Wausau Business Insurance Company

Report of the Examination of Wausau Business Insurance Company Wausau, Wisconsin As of December 31, 2004 TABLE OF CONTENTS Page I. INTRODUCTION .................................................................................................................. 2 II. HISTORY AND PLAN OF OPERATION .............................................................................. 4 III. MANAGEMENT AND CONTROL ...................................................................................... 10 IV. AFFILIATED COMPANIES ................................................................................................ 12 V. REINSURANCE ................................................................................................................. 23 VI. FINANCIAL DATA .............................................................................................................. 26 VII. SUMMARY OF EXAMINATION RESULTS ....................................................................... 36 VIII. CONCLUSION.................................................................................................................... 47 IX. SUMMARY OF COMMENTS AND RECOMMENDATIONS.............................................. 48 X. ACKNOWLEDGMENT ....................................................................................................... 50 State of Wisconsin / OFFICE OF THE COMMISSIONER OF INSURANCE Jim Doyle, Governor Jorge Gomez, Commissioner Wisconsin.gov April 12, 2006 125 South Webster Street • P.O. Box 7873 Madison, Wisconsin 53707-7873 Phone: (608) 266-3585 • Fax: (608) 266-9935 E-Mail: information@oci.state.wi.us Web Address: oci.wi.gov Honorable Jorge Gomez Commissioner of Insurance State of Wisconsin 125 South Webster Street Madison, Wisconsin 53702 Honorable Alfred W. Gross Chair, Financial Condition (E) Committee, NAIC Commissioner of Insurance Commonwealth of Virginia 1300 East Main Street Richmond, Virginia 23219 Honorable Ann Womer Benjamin Secretary, Midwestern Zone, NAIC Director, Department of Insurance State of Ohio 2100 Stella Court Columbus, Ohio 43215 Honorable Julianne M. Bowler Secretary, Northeastern Zone, NAIC Commissioner of Insurance Commonwealth of Massachusetts One South Station, 5th Floor Boston, Massachusetts 02110 Honorable Eleanor Kitzman Secretary, Southeastern Zone, NAIC Director of Insurance State of South Carolina 300 Arbor Lake Drive, Suite 1200 Columbia, South Carolina 29223 Honorable Gary L. Smith Secretary, Western Zone, NAIC Director, Department of Insurance State of Idaho 700 West State Street Boise, Idaho 83720 Commissioners: In accordance with your instructions, a compliance examination has been made of the affairs and financial condition of: WAUSAU BUSINESS INSURANCE COMPANY Wausau, Wisconsin and this report is respectfully submitted. I. INTRODUCTION The previous examination of Wausau Business Insurance Company (hereinafter also “WBIC” or “the company”) was conducted in 2000 as of December 31, 1999. The current examination covered the intervening period ending December 31, 2004, and included a review of such subsequent 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 section of this report titled "Summary of Examination Results” contains comments and elaboration on those areas where adverse findings were noted or where unusual situations existed. This office relied on work performed by the Massachusetts Division of Insurance in regards to pooled balances as deemed appropriate. See comments below in section titled “Independent Actuary’s Review.” Comment on the remaining areas of the company's operations is contained in the examination work papers. 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 2 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 Since January 1, 1999, the company has been a participant in a reinsurance pooling agreement with Liberty Mutual Insurance Company and certain of its property and casualty insurance subsidiaries. The company’s net loss and loss adjustment expense reserves are the product of the reserves of the Liberty Mutual Group Pool and the company’s participation percentage in the pool. PricewaterhouseCoopers LLP, under contract with the Massachusetts Division of Insurance, reviewed the adequacy of the company’s loss reserves and loss adjustment expense reserves, as a function of its participation in the pool. The results of the firm’s work were reported to the examiner-in-charge. As deemed appropriate, reference is made in this report to the actuarial firm’s conclusion. 3 II. HISTORY AND PLAN OF OPERATION Wausau Business Insurance Company, a stock property and casualty company operating under ch. 611, Wis. Stat., is the successor to the Canners Exchange Subscribers, an Illinois reciprocal insurer organized in 1907. Canners Exchange Subscribers, the predecessor to WBIC, became affiliated on January 1, 1983 with Employers Insurance Company of Wausau (then known as EMPLOYERS INSURANCE OF WAUSAU A Mutual Company), when all of the outstanding shares of the reciprocal’s attorney-in-fact corporation, Lansing B. Warner, Inc., were purchased by Wausau Service Corporation. Wausau Service Corporation was at that time a firsttier intermediate holding company subsidiary of EMPLOYERS INSURANCE OF WAUSAU A Mutual Company. Wausau Business Insurance Company was incorporated on June 30, 1987, as the “Westwood Insurance Company” under the laws of the state of Illinois to effect a conversion of Canners Exchange Subscribers to a stock company. The assets and liabilities of the reciprocal were merged into the stock company on July 1, 1987. On September 1, 1990, the company redomiciled to Wisconsin and simultaneously changed its name to that currently used. On November 23, 1985, Employers Insurance Company of Wausau, then known as EMPLOYERS INSURANCE OF WAUSAU A Mutual Company (hereinafter also, “EICOW”) consummated an affiliation agreement with Nationwide Mutual Insurance Company (hereinafter also, “NMIC”) dated November 6, 1985. NMIC’s sister company, Nationwide Mutual Fire Insurance Company (hereinafter also, “NMFIC”), was not party to the affiliation agreement. Within the context of this agreement, and certain subsequent agreements, NMIC exercised control of EICOW and its subsidiaries through nomination of the various boards of directors, common executive management, and control of the reinsurance pool to which all direct premiums written by WBIC were then ceded and from which all net premiums written were then assumed. The directors of Employers Insurance Company of Wausau continued to be elected by the policyholders of EICOW, as required by s. 611.53 (2), Wis. Stat., but election and reelection of nominees associated with NMIC on the EICOW board preserved the affiliation. 4 The years of affiliation with NMIC resulted in considerable integration of the operations of EICOW and NMIC, together with their respective subsidiaries and affiliates. The two insurers and many of their respective insurance subsidiaries, including WBIC, pooled their risks, and shared a program of external reinsurance on the pooled risks. The same persons held many of the senior executive positions of NMIC and EICOW. EICOW and its subsidiaries and NMIC and its subsidiaries provided numerous services to one another. The employees of Wausau Service Corporation received pension, medical, and other benefits from plans sponsored by NMIC. In 1998, NMIC decided to end its affiliation with EICOW in order to focus greater attention on personal lines, particularly on promotion and service to its “First of America” brand of life insurance and investment products. The management of EICOW searched for an affiliation in replacement that would provide the company with a means of severing its ties with NMIC in an orderly manner that preserved the continuity of quality service to policyholders and claimants. On October 5, 1998, EICOW entered into an Affiliation and Contribution Note Purchase Agreement with Liberty Mutual Insurance Company (hereinafter also “LMIC”) and a DeAffiliation Master Agreement with NMIC. The affiliation with Liberty Mutual Insurance Company was approved by OCI, following a public hearing, on December 16, 1998, and under the terms of the agreement, became effective January 1, 1999. The disaffiliation with NMIC was approved in writing on December 16, 1998, and under the terms of that agreement, became effective December 31, 1998. As part of the affiliation, Liberty Mutual Insurance Company purchased Wausau Insurance Company (U.K.) Limited and Wausau Service Corporation, together with the latter’s subsidiaries, including Wausau Business Insurance Company. In this way, WBIC became an affiliate of Liberty Mutual Insurance Company, and its current ultimate parent, Liberty Mutual Holding Company, Inc. Additional information concerning the holding company system is contained in the section of this report titled, “Affiliated Companies.” As of December 31, 2004, the company’s capitalization included $10,900,000 in the form of 10,900,000 common shares (of 20,000,000 authorized) with a par value of $1.00 per share, and 5 $42,900,000 of paid-in and contributed surplus. The following schedule reflects the activity in capital stock and paid-in surplus since the incorporation of the company: Gross Authorized Common Shares 2,000,000 18,000,000 (14,100,000) 14,100,000 Gross Paid-In and Contributed Surplus $ 1,000,000 3,000,000 1,500,000 400,000 5,000,000 12,000,000 20,000,000 $42,900,000 Year(s) 1987 1989 1990 1992 1995 1996 1999 12/31/2004 Issued and Outstanding 2,000,000 2,000,000 1,500,000 400,000 5,000,000 Par Value Per Share $1.00 Capital Paid Up $ 2,000,000 2,000,000 1,500,000 400,000 5,000,000 20,000,000 10,900,000 $1.00 $10,900,000 The company has no employees of its own. All day-to-day operations are conducted with staff provided by LMIC in accordance with the business practices and internal controls of that organization. Expenses are paid by LMIC on behalf of the company, or, in some cases, directly by the company for itself. Expenses other than federal income taxes are allocated on the basis of specific identification, utilization estimates, and time studies, in conformity with a general expense allocation agreement. Tax allocations are established in accordance with a written consolidated federal income tax sharing agreement applicable to Liberty Mutual Insurance Company and certain of its direct and indirect subsidiaries. Intercompany balances with affiliates are created in the ordinary course of business with settlements generally made on a quarterly basis. Written agreements with affiliates are further described in the section of this report titled “Affiliated Companies.” WBIC’s operations are coordinated from its home office in Wausau, Wisconsin. The company owns its office building in Wausau which is used principally for the transaction of its own business. Support services are provided through a network of leased office facilities in 80 cities throughout the United States. This represents an increase, since at the time of the prior examination the company had offices in 66 U.S. cities. 