Princeton Insurance by jld17717

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									REPORT ON EXAMINATION AS TO THE CONDITION OF


       PRINCETON INSURANCE COMPANY


         PRINCETON, NEW JERSEY 08540


           AS AT DECEMBER 31, 2005


           N.A.I.C. GROUP CODE 1210


         N.A.I.C. COMPANY CODE 42226
                                          TABLE OF CONTENTS




Salutation................................................................................................                 1
Scope of the Examination.... .......... .... .... .... ...... ........ ......... .... ...... ........ .... ... ....        2
Compliance with Prior Examination Report Recommendations..............................                                     3
History and Kind of Business. ... ...... ....... ..... ...... ...... ...... ...... ............ ....... ..... ....        10
Statutory Deposits.. ........ ...... .......... ..... ... ...... ....... ..... ...... ............ ...... ...... ......   12
Territory and Plan of Operation....... ... ... ...... .... ........ .... ..... ............. ..... ... .... .....         12
Corporate Records. .......... ...... ..... ... ....... ..... ...... .... ... ... ..... ... ......... ......... .... ...   15
Management and Control..............................................................................                      15
Reinsurance and Retention............. ... ... ......... ...... ...... ..... .... ....... ..... .... ..... .......        18
Regulation ofInsurance Holding Company Systems. ....... ..... ...... ... ...... ...... ....... ....                       21
Inter-Company Agreements...........................................................................                       23
Policy on Conflict of Interest.........................................................................                   24
Employee Welfare and Pension Plan................................................................                         24
Fidelity Bond and Other Insurance Coverages.................................................. ...                         25
Policy Forms and Other Underwriting Practices.... ...... ...... ... ...... .......... ........... ...                     26
Accounts and Records.... ............ .... ... ..... .... ..... ... ... .... ..... ... ... .... ...... ......... ....     27
Advertising and Sales Material......................................................................                      28
Treatment of Policyholders...........................................................................                     28
Continuity of Operations..............................................................................                    28
Financial Statements and Other Exhibits:....... ......... ...... ...... .... ...... ..... .......... .....                29

Exhibit A - Balance Sheet at December 31, 2005 and December 31, 2002...................                                   30
Exhibit B - Summary of Operations for the Three Year Period Ending
            December 31, 2005..................................................... ................                       31
Exhibit C - Capital and Surplus Account for the Three Year Period Ending
            December 31, 2005. ...... ... ... ...... ... .... ..... ...... ...... ...... ... ...... ...........           32

Notes to the Financial Statements............. .... ... ........ ...... ...... ...... ... ............ .... ...           33
Summary of Recommendations..... ........... ......... ...... ......... ...... ....... ..... ... ....... ...               37
Subsequent Events. ......... ......... ............... .... ............... ..... ...... ............ ....... ...         38
Conclusion................ ......... ......... ... ...... ....... ........... .... ...... ........... .... ..... ....     39
Certification.............................................................................................                40
                                      ~tatt    of Ntw Jtr.&tU
                                DEPARTMENT OF BANKING AND INSURANCE
                                              PO Box 325
                                        TRENTON, NJ 08625-{)325
JON S. CORZINE                                                                            STEVEN   M. GOLDMAN
   Governor                                                                                  Commissioner
                                              TEL (609) 292-5360




                                                                                     June 21, 2007

     Honorable Steven M. Goldman
     Commissioner of Banking and Insurance
     State of New Jersey
     PO Box 325
     Trenton, New Jersey 08625

     Commissioner:

     In accordance with the authority vested in you by the Revised Statutes of New Jersey
     (N ..J.s.A.), an examination has been made of the assets, liabilities, method of conducting
     business and other affairs of the:

                              PRINCETON INSURANCE COMPANY
                                       746 Alexander Road
                                   Princeton, New Jersey 08540
                                    N.A.I.C. Group Code 1210
                                  N.A.I.C. Company Code 42226

     hereinafter referred to as the "Company" or "Princeton".




                                    Visit us on the Web J.t www,njdobi.org
           New Jersey is an Equal Opportunity Employer • Printed on Recycled Paper and Recyclable
SCOPE OF EXAMINA TION

This financial condition examination was called by the Commissioner of Banking and
Insurance of the State of New Jersey pursuant to the authority granted by Section 17:23-
22 of the New Jersey Revised Statutes. The examination was a full scope comprehensive
examination and was conducted at the Company's home office located at 746 Alexander
Road, Princeton, New Jersey.

The examination was made as at December 31, 2005, and addressed the three-year period
from December 31, 2002, the date of the last financial condition examination. During this
three-year examination period, the Company's assets decreased from $1,025,240,820 to
$1,002,388,693. Liabilities decreased from $918,002,224 to $830,249,742 and surplus as
regards to policyholders increased from $107,238,596 to $172,138,951.

The conduct of the examination was governed in accordance with the procedures of the
National Association of Insurance Commissioners (NAIC) and followed regulatory
procedures prescribed or permitted by the New Jersey Department of Banking and
Insurance.

In determining the emphasis to be placed on specific accounts, consideration was given to
the Company's system of internal control, the nature and size of each account, its relative
importance to solvency and the results of the analytical reviews performed within the New
Jersey Department of Banking and Insurance and by the examination staff.

The examination notes that the significant cycles specific to the audit of Princeton include
the premium, loss, reinsurance and investment cycles. The material balance sheet
accounts included within these cycles and the examination's assessment of emphasis to be
placed on each of these accounts is outlined as follows:

       Account                                                             Emphasis Level

       Losses                                                                   Medium
       Loss Adjustment Expenses                                                 Medium
       Premiums and Agents' Balances in Course of Collection                    Medium
       Premiums, Agents' Balances and Installments Booked But
              Deferred and Not Yet Due                                          Medium
       Contingent Commissions and Other Similar Charges                         Medium
       Unearned Premiums                                                        Medium
       Advance Premiums                                                         Medium
       Amounts Withheld or Retained by Company for Account of Others            Medium
       Amounts Recoverable from Reinsurers                                      Medium
       Agg. Write-ins for Other Than Invested Assets - Receivable from Others   Medium
       Ceded Reinsurance Premiums Payable                                       Medium
       Funds Held by Company Under Rein~urance Treaties                         Medium
       Bonds                                                                    Medium
       Preferred Stocks                                                         Medium
       Common Stocks                                                            Medium




                                                2
      Account                                                           Emphasis Level

       Real Estate - Properties Occupied by the Company                      Medium
       Cash and Short-tenn Investments                                       Medium
       Investment Income Due and Accrued                                     Medium


Other forepart items reviewed during this examination included the following:

       History and Kind of Business
       Territory and Plan of Operation
       Reinsurance and Retention
       Insurance Holding Company System
       Corporate Records
       Management and Control
       Policy on Conflict of Interest
       Fidelity Bond and Other Insurance Coverages
       Accounts and Records
       Employees' Welfare and Pension Plans
       Treatment of Policyholders
       Continuity of Operations

The control risk level will ultimately determine the amount of emphasis placed on each
account. Based on our review of Exhibit B, discussions with the Department's EDP
Consultant concerning the completion of Exhibit C by the Company, the cycle questions
and verification of Company responses to these questions on a test basis, the intended
reliance on the Company's control environment has been determined to be medium.

The examination report, contained herein, will address significant balance sheet
accounts and, if necessary, comment on those accounts which involve departures from
laws, regulations or rules, or which are deemed to require special explanation or
description.


COMPLIANCE WITH PRIOR REPORT ON EXAMINATION RECOMMENDATIONS

                 Compliance With Prior Report Examination Findings

                                 Continuity of Operations

2002 Examination Recommendation
The Company should formalize, test and distribute to designated employees a business
continuity and disaster recovery plan.

Company Response
The Company indicated in their response that they have contracted with SunGard, Inc.
for the next three years for a hot site and to assist Princeton with the development of a



                                               3
comprehensive disaster recovery and business continuity plan. The first stage of this
process has been completed including a formalized custom disaster recovery plan
utilizing SunGard's pre-recovery program. Two test dates have been included for 2004 -
8 hrs on June 23rd and 16 hours on October 18th • The first of these tests has been
successfully completed and the resulting documentation assembled.

2005 Examination Findings
The examination notes that the Company has a disaster recovery plan in place as of
December 31, 2005, however Princeton does not have a formal, written business
continuity plan in place as of the examination date. It is again recommended, as was in
the prior examination report, that the Company formalize, test and distribute to
designated employees a business continuity plan.

                                Accounts and Records

2002 Examination Recommendation
The Company should ensure that its developed procedures for escheating unclaimed
funds are updated annually to include any revisions to N.J.S.A. 46:308-16.

