensation $226,812* 119,163* 118,300* 90,756*
Name George S. Milnor John F. Robinson Steven L. Berg Francis B. Luitjohan
Office President and CEO Vice President Vice President, Finance & Admin., Secretary and Treasurer Vice President, Claims
* Compensation reported is total compensation paid by the company’s parent, Millers First Insurance Company. Millers Classified is allocated a portion of compensation paid under an operating agreement with Millers First.
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Committees of the Board The company's bylaws allow for the formation of certain committees by the board of directors. The committees at the time of the examination are listed below:
Executive Committee Thomas W. Hurd, Chair George S. Milnor Steven L. Berg Compensation Committee* William C. Bouchein, Chair Thomas W. Hurd Edward P. Milbank
Audit Committee* James T. Little, Chair Robert D. Perry Robert W. Schrimpf
* These committees are appointed by the board of directors of the company’s parent, Millers First Insurance Company. Committee members are outside directors of Millers First, and the committees act on behalf of both Millers First and Millers Classified.
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IV. AFFILIATED COMPANIES Millers Classified Insurance Company (MCIC) is a member of a holding company system. The organizational chart below depicts the relationships among the affiliates in the group. A brief description of the significant affiliates follows the organizational chart. Organizational Chart As of December 31, 2007
Affiliated Mutual Holding Company (IL)
Millers First Insurance Company (IL) 100%
Millers Classified Insurance Company (WI) 100%
D.R. Sparks Insurance Services, Inc. (IL) 99.8%
Affiliated Mutual Holding Company (AMHC) AMHC is a mutual insurance holding company organized on April 1, 2003, to reorganize Millers Mutual into an Illinois stock insurance company with the name Millers First Insurance Company. 100% of the outstanding shares of voting stock of Millers First was issued to and is owned by AMHC. Millers Classified Insurance Company remained a wholly owned subsidiary of Millers First and was not directly affected by the reorganization. Wisconsin approved the change of control of Millers Classified to AMHC on April 2, 2003. As of December 31, 2007, the company's audited financial statement reported assets of $21,233,188, liabilities of $1,588, and surplus of 21,231,600. Interest income less investment expenses led to a net Income of $2,198 for the year ended December 31, 2007. Millers First Insurance Company (MFIC) MFIC is a stock property and casualty insurer operating under the laws of the state of Illinois. The company writes primarily private passenger auto liability, auto physical damage, and homeowner’s multiple peril, and operates in the Midwest. Prior to 2000, MFIC wrote commercial agribusiness; the company exited this market in the fourth quarter of 2000 due to changed market
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conditions and continued unprofitable results. MFIC continues to pay agribusiness claims as this business is in runoff. As of December 31, 2007, the company's audited financial statement reported assets of $40,439,823, liabilities of $19,239,443, and policyholders’ surplus of $21,200,380. Operations for 2007 produced a net income of $1,246,760. D.R. Sparks Insurance Services, Inc. (DR Sparks) DR Sparks serves as an insurance agency for business placed in Missouri and Illinois, including business placed with MFIC and MCIC. As of December 31, 2007, the company's unaudited financial statement reported assets of $1,544,421, liabilities of $1,270,930, and net worth of $273,491. Operations for 2007 produced a net income of $60,508. DR Sparks wholly owned Insurance Specialists, Inc., (ISI) which had been inactive since 2006 and was dissolved in 2008. Financial results for ISI are not included in this report, and ISI was not included in the organization chart above due to the immateriality of its operations. Affiliated Service Agreement Millers First Insurance Company, as parent, provides various management, administrative, and operational services to Millers Classified Insurance Company’s business, in accordance with an agreement effective January 1, 2004. Management services include, but are not limited to, appointment of agents, establishment of underwriting guidelines, reinsurance placement, securing of professional liability and other corporate insurance protection, state filing compliance, monitoring of legislative and judicial developments, internal auditing, corporate planning, administration of payroll and employees’ benefits, and other general executive management responsibilities. Administrative and operational services are provided as needed in connection with human resources, pricing and product development, marketing, sales, underwriting, claims examining and adjustment, claims litigation, management and financial accounting, data processing, and investment activities. MFIC completely directs and controls all employees performing services for the benefit of the company. All employees performing services under the agreement are employees of MFIC.