6 As of the examination date, the company is licensed in all 50 states and the District of Columbia. In 2004, the company wrote business in every jurisdiction in which it is licensed in the United States. The distribution of direct premiums written in 2004 by state was as follows: Wisconsin Illinois Tennessee Pennsylvania California New York Texas All others Total $ 26,818,131 10,141,801 8,141,800 7,307,983 6,750,756 5,506,190 5,268,868 63,065,542 $133,001,071 20.2% 7.6 6.1 5.5 5.1 4.1 4.0 47.4 100.0% 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 (d) Liability and Incidental Medical Expense (e) Automobile (f) Fidelity (g) Surety (k) Worker’s Compensation (n) Miscellaneous (o) Aircraft As of December 31, 2004, business was written through a sales force consisting of 88 account representatives and 420 independent agents. Account representatives are employees of Liberty Mutual Insurance Company designated to sell products specifically for the company. Each received a salary with the opportunity to earn a bonus if his/her remuneration credits, tallied much the same as commissions, exceeded his/her salary and chargeable business expenses. If remuneration credits did not exceed salary and chargeable expenses, there was no chargeback, nor was the deficiency carried into the following year’s compensation formula. Independent agents are compensated according to the following commission schedule. Some rates are on a sliding scale that declines with the volume of premium or service revenue related to a specific policy. 7 Product Line Worker’s Compensation General Liability Auto Umbrella Packages Other Liability Other Property Highly Protected Risks/ Property Special Risks Fidelity, Burglary & Other Crime Plate Glass Contract Surety Bonds Other Surety and Individual and Schedule Public Official Bonds Commission Rates 5% 15% 15% 15% 15% Varies 15% 15% 15% 10% 5% to 30% 25% Independent agents are also eligible to earn contingent commissions based on written premium growth performance and loss performance during a calendar year. 8 The following table is a summary of the net insurance premiums written by the company in 2004. The growth of the company is discussed in the Financial Data section of this report. Direct Premium $ 278,418 310,739 0 0 26,663,423 0 0 0 954,767 0 0 69,520,310 14,017,670 0 4,245,286 0 0 13,168,395 3,842,188 0 0 0 238 (363) Reinsurance Assumed $ 714,566 235,324 (15,207) 4,506,927 658,481 108,340 235,510 (74) 122,780 (32,767) 564 12,507,281 1,926,298 374,336 154,224 9,450 9,481,993 1,707,529 5,694,432 255,749 14,962 564,033 1,540 8,085 Reinsurance Ceded $ 278,418 310,739 0 0 26,663,423 0 0 0 954,767 0 0 69,520,310 14,017,670 0 4,245,286 0 0 13,168,395 3,842,188 0 0 0 238 (363) $ Net Premium 714,566 235,324 (15,207) 4,506,927 658,481 108,340 235,510 (74) 122,780 (32,767) 564 12,507,281 1,926,298 374,336 154,224 9,450 9,481,993 1,707,529 5,694,432 255,749 14,962 564,033 1,540 8,085 Line of Business Fire Allied lines Farmowners multiple peril Homeowners multiple peril Commercial multiple peril Ocean marine Inland marine Medical malpractice – occurrence Earthquake Group accident and health Other accident and health Worker’s compensation Other liability – occurrence Other liability - claims made Products liability – occurrence Products liability claims made Private passenger auto liability Commercial auto liability Auto physical damage Aircraft (all perils) Fidelity Surety Burglary and theft Boiler and machinery Reinsurance non-proportional assumed property Reinsurance non-proportional assumed liability Total All Lines 0 158,749 0 158,749 0 $133,001,071 325,085 $39,718,190 0 $133,001,071 325,085 $39,718,190 9 III. MANAGEMENT AND CONTROL Board of Directors The board of directors consists of seven members. The terms of directors are staggered so as to maintain three classes of expiry which are at, or as nearly possible at, onethird of the membership of the board, with each director having a term of three years. Members of the company's board of directors are typically members of other boards of directors in the holding company system. Senior officers are elected at the board's annual organizational meeting, and as positions are created or fall vacant. Officers other than those elected by the board are appointed by the senior officers. The board members currently do not receive compensation for serving on the board. All board members have executive management positions within the holding company structure and they receive no distinct and separate compensation for service as directors. Directors are reimbursed for travel to board meetings in accordance with company policy. Currently the board of directors consists of the following persons: Name and Residence Mark E. Fiebrink Amherst, New Hampshire Anthony A. Fontanes Hingham, Massachusetts Principal Occupation President and Chief Operating Officer of Wausau Insurance Companies Executive Vice President and Chief Investment Officer Liberty Mutual Insurance Company Executive Vice President Liberty Mutual Insurance Company Chairman, President, and Chief Executive Officer Liberty Mutual Insurance Company Senior Vice President, Chief Financial Officer and Controller Liberty Mutual Insurance Company Senior Vice President and General Counsel Liberty Mutual Insurance Company Senior Vice President and Chief Information Officer Liberty Mutual Insurance Company Term Expires 2008 2008 Gary R. Gregg Milton, Massachusetts Edmund F. Kelly Weston, Massachusetts 2006 2007 Dennis J. Langwell Franklin, Massachusetts 2007 Christopher C. Mansfield Dedham, Massachusetts 2006 Stuart M. McGuigan Cape Neddick, Maine 2008 10 Officers of the Company The senior officers elected by the board of directors or appointed by the elected officers and serving at the time of fieldwork for this examination are listed below. 2004 Compensation* $63,772 $14,544 $3,822 $1,352 $2,419 $970 $1,133 $1,207 $1,190 $1,162 Name Edumund F. Kelly Gary R. Gregg Joseph A. Gilles James S. Hoffert Laurance H. S. Yahia Roy K. Morrell Mark A. Steinberg David L. Lancaster Michael L. Parker George Juzdan Office Chairman of the Board and Chief Executive Officer Vice Chairman President and Chief Operating Officer Vice President – General Counsel and Secretary Vice President and Treasurer Vice President – Chief Actuary Senior Vice President – President, Wausau Signature Agency Inc. Senior Vice President – General Manager, Direct Division Senior Vice President – General Manager, Western Division Senior Vice President – General Manager, Eastern Division * The 2004 compensation for the executive officers only includes the allocated amount of incurred salary expenses to the company based on its pool participation percentage, which is 0.4%. This includes only the allocated amount of incurred expenses relating to Liberty Mutual Insurance Company’s “Executive Partnership Plan” and not its associated liability. See section VII of this report titled “Summary of Examination Results” under the heading “Report on Executive Compensation” for further comments on the company’s reporting of its executives’ “Executive Partnership Plan” account balances. Committees of the Board Article IV of the company’s bylaws permits the appointment of committees to exercise the powers of the board and the management of the business affairs of the corporation to the extent authorized by law and by board resolution, with certain named exclusions. At the time of this examination, the board of directors had not appointed any committees. However, from the period beginning 2000 through 2002 the board of directors appointed an audit committee and a compensation committee, neither of which were reappointed after 2002. 11 IV. AFFILIATED COMPANIES WBIC 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, 2004 Liberty Mutual Holding Company Inc. LMHC Massachusetts Holdings Inc. Liberty Mutual Group Inc. Employers Insurance Company of Wausau Liberty Mutual Insurance Company Liberty Mutual Fire Insurance Company Liberty Mutual Investment Advisors Wausau Service Corporation Liberty Life Assurance Company of Boston Wausau Business Insurance Company Wausau General Insurance Company Wausau Underwriters Insurance Company Note that the above organizational chart is a simplified version of the of the complete organization chart due to the size and complexity of the holding company system. The chart includes only significant affiliates and ones that directly affect the operations of WBIC. 12 Wausau Business Insurance Company is a member of the Liberty Mutual Group, a multinational holding company system under the control of Liberty Mutual Holdings Company Inc. WBIC is part of a distinct holding company subsystem within the Liberty Mutual Holding Company, commonly known as the Wausau Insurance Companies. The Wausau Insurance Companies’ marketing emphasis is on middle market and small business commercial risks. Employers Insurance Company of Wausau exercises a leadership role within the Wausau Insurance Companies holding company subsystem. Employers Insurance Company of Wausau does not own any subsidiaries, nor does it exercise “control” of any affiliate as that term is defined by s. 601.01 (13), Wis. Stat. Its leadership role exists by virtue of its position as the largest member of that holding company subsystem. Review of the December 31, 2004, Schedule Y reveals that the Wausau Insurance Companies exist primarily as a shared brand identity. The Wausau Insurance Companies’ marketing emphasis is on middle market and small business commercial risks. The Wausau companies that are identified on the schedule Y are: Employers Insurance Company of Wausau, Wausau Insurance Company LTD. (UK), Wausau Underwriters Insurance Company, Wausau General Insurance Company, Wausau Business Insurance Company, and Wausau Service Corporation. Wausau Service Corporation is shown as the upstream holding company of Wausau Underwriters Insurance Company, Wausau General Insurance Company, and Wausau Business Insurance Company. The company stated that operations for Wausau (UK) were shut down in 2001 and the last claim was settled in 2003. The size and complexity of the Liberty Mutual Group makes the description of each legal entity within the holding company system impractical in the context of this examination report. Therefore, this report will confine its discussion of specific entities to the success of control, beginning with the ultimate parent, Liberty Mutual Holding Company Inc., and progressing to the next immediate tier of control, Employers Insurance Company of Wausau, and other affiliates with whom Wausau Business Insurance Company has a significant contractual or operational relationship. Written agreements with affiliates will be described following the summary of companies. 