Company Response
The Company has reviewed and updated their procedures for escheatment of funds to
include revisions to NJ.s.A. 46:308-16. The New Jersey regulations will be reviewed
annually to ensure that all future revisions are incorporated into the Company's
procedures.

2005 Examination Findings
The Company now formally reviews its escheatment procedures on an annual basis to
ensure that they are in compliance with the provisions of N.,l.S.A. 46:308-16.

            Reinsurance Payable on Paid Loss and Loss Adjustment Expenses

2002 Examination Recommendation
It was again recommended the Company settle reinsurance payables due to the Hospital
Trust for Workers' Compensation in a timely manner.

Company Response
The Company will settle future Hospital Trust reinsurance payables no more than sixty
days after the end of each quarter.

2005 Examination Findings
A review of documentation supporting settlement of the Company's 2005 outstanding
reinsurance balances payable indicated that settlement was not completed within 60 days
of calendar year end. It is again recommended that the Company settle reinsurance
balances payable due to the Hospital Trust for Workers' Compensation in a timely
manner.




                                             4
                            Territory and Plan of Operation

2002 Examination Recommendation
It was recommended the Company prepare a written contract with all reinsurance
intermediaries outlining the responsibilities of the reinsurance intermediaries as
indicated in N..J.S.A. 17:22E-6.

Company Response
The Company states that they currently have executed written contracts with all active
reinsurance intermediaries.

2005 Examination Findings
The Company entered into a broker authorization contract with its reinsurance
intermediary, Benfield, Inc. on January 12, 2004. This written contract contains the
applicable clauses and wording which puts the Company in compliance with the
provisions ofN.,l.S.A.17:22E-6.

                              Reinsurance and Retention

2002 Examination Recommendation
The reinsurance contract covering medical hospital and physician liability on Liberty
Health Care Systems, Inc. policies was endorsed by both parties over nine months after
the effective date of the reinsurance contract. In accordance with SSAP #62.23, any
reinsurance agreement signed after nine months from the effective date must be
accounted for as retroactive reinsurance. It was recommended the Company account for
this reinsurance agreement as retroactive reinsurance and have all reinsurance
agreements signed within nine months from the effective date of the reinsurance
agreement in accordance with SSAP #62.23.

Company Response
Princeton will ensure that all future reinsurance agreements are signed within nine
months of the corresponding effective date.

2005 Examination Findings
The appropriate parties have executed all reinsurance agreements in force at December
31,2005 within nine months from the effective date of the reinsurance agreement.

                                Management and Control

2002 Examination Recommendation
Since the Company's Certificate of Incorporation continues to list Donald E. Smith as the
registered agent upon whom process may be served, it is recommended the Company
subsequently revise its Certificate of Incorporation to reflect a compulsory change in the
registered agent upon whom process may be served.




                                              5
Company Response
Princeton has initiated action to comply with this recommendation and wiU present a
board resolution at the next regularly scheduled Board of Directors meeting. Subsequent
to that meeting, the Certificate of Change of Registered Agent wiD be filed as required.

2005 Examination Findings
The Company is in compliance with the recommendation. During the first quarter of
2006, the Company submitted an amended and revised Certificate of Incorporation that
reflected a compulsory change in the registered agent upon whom process may be served.

                               Policy on Conflict of Interest

2002 Examination Recommendation
It was recommended the Company revise its policy statement on conflict of interest to
reflect that the Company's Vice President and General Counsel reviews all completed
conflict of interest questionnaires.

Company Response
Princeton will revise its current policy to reflect the review of completed conflict of
interest questionnaires by the Company's Vice President and General Counsel.

2005 Examination Findings
The Company did comply with this recommendation. The Company's policy statement
on conflict of interest was amended in 2005 to include the statement that aU completed
conflict of interest questionnaires shall be submitted to the Vice President and General
Counsel of Princeton Insurance Company.

2002 Examination Recommendation
It was recommended by this examination that the Company improve its record keeping
of all completed conflict of interest questionnaires so that they will be available for review
in subsequent examination periods.                                                   '

Company Response
The Company will revamp its record keeping system to ensure that all completed
questionnaires are readily accessible.

2005 Examination Findings
The examination found the Company to be in compliance with this recommendation. The
examination requested from the Company and was provided with all completed director,
officer and key employee conflict of interest questionnaires for the current period under
examination.




                                                6
                                     Bonds and Stocks

2002 Examination Recommendation
It was recommended the Company revise its custodial agreement with Mellon Bank, NA
to include a clause for the replacement of securities or the value of such securities
(including the loss of rights and privileges) as a result of the custodian's loss of securities.

Company Response
The Company has had discussions with Mellon Bank, NA and is in the process of
updating its custodial agreement to in~lude the recommended clause.

2005 Examination Findings
A review of the Company's current custodial agreement with Mellon Bank, NA notes
that the agreement contains the proper indemnification clause concerning the
replacement of securities as a result of custodian negligence, dishonesty, theft, etc.

       Reinsurance Recoverable on Loss and Loss Adjustment Expense Payments

2002 Examination Recommendation
It was recommended the Company list each L10yds Syndicate separately on Schedule F-
Part 3 of their annual statement and indicate the status (authorized or unauthorized) of
each Syndicate in Schedule F.

Company Response
Princeton will comply with this recommendation in future annual statement Schedule F
statutory filings.

2005 Examination Findings
The Company is in compliance with this recommendation, as a review of the 2005 annual
statement Schedule F-Part 3 now lists each Lloyd's Syndicate separately and classifies
each Syndicate as either authorized or unauthorized.

                      Equities and Deposits in Pools and Associations

2002 Examination Recommendation
It was recommended the Company record premiums, losses and expenses from underwriting
pools and associations in the same fashion as any other reinsurance agreement in accordance
with SSAP No. 63-8.

Company Response
The Company acknowledges that it will comply with this recommendation in future
statutory filings.

2005 Examination Findings
The Company is in compliance with the above recommendation as of December 31,
2005.



                                                 7
                        Loss and Loss Adjustment Expense Reserves

2002 Examination Recommendations
It was recommended that the Company maintain loss and loss adjustment expense
reserves at a level adequate to meet its incurred loss and loss adjustment expense
obligations.

Company Response
Princeton has taken steps to significantly improve its reserve position in two areas:

1. Princeton implemented operational and procedural changes within the Claims
   Department which have precipitated a more conservative approach in setting individual
   case reserves. These changes generated reserve strengthening and earlier recognition of
   ultimate losses. Note that Spinella and Associates' final actuarial report stated that
   'Preliminary analysis of PIC's closed-claim transaction database provides strong, though
   not conclusive, evidence of a stronger reserving attitude currently than has existed during
   the past decade'.
2. Princeton has also adopted a more conservative reserving posture in recording bulk
   reserves. At December 31, 2003, Princeton recorded reserves consistent with the point
   estimate of its independent actuary, Milliman USA. During 2003, Princeton booked $58
   million of additional reserves for incurred year 2002 and prior.

2005 Examination Findings
The examination has contracted with the independent actuarial consulting firm (MBA
Actuaries, Inc.) to perform an actuarial review as to the reasonableness of Princeton's
loss and loss adjustment expense reserves as of December 31, 2005. Their findings have
been summarized and documented under the examination section entitled Notes to
Financial Statements under the note for Loss and Loss Adjustment Expense Reserves.

2002 Examination Recommendation
To provide insight into the Company's claim reserving procedures and to aid in the
actuarial analysis of the Company, the NJDOBI utilized the services of Spinella &
Associates, Inc. to perform a comprehensive claims operational audit on the Company's
claim handling and claims administration.

The following is a list of some of the observations and recommendations noted from this
audit:

 •   It was recommended the Company improve its claims administration of expense
     reserves and revise its expense reserve guidelines to ensure proper assessment of
     claims expense reserves.
 •   It was recommended the Company reduce the claim consultant caseload to a more
     reasonable 140 to 150 claims per consultant.
 •   It was recommended the Company produce additional reports which can be
     beneficial and aid in the Company's claims administration and analysis.


                                                8
Company Response
Regarding the Spinella and Associates recommendations, the Company offers the
following responses:

•   Princeton is currently revISIng its expense reserving process based on
    recommendations from its consulting actuaries.
•   Princeton has added additional staff, reduced case loads, and will continue to
    address this issue through the remainder of 2004.
•   Princeton is continually accessing its reporting process to accommodate current
    needs and requirements.

2005 Examination Findings
The examination found the Company to be in compliance with the recommendations
resulting from the Spinella and Associates claims operational audit.