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Fees under the agreement consist of both a corporate and service fee. The corporate fee is computed at $600 per million of net premium earned. The service fee is computed based upon direct allocation of expenses directly attributable to the company, upon allocations proportional to premiums or salaries, or upon special studies. One-twelfth of the annual corporate fee is to be paid to Millers First per month. Every month the company’s parent calculates the service fee and bills the company appropriately. Remuneration of the billed service fees is transacted within the month following the billing. Termination of the agreement may be initiated with 30 days’ prior written notice by either party on any December 31. Tax Allocation Agreement Millers Classified’s federal income tax return is consolidated with that of Affiliated Mutual, Millers First, D.R. Sparks Insurance Services, Inc., and Insurance Specialists, Inc. The consolidated tax liability is apportioned among the members of the affiliated group by the ratio of that portion of the consolidated taxable income attributable to each member of the group having taxable income bears to the consolidated taxable income. Each member pays to Affiliated Mutual, with excess losses or tax credits, its allocable share of the amounts allocated pursuant to the above, no later than 10 days prior to the due date of the tax payment. The agreement applies to all taxable years during which the company is a member of the affiliated group, unless earlier terminated by signed written agreement.
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V. REINSURANCE The company's reinsurance portfolio and strategy is described below. A list of the companies that have a significant amount of reinsurance in force at the time of the examination follows. All contracts include both MCIC and MFIC as reinsured parties. The contracts contained proper insolvency provisions. Nonaffiliated Ceding Contracts 1. Type: Reinsurers: Property Catastrophe Excess of Loss Arch Reinsurance Company, Employers Mutual Casualty Company, Mapfre Compania De Reaseguros S.A., Odyssey America Reinsurance Corporation, Platinum Underwriters Reinsurance, Inc., QBE Reinsurance Corporation, XL Re LTD, Lloyd’s of London, Brit Insurance Limited Reinsurer Arch Employers Mapfre Odyssey Platinum QBE XL Lloyds Brit First Layer 15.00% 1.00 5.00 6.00 24.50 6.00 15.00 25.625 1.875 Second Layer 15.00% 2.00 5.00 6.00 24.00 6.00 15.00 25.125 1.875 Third Layer 15.00% 2.00 5.00 6.00 24.00 6.00 15.00 25.125 1.875
Scope: Coverage:
All property business
Retention * Limit * Aggregate Limit *
First Layer $1,500,000 3,500,000 7,000,000
Second Layer $ 5,000,000 5,000,000 10,000,000
Third Layer $10,000,000 10,000,000 20,000,000
* Company retains 5% of covered losses in addition to base retention; coverage is 95% of the listed amount. Premium: Gross Net Written Premium times a factor, subject to a minimum. Deposit premiums are required and are payable in quarterly installments. First Layer 9.55% $496,230 620,287 Second Layer 5.73% $297,600 372,000 Third Layer 4.77% $248,000 310,000
Premium Factor Minimum Deposit Premium
Commissions: None Effective date: January 1, 2008 Termination: January 1, 2009
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2.
Type: Reinsurers:
Property Per Risk Excess of Loss Employers Mutual Casualty Company, Platinum Underwriters Reinsurance, Inc., Swiss Reinsurance American Corporation Percent of Layer 10% 45 45
Reinsurer Employers Mutual Casualty Company Platinum Underwriters Reinsurance, Inc. Swiss Reinsurance America Corporation Scope: Coverage:
All property business written as general business Retention Limit Per Occurrence Limit $ 300,000 1,750,000 2,900,000
The reinsurer’s liability hereunder shall be limited to $2,000,000 for all losses involving mold for the duration of the contract. Premium: Gross Net Earned Premium times a factor, subject to a minimum. Deposit premiums are required and are payable in quarterly installments. Premium Factor Minimum Deposit Premium 1.9% $126,282 157,852
Commissions: None Effective date: July 1, 2008 Termination: 3. Type: Reinsurer: July 1, 2009 Personal Umbrella Quota Share Employers Mutual Casualty Company, Platinum Underwriters Reinsurance, Inc., Swiss Reinsurance American Corporation Percent of Layer 10% 45 45
Reinsurer Employers Mutual Casualty Company Platinum Underwriters Reinsurance, Inc. Swiss Reinsurance America Corporation Scope: Coverage: Premium: All personal umbrella business
95% quota share, subject to a maximum liability of $1,900,000. 95% of original premiums received
Commissions: 23.25% on all premiums
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Effective date: July 1, 2008 Termination: July 1, 2009; or the company may terminate the contract at the end of any calendar quarter by providing 30 days’ prior written notice. Casualty Excess of Loss Employers Mutual Casualty Company, Platinum Underwriters Reinsurance, Inc., Swiss Reinsurance American Corporation Reinsurer Employers Mutual Casualty Company Platinum Underwriters Reinsurance, Inc. Swiss Reinsurance America Corporation Scope: Coverage: Retention Limit Aggregate Limit First Layer $ 225,000 1,000,000 None Second Layer $1,000,000 2,000,000 2,000,000 All casualty business First Layer 10% 45 45 Second Layer 10% 45 45
4.