13 Present Succession of Control Liberty Mutual Holding Company Inc. Liberty Mutual Holding Company Inc. was incorporated under the laws of the Commonwealth of Massachusetts on November 28, 2001. The mutual holding company serves as the ultimate holding company for the Liberty Mutual Group. It directly holds the stock of LMHC Massachusetts Holdings Inc. Headquarters are maintained in Boston, Massachusetts. As of December 31, 2004, Liberty Mutual Holding Company Inc. reported assets of $72,359,000,000, liabilities of $63,662,000,000, policyholders’ equity of $8,697,000,000, and a net income of $1,245,000,000. LMHC Massachusetts Holdings Inc. LMHC Massachusetts Holdings Inc. was incorporated under the laws of the Commonwealth of Massachusetts on November 28, 2001. The company serves as an intermediate stock holding company within the mutual holding company system. It directly holds the stock of Liberty Mutual Group Inc. Headquarters are maintained in Boston, Massachusetts. As of December 31, 2004, LMHC Massachusetts Holdings Inc. reported assets of $8,697,000,000, no liabilities, and policyholders’ equity of $8,697,000,000. Liberty Mutual Group Inc. Liberty Mutual Group Inc. was incorporated under the laws of the Commonwealth of Massachusetts on November 28, 2001. The company serves as an intermediate stock holding company within the mutual holding company system. It directly holds the stock of Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Employers Insurance Company of Wausau, and other insurance and non-insurance entities. It is the primary entity used to raise funds for the Liberty Mutual Group, primarily through the issuance of short-term and long-term debt instruments to unrelated third parties. Headquarters are maintained in Boston, Massachusetts. As of December 31, 2004, Liberty Mutual Group Inc. reported assets of $10,891,207,000, liabilities of $2,194,207,000, policyholders’ equity of $8,697,000,000, and a net income of $133,605,000. 14 Liberty Mutual Insurance Company Liberty Mutual Insurance Company was incorporated under the laws of the Commonwealth of Massachusetts on January 1, 1912, and commenced business on July 1, 1912. The incorporator was Liberty Mutual Fire Insurance Company, which advanced all of the organizational expenses and initial financing. LMIC is a diversified property and casualty insurer of commercial and personal lines, with distribution primarily by independent agents who confine their representation exclusively to companies in the Liberty Mutual Group. The company is licensed in all 50 U.S. states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and in various other foreign countries. Headquarters are maintained in Boston, Massachusetts. As of December 31, 2004, Liberty Mutual Insurance Company reported assets of $23,956,964,668, liabilities of $16,701,614,750, policyholders’ surplus of $7,255,349,918, and net income of $216,859,590. Liberty Mutual was examined concurrently with Employers Insurance Company of Wausau as of December 31, 2004, and the results of that examination were expressed in a separate report issued by the Massachusetts Division of Insurance. Wausau Service Corporation Wausau Service Corporation (hereinafter also “WSC”) was incorporated under the laws of the state of Wisconsin as the “Wausau Insurance Finance Corporation” on September 21, 1959. It was initially organized to finance insurance premiums, a function that had been handled through the Insurance Finance Company, an independently owned corporation. Within only a few years, with the introduction of company installment plans, the corporation’s original purpose became largely obsolete. From 1964 to the formation of Countrywide Services Corporation in 1971, WSC provided loss adjustment, safety, and health services to self-insured accounts on behalf of the Wausau Insurance Companies. Thereafter, for a time, the corporation essentially fell dormant. Then, in late 1977, it was decided to reactivate WSC as a downstream holding company. On November 18, 1977, WSC’s board of directors voted to accept transfer of ownership from Employers Mutual Liability Insurance Company of Wisconsin (as EICOW was known at the time) of the capital stock of all affiliates except Wausau Insurance Company (U.K.) 15 Limited (then known as Employers of Wausau (U.K.) Ltd.) effective January 2, 1978. On December 31, 1998, pursuant to a Stock Purchase Agreement dated October 5, 1998, Wausau Service Corporation, together with certain of its subsidiaries, was sold to Liberty Mutual Insurance Company. As of December 31, 2004, WSC reported assets of $206,239,740, liabilities of $2,014,160, stockholders’ equity of $208,253,900, and a net income of $661,493. Pursuant to the First Amendment to the Service Agreement between WBIC and WSC, dated January 1, 2000, and the concurrently executed Service Agreement between Liberty Mutual Insurance Company and WBIC, the services once provided by WSC to WBIC were migrated to Liberty Mutual Insurance Company. According to company personnel, the transfer of services was completed on or near the end of the year 2001, with all of the WSC employees being either terminated or transferred to LMIC’s payroll. This corporation is now dormant, although it continues to hold 100% of the capital stock of Wausau Business Insurance Company, Wausau General Insurance Company, Wausau Underwriters Insurance Company and other Wausau Group subsidiaries. The complete liquidation of the WSC entity has been discussed within the Liberty Mutual Group. The company stated that WSC will likely not be in existence at the time of the next examination of the Wausau Insurance Companies. Significant Affiliates Employers Insurance Company of Wausau Employers Insurance Company of Wausau, a stock property and casualty company operating under ch. 611, Wis. Stat., was originally incorporated as a mutual company in the state of Wisconsin on August 21, 1911, under the name “Employers Mutual Liability Insurance Company of Wisconsin.” In 1911, the Wisconsin Legislature approved the first worker’s compensation law in the United States, which required employers to carry such insurance as protection for employees injured on the job. A group of Wausau area industrialists decided to sponsor the incorporation of this mutual insurance company in order to give the law a chance to work as envisioned. The company commenced business on September 1, 1911, with the 16 effective date of Wisconsin’s worker’s compensation law. It absorbed by merger, two companion carriers, Employers Mutual Indemnity Corporation and Employers Mutual Fire Insurance Company, at the years ended 1937 and 1975, respectively. Operations were conducted under the title Employers Mutual Liability Insurance Company of Wisconsin from inception until September 1, 1979, when the company changed its name to EMPLOYERS INSURANCE OF WAUSAU A Mutual Company (hereinafter also “Employers”). Effective on November 22, 2001, EMPLOYERS INSURANCE OF WAUSAU A Mutual Company was restructured into a mutual holding company pursuant to the provisions of ch. 644, Wis. Stat. This restructuring was approved by OCI on November 19, 2001, following a public hearing, and was approved by vote of the policyholder members of Employers on November 20, 2001. Pursuant to the mutual holding company restructuring, Employers became a stock company, and the company was also renamed “Employers Insurance Company of Wausau,” effective November 21, 2001. Thereafter, 100% of the stock of Employers was owned by the newly formed Employers Insurance of Wausau Mutual Holding Company. Effective on March 19, 2002, Employers Insurance of Wausau Mutual Holding Company was merged into Liberty Mutual Holding Company Inc. Since that time, policyholders of Employers have been members of Liberty Mutual Holding Company Inc. EICOW is currently licensed in 50 states in the United States, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Canada and Other Alien Countries. The worker’s compensation line of business provided over 50% of direct premiums written in 2004. EICOW has a 16% participation in the Liberty Mutual Group’s inter-company reinsurance agreement. As of December 31, 2004, Employers Insurance Company of Wausau reported assets of $4,423,248,464, liabilities of $3,428,099,497, policyholders’ surplus of $995,148,967, and net income of $100,463,545. EICOW was examined concurrently with WBIC as of December 31, 2004, and the results of that examination were expressed in a separate report. Liberty Mutual Investment Advisors LLC Liberty Mutual Investment Advisors LLC (hereinafter also “Liberty Advisors”) was organized under the laws of the Commonwealth of Massachusetts on June 23, 1999. The 17 company serves as an investment manager for various entities within the Liberty Mutual Group, primarily with regard to the U.S.