                 Contingent Commissions and Other Similar Charges

2002 Examination Recommendation
It was recommended that the Company review the amount of commissions payable due
to agents and write-off commissions payable on those policy premiums non-admitted and
subsequently written off.

Company Response
The Company has established procedures and initiated a process to review and write-off
all subject balances.

2005 Examination Findings
The Company is in compliance with this recommendation, as it now properly writes off
commissions payable associated with any policy premiums that have been non-admitted
and subsequently written off.

                               Provision for Reinsurance

2002 Examination Recommendation
It was recommended the Company only record letter of credit amounts in effect as of the
financial reporting date.

Company Response
Princeton will ensure that all letters of credit reported in future Schedule F statutory
filings are in effect as of the reporting date.

2005 Examination Findings
The examiner noted the correct reporting of letter of credit amounts in the Company's
2005 annual statement Schedule F.




                                              9
HISTORY AND KIND OF BUSINESS

The Princeton Insurance Company filed for incorporation on December 3, 1981 under and
pursuant to the provisions of Chapter 17 of the Revised Statutes of the State of New Jersey.
The Certificate of Incorporation was approved by the Deputy Attorney General of the New
Jersey on January 12, 1982 and filed with the Department of Insurance on January 16, 1982.
The Company was officially incorporated on January 16, 1982, with active business
operations commencing on February 1, 1982.

The Company was originally Cormed to write non-assessable medical malpractice coverage
for physicians, dentists and other health care providers in an effort to combat the medical
malpractice crisis in New Jersey.

The Company's former sole shareholder, Nassau Holding Company, approved an amended
and restated Certificate oC Incorporation on December 22, 1995. This approved amendment
was filed and approved by the New Jersey Department of Banking and Insurance (NJDOBI)
on March 18, 1996. The amendment revised the "Third", "Fourth" and "Fifth" Articles oC
the Company's original Certificate oC Incorporation.

At the Company's inception, all of issued and outstanding shares of common capital stock
were owned by the Nassau Holding Company, a non-insurer downstream holding company.
Nassau Holding Company was a wholly-owned subsidiary of the Health Care Insurance
Company, Princeton's ultimate parent.

The Health Care Insurance Company, originally known as the Health Care Insurance
Exchange, was organized as a reciprocal inter-insurance exchange concurrent with the
incorporation of its attorney-in-Cact, NJHA Underwriters, Inc., a not-for-profit corporation
on November 3, 1975. The Certificate of Incorporation was duly filed and recorded by the
Secretary of State and the Mercer County Clerk on November 6, 1975. The Health Care
Insurance Company would offer medical malpractice insurance to New Jersey hospital and
other health care institutions.

On January 1, 1991, the Health Care Insurance Exchange reorganized from a reciprocal
inter-insurance exchange to a stock insurance company.

A re-capitalization plan was developed and implemented during 1999 and 2000 in an effort
to simplify the capital structure of the Health Care Insurance Company. The re-
capitalization plan involved the formation of the Princeton Insurance Company Merger
Corporation (PICMC) and the Princeton Insurance Holdings, Inc., a new holding company.
Princeton Insurance Holdings, Inc. was formed under the laws of the State of Delaware on
December 10, 1999 and became the sole owner (shareholder) of PICMC. PICMC filed a
Certificate of Incorporation with the Commissioner of Banking and Insurance on December
29, 1999. The re-capitalization plan was authorized by the Commissioner on January 21,
2000 and a Certificate of Authority was issued to PICMC to write the kinds of insurance
authorized by paragraph "e" of N.,J.S.A. 17:17-1. Ultimately, PICMC merged into the



                                             10
Health Care Insurance Company under an Agreement and Plan of Merger, and Princeton
Insurance Holdings, Inc, became the ultimate parent,

On February 15,2000, in accordance with the provisions of N,J.S.A. 17:27A-2, the Medical
Liability Mutual Insurance Company ("MLMIC") filed an application with the New Jersey
Department of Banking and Insurance to acquire control of the Health Care and Princeton
Insurance Companies. On September 12, 2000 the Commissioner of Banking and Insurance,
Karen L. Suter, signed an Administrative Decision and Order approving the acquisition of
Health Care and Princeton Insurance Companies by MLMIC. The acquisition was
completed with the merger of the MLMIC Holding Company (a corporation established for
the purposes of completing this merger transaction) and Princeton Holdings, Inc. Under the
merger, Princeton Holdings, Inc. emerged as the surviving corporation, but was renamed
MLMIC Holding Company, Inc. In accordance with the merger agreement, all Class A
common stock of Princeton Holdings, Inc. was canceled, retired and terminated.

The Board of Directors and sole shareholders of the Princeton and Health Care Insurance
Companies approved an Agreement of Merger (Merger) on November 13,2001, whereby at
12:00 noon on December 31, 2001, the Health Care Insurance Company (HCIC) would
merge with and into Princeton, the separate existence of HCIC would cease, and Princeton
would continue as the surviving corporation under the name Princeton Insurance Company
and be governed by the laws of New Jersey. This Agreement of Merger was submitted to the
NJDOBI for approval, and a certificate of approval was issued by Donald Bryan, the Acting
Commissioner of Banking and Insurance, on November 8, 2001. The merger was effectuated
on December 31, 2001. At the completion of the merger, the cancellation and conversion of
securities was as follows:

   "The shares of common stock in Princeton issued to Nassau Holding Company, the
   shares of common stock in Nassau Holding Company issued to HCIC and the shares of
   common stock in HCIC issued to MLMIC Holding Company, Inc. shall all be
   cancelled. Each share of common stock of HCIC owned by MLMIC Holding
   Company, Inc. immediately prior to the merger shall be converted automatically upon
   the merger into four and two-tenths (4.2) fully paid and non-assessable shares of
   common stock in Princeton, which shares shall constitute all the issued and
   outstanding shares of the common stock of Princeton immediately following the
   merger, and thereafter."

As a result of the merger, the Company filed a Second Amended and Restated Certificate of
Incorporation on November 13, 2001 with the NJDOBI. This amended Certificate of
Incorporation was approved by the Attorney General of New Jersey on December 20, 2001
and filed with the NJDOBI on December 26, 2001. Under the revised Certificate of
Incorporation, the Company's principal office is located at 746 Alexander Road, P.O. Box
5322, Princeton, New Jersey and the agent upon whom process may be served is Donald E.
Smith. The Company shall have $4,200,000 of common capital stock, consisting of 42,000
shares at a par value of $100 per share.




                                            II
On March 28, 2002 the NJDOBI approved and the Company received a cash infusion of
$40,000,000 from its ultimate parent, MLMIC in the form of a surplus note pursuant to a
Form D filing in accordance with N.J.s.A. 17:27A-4a(2). The note will mature on March 29,
2012 and will earn 6% interest annually. All interest payments are subject to approval by the
NJDOBI. As of the examination date, there have been no approvals of interest payments by
the NJDOBI and the Company has not made any interest payments on this note.

The Company made a decision in calendar year 2002 to exit its small risk workers'
compensation program that was administered by one of its wholly-owned subsidiaries, The
Princeton Agency, Inc. On December 30, 2002 Princeton Insurance Company entered into an
agreement to sell The Princeton Agency and the renewal rights to its Small Risk Workers'
Compensation business to AmTrust Financial Services. Effective January 1, 2003, for a
period of five years, Princeton shall receive 2 percent of the gross premium relating to new
and renewal business of AmTrust.

On March 4, 2003 the Princeton Insurance Company fIled a request with the NJDOBI to
withdraw from writing Business Owner Protection insurance in New Jersey, citing a
reduction in its business capacity due to the overall deterioration in the Company's financial
condition, among other reasons. On May 20, 2003, the NJDOBI issued Consent Order No.
C03-105 approving this withdrawal.

Per the Company's amended Certificate of Authority dated August 25, 1997, the Princeton
Insurance Company is authorized to engage in the kinds of insurance as specified in
paragraphs "a", "b", "e", "r t , "g", "j", "k", "I", "0_1" and "0_3" ofN ..I.S.A.17:17-1 et
seq.


 STATUTORY DEPOSITS

The following statutory deposits are registered with the Commissioner of Banking and
Insurance of the State of New Jersey, as trustee, and are being held in trust for the benefit
and security of all the policyholders of Princeton Insurance Company:

             US Treasury Note, 6.125%, due 8/15/07                $2,100,000
             US Treasury Note, 3.50%, due 11/15/06                   245,000

                     Total                                        $2.345.000

TERRITORY AND PLAN OF OPERATION

The Company is licensed to transact business in 16 states and the District of Columbia as of
December 31, 2005. The Company made a business decision in the first quarter of 2003 to
cease writing new and renewal business in all states outside of New Jersey and to withdraw
from writing small business workers' compensation countrywide. Princeton changed it~
overall business plan to focus its premium writings on its core book of business - medical
malpractice insurance within the State of New Jersey.