Type: Reinsurers:
The reinsurer’s liability hereunder shall be limited to $2,000,000 for all losses involving mold for the duration of the contract. Premium: Gross Net Earned Premium times a factor, subject to a minimum. Deposit premiums are required and are payable in quarterly installments. First Layer 3.00% $189,071 236,339 Second Layer 1.59% $100,000 125,000
Premium Factor Minimum Deposit Premium
Commissions: None Effective date: July 1, 2008 Termination: July 1, 2009; or the company may terminate the contract at the end of any calendar quarter by providing 30 days’ prior written notice
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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, 2007, 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."
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Miller Classified Insurance Company Assets As of December 31, 2007 Net Admitted Assets $20,822,064 1,876,342 196,144
Assets Bonds 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 Net deferred tax asset Receivable from parent, subsidiaries, and affiliates Total Assets $20,822,064 1,876,342 196,144
Nonadmitted Assets $
97,207
4,504
92,703
565,543 18,821 2,969,393 144,917 $26,690,431
565,543 18,821 438,531 144,917 $24,155,065
2,530,862 0 $2,535,366
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Millers Classified Insurance Company Liabilities, Surplus, and Other Funds As of December 31, 2007 Losses Reinsurance payable on paid loss and loss adjustment expenses Loss adjustment expenses Commissions payable, contingent commissions, and other similar charges Other expenses (excluding taxes, licenses, and fees) Taxes, licenses, and fees (excluding federal and foreign income taxes) Current federal and foreign income taxes Unearned premiums Advance premium Ceded reinsurance premiums payable (net of ceding commissions) Amounts withheld or retained by company for account of others Remittances and items not allocated Drafts outstanding Payable to parent, subsidiaries, and affiliates Total liabilities Common capital stock Gross paid in and contributed surplus Unassigned funds (surplus) Surplus as regards policyholders Total Liabilities and Surplus $ 4,000,000 14,176,598 (7,223,456) 10,953,142 $24,155,065 $ 5,540,265 25,655 1,365,374 69,506 243,964 61,901 113,106 4,278,812 315,050 22,128 92,470 7,130 591,505 475,057 13,201,923
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Millers Classified Insurance Company Summary of Operations For the Year 2007 Underwriting Income Premiums earned Deductions: Losses incurred Loss expenses incurred Other underwriting expenses incurred Total underwriting deductions Net underwriting gain (loss) Investment Income Net investment income earned Net realized capital gains (losses) Net investment gain (loss) Other Income Net gain (loss) from agents' or premium balances charged off Finance and service charges not included in premiums Write-ins for miscellaneous income: Miscellaneous income Total other income Net income (loss) after dividends to policyholders but before federal and foreign income taxes Federal and foreign income taxes incurred Net Income $
$13,053,070
$7,853,306 1,837,016 3,820,911 13,511,233 (458,163)
949,039 (4,739) 944,300
(5,472) 96,243 29 90,800
576,937 115,692 461,245