-based insurance companies’ investments in venture capital limited partnerships and a short-term cash liquidity pool. The company’s management consists of employees of Liberty Mutual Insurance Company. As of December 31, 2004, Liberty Mutual Investment Advisors LLC reported assets of $271,307,000, liabilities of $928,000, policyholders’ equity of $270,378,000, and a net income of $24,623,000. Written Agreements with Affiliates As previously noted, WBIC has no employees of its own. All operations are conducted by employees of LMIC, 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 agreement and undertakings affect the company’s relationship to its affiliates. Reinsurance Agreements are described in section V of the report titled “Reinsurance.” A brief summary of the other agreements follows: Liberty Mutual Holding Company Inc. Federal Tax Sharing Agreement Effective January 1, 2002, Wausau Business Insurance Company entered into a tax sharing agreement with Liberty Mutual Holding Company and all the parties of the Liberty Mutual Group. Under this agreement, Liberty Mutual Holding Company Inc. files a consolidated U.S. Federal Income Tax Return that includes WBIC and other 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 Liberty Mutual Group’s consolidated U.S. federal income tax liability 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, dispute resolution and other administrative requirements. The agreement calls for the settling of estimated federal tax payments on the 12th day of April, June, September, December and March. Final settlement is due within 30 days of the 18 receipt of invoice. The agreement has provisions for members entering or departing the group and provides for successors and assigns. Liberty Mutual Insurance Company Investment Management Agreement Wausau Business Insurance Company entered into an Investment Management Agreement with Liberty Mutual Insurance Company effective December 31, 1998. Under this agreement, LMIC acts as the company’s agent and attorney-in-fact with respect to its investment portfolio. Subject to the WBIC board of director’s decisions and investment guidelines, LMIC has complete day-to-day discretionary control, including the power to make acquisitions and disposals of investments, and issue instructions to brokers and custodians. The company is to reimburse LMIC the actual and reasonable fees and expenses incurred by LMIC in the performance of its duties under this agreement. The agreement is to be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. Either party may terminate this agreement at any time upon 120 days’ advance written notice or otherwise by mutual agreement. The agreement can also be terminated by either party with 90 days’ notice prior to each three-year anniversary of the renewal date of the agreement. Service Agreement Wausau Business Insurance Company and Liberty Mutual Insurance Company entered into a Service Agreement effective January 1, 2000. Under this agreement, LMIC is to provide all services essential to the day-to-day operation of WBIC as requested by the company. WBIC is to reimburse LMIC a percentage of the total reasonable expenses, costs, losses, and disbursements, excluding claim payments, incurred by LMIC in its operation and in the operation of its subsidiaries. This allocation percentage is to be consistent with the company’s customary cost allocation practices and is to be supported by its current expense allocation model, which model substantially complies with statutory accounting guidelines promulgated by the National Association of Insurance Commissioners. Settlements of fees and expenses are to be made within 45 days of the end of each calendar quarter. 19 Either party may terminate this agreement at any time with 90 days’ written notice to the other. Only 45 days’ notice is required in the event of the insolvency of either party. LMIC may terminate the contract immediately if WBIC fails to make payment of fees and expenses and such failure has not been cured within 30 days after the due date, or if WBIC participation in the Liberty Mutual Group reinsurance pool is terminated and the company is no longer affiliated with the Liberty Mutual Group. In the event of termination, Liberty Mutual Insurance Company shall continue to provide such services for a period of time that is reasonably necessary to transfer service responsibilities to a new party. Wausau Service Corporation Management Agreement Wausau Business Insurance Company entered into a Management Agreement with Wausau Service Corporation effective December 31, 1998, which was amended effective January 1, 2000. The terms of this agreement are largely the same as those of the Service Agreement with Liberty Mutual Insurance Company. This agreement was amended to terminate the exclusivity of Wausau Service Corporation’s appointment as a provider of management services. Over the period under examination the employees that provided services to the Wausau Insurance Companies were in the midst of a comprehensive reorganization to integrate them into the Liberty Mutual Group, and thereby eliminating the duplication of services and taking advantage of the respective organizations’ strengths. Currently Wausau Service Corporation does not have any employees as a result of the consolidation with Liberty Mutual Insurance Company and subsequent migration of employees and services to LMIC. As of the date of the examination report, Wausau Service Corporation provides no services to WBIC. Liberty Mutual Investment Advisors LLC Cash Management Agreement Wausau Business Insurance Company entered into a Cash Management Agreement with Liberty Mutual Investment Advisors LLC dated January 28, 2000. Under this agreement, Liberty Advisors manages an investment pool on behalf of participating members of the Liberty 20 Mutual Group, investing and reinvesting funds contributed by the members in short-term obligations of banks, corporations, and the U.S. and Canadian federal governments with a maximum duration of 365 days from the date of purchase. The investment pool functions in a manner analogous to a short-term bond mutual fund. A participant may terminate the agreement at the end of any business day upon prior written notice to the manager, or at any time by Liberty Advisors upon 30 days’ written notice to the company. If the company should ever become insolvent, the company’s statutory successor in interest could withdraw all or any portion of the company’s proportionate share of the assets in the investment pool. Investment Management Agreement Effective May 1, 2000, Wausau Business Insurance Company entered into an Investment Management Agreement with Liberty Mutual Investment Advisors LLC. Under this agreement, Liberty Advisors acts as the company’s agent and attorney-in-fact with respect to its investment portfolio. Subject to the WBIC board of director’s decisions and investment guidelines, Liberty Advisors has complete day-to-day discretionary control, including the power to make acquisitions and disposals of investments, and issue instructions to brokers and custodians. Liberty Mutual Investment Advisors LLC is to be reimbursed for all custody related charges and wire transfer fees related to the account, including, but not limited to, commission expenses and transaction fees imposed by the U.S. Securities and Exchange Commission. Liberty Advisors is to receive a monthly management fee equivalent to 3.4 basis points on an annualized basis. In the event that compensation is determined to be unfair and unreasonable in relation to actual expenses incurred in managing the account, the amount of compensation will be adjusted by mutual agreement. Liberty Advisors, appointed as the manager, is responsible for reasonable diversification of the assets of the investment portfolio account, such diversification of assets to be achieved through adherence to specified guidelines based on statutory accounting treatment. Assets are to be managed on a full discretionary basis, subject to the aforementioned constraints. Reverse repurchase agreements may be entered into for purposes of liquidity management and yield enhancement within prescribed limits. All investments made on behalf of 21 the company remain the property of the company. All investment transactions are to be reported to the company at regularly scheduled intervals for reporting to its board of directors. The agreement is to be construed in accordance with applicable federal law and, to the extent not preempted, the laws of the state of Wisconsin. Liberty Mutual Investment Advisors LLC may terminate this agreement at any time upon 90 days’ advance written notice. Wausau Business Insurance Company may terminate this agreement at any time upon written notice to Liberty Advisors, but Liberty Advisors shall have a reasonable time, not to exceed 90 days, to transfer assets to a custodian selected by WBIC. The terms of this agreement are largely the same as those of the Investment Management Agreement between WBIC and LMIC as noted earlier in this section of the report, however the functionality of the agreements are not. This agreement covers the management of the company’s investments that are not being managed by LMIC, more specifically privately placed securities. It should be noted that nowhere in the agreement is the functionality specifically addressed. 22 V. REINSURANCE All voluntary contracts reviewed by examiners contained proper insolvency provisions. Involuntary arrangements, such as state auto insurance facilities, mine subsidence funds, and other involuntary excess funds have provisions deemed appropriate by the governmental authorities that establish and administer them. Significant treaties and arrangements are summarized as follows. Affiliated Pooling Agreement Wausau Business Insurance Company of Wausau participates in a pooling arrangement with certain of its affiliates. After external reinsurance, the pool participants cede 100% of their net premiums written, losses, loss adjustment expenses, underwriting expenses, and related balance sheet categories to LMIC. LMIC, as the lead company and pool manager, administers all aspects of the pooled business, including placement of reinsurance with nonaffiliated insurers. After external reinsurance, LMIC distributes the net pooled business according to the participations listed below. Income and expenses related to investment operation and corporate taxes, including federal incomes taxes, are not included in the pooling. Participations: 1/1/200 0 63.00% 16.00% 10.00% 6.00% 2.50% 0.70% 0.40% 0.40% 0.40% 0.20% 0.20% 0.10% 0.10% 0.00% 0.00% 0.00% 12/31/200 4 66.50% 16.00% 10.00% 6.00% 0.00% 0.00% 0.40% 0.40% 0.40% 0.00% 0.20% 0.00% 0.10% 0.00% 0.00% 0.00% Liberty Mutual Insurance Company EMPLOYERS INSURANCE OF WAUSAU Liberty Mutual Fire Insurance Company Liberty Insurance Corporation Golden Eagle Insurance Corporation * Montgomery Mutual Insurance Company * Wausau Business Insurance Company Wausau General Insurance Company Wausau Underwriters Insurance Company Merchants and Business Men’s Mutual Insurance Company * LM Insurance Corporation Montgomery Indemnity Company * The First Liberty Insurance Corporation Liberty Insurance Company of America Liberty Personal Insurance Company Liberty Surplus Insurance Corporation 23 100% Quota Share Affiliated Companies: Liberty Lloyds of Texas Insurance Company Liberty Insurance Underwriters, Inc. Liberty County Mutual Insurance Company Bridgefield Employers Insurance Company Bridgefield Casualty Insurance Company LM Property and Casualty Insurance Company (formerly Prudential Property and Casualty Insurance Company) LM General Insurance Company (formerly Prudential General Insurance Company) LM Personal Insurance Company (formerly Prudential Commercial Insurance