                                              12
Princeton Insurance Company is a domestic for-profit stock property-casualty insurance
company. Organized in 1982, it was originally formed to write non-assessable coverage for
individual health care providers in New Jersey. The Company has gradually expanded its
product lines and territories. As of December 31, 2005, the Company wrote the following lines
of business: commercial multiple-peril, medical malpractice (occurrence and claims-made),
other liahility (occurrence and claims-made), commercial auto liability, auto physical damage
and surety. The Company also assumes coverage for fire, allied lines, commercial multiple-
peril, medical malpractice claims-made, workers' compensation, commercial auto liability,
auto physical damage, burglary and theft and non-proportional reinsurance.


                     Year                             Gross Direct Premiums Written

                     2003                                       $274,896,938
                     2004                                        234,264,068
                     2005                                        223,648,330


 Gross premiums written in 2005 were allocated among the following lines of business:


            Lines of Business Written                   Gross Direct Premiums Written

 Medical Malpractice - Claims Made                               $188473,584
 Medical Malpractice' Occurrence                                   22,384,067
 Other Liability - Occurrence                                      10,364,765
 Commercial Multiple Peril                                          2,618,578
 All Other Lines                                                     (92664)
       Total                                                     $223,648,330

 Princeton has no career agents, but rather markets its product predominately through a
 network of approximately 96 independent contract agents. The Company utilizes an agency
 contract for individual risks and a broker's contract for institutional risks. The Company
 utilizes direct billing procedures, and had no MGA relationships in place as of December 31,
 2005.

 Princeton maintains various service agreements with vendors who are not affiliated with the
 Company. These include the following:

 •   A Claims Servicing Agreement with Integrated Claims Strategies, Inc. (ICS), a Florida
     corporation, that was entered into on January 28, 2002. Under the terms of this
     agreement, ICS agrees to perform all facets of workers' compensation claims servicing
     and handling including accepting and servicing all claims and loss reports, investigating
     claims, establishing claim files and providing a liaison between ICS and Princeton. The
     Agreement shall cover all workers' compensation claims as outlined in Addendum A of
     the Agreement which were reported during the 24 month period commencing March 1,
     2002 and ending February 28, 2004.


                                               13
•   A Claims Servicing Agreement with Crawford & Company (C&C) that was entered into
    on May 12, 1999 and which provides certain services with respect to the investigation and
    payment of workers' compensation insurance claims. Under the terms of this agreement,
    C&C agrees to provide all services as outlined within the agreement to the insurer in
    connection with the insurer's claims occurring under policies in the states of Connecticut,
    Delaware, Georgia, Illinois, Indiana, Maryland, North Carolina and Virginia during the
    period commencing May 12, 1999 and ending May 11, 2000. C&C wiII provide the
    Company with a monthly claims report. In return for services rendered by C&C,
    Princeton agrees to pay C&C various servicing fees as prescribed and outlined in Exhibit
    B of the Claims Service Agreement.
•   A Recovery Services Agreement entered into on December 22, 2003 between SunGard
    Recovery Services LP and Princeton Insurance Company that provides computer
    recovery services by SunGard to Princeton in the event of a disaster, which is dermed as
    "any unplanned event or condition that renders Subscriber (Princeton) unable to use a
    Location for its intended computer processing and related services". Within this
    agreement are various schedules which specify a Subscriber location ("Location"), the
    recovery services to be provided by SunGard to Subscriber for that Location ("Recovery
    Services"), the fees to be paid Subscriber to SunGard for those services, and any other
    applicable terms. Recovery services as outlined in this agreement generally include center
    based recovery services as they relate to Work Group Space and MegaVoice and Mobile
    Recovery Services (Replacement Recovery System). The term of this Agreement shall
    commence on December 22, 2003 and continue for a period of 36 months where,
    thereafter, the agreement shall automatically renew for successive one (1) month renewal
    terms, not to exceed six (6) consecutive one-month renewal terms, unless either party
    gives written notice of termination to the other at least thirty (30) days before the end of
    the then current term.
•   A Securities Lending Agreement with Mellon Bank, NA. This Agreement, entered into by
    the parties on April 4, 1997, authorizes Mellon Bank (the "Lending Agent") to establish,
    manage and administer a Securities Lending Program in accordance with the provisions
    of the Lending Agreement and with respect to the lendable securities held by Princeton
    Insurance Company Client (''the Client"). The Lending Agent shall have the
    responsibility for negotiating the terms of each loan and, for collecting all required
    collateral, whether in the form of cash, U.S. government securities, irrevocable letters of
    credit issued by banks independent of the Borrowers or other forms approved by the
    Client for use as collateral (the "Collateral"), on behalf of the Client. The Lending Agent
    shall also have authority to do or cause to be done all acts by and on behalf of the Client
    as it shall determine to be desirable, necessary or appropriate to implement and
    administer the Program. By the close of the business day on which the securities are
    delivered to the Borrower, the Lending Agent shall obtain from such Borrower Collateral
    in an amount equal, as of such date, to 102% in the case of securities of United States
    issuers, and 105% in the case of securities on non-United States issuers, of the market
    value of any securities loaned, including any accrued interest.




                                               14
The Company conducts it~ everyday business operations from its statutory home and main
administrative office located at 746 Alexander Road, Princeton, NJ 08540. These operations
include cash and investment management, underwriting and claims handling, among others.
Princeton maintains an in-house claims department which handles the notification,
processing, adjusting and payment of New Jersey physician claims, hospital claims and
workers' compensation claims. Open workers' compensation claims outside the state of New
Jersey are handled by one of two independent third party administrators (Crawford &
Company and Integrated Claims Strategies, Inc.) under the terms and conditions of claim
servicing agreements with each of these third party administrators. Princeton also maintains
two field offices in Hunt Valley, Maryland and Downers Grove, Illinois, which deal
predominately with the run-off of small business workers' compensation claims.


CORPORATE RECORDS

A review of the minutes of the Board of Directors, Audit Committee and Finance Committee
indicated that all meetings were well attended. The Company's Board of Directors meets five
times per year. The examination noted that the proceedings at each meeting were done in
compliance with Princeton's state charter and By-laws. The Board minutes also indicated that
the Company's overall transactions and events were adequately supported and approved.

A review of the signed affidavits by each member of the Board indicated that he or she had
received and reviewed a copy of the December 31, 2002 f"mancial condition examination
report.


MANAGEMENT AND CONTROL

The business, property and affairs of the Princeton Insurance Company shall be conducted
and managed under the guidance of the Company's Board of Directors.

Directors

Princeton's amended and restated By-laws specify that the Board of Directors shall consist of
at least nine (9) but no more than twenty-one (21) members. At least one-third of directors
serving in this capacity must not be officers or employees of the Company or any entity
controlling, controlled by, or under common control with the Company, and who are not
beneficial owners of a controlling interest in the voting stock of the Company (i.e. "Outside
Directors").

Each director shall be elected by the Shareholders at their annual meeting in May. Directors
can be removed from office upon a majority vote of shareholders, and any director vacancies
may be filled by a shareholder's majority vote. Any director may resign at any time upon
written notice to the Company. Any person appointed to fill a vacancy will hold office until
the next annual election of Directors.




                                             15
In addition to the Annual Meeting, the Board is required to have at least three scheduled
quarterly meetings per year. Regular meetings of the Board may be held with or without
notice at such time and at such place as shall be determined by the Board. Special meetings
of the Board may be called by the Chairman or any four (4) Directors on ten (10) days
notice. The notice is not required to specify the purpose of or business to be transacted at the
meeting. At all meetings of the Board of Directors, a majority of Directors then in office shall
constitute a quorum for the transaction of business provided the quorum consists of at least
one Outside Director.