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Millers Classified Insurance Company Cash Flow For the Year 2007 Premiums collected net of reinsurance Net investment income Miscellaneous income Total Benefit- and loss-related payments Commissions, expenses paid, and aggregate write-ins for deductions Federal and foreign income taxes paid (recovered) Total deductions Net cash from operations Proceeds from investments sold, matured, or repaid: Bonds Total investment proceeds Cost of investments acquired (long-term only): Bonds Total investments acquired Net cash from investments Cash from financing and miscellaneous sources: Other cash provided (applied) Net cash from financing and miscellaneous sources Reconciliation: Net change in cash, cash equivalents, and short-term investments Cash, cash equivalents, and short-term investments: Beginning of year End of Year $12,823,672 936,544 90,800 13,851,016 $ 7,364,564 5,401,783 (1,748) 12,764,599 1,086,417
$ 9,691,424 9,691,424
10,098,826 10,093,826 (402,402)
(72,177) (72,177)
611,838
1,264,504 $ 1,876,342
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Millers Classified Insurance Company Compulsory and Security Surplus Calculation December 31, 2007 Assets Less liabilities Adjusted surplus Annual premium: Lines other than accident and health Factor Compulsory surplus (subject to a minimum of $2 million) Compulsory Surplus Excess (or Deficit) $24,155,065 13,201,923 10,953,142
$12,743,548 20%
2,548,710 $ 8,404,432
Adjusted surplus (from above) 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%) Security Surplus Excess (or Deficit)
$10,953,142
3,568,194 $ 7,384,948
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Millers Classified Insurance Company Reconciliation and Analysis of Surplus For the 5-Year Period Ending December 31, 2007 The following schedule is a reconciliation of total surplus during the period under examination as reported by the company in its filed annual statements:
2007 Surplus, beginning of year Net income Change in net unrealized capital gains/losses Change in net deferred income tax Change in nonadmitted assets Change in provision for reinsurance Surplus, End of Year 2006 2005 2004 2003
$10,469,494 461,245 7,545 (98,672) 113,530
$10,350,381 68,468 75,282 (53,037) 28,400
$ 8,712,556 1,262,978 (82,827) 369,582 82,091 6,000
$7,855,045 858,295
$8,125,358 (265,609)
(68,003) 70,220 (3,000) $8,712,556
109,570 (111,274) (3,000) $7,855,045
$10,953,142
$10,469,494
$10,350,381
Millers Classified Insurance Company Insurance Regulatory Information System For the 5-Year Period Ending December 31, 2007 The company’s NAIC Insurance Regulatory Information System (IRIS) results for the period under examination are summarized below. Unusual IRIS results are denoted with asterisks and discussed below the table. Ratio #1 #2 #3 #4 #5 #6 #7 #8 #9 #10 #11 #12 #13 Gross Premium to Surplus Net Premium to Surplus Change in Net Premiums Written Surplus Aid to Surplus Two-Year Overall Operating Ratio Investment Yield Gross Change in Surplus Net Change in Adjusted Surplus (established in 2005) Liabilities to Liquid Assets Agents’ Balances to Surplus One-Year Reserve Development to Surplus Two-Year Reserve Development to Surplus Estimated Current Reserve Deficiency to Surplus 2007 126 116 (8) 0 98 4.3 5 5 55 1 0 (10) (11) 2006 142 132 (8) 0 95 3.9 1 1 55 1 (9) (13) (2) 2005 156 146 (5) 0 91 3.5 19 19 59 1 (3) (1) (5) 2004 195 183 0 0 97 3.3* 9 0 63 1 0 (8) (15) 2003 217 202 4 0 104* 3.6* (2) 0 64 1 (9) (5) (2)
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Ratio 5 is a measure of the profitability of an insurance company. The company’s exceptional results in 2003 were primarily due to underwriting losses as a result of high incurred catastrophe losses. Ratio 6 provides an indication of the general quality of a company’s investment portfolio. The exceptional result of 3.6% and 3.3% in 2003 and 2004, respectively, are attributed to the lower interest rates available in the market during those years. The company’s investment yields have improved over the past three years and are now within the normal range.