Company) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total Liberty Mutual Group Pool 100.00% 100.00% *See amendments to the affiliated pooling arrangement listed below Lines Covered: All except for any risks arising out of any participant’s transaction of business in Canada Premiums written and earned, losses, loss adjustment expenses, underwriting expenses, salvage and subrogation recoveries, assessments, taxes, and policyholder dividends January 1, 1999, as amended effective January 1, 2000, and January 1, 2004 At any time with 120 days’ written notice by any party. Each participant shall remain liable with respect to all cessions in force on the effective date of termination Any dispute arising out of this agreement shall be settled through arbitration. Amendment Number 1, effective January 1, 2000 - EICOW accepts 16% quota share, Liberty Mutual Insurance Company reduces to 63%, and Merchants and Business Men’s Mutual Insurance Company reduces to 0.20% Amendment Number 2, effective January 1, 2004 - Golden Eagle Insurance Company is deleted from this agreement Amendment Number 3, effective January 1, 2004 - Montgomery Mutual Insurance Company and Merchants & Business Men’s Mutual Insurance Company are deleted from this agreement Amendment Number 4, effective January 1, 2004 - The agreement now states that the reinsurance provided under this agreement shall be coextensive with the territory of the policies reinsured except that the reinsurance provided under this agreement shall not extend to risks arising out of the companies’ transaction of business in Canada Items Included: Effective: Termination: Additional Comment: Amendments: 24 WBIC, WGIC and WUIC cede 100% of its direct underwriting activity to EICOW. EICOW assumes and cedes premiums from certain other affiliated insurers and nonaffiliated insurers. EICOW cedes its net underwriting activity to LMIC. Other Ceding Reinsurance The company is a direct co-party to the following ceded reinsurance agreements, which have been summarized in detail in the concurrent examination report of Employers Insurance Company of Wausau. Effective Date Termination Date Type of Reinsurance Pre-Pool Reinsurance Program 100% Quota Share on Discontinued Operations with Nationwide Indemnity Company Commercial Umbrella Business Quota Share Worker’s Compensation and Employers Liability Excess of Loss Public Entities Legal Liability Quota Share Liberty Mutual Pool Reinsurance Program Four-Layer Commercial Markets and Business Markets Property Catastrophe Excess of Loss Two-Layer Liberty Mutual Property Business Unit Property Per Risk Excess of Loss Two-Layer Wausau Commercial Market/Business Market Property Per Risk Excess of Loss Three Layer Commercial Markets Consolidated Per Risk Excess of Loss National Worker’s Compensation Reinsurance Pool Residual Market Worker’s Compensation Reinsurance Facility Quota Share Commercial Umbrella Quota Share Automobile Liability Carve-Out of National Market Commercial Umbrella Quota Share Commercial Umbrella Quota Share Commercial Umbrella Business Excess of Loss Property Automatic Facultative Two-Layer Hawaii Only Property Catastrophe Excess Of Loss Personal Markets Quota Share Equipment Breakdown Quota Share Surety Excess of Loss Two-Layer Casualty Excess of Loss Four-Layer Property Catastrophe Excess of Loss Three-Layer Worker’s Compensation Catastrophe Excess of Loss 12/31/1998 10/01/2004 07/01/2004 04/01/2005 Continuous Continuous 07/01/2004 04/01/2006 07/01/2005 07/01/2005 07/01/2005 07/01/2005 07/01/2005 07/01/2006 07/01/2006 07/01/2006 07/01/2006 12/31/2005 06/01/2005 06/01/2005 08/01/2005 08/01/2005 08/01/2005 05/01/2005 01/01/2002 07/01/2000 11/01/2004 01/01/2005 01/01/2005 01/01/2005 Continuous Continuous 08/01/2006 08/01/2006 Continuous 05/01/2006 Continuous Continuous 10/31/2005 01/01/2006 01/01/2006 01/01/2006 25 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, 2004, 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." 26 Wausau Business Insurance Company Assets As of December 31, 2004 Net Admitted Assets $109,238,503 1,695,876 7,922,188 170 1,255,732 Assets Bonds Cash Short-term investments Receivable for securities 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 Accrued retrospective premiums Amounts receivable relating to uninsured plans Net deferred tax asset Guaranty funds receivable or on deposit Receivable from parent, subsidiaries, and affiliates Write-ins for other than invested assets: Other Assets Cash Surrender value life insurance Equities and deposits in pools and associations Amounts receivable under high deductible policies Total Assets $109,238,503 1,695,876 7,922,188 170 1,255,732 Nonadmitted Assets $ 0 0 0 0 0 2,831,662 146,103 2,685,559 7,671,131 3,410,391 15,164 5,072,000 225,125 7,213,500 8,018 343,074 15,164 2,190,080 0 0 7,663,113 3,067,317 0 2,881,920 225,125 7,213,500 237,640 757,637 120,763 951,809 $148,619,291 103,402 0 0 25,136 $2,830,977 134,238 757,637 120,763 926,673 $145,788,314 27 Wausau Business Insurance Company Liabilities, Surplus, and Other Funds As of December 31, 2004 Losses 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 Dividends declared and unpaid: Policyholders Amounts withheld or retained by company for account of others Drafts outstanding Payable to parent, subsidiaries, and affiliates Payable for securities Write-ins for liabilities: Amounts held under uninsured plans Other Liabilities Collateral held for securities loaned Pooled retroactive reinsurance Total Liabilities Write-ins for special surplus funds: Special surplus from retroactive reinsurance Common capital stock Gross paid in and contributed surplus Unassigned funds (surplus) Surplus as Regards Policyholders Total Liabilities and Surplus $ 53,560,966 10,216,078 544,154 1,962,914 1,214,234 202,028 16,135,678 150,007 44,046 499,618 1,472,290 15,437,687 993,134 2,692,530 858,175 6,508,210 (8,840,663) 103,651,086 $4,557,481 10,900,000 42,900,000 (16,220,253) 42,137,228 $145,788,314 28 Wausau Business Insurance Company Summary of Operations For the Year 2004 Underwriting Income Premiums earned Deductions: Losses incurred Loss expenses incurred Other underwriting expenses incurred Write-ins for underwriting deductions: North Carolina private passenger auto escrow Total underwriting deductions Net underwriting gain or (loss) Investment Income Net investment income earned Net realized capital gains or (losses) Net investment gain or (loss) Other Income Net gain or (loss) from agents' or premium balances charged off Finance and service charges not included in premiums Write-ins for miscellaneous income: Other expense Retroactive reinsurance gain Total other income Net income (loss) before dividends to policyholders and before federal and foreign income taxes Dividends to policyholders Net income (loss) after dividends to policyholders but before federal and foreign income taxes Federal and foreign income taxes incurred Net Income $38,803,786 $25,796,582 6,331,102 9,691,711 (7,487) 41,811,908 (3,008,122) 5,969,430 800,687 6,770,117 (186,830) 237,831 (884,921) 94,513 (739,407) 3,022,588 157,730 2,864,858 666,315 $2,198,543 29 Wausau Business Insurance Company Cash Flow For the Year 2004 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 Dividends paid to policyholders Federal and foreign income taxes paid (recovered) Total deductions Net cash from operations Proceeds from investments sold, matured, or repaid: Bonds Miscellaneous proceeds Total investment proceeds Cost of investments acquired (long-term only): Bonds Total investments acquired Net cash from investments Other cash provided (applied) Net cash from financing and miscellaneous sources Reconciliation Net change in cash and short-term investments Cash and short-term investments, December 31, 2003 Cash and short-term investments, December 31, 2004 $38,959,957 6,227,747 (5,073,238) 40,114,466 $25,133,327 16,013,367 127,717 678,872 41,953,283 (1,838,817) $31,779,571 1,292,669 33,072,240 40,620,806 40,620,806 (7,548,566) 14,203,165 14,203,165 4,815,782 4,802,282 $9,618,064 30 Wausau Business Insurance Company Compulsory and Security Surplus Calculation December 31, 2004 Assets Less security surplus of insurance subsidiaries Less liabilities Adjusted surplus Annual premium: Individual accident and health Factor Total Group accident and health Factor Total Lines other than accident and health Factor Total Compulsory surplus (subject to a minimum of $2 million) Compulsory surplus excess (or deficit) $145,788,314 103,651,086 42,137,228 $564 15% $84 (32,767) 10% (3,276) 39,592,663 20% 7,918,532 7,915,340 $34,221,888 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) $42,137,228 11,081,476 $31,055,752 31 Wausau Business Insurance Company Reconciliation and Analysis of Surplus For the Five-Year Period Ending December 31, 2004 The following schedule is a reconciliation of total surplus during the period under examination as reported by the company in its filed annual statements: 2004 Surplus, beginning of year Net income Net unrealized capital gains or (losses) Change in net deferred income tax Change in non-admitted assets Change in provision for reinsurance Cumulative effect of changes in accounting principles Write-ins for gains and (losses) in surplus: Other Changes Supplemental income retirement plan Change in accumulated translation adjustment Surplus, end of year $40,275,718 2,198,543 2003 $38,842,704 1,481,334 51,592 716,384 (1,105,264) (27,019,933) 26,946,559 2002 $34,827,312 3,398,056 70,394 16,603,609 (16,032,124) 2001 $34,058,502 800,950 (121,986) 1,246,606 (476,906) 463,440 (115,336) (392,190) 2000 $31,438,056 2,842,904 (215,511) 51,847 (26,538) (8,761) (941,024) 285,556 $42,137,228 $40,275,718 (15,782) $38,842,704 13,241 $34,827,312 (488) $34,058,502 32 Wausau Business Insurance Company Insurance Regulatory Information System For the Five-Year Period Ending December 31, 2004 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 Gross Premium to Surplus Net Premium to Surplus Change in Net Writings Surplus Aid to Surplus Two-Year Overall Operating Ratio #6 Investment Yield #7 Change in Surplus #8 Liabilities to Liquid Assets #9 Agents’ Balances to Surplus #10 One-Year Reserve Development to Surplus #11 Two-Year Reserve Development to Surplus #12 Estimated Current Reserve Deficiency to Surplus #1 #2 #3 #4 #5 2004 410.0% 94.0 8.0 0.0 94.0 5.4 5.0 80.0 6.0 3.0 17.0 29.0* 2003 276.0% 92.0 10.0 0.0 93.0 5.6 4.0 73.0 9.0 8.0 18.0 29.0* 2002 317.0% 87.0 14.0 0.0 96.0 5.8 11.0 76.0 9.0 7.0 27.0* 35.0* 2001 439.0% 85.0 1.0 0.0 95.0 6.5 3.0 79.0 9.0 14.0 20.0* 22.0 2000 686.0% 86.0 100.0* 0.0 98.0 7.7 5.0 76.0 10.0 4.0 