A listing of the nine directors serving the Company at December 31, 2005, with their
principal occupation and current home or business address, is presented as follows:


                                  Principal Occupation             BusinesslResidential Address

Kenneth Aitchison              Retired from Healthcare             74 Kahdena Road
                               Industry                            Morristown, NJ 07960

Raymond H. Bateman             Government Consultant                117 West End Avenue
                                                                    Somerville, NJ 08876

John F. Dwyer, MD              Retired Physician                    205 West End Avenue
                                                                    New York, NY 10023
Stanley L. Grossman, MD        Retired Physician                    82 Susan Drive
                                                                    Newburgh, NY 12550

Harold Herzog                  Retired from Finance                 221 Mill Road
                               Industry                             New Canaan, CT 06840

Keith McLaughlin               Retired from HeaIthcare              53 Sydney Court
                               Industry                             Atlantic Highlands, NJ 07716

Robert A. Menotti, MD          Retired Physician                    4045 Bristol Road
                                                                    Clinton, NY 13323


Andrew H. Patterson, MD        Physician and President of           2 Park Avenue
                               Medical Liability Mutual             New York, NY 10016
                               Insurance Company

Richard F. Schaub              Semi Retired; at times               128 Bermuda Drive
                               serves as Interim President          Neshanic Station, NJ 08853
                               of Raritan Valley
                               Community College




                                               16
The Company's By-laws stipulate that the Board of Directors shall establish an Audit and
Compensation Committee consisting entirely of Outside Directors_ The duties and functions
of this Committee shall include, but not be limited to, recommending the selection of
independent certified public accountants; reviewing the Company's fmancial condition;
reviewing the scope and results of independent CPA or internal audits; nominating director
candidates for election by Shareholders; evaluating the performance of Company officers
and recommending to the Board of Directors the selection and compensation of Company
officers.

Members serving on the Audit and Compensation Committee at December 31, 2005 were as
follows:
                             Kenneth Aitchison, Chairman
                                 John F. Dwyer, MD
                                  Keith McLaughlin

Additionally, the Company's By-laws allow for the establishment of one or more other
committees consisting of directors appointed by a majority vote of the entire Board. For each
such adopted committee, at least one-third of the directors serving on that committee shall be
Outside Directors. At December 31, 2005 the Company maintained a Finance Committee
consisting of three members whose responsibilities include reviewing investment guidelines
and evaluating and approving investment portfolios and/or results. The members serving on
this Committee at the examination date were as follows:

                                Richard F. Schaub, Chairman
                                       Harold Herzog
                                 Andrew H. Patterson, MD

Princeton is required to comply with the provisions of N.J.8.A. 17:27A-4d(3) which states
that "not less than one third of the directors of a domestic insurer shall be persons who are
not officers or employees of that insurer or of any entity controlling, controlled by, or under
common control with, that insurer and who are not beneficial owners of a controlling interest
in the voting securities of that insurer or any such entity." The examination notes that the
Company is in compliance with the provisions of this statute, as the Board of Directors
consists of nine members, of which eight members are considered Outside Directors.

The Company is also required to comply with the provisions of N.J.S.A. 17:27A-4d(4) which
states that "the board of directors of a domestic insurer shall establish one or more
committees comprised solely of directors who are not officers or employees of the insurer or
of any entity controlling, controlled by, or under common control with, the insurer and who
are not beneficial owners of a controlling interest in the voting securities of the insurer or
any such entity." The Company was determined to be in compliance with the provisions of
this statute as of the examination date, as the Audit and Compensation Committee is
comprised solely of Directors who are not employees or controlling shareholders of the
Company or any affiliate.




                                               17
The Board of Directors has the power to fill the office of the Chairman; President; Vice
President(s); Secretary; Treasurer and Other Officers as stipulated in Article IV of the
Corporate By-laws. The Board may also designate additional offices to be served including
one or more Assistant Secretaries and one or more Assistant Treasurers. All officers shall
perform duties in the conduct and management of the business and property of the Company
as designated by the Board. More than one person may hold an office of the same title, but
the person serving as President may not serve simultaneously as Secretary. The following
senior officers have been elected and were serving the Company as of December 31, 2005:

                                                                             Office

William J. McDonough                                President and Chief Executive Officer
Andrea C. Kanefsky                                  Senior Vice President, Chief Financial Officer & Treasurer
Charles W. Lefevre                                  Senior Vice President and Chief Operating Officer
Stanley L. Grossman, MD                             Secretary
Kiernan E. Pillion, Jr.                             Vice President and General Counsel

REINSURANCE AND RETENTION

The Princeton Insurance Company has various external reinsurance agreements in force as
of December 31, 2005. Those agreements in effect, the coverage provided and the maximum
limits of reinsurance, are summarized in the following table:
       Business Covered and Tvpe of Contract                                        Reinrurance Limits

HospitalJPhysician Medical Malpractice and General
Liability,

1d Excess of Loss (4I1J05 _ 411106)                    95 % COV£raRe for aU losses $5,000 000 excess of $1 000,000

2   Excess of Loss (411/05 - 411/06)                   100%    co~e        for all losses $10,000 000 excess 0($6,000 000

1" Excess of Loss (411104 - 411105)                    100% covCI"a2e for all losses $S 000,000 excess of $1,000,000

2   Excess of Loss (411104 - 4IIJ05                    95 %   COVeI"a2e   for aU losses $10,000 000 excess of $6,000,000

HospiJallJrnlividual Providen Med. Mal. and General
Liabilir/
(Occurrencelclaims m.atkloccurrence plus policies
effectiv. at 411103),

1st Excess of Loss (411/03 - 4/1/04)                   95 % coverage for aU losses $4,000 000 excess of $2,000 000

2   Excess of Loss (41lJ03 - 4/1104)                   97.5% coverae.e for alilo-sses $5,000,000 excess of $6,000,000

3 rt' Excess of Loss (4/1103 - 4111(4)                 96.5% coverage for all losses $10 000,000 excess of $11 000,000

Ouota Share (effective 7/lJ02· cancelled 3/31/03)      80% Quota share l!P.to $6,000,000

Physicians Occurrence Plus Tail Coverage:

Excess of Loss·Coverage for 1987 through}997           $172,500,000 aggregate excess of $50,000,000 retention
Cancel Years

Excess of Loss·Coverage for 1998 Cancellation Year     $31,745,000 lIt aggregate

                                                                                        -      .uu~~    ______      ~       _~~,,   __




                                                                     18
      BllSin~ Coyered and Tvoe of Contract           _;;,                       Reinsur.mce Limits
Quota Shan·Policies in Force as of 12/3U98 for         $180,000,000 in aggregate
those polices cancelled or not renewed after January
1.2001

Small Business Workers Compensation:

In force and Renewal (100% quota share-               110% (EP net of ceding com) pIlLS ULAE in the aggregate
IIIn(03)

Old Business (100% quota share -12/31102 and          $102,500.000 (plus ULAE) in the aggregate
,,-rior)

Business Office Policies - Property and General
Liabilit>I'

1>{ Excess of Loss (411105 - 41lJ06)                  $250,000 excess 0($250,000

2 Excess ot Loss (411105 - 4/1106)                    $500.000 excess ot $500 000

Facultative Excen Physician Property:

1- Excess ot Loss (411105 - 4111(6)                   $9 000.000 excess of $1 000 000

Equipment Breakdown:

Quota Share                                           100% quota share up to $25 000,000


The Company maintains a Property Facultative Excess of Loss Binding Agreement with
American Re-Insurance Company that provides coverage for all risk property and physical
damage to business classified as Non-HPR hospitals, nursing facilities, clinics and the offices
of physicians, surgeons and other health care professionals. The reinsurer's maximum limit
of liability under this agreement shall be $9,000,000 each risk, each occurrence, with a
Company retention limit of $1,000,000.

Reinsurance ceded to other insurance companies as outlined in the above chart is done in the
normal course of business. Reinsurance is ceded to permit the recovery of a portion of direct
losses and to protect Princeton against excess losses on large risks; however, Princeton is
liable for such reinsurance ceded in the event its reinsurers do not meet their obligations.
Insurance liabilities are presented in the financial statements net of reinsurance ceded.

In addition to the Company's participation and assumption of reinsurance from mandatory
and voluntary insurance pools and associations (including NJCAIP, National Council of
Compensation Insurance [NCCI], New Jersey Insurance Underwriter Association, Fair Plan
New York and HCIF Excess Liability Pool), the Company also assumes reinsurance from the
Hospital Trust for Workers' Compensation. The Hospital Trust for Workers' Compensation
(the Trust) was created in cooperation with the Company to self-insure participating hospital
workers' compensation insurance and employer's liability insurance under the authority of
N ..I.A.C. 11:15. Workers' compensation and employer's liability insurance is assumed by the
Company to the extent indicated below:

Per Accident: Amounts in excess of the Trust's retention of $100,000 on loss indemnity
              payments. Loss adjustment expenses shall be shared in the proportion
              that the loss incurred by the reinsurer bears to the total amount of loss
              incurred by the Trust.