Growth of Millers Classified Insurance Company Surplus as Regards Policyholders $10,953,142 10,469,494 10,350,381 8,712,556 7,855,045 8,125,358
Year 2007 2006 2005 2004 2003 2002
Admitted Assets $24,155,065 23,166,721 25,214,697 23,957,647 21,804,371 21,749,715
Liabilities $13,201,923 12,697,227 14,864,316 15,245,091 13,949,327 13,624,357
Net Income $ 461,245 68,468 1,262,978 858,295 (265,609) (688,900)
Year 2007 2006 2005 2004 2003 2002
Gross Premium Written $13,797,171 14,903,184 16,132,256 16,974,341 17,042,642 16,234,539
Net Premium Written $12,743,548 13,836,180 15,096,293 15,941,374 15,897,071 15,278,813
Premium Earned $13,053,070 14,172,541 15,350,891 15,876,845 15,602,660 14,980,343
Loss and LAE Ratio 74.2% 80.0 67.6 72.7 78.7 83.8
Expense Ratio 29.3% 26.5 27.1 24.5 28.5 26.6
Combined Ratio 103.5% 106.5 94.7 97.2 107.2 110.4
Millers Classified has had mixed results over the past five years with underwriting losses in 2002, 2003, 2006, and 2007 offset by gains in 2004 and 2005. Much of the losses in 2003 and 2006 were attributed to catastrophe events such as wind, hail, or ice storms. In recent years, the company has worked to diversify its exposures geographically throughout its territories, while controlling existing business through appropriate underwriting and rating. The company’s Expense Ratio has been approximately 27% each year except for 2003 and 2007 in which this ratio approached 29%. The increased expense in 2003 was due to
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reallocation of fixed costs within the group following the discontinuance of agribusiness and to the amortization of EDP equipment and software as a result of operating and financial reporting systems replaced in the mid to late 1990s. The higher ratio in 2007 was attributed to increases in marketing expense as part of new business production and policyholder retention and to the accrual of employee incentives. Premiums written and premiums earned have each decreased over the three years with decreases of over one million dollars in each of the past two years. During this time, the company has sought to maintain a stable policyholder base and adequate rates though this has been challenging in some market segments. Reconciliation of Surplus per Examination No adjustments were made to surplus as a result of the examination. The amount of surplus reported by the company as of December 31, 2007, is accepted.
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VII. SUMMARY OF EXAMINATION RESULTS Compliance with Prior Examination Report Recommendations There were two 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. Affiliated Agreement—It is recommended that the company update the Affiliated Service Agreement to reflect the current legal names of both parties to the agreement. Action—Compliance. 2. Disaster Recovery Plan—It is recommended that the company submit a revised and updated Disaster Recovery Plan to this office by September 30, 2004. Action—Compliance.
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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. Disaster Recovery Plan The prior examination report contained a recommendation that the company revise and update its Disaster Recovery Plan to reflect the major changes in the Information Systems environment. The company did revise and update its Disaster Recovery Plan after the prior examination; however, since that examination the company has not tested the Disaster Recovery Plan to ensure the viability and continuity of operations in the event of a disaster. It is recommended that the company periodically conduct a test of its Disaster Recovery Plan. Reinsurance Agreements As noted in Section V. of this report, all contracts include both MCIC and MFIC as reinsured parties. As of March 2008, the NAIC Accounting Practices and Procedures Manual, SSAP 62, paragraph 9, requires that reinsurance agreements with multiple cedents have allocation agreements between the cedents. The company’s current intention is to settle losses with MFIC on a pro rata basis based on each company’s losses, in the event that ceded losses exceeded the aggregate limit of the treaty. To provide for a more formal allocation and to be in compliance with the new requirement noted in the preceding paragraph, it is recommended that the company reach a written agreement with MCIC in accordance with the NAIC Accounting Practices and Procedures Manual, SSAP 62, Paragraph 9, and that the agreement be filed with this office for prior approval under ch. Ins 40, Wis. Adm. Code.
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VIII. CONCLUSION The examination found that Millers Classified Insurance Company had assets of $24,155,065; liabilities of $13,201,923; and surplus of $10,953,142 as of December 31, 2007. The company has suffered underwriting losses in three of the past five years, including the past two, but has continued a strategic restructuring designed to improve and stabilize its business. Steps to meet these goals have primarily been a reduction of wind and hail catastrophe risk concentration through geographic dispersion its markets and modifications to the company’s marketing plan to emphasize new avenues of premium growth that are controlled by the company. The company continues to explore strategies for improving underwriting performance. The company’s loss and loss adjustment expense reserves have historically been adequate to support the business written. The company complied with the two prior examination recommendations. The current examination resulted in two recommendations summarized in the following section and no adjustments or reclassifications to surplus.
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IX. SUMMARY OF COMMENTS AND RECOMMENDATIONS 1. Page 24 - Disaster Recovery Plan—It is recommended that the company periodically conduct a test of its Disaster Recovery Plan. Page 24 - Reinsurance Agreements—It is recommended that the company reach a written agreement with MCIC in accordance with the NAIC Accounting Practices and Procedures Manual, SSAP 62, Paragraph 9, and that the agreement be filed with this office for prior approval under ch. Ins 40, Wis. Adm. Code.
2.
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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 David Jensen Terry Lorenz Victoria Chi Title Insurance Financial Examiner Insurance Financial Examiner Information Systems Audit Specialist
Respectfully submitted,
Karl Albert, CFE Examiner-in-Charge
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