0.0 146.0* Ratio No. 3 was exceptional in 2000. This ratio measures the change in net premium writings from the prior year. The exceptional score reflects increased net premium writings due to the participation in an affiliated reinsurance pooling arrangement as described in section IV of this report titled “Affiliated Companies.” Ratio No. 11 measures the two-year reserve development to the company’s year-end surplus. This has been exceptional in 2001 and 2002 due to significant reserve strengthening. Ratio No. 12 is the estimated current reserve deficiency to surplus ratio. The estimated current deficiency is the difference between the estimated reserves (net premiums earned multiplied by the average ratio of developed reserves to earned premiums for the last two years) required by the company and the actual reserves maintained. Ratio No. 12 has been exceptional in 2000, 2002, 2003, and 2004 due to rate increases, changes in line/product mix, reserve strengthening, and net premium growth. As noted in the section V of the report titled “Reinsurance” the company participates in an affiliated reinsurance pool in which it cedes 100% of its business to the pool and assumes 33 back 0.4% of the pool reserves and expenses. Therefore all the above mentioned IRIS exceptions were primarily affected by this arrangement. Growth of Wausau Business Insurance Company Surplus As Regards Policyholders $42,137,228 40,275,718 38,842,704 34,827,312 34,058,502 31,438,056 Loss And LAE Ratio 82.8% 85.5 85.1 106.1 92.7 92.0 Year 2004 2003 2002 2001 2000 1999 Admitted Assets $145,788,314 124,342,355 126,242,869 119,743,481 114,375,467 118,134,356 Gross Premium Written Net Premium Written $39,718,190 36,917,583 33,668,538 29,593,658 29,388,129 14,687,387 Liabilities $103,651,086 84,066,637 87,400,165 84,916,169 80,316,965 86,696,300 Net Income $2,198,543 1,481,334 3,398,056 800,950 2,842,904 1,643,593 Year 2004 2003 2002 2001 2000 1999 Premium Earned $38,803,786 35,035,442 31,667,944 29,337,988 28,564,943 27,617,610 Expense Ratio 26.2% 25.7 23.8 16.6 19.5 47.1 Combined Ratio 109.0% 111.2 108.9 122.7 112.2 139.1 $172,719,261 111,035,404 122,947,358 153,020,264 233,624,645 260,441,031 The company has experienced surplus growth over the past five years of 34%, while at the same time maintaining a gross premiums written to surplus ratio of around 4 to 1 and a net premiums written to surplus ratio of under 1 to 1. Net premium growth has been steady over the five-year period under examination and is attributable to its participation in an affiliated reinsurance pool as described in section V of this report titled “Reinsurance.” The company’s and Liberty Mutual Group’s combined ratio has been above 100% over the five-year period under examination and has averaged 112.8% over that same period. Net investment gains have negated the high combined ratio and resulted in the company reporting net income for all five years under examination. 34 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, 2005, is accepted. 35 VII. SUMMARY OF EXAMINATION RESULTS Compliance with Prior Examination Report Recommendations There were three 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. Surplus Guaranties from Affiliate—It is recommended that the company replace the surplus guaranties from Employers with guaranties from a corporation that has an ownership interest in the company or other commercial incentive to extend such guaranties. If it is not possible to replace one or more existing surplus guaranties, then it is recommended that the company enter into an agreement to pay fair and reasonable compensation for the guaranties. Action—Compliance. 2. Reinsurance Recoverable—It is again recommended that the company establish and maintain a verifiable record of the aging of reinsurance recoverable, with sufficient audit trails to permit comparison of annual statement data to specific reinsurance billings. Action—Compliance. 3. Other Expenses—It is recommended that the company estimate its liabilities with respect to each executive compensation and benefit program and record such estimates on future statutory financial statements. Action—Compliance. 36 Summary of Current Examination Results Corporate Records Affiliated Agreements The company is a member of a complex multinational holding company system known as the Liberty Mutual Group. Numerous corporate contracts exist with affiliates and nonaffiliates alike. A summary of affiliated contracts was provided in section IV of this report titled “Affiliated Companies.” All requested affiliated agreements were provided to the examination team for review. It was noted during the review of those affiliated agreements that it appeared management was not consistently performing timely reviews of its affiliated agreements to ensure that the agreements reflected the current operational environment of the company. It was conveyed to the examination team that the service agreement with Wausau Service Corporation listed in Form B of its 2004 annual holding company registration statement (s. Ins. 40.19, Wis. Adm. Code) appeared to be obsolete. The existence obsolete agreements has the potential to give rise to conflicts with other affiliated agreements then in effect, causing increased potential for error. Having ambiguous, obsolete, overlapping and/or incomplete affiliated agreements in a structure as complex as the Liberty Mutual Group system can easily result in improper charges for intercompany services, with little or no recourse available to the adversely affected party. Signed written agreements help develop and maintain a division of accountability and responsibility. It is recommended that the company periodically review its affiliated agreements to verify whether they accurately reflect services being provided under its current operational environment and take the necessary measures to amend or terminate ones that are obsolete or ambiguous. Executive Compensation As discussed in section II of this report captioned “History and Plan of Operation,” the company has no employees of its own and any expenses relating to the day-to-day operations of the company are allocated to the company through a service agreement between WBIC and LMIC. This would include the services of executives and directors provided to the company and associated expenses including salaries, bonuses and any other compensation. Allocated accrued expenses relating to executives include, but are not limited to a Supplemental Income Retirement 37 Plan (hereinafter also, “SIRP”) and an Executive Partnership Plan (hereinafter also, “EPP”). The Executive Partnership Plan allows for executives to be awarded units that act in a manner analogous to shares of common stock. Review of the Liberty Mutual Group’s Executive Partnership Plan and all amendments to the plan since its inception on January 1, 1993, indicate that the plan has placed a limit on the number of outstanding executive partnership units (EPUs) that can be awarded under the plan. Since inception the number of outstanding EPUs available for award was increased from 500,000 units to 18,000,000 units under a series of board approved amendments to the EPP plan. Per review of the EPP documents provided by the company it was noted that EPUs awarded and outstanding at year-end 2004 amounted to 13,258,896 units. The company is allocated expenses relating to the change in the EPP accrual for the year based upon awarded units that vested during the year plus an amount related to future periods over which the participants perform services for which the awards were granted. WBIC is also allocated the change in the SIRP accrual each year. The expense allocation to WBIC relating to those plans is an amount equal to its participation percentage reported in the affiliated reinsurance pooling agreement, which is referenced in the service agreement between the company and LMIC as the basis for compensation for services rendered. Prior to March 31, 2003, LMIC administered the EPP and the SIRP. LMIC also allocated a portion of the accruals relating to the plans down to its affiliates, which included WBIC. A transfer and novation agreement effective March 31, 2003, between LMIC and Liberty Mutual Group Inc. novated both plans’ assets and liabilities from LMIC to LMGI. The novation of the EPP and SIRP liabilities from LMIC to LMGI constituted as an economic transaction due to the fact that LMIC transferred assets in an amount that reasonably supported the liabilities transferred to LMGI for those plans at the time of transfer. Furthermore, LMIC received signed novations from substantially all participants of the EPP and SIRP. The only novations not received by LMIC were from participants that were terminated or retired prior to the novation of the plan from LMIC to LMGI. LMIC continues to administer the plans, but LMGI now reports the liabilities associated with those plans on its balance sheet. Therefore the company no longer is allocated a portion of the 38 balance sheet liability associated with EPP and the SIRP and does not report a balance on its annual statement. At year-end 2004, LMGI had approximately $400 million in assets other than affiliated common stock holdings to support the accrued expenses of $761,389,000 relating to those plans ($455,595,000 for accrued post retirement and pension benefits and $305,794,000 for the Executive Partnership Plan reserve). Of that $400 million, approximately only $67,223,000 of those assets consist of bonds, short-term investments, and cash and cash equivalents. According to the company the allocated accrued expenses that were paid by the Liberty Mutual Group pool members relating to those plans were applied to capital management purposes within the Liberty Mutual Group holding company structure. More specifically, Liberty Mutual Group Inc. contributed the payments by pool members relating to the accrued expenses for the EPP and the SIRP back to LMIC as capital contributions. The company explained that the additional cash flow generated from LMGI’s subsidiary noninsurance companies could be used to cover the amounts annually paid out under those plans. The company provided this office with documentation, which compared the future estimated payments related to SIRP and EPP to the expected annual cash flow of LMGI from its subsidiary noninsurance companies. The projections provided to the OCI indicate that LMGI would have enough additional cash flow to meet anticipated annual payouts on those plans to the plans’ participants without having the pooled companies pay additional amounts on those plans for which they have already paid. The