                                                                    19
In Aggregate: The Company shall pay to the Trust the amount of losses and loss
              adjustment expense payments not reimbursed by the Company which
              exceed the participating hospital's percentage retention level (i.e. 40% or
              80%) of its Trust contributions for the applicable agreement year and the
              amount of the Trust's investment income accrued on the applicable
              participating hospital's trust contributions.

As of January 1,2002, the contract with The Hospital Trust for Workers' Compensation has
no in-force business.

Effective December 31, 2005, Princeton commuted their $1 million excess $1 million contract
effective April 1, 2003 and expiring March 31, 2004, which covered certain medical
malpractice and general liability claims. As a result of the commutation, Princeton booked a
reinsurance paid loss of $5,759,000 offset by reinsurance IBNR of $4,831,000, resulting in a
profit of $928,000.

Effective January 1, 2003, Princeton entered into a reinsurance contract for their small
business workers compensation program. This reinsurance contract was necessary due to the
Company's decision to withdraw from its small business workers' compensation program
effective December 31, 2002. This contract represented a loss portfolio transfer of all unpaid
claim liabilities as of January 1, 2003, which is accounted for as a non-risk transfer. The
initial cost for this first coverage was $96 million and was accounted for as deposit
accounting on Princeton's balance sheet. In 2003, this contract exceeded the maximum
aggregate of $102.5 million and therefore $6.5 million was recorded as other income to
increase the recoverable to its aggregate. At December 31, 2005, Princeton's ending
receivable balance, which is included in other admitted assets, was $31.8 million. This
amount is down from $44.5 million in 2004 due to claim payment activity.

Princeton's reinsurance program for its occurrence plus product, which includes activated
tail coverage for insureds that terminated coverage on or before December 31, 1998, is
reinsured with American Re-Insurance Company. For insureds that terminated coverage
prior to December 31, 1997, Princeton retained liability for the first $50,000,000 of loss
settled. American Re provides coverage for losses in excess of $50,000,000 up to
$222,500,000. For insureds that terminated coverage during 1998, American Re provides
ground up coverage up to an aggregate limit of $31,745,000.

On November 29, 2000, Princeton entered into a Quota Share Reinsurance Agreement with
MLMIC, effective January 1, 2001. Under the terms of this agreement, the Company ceded
to MLMIC 100% of the aggregate ultimate losses settled on policies canceled or not renewed
after January 1, 2001 for those policies in force as of December 31, 1998, subject to an
aggregate overall limit of liability of $180,000,000. Princeton ceded an initial premium of
$51,000,000 to MLMIC for this coverage and such premium is adjusted quarterly for annual
renewals and is carried on a funds held basis. At December 31, 2005 and 2004 the funds held
balance for this tail coverage was $80,665,000 and $86,703,000, respectively.



                                              20
Reinsurance agreements were reviewed to ensure contracts had acceptable clauses and
conditions, that they were in compliance with the provisions of SSAP No. 62 - Property &
Casualty Reinsurance, and to ensure that the contracts exhibited proper transfer of risk. The
examination noted that the contracts contained no unusual clauses or conditions, and that
they were in compliance with the provisions of SSAP No. 62.

The Company reported in its 2005 annual statement general interrogatories page that their
largest net aggregate amount insured in anyone risk (excluding workers' compensation) was
$1,250,000. A review of the Company's policy counts and premium summaries at December
31, 2005 indicated that the Company's largest net aggregate amount insured in anyone risk
should have been reported as $2,250,000. The examination recommends that the Company
update and amend its general interrogatories page to properly reflect their largest net
aggregate amount insured in anyone risk.

REGULATION OF INSURANCE HOLDING COMPANY SYSTEMS

Princeton Insurance Company is a member of an insurance holding company system as
dermed in N.J.S.A. 17:27A-1. Princeton is a whoUy-owned subsidiary of MLMIC Holding
Company, a Delaware domiciled insurance holding company. Princeton's ultimate parent is
the Medical Liability Mutual Insurance Company, a New York domiciled insurance
company. Since the Company is a member of an insurance holding company system, it is
subject to the various registration requirements of N.,J.S.A. 17:27A-3. One of these
requirements stipulates that the Company must fIle an annual holding company registration
statement with the New Jersey Commissioner of Banking and Insurance by April 1st of each
calendar year. At December 31, 2005 it was determined by this examination that the
Company did fIle the proper holding company registration statement in compliance with
N.,l.S.A. 17:27A-3.

The interrelationships of Princeton Insurance Company with its ultimate parent and various
subsidiaries is outlined in the organization chart presented below:




                                             21
                                                  Mediral LiabiJit,' Mutua! !nStlfil.Iiet Company
                                                               FEIN 14·15i4861
                                                                     New York
                                                              NAIC 121()'34231

                                                                         I
                I                                  I                                            I                               I
   MLMIC Holding CompOlY, Inc.           OHIC Insurance Company                   HUM Mill"keting uoup, Inc.   Professional Services Broker~, Inc..
       FEIN 5z.2257935                        100% 011                               FEIN 1"1789101                         100% NY
          100% DE                           FEIN 31.D92W59                               100% NY
                                            NAIC 121()'35@




        PrincetOD Insurance Company
            FEIN 22.2J86692
               100% NJ
            NAIC 121().42226




               Princeton Advertising &
                Marlering Groop, Inc.
                  FEIN 2n015%5
                       100% NJ


                     Princeton Ri~
                     Protection, Inc.
                    FEIN J2. )085112
                        100% NJ


                   Akundar Roal
               lruur<l\ce Agency, Inc.
                       100% NJ
                  FEIN 04·3144116


             MLMIC Insurance
              (Bermuda) LtcL
              1004 Bennucb:t




Princeton owns 100% of the outstanding shares of Princeton Risk Protection, Inc., which
sells claims processing, investment consulting and risk management services. In February
2003, Princeton established the Alexander Road Insurance Agency (ARIA), a wholly-owned
subsidiary, formed for the purpose of administering Princeton's hospital property program.
On December 31, 2004, Princeton dissolved The Princeton Insurance Agency ("TPIA"), a
wholly-owned subsidiary formed in 2001.




                                                                             22
INTER-COMPANY AGREKMENTS

At December 31, 2005 Princeton Insurance Company was a party to various inter-company
agreements with its parent, subsidiaries and affiliates. These agreements include the
following:

Surplus Note - Princeton issued a surplus note to MLMLC in the amount of $40,000,000 on
March 28, 2002. This note will mature on March 29, 2012 and will earn 6% interest to be
paid semi-annually. The surplus note is presented as a component of surplus and is generally
subordinated to policyholders and claimants under the Company's insurance policies. All
interest and principal payments are subject to the prior approval of the New Jersey
Department of Banking and Insurance. No principal and or interest payments were
approved or made during the current examination period, and as of December 31, 2005,
there was unapproved interest of $9,028,000.

Service and Expense Allocation Agreement - This agreement, entered into on June 26, 2002,
between Princeton Insurance Company, Medical Liability Mutual Insurance Company
(MLMIC) [ultimate parent) and ornc Insurance Company (OHIC)[affiliate), allows the
members of the group to provide and make available to each other the services of their
personnel, the apportionment of space, and the use of equipment, as long as such
arrangement does not interfere with or impede their normal business operations. The costs
and expenses of providing such facilities, equipment and services shall be determined and
allocated on a fair and equitable basis and in conformity with customary insurance practices
consistently applied and shall not exceed the cost incurred in providing the actual services.
Any out of pocket expenses which are directly calculable, including but not limited to,
electricity, telephone, postage, furniture, fixtures, leasehold improvements, etc. shall be
directly allocated to the responsible party. All billings between the parties shall be settled
within sixty (60) days after the last day of each calendar quarter for the net amount of all
such quarterly allocated costs and expenses.

Federal Income Tax Allocation Agreement - The Company's parent (MLMIC) and all
subsidiary companies file a consolidated federal income tax return under the provisions of an
amended and restated federal income tax allocation agreement entered into among all
affiliated companies on January 15, 2002. This agreement requires that each subsidiary
compute a separate return tax liability for each taxable year equal to the tax liability it would
have incurred had it never been included in a consolidated tax return. Each subsidiary will
pay to MLMI C an amount equal to the separate return tax liability as computed. If any
subsidiary was entitled to carry back a loss or credit to the prior tax year, then MLMIC will
pay to the subsidiary the difference between the liability computed and paid for the carry
back year and the liability recomputed taking into account the loss or credit. Payments by
each subsidiary to MLMIC shall be made on a quarterly basis (within 30 days of the date
that estimated tax installments would have been due if the subsidiary had filed its federal
income tax return on a separate basis). If the sum of all quarterly payments exceeds the
separate return liability, then MLMIC shall, as soon as possible, but in all events within 30
days after the statutory due date for the consolidated federal income tax return for such
year, pay the excess to the subsidiary. Payments attributable to a tax refund from the



                                               23
Internal Revenue Service shall be paid to the subsidiary within 30 days of receipt of such
refund by MLMIC.

Trust Agreement - Princeton Insurance Company - "Beneficiary" has entered into a Trust
Agreement effective February 1, 2005 with Medical Liability Mutual Insurance Company
(MLMIC) - Grantor and Citibank, N.A. (Trustee).

The Company and MLMIC have entered into a Quota Share Reinsurance Agreement where
MLMIC has agreed to indemnify the Company, as cedent, against losses.

MLMIC and the Company have created this trust account to hold assets as security for the
performance by MLMIC of its obligations under the Quota Share Reinsurance Agreement.

At December 31, 2005, the market value of the trust was $119,853,259.

POLICY ON CONFLICT OF INTEREST

The Company has an established policy statement in place regarding the reporting of
conflicts or potential conflicts of interest. Each director, officer and key employee of the
Princeton Insurance Company is required on an annual basis to review the Company's
conflict of interest policy statement and complete and sign the conflict of interest
questionnaire. The completed questionnaires are returned to the Company's Vice President
and General Counsel, who reviews these questionnaires and reports any conflicts or potential
conflicts of interest directly to Princeton's Board of Directors.

A review of the completed questionnaires filed during the examination period indicated no
material disclosures of conflicts of interest or potential conflicts of interest.

EMPLOYEE WELFARE AND PENSION PLAN

Princeton offers a dermed contribution savings plan covering substantially all employees
over 21 years of age with at least one year of completed service with the Company. The
Company makes matching non-discretionary contributions equal to 50% of the employee's
pre-tax contributions up to 6%.

Princeton offers substantially all of its employees a defined contribution pension plan.
Contributions are based on years of service and the age of the eligible employee. Princeton's
contributions for the plan were $1,035,362 for 2005. There are no plan assets held by
Princeton at December 31, 2005. For each payroll cycle, Princeton will contribute for each
eligible participant an amount in accordance with the following schedule:




                                             24
Age Plus Years of Service                               Percentage of Compensation

Less than 30                                                        4%
Greater than 30 but less than 40                                    5%
Greater than 40 but less than 50                                    7%
Greater than 50 but less than 60                                    9%
Greater than 60                                                     11%

Princeton also offers its retirees certain medical and prescription drug plan benefits.
Substantially all employees with five or more years of service with Princeton at retirement
are eligible for benefits associated with these Plans.

Finally, Princeton offers a non-qualified deferred compensation plan for certain executives of
the Company who are in the position of Assistant Vice President or higher. These benefits
are based on employee level, age, years of service and compensation.

FIDELITY BOND AND OTHER INSURANCE COVERAGES

The Company is a named insured on a financial institution bond underwritten by The
National Union Fire Insurance Company of Pittsburgh, PA which provides fidelity coverage
in the amount of $10,000,000 (aggregate liability) and includes coverage for fidelity, loss of
property on premises or in transit and loss due to forgery or alteration of deposits or
securities. The amount of fidelity coverage carried in this policy (on both an aggregate and
single loss limit of liability) was determined to be adequate, as measured by the NAIC's
formula and exposure index.

Princeton maintains other insurance coverage designed to protect its assets and those of its
wholly-owned subsidiaries from losses arising out of property and casualty risks. In general,
the principal coverages, in which the Company is a narned insured, include commercial
property coverage with blanket building limits of $12,100,000, blanket business personal
property limits of $2,500,000,90% co-insurance clause, a $2,500 deductible per occurrence
and replacement cost valuation. Additional commercial property coverages include business
income and extra expense with varying limits based upon covered location. The Company
also maintains computer coverage for all computer systems including data, media and data
processing equipment up to a limit of $3,000,000; and boiler and machinery coverage with an
equipment breakdown limit of $10,000,000. Princeton's general liability coverage includes a
general aggregate limit of $2,000,000, products and completed operations aggregate limit of
$2,000,000, personal and advertising injury limit of $1,000,000, fire damage (anyone fire)
limit of $1,000,000, medical expense limit of $25,000 (anyone person) and an each
occurrence limit of $1,000,000. The Company also carries commercial umbrella catastrophe
liability coverage having per occurrence and aggregate limits of $5,000,000. Finally, the
Company maintains workers' compensation coverage with statutory limits and fiduciary
liability coverage with limits of $2,000,000.




                                              25
POLICY FORMS AND UNDERWRITING PRACTICES

Princeton underwrites professional liability policies on either Claims-made or Occurrence
Plus coverage forms. The Claims-made policy covers the insured against claims that are
reported during the policy period, for incidents that occurred after the retroactive date of
the policy and prior to the expiration of the policy. If a Claims-made policy is terminated or
if an individual is removed from the policy, an extended reporting period endorsement (tail)
must be purchased through the Company or another insurance company to ensure coverage
for claims made after the termination date. This extended endorsement must be prepaid
before issuance. The extended reporting period endorsement shall be provided to the insured
at no cost if cancellation is due to death, total disability or retirement after five (5) years of
being on a Claims-made policy and reaching 55 years of age.

The Company also offers a Claims-made Advantage policy form that provides claims-made
coverage for a five to ten year period, with a conversion to an Occurrence Plus form at the
end of that period. This coverage is available to individuals who have had a claims-made
policy with a prior carrier.

Additionally, Princeton offers Straight Occurrence and Occurrence Plus policy forms to
certain classes of insureds. Straight Occurrence is only offered to dentists at $1M1$3M limits
and provides coverage for claims that occurred during the policy period. Occurrence Plus
policy forms are offered by the Company and combine the features of both Occurrence and
Claims-made forms. Under this type of form, coverage is provided for claims that occurred
during the policy period and are reported by the insured during or after the policy period.
However, policy limits in effect when the claim is reported (rather than the limits in effect at
the time the incident occurred) will respond. Under this coverage type, extended reporting
period coverage (tail) is included at no additional cost.

The Company also offers Prior Acts coverage which is only available to those insureds that
had Claims-made coverage through their previous insurer and are going to continue on a
Claims-made form with Princeton. Prior Acts coverage is not available to any insured who
practiced in any state in which Princeton is not licensed to write business.

Primary policy limits for Claims-made and Occurrence Plus policies are $1 million per
medical incidentJ$3 million annual aggregate. Increased limits are available through the
Company's umbrella or excess liability program. Claims-made and Occurrence Plus policies
for Physicians and Surgeons only are issued on a four-tier merit system: standard, preferred,
preferred plus and elite. The general guidelines and definitions used to arrive at these tier
ratings are outlined in the Company's underwriting manual.

In order to obtain insurance with the Company, the applicant is required to meet certain
submission requirements 60 days prior to their requested effective date of the policy. These
include completing a Company application for insurance, providing an outline of loss
exposures for the previous six years, providing an audited financial statement for the most
current 12 months and providing any other materials requested by the Company that will
assist in the Company's underwriting review of the applicant.



                                                26
Claims-made policies may be written for a specific term of up to one year at the Company's
option. All policies will be subject to the rules, rates and forms in effect at the time of
issuance or renewal. The Company will not offer coverage for a period of less than one year,
except when the individual is joining an employer that is already insured by the Company.
Princeton offers a new practitioner discount for chiropractors, dentists, physicians and
surgeons (excluding OB/GYNS and bariatric surgeons). This first year discount is applicable
for a one-year period and may only be applied within the first six (6) months after
completion of a residency or fellowship program or within six (6) months after receipt of
license. A practitioner who practices part-time (21 hours or less per week) qualifies for a
part-time discount, provided that a part-time application has been completed and submitted
to the Company. This part-time discount is not available to insureds classified as
obstetrics/gynecology, retired or allied health care. Princeton also offers practice
interruption coverage to all physicians, dentists and chiropractors. When a practitioner is
forced to temporarily cease his or her practice due to military assignment, illness, injury or a
maternity/paternity leave of absence, that person may request to have his or her individual
professional liability coverage suspended for a period of 30-180 days in anyone policy.

The examination verified, on a sample basis, that the Company's policy forms and rate
filings have been approved by the New Jersey Department of Banking and Insurance.

ACCOUNTS AND RECORDS

The Company's accounting books and records are maintained at their statutory home and
main administrative office located at 746 Alexander Road, Princeton, New Jersey 08540.
Financial information needed in conjunction with the verification of assets and the
determination of liabilities was made available in detail and summary form. The Company's
general ledger was reviewed, tested and reconciled with the 2005 annual statement.