company has to file a Report of Executive Compensation to the commissioner annually. The supplemental filing to the commissioner for 2004 was reviewed and it was noted that it did not contain the full share of LMIC’s awarded contribution towards WBIC’s executives who participate in an Executive Partnership Plan. Therefore, the compensation figures reported on the Report of Executive Compensation are incorrect. According to s. 611.63 (4), Wis. Stat., companies are to report to the commissioner, on an annual basis, all direct and indirect remuneration for services, including retirement and other deferred compensation benefits and stock options, paid or accrued each year for the benefit of each director and each officer and 39 employee whose remuneration exceeds the amount established by the commissioner. In this case, the full amount awarded, vested and unvested, should be reported as part of the "all other compensation" balance. Any adjustments made from year to year due to an increase in value of awarded units or any additional units awarded by the Board of Directors should also be reported in the Report on Executive Compensation. The 2004 Report of Executive Compensation to the commissioner only included the value of executive partnership units redeemed during the year, which did not include the vested and unvested portion of executive partnership units awarded to company executives equaling $417,948 in aggregate. This amount is not reflected in the executives’ compensation reported in section III of this report titled “Management and Control” under the heading “Officers of the Company.” It is recommended that the company report all remuneration to executives, which includes deferred compensation and other retirement compensation fully-funded or awarded by the company, for those directors, officers and employees whose remuneration meets the requirements to be reported to the Commissioner of Insurance in accordance with s. 611.63, Wis. Stat. Territory and Plan of Operations Reporting of Agents The company is required to file with this office all agents that write business for the company as well as agents who have been terminated, pursuant to s. 628.11, Wis. Stat. The examiner found that the aggregate number of agents reported on the company's Registered Agent List maintained by this office exceeded the aggregate number of agents provided to the examiner by the company. The company explained that there have been several factors that have affected the company's timely reporting of terminated agents. These include the fact that the company made a wholesale reduction in the number of its independent agents; the licensing process function was centralized in Liberty's Dover, New Hampshire office; and a new information technology system for licensing was installed. The collective consequence of all these factors has been that the company has fallen behind in processing the termination of its agents. The company assured the examiners that each of the terminated agents was timely notified that it would no longer accept business from them and their contracts have been terminated. It is 40 recommended that the company timely notify the Office of the Commissioner of Insurance of all agent appointments and terminations in accordance with s. 628.11, Wis. Stat. Affiliated Balances Completion of Schedule Y The company's Schedule Y, Part 2, was reviewed. It was noted that the 2004 Annual Statement did not report any amount under column 8 "Management Agreements and Service Contracts" in Schedule Y, Part 2 for WBIC. According to the NAIC Annual Statement Instructions - Property and Casualty column 8 is to include the following: all revenues and expenditures under management agreements, service contracts, etc.; contracts for services provided by the insurer or purchased by the insurer from other affiliates (excluding income and disbursements incurred under reinsurance agreements); all income tax amounts resulting from inter-company tax sharing agreements; and all compensation under agreements with affiliated brokers and reinsurance intermediaries. The introductory portion of these instructions prescribes a materiality standard for what must be reported. The company’s interpretation is that these limits apply and therefore the company did not report any amounts in Schedule Y, Part 2. As part of the examination of WBIC, review of all significant affiliated agreements was performed and a summary of those contracts was provided in the section of this report captioned “Affiliated Companies.” The company has several service and management agreements with affiliates other than inter-company reinsurance agreements and tax sharing agreements. The expense allocation to WBIC relating to services provided by affiliates under those service and management agreements are often related to the company’s participation percentage in the affiliated reinsurance pooling agreement, which is the basis for compensation for services rendered. Pursuant to s. Ins 40.04, Wis. Adm. Code, all affiliated management and service agreements are material. However, since the NAIC Annual Statement Instructions - Property and Casualty prescribes a materiality standard for reporting purposes in Schedule Y, Part 2, this office will allow the company to continue its current reporting practices with regard to this schedule. Pursuant to s. 601.42 (3), Wis. Stat., this office believes the transactions paid to or received from affiliates in regards to all affiliated management and service agreements should be disclosed in a 41 note to the financial statements in the company’s annual statement filing. It is recommended that the company disclose transactions paid to or received from affiliates for each management and service agreement in Notes to Financial Statements pursuant to s. 601.42 (3), Wis. Stat. Invested Assets Foreign Held Securities As part of the review of the company’s investment holdings the examination team tested the currency conversion of five foreign held securities from the foreign currency in which they are denominated to U.S. Dollars. It should be noted that the sample chosen to review foreign security translations was taken from the Wausau Insurance Companies’ aggregate holdings of foreign securities, due to the fact that the examination of Employers Insurance Company of Wausau, Wausau General Insurance Company and Wausau Underwriters Insurance Company were being performed concurrently with WBIC and that investment administration services are provided by Liberty Mutual Insurance Company for all four entities. As part of this review the exchange rates as of December 31, 2004 were obtained from a reputable statistical investment information organization and were applied to the book value and par value of those securities in their respective foreign denominated currency supplied by the company. Discrepancies were noted between the recalculated book value and par value of foreign securities tested and what was reported in the company’s annual statement, Schedule D – Part 1. Two of the five sampled foreign securities did not have discrepancies, one reported just a discrepancy in the par value, another one reported a discrepancy in the book value and one had discrepancies in both the book and par values reported. The explanation given by the company for the discrepancies was that manual changes were made to the system data to take into account a warning from the software vendor related to foreign exchange calculations in 2004 investment accounting export files. The company further clarified that these manual changes were incorrect due solely to human error in the interpretation of the limited information provided by the software vendor, but the errors were limited to the presentation of pars/shares and were not of a material financial impact to the total book adjusted carrying value. 42 To expand the examination team’s understanding of the situation, the entire population of the Wausau Insurance Companies foreign securities was tested. Per complete testing of the Wausau Group foreign held securities it was noted that nine out of the sixteen Canadian securities denominated in Canadian dollars were purchased at different dates (even in different years) and the par value of each of them were translated by using the same exchange rate ($0.77104), and that nine securities issued in foreign countries did not have the proper foreign code ("F" stands for foreign securities issued in U.S. dollars, "C" stands for Canadian securities issued in Canadian dollars or U.S. dollars, and "D" stands for foreign securities issued in other foreign countries and currencies ) reported on Schedule D – Part 1, column 4. In addition, the estimated misstatement in the par and market value that resulted when applying the foreign exchange rates to the custodian's par and market value were both below tolerable error set for the examination; therefore, no adjustments are proposed by this examination. Past examinations of the company uncovered similar reporting problems that were not included in the prior examination reports. It is recommended that the foreign currency translations for foreign held securities be performed in accordance with the NAIC Accounting Practices and Procedures Manual, SSAP 23 paragraph 5 (b). It is further recommended that the company assign the proper code to foreign held securities reported on Schedule D - Part 1, column 4, in accordance with the NAIC Annual Statement Instructions-Property and Casualty. Callable Bonds Per review of Schedule D – Part 1 it was noted that there were not any securities identified as callable. During the aggregate testing of the Wausau Insurance Companies’ Schedule D – Part 4 regarding disposed securities in 2004, it was discovered that there were 5 bonds out of a sample of 40 that were called during the year. This alerted the examiners that the company may be holding callable bonds, but are not identifying them properly. According to the NAIC Annual Statement Instructions-Property and Casualty, callable bonds are to be identified with a “1” in Schedule D – Part 1, column 5. The explanation given by the company for this reporting error is that the vendor software it uses to complete the annual statement filings was not programmed to identify callable bonds with a “1.” It should be noted that the practice of identifying 43 callable bonds in this manner commenced with the 2004 annual statement filing. It is recommended that the company properly identify callable bond holdings in Schedule D in accordance with the NAIC Annual Statement Instructions-Property and Casualty. Maturity Dates Per aggregate testing