Princeton Insurance Company's accounting and statistical information is produced by
multiple electronic data processing systems. The Company's general ledger accounts, trial
balance, cash receipts and disbursements are processed on an automated system called
PLA TINUM, which interfaces with the systems used for investments, losses, reinsurance,
premiums and agent communications. Financial statements are prepared under the direction
and management of the chief financial officer.

Initial input data for premiums and losses is entered into the automated system ECHOS
(Exposure Center Home Office System). ECHOS is an internally developed database system
which interfaces with the Company's residence database system, the AlS 400 (WINS-
Wheatley Insurance System). The WINS system is primarily used for running reports and
maintaining all underwriting and claims information. The information contained within the
AlS 400 system is accessible through Microsoft Access, which resides on each employee's
desktop computer. Only certain individuals within the Company are authorized to access
and work with the WINS database. Database software, including Microsoft ACCESS, is
available on the Company's LAN (Local Area Network) and is where data calculation occurs
such as accounting for reinsurance (ceded and assumed), commission calculations, etc.
Information included within ACCESS is then interfaced with the Company's automated


                                               27
general ledger system (known as PLATINUM). System reports can be generated from all
aforementioned systems as needed.

The aforementioned data flow is followed for both premium and loss accounting. Premium
and claim data is input into the ECHOS system and uploaded/interfaced with the Company's
AJS 400 (WINS system). Once the data is uploaded into the WINS system, the data can then
be accessed/uploaded to Microsoft ACCESS and finally, uploaded and interfaced with the
Company's automated general ledger system (pLATINUM).

The examiner made an inspection of transactions relating to income and disbursements
which was generally restricted to the reconciliation of the Company's trial balance and the
verification of assets and liabilities as of the examination date.

ADVERTISING AND SALES MATERIAL

A review by this examination found that all forms of advertising currently utilized by the
Company are in compliance with the provisions of N,J.S.A. 17:18-10.

TREATMENT OF POLICYHOLDERS

The Company records and maintains complaints in a central complaint database located at
its home office in Princeton, New Jersey. The complaint data base, which is maintained on an
"as received" basis, outlines the number and type of complaint, the date the complaint was
received, the complainant name, the nature of the complaint and a brief resolution to the
complaint. The Company's Legal Department closely monitors complaint and inquiry
activity to verify that internal procedures are being followed with regards to the timing and
quality of the Company's responses to consumer complaints.

The examination reviewed the Company's complaint data base for the period under
examination, noting that the Company is properly maintaining, recording and responding to
consumer complaints in accordance with the provisions of N.J.S.A. 17:29B-4(10).

CONTINUITY OF OPERATIONS

A business continuity plan is necessary to help ensure the Company can adequately recover
from a system failure or business interruption in a timely fashion and without the loss of
significant data. It was recommended in the prior examination report that the Company
formalize, test and distribute to designated employees a business continuity and disaster
recovery plan.

Princeton Insurance Company has not complied with this recommendation. The Company
has not created a formal, comprehensive business continuity plan, which includes a disaster
recovery plan. It is again recommended, as was in the prior examination report, that the
Company formalize, test and distribute to designated employees a comprehensive business
continuity and disaster recovery plan.




                                             28
FINANCIAL STATEMENTS AND OTHER EXHmITS


Exhibit A: Balance Sheet at December 31, 2005 and December 31, 2002


Exhibit B: Summary of Operations for the Three Year Period Ending December 31, 2005


Exhibit C: Capital and Surplus Account for the Three Year Period Ending December 31,
           2005




                                          29
                                                                                                                                                                       IXHIBITA


                                                                                          PRri"CITO~     I:'i'SrR.-\...'KI   CO~lPA...
                                                                                                                                    "n·
                                                                              B.\L-\..."C[ SHIIT AT MeHmERJ1, 1005 ."--'\D orcnmrR31,::00l


                                                                                              CllITtDt                BAbaceper                                          PrMioQ~

                                                                                            ru.uu_                      COIDfUY               [XUlWti.n         ~ote   ha.lllwtiOR

                                                                                            Ii J~{Jl&!i               I' UQlL1!~               !du&<            ~       111;:Qlt2l


Bod,                                                                                          5731..91Z.15O            S151,912,150                      SO      1      S874.386,734
Pnllfrnd Stodu                                                                                      4.554.810                 4.554,870                   0       1          8,871.750
OUIIIII•• StlKks                                                                                   7.3,456,47-4              73.456,474                   0      1          -W.794,591
Rul [lmlf ... P:repIfrties Occupiftl \)- tillf Compuy                                               6.,1A9.634                6.!>l9,6.34
                                                                                                                                                          •                   6.553.075
Cub and SlNn-T UD. [nunlu'Ri!
R«t-in\llf (or S-.cwities
                                                                                                   77,816.130
                                                                                                            0
                                                                                                                             77.816,.130
                                                                                                                                         0
                                                                                                                                                          •
                                                                                                                                                          0
                                                                                                                                                                            31,931,136
                                                                                                                                                                              4.867,778
[n."fMtJaeur       mcome D-u .... _",-ccneel                                                        6,951$65                  6.951,.565                  0                   1>.191.715
A,e.u' Balanus or [".ulk-ctell Pro.hullS:
  l"I1UUIfcttd Proti.." u.4 A&:na:ts' .B.al.ance! la C_rn ofCoUKtUa                                     33,747                   33,747                    0                  8..144,048
 DfiHTe'Ii         Prem.huas,A&~IItS· ~UlIlB4lIa::tallmeJlU          ItHkN B ..
         Dfierred aM. NM 'hot Dae-                                                                 13,.278,.896              13,.l78,8U                    0                  7,788.,..J4S
 ACCnled retrHpectin pnllliJaas                                                                               0                       0                    0                          0
AIII.uats Recen..-.J.e fn. RdulU'US                                                                11.188,26.3               12.188.263                    0                12,625,.356
ftutds Hdd r.y.,. Depeslted wttb Re.bastIHCI C.apaades
~IetDefHTMTU._~SK
                                                                                                        34,078
                                                                                                   13.,417.,249
                                                                                                                                 34.073
                                                                                                                             13.417.,2-49
                                                                                                                                                           •
                                                                                                                                                           0
                                                                                                                                                                                673M3
                                                                                                                                                                             }.(,8}7,040
Dc-rln.aic n.t. P~:5ia& ~ aJMII s.b"are                                                               599.918                   599,928                    0                  1,135.124
~t1:   .-\.djlUtlHDtDae .. fereip ucftaJ.e Rate
Receiulile fro .. P~t. SU5idb.rles aM Affiliates
                                                                                                         1.578
                                                                                                        11,992
                                                                                                                                   1..578
                                                                                                                                  11,992
                                                                                                                                                           •
                                                                                                                                                           0                  1,605.837
                                                                                                                                                                                            0


Iquities ad ~it:5 iA P.oJ.s aU .obwciatMas                                                                    0                          0                 0                  1.110,401
.\.cirea:ate Wrire-uu r.r Odter ru.            lan~ted .~nts                                       41.88l.l39                41.307.139           ~               2                 m;rn

                                                                                             ~J   DiU aWlIi2i3       ~!    fJ:Sl" .all ti2~      '~1~ UifIl            ~J 11"~      ljg a"'j}

LIUmrlu


L.nn aad lAss Adju.stmflll: [xpelUf"                                                            5634,670,101            S616.738,101           S17.932,OOO        3     S702.161,094
Rdllsu.nJl« Pa~""'le _ PaW IAn aM LA!:                                                                 500.142                  500,14:2                   0                        655,672
C ••ali.ni...s PayUle Utd 0dlH' Si.mil&r C1l.arcn                                                    1,771,113                1.771,173                    0                   6,458..B89
0tit1Pr [~SM                                                                                         7,711,416                 7,721.416                   0                   8.740,752
TUlfs, Licerue& aad. £«5                                                                                74,223                    14,123                   0                   1.869,983
Carrcsd feden.!:lad. hrdp meOlllto Taus                                                              1.247.913                 1.147,913                   0                                 0
t"lIearuci Prutilllll.                                                                              79,.993,484              19..993.484                   0                 37.8ll.906
.~.Ul.U       Prellli1lJlU                                                                          1l,6M.638                11,690,638                    0                 13J34.414
P.lkyJl.Wt-.r DhWea4b D-eclaretI aU Uapid                                                               45.us                     45.248-                  0                         ..........
Ceded     Rlfiru:~e          Prtiai1Ull1 PayMk                                                       4.448,.367                4,448,.367                  0                138.694.613
Funds Held ~          emil,...,. I;n.der RewllnIlce