of the Wausau Insurance Companies’ Schedule D – Part 3 regarding securities that were acquired in 2004, it was discovered that 4 out of 40 bond acquisitions sampled had discrepancies between what the company reported as their maturity date in Schedule D – Part 3, column 2 and what was recorded in their respective year-end 2004 custodial statement. All four identified exceptions had a difference of 15 days. It was also noted per aggregate testing of the Wausau Insurance Companies’ Schedule D – Part 4 regarding disposed securities in 2004 that 10 out of 40 disposed securities sampled showed a difference in the reported maturity date on Schedule D – Part 4, column 2 when compared to their respective year-end 2004 custodial statement. Four items in the sample had differences in the reported maturity date of less than 30 days; however, six items in the sample had differences ranging between 15 and 17 years. Furthermore, the company explained that the calculations associated with the maturity dates are correct and that this was an issue with the companies' vendor software. In order to corroborate the company’s response the amortized book value of its year-end bond holdings were recalculated using the maturity dates reported on their respective custodial statement with no material differences noted. It appears that the company is calculating the amortized book value of its bond holdings using the correct maturity dates and therefore no adjustment was deemed necessary. Past examinations of the company uncovered similar reporting problems that were not included in the prior examination reports. It is recommended that the company report the correct maturity dates of its security holdings in Schedule D in accordance with NAIC Annual Statement Instructions-Property and Casualty. Losses and Loss Adjustment Expenses The company reported unpaid losses of $53,560,966 and unpaid loss adjustment expenses of $10,216,078. These liabilities represent the company’s estimate of amounts payable on losses and loss adjustment expenses incurred on or prior to December 31, 2004, and 44 remaining unpaid as of that date. Since January 1, 1999, the company has been a participant in a reinsurance pooling agreement with Liberty Mutual Insurance Company and certain of its property and casualty insurance subsidiaries and other affiliates. The company’s net loss and loss adjustment expense reserves are the product of the reserves of the Liberty Mutual Group Pool and the company’s participation percentage in the pool. As part of its engagement by the Massachusetts Division of Insurance to assist in the overall examination of Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company, PricewaterhouseCoopers LLP (PwC) reviewed the adequacy of the company’s loss reserves and loss adjustment expense reserves, including the provisions for environmental claims, as a function of its participation in the pool. The review was conducted in a manner consistent with the Code of Professional Conduct and the Qualification Standards of the American Academy of Actuaries and the Standards of Practice adopted by the Actuarial Standards Board. The results of PwC’s actuarial review indicated that the pool’s held reserves were $514 million below its point estimate, but fell within its range of reasonability. Asbestos and environmental reserves at year-end 2004 fell $238 million below PwC’s point estimate while adverse development for all other lines of business was $276 million, which is almost entirely attributable to its commercial business reserves. The noted difference of $514 million between PwC’s point estimate and the pool’s booked reserves represents approximately 3.8% of the total pool reserves of $13.39 billion at December 31, 2004. The consulting actuary requested that LMIC provide them with information on any significant reserving events subsequent to their December 31, 2004, analysis. LMIC provided information in regards to reserve strengthening for calendar year 2005 of $511.6 million for loss and loss adjustment expense reserves from accident years 2004 and prior. The reported prior year adverse development noted by the company would appear to be reserve strengthening within the reasonable range of estimates relative to PwC’s $514 million reserve difference as of December 31, 2004, as discussed above. No adjustments were made to the company’s stated reserves as of December 31, 2004, concerning the aforementioned information. 45 In the course of PricewaterhouseCoopers, LLP conducting its review of the Liberty Mutual Group Pool’s 2004 stated reserves, it became apparent that the Liberty Mutual Group’s set of reserve reviews by business unit did not attempt, nor was it intended, to form a complete actuarial report, according to formal actuarial opinion requirements in areas such as: • Reserve summary schedules were not ready for examination, but instead were constructed during the examination. • The reserve summary schedules, once constructed, contained a combination of corporate actuarial and local strategic business unit actuarial reserve adequacy indications and no documentation was provided to reconcile the two views and present support for management’s best estimate. • Reconciliations of the historical data, including paid losses, case reserves, paid LAE, paid ULAE and earned premiums had not been prepared and balanced to Schedule P data. • In certain circumstances the documentation did not include the rationale for changes in reserving methodology and/or support for certain key reserving assumptions. • The documentation provided did not include support for why the held reserves differed from Liberty’s reserve point estimate. Therefore, it is recommended that the company improve its internal processes and procedures for preparing the actuarial report in the areas detailed above. 46 VIII. CONCLUSION Reported policyholders’ surplus has increased from $31,438,056 as of year-end 1999 to $42,137,228 as of year-end 2004. This represents an increase of 34% during the period under examination. Net premium growth has been steady over the five-year period under examination and is attributable to its participation in an affiliated reinsurance pool. Operating earnings have been profitable during the period under examination due to steady investment income that has largely offset combined ratios that have ranged from 108.9% to 122.7% during the period. The examination of Wausau Business Insurance Company resulted in nine recommendations, none of which were repeat recommendations, no adjustments to surplus, and no reclassifications. Examination recommendations pertain to, but were not limited to, annual statement reporting guidelines, proper filing requirements relating to executive compensation and agent listings, improvement of internal processes and procedures regarding loss and loss adjustment expense reserves, and management oversight to ensure affiliated agreements reflect the company’s current operational environment. 47 IX. SUMMARY OF COMMENTS AND RECOMMENDATIONS 1. Page 37 - Corporate Records—It is recommended that the company periodically review its affiliated agreements to verify whether they accurately reflect services being provided under its current operational environment and take the necessary measures to amend or terminate ones that are obsolete or ambiguous. Page 40 - Corporate Records—It is recommended that the company report all remuneration to executives, which includes deferred compensation and other retirement compensation fully-funded or awarded by the company, for those directors, officers and employees whose remuneration meets the requirements to be reported to the Commissioner of Insurance in accordance with s. 611.63, Wis. Stat. Page 40 - Territory and Plan of Operations—It is recommended that the company timely notify the Office of the Commissioner of Insurance of all agent appointments and terminations in accordance with s. 628.11, Wis. Stat. Page 42 - Affiliated Balances—It is recommended that the company disclose transactions paid to or received from affiliates for each management and service agreement in Notes to Financial Statements pursuant to s. 601.42 (3), Wis. Stat. Page 43 - Invested Assets—It is recommended that the foreign currency translations for foreign held securities be performed in accordance with the NAIC Accounting Practices and Procedures Manual, SSAP 23 paragraph 5 (b). Page 43 - Invested Assets—It is recommended that the company assign the proper code to foreign held securities reported on Schedule D - Part 1, column 4, in accordance with the NAIC Annual Statement Instructions-Property and Casualty. Page 44 - Invested Assets—It is recommended that the company properly identify callable bond holdings in Schedule D in accordance with the NAIC Annual Statement Instructions-Property and Casualty. Page 44 - Invested Assets—It is recommended that the company report the correct maturity dates of its security holdings in Schedule D in accordance with NAIC Annual Statement Instructions-Property and Casualty. Page 46 - Losses and Loss Adjustment Expenses—It is recommended that the company improve its internal processes and procedures for preparing the actuarial report in the following areas: • Reserve summary schedules were not ready for examination, but instead were constructed during the examination. • The reserve summary schedules, once constructed, contained a combination of corporate actuarial and local strategic business unit actuarial reserve adequacy indications and no documentation was provided to reconcile the two views and present support for management’s best estimate. • Reconciliations of the historical data, including paid losses, case reserves, paid LAE, paid ULAE and earned premiums had not been prepared and balanced to Schedule P data. 2. 3. 4. 5. 6. 7. 8. 9. 48 • • In certain circumstances the documentation did not include the rationale for changes in reserving methodology and/or support for certain key reserving assumptions. The documentation provided did not include support for why the held reserves differed from Liberty’s reserve point estimate. 49 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 Jerry C. DeArmond Title Insurance Financial Examiner Advanced Loss Reserve Specialist Insurance Financial Examiner Insurance Financial Examiner Insurance Financial Examiner Advanced Exam Planning & Quality Control Russell L. Lamb Thomas W. Thomas II Frederick H. Thornton Specialist Carina V. Toselli Tim J. VandeHey Insurance Financial Examiner Insurance Financial Examiner Advanced Data Processing Audit Specialist Respectfully submitted, John Litweiler Examiner-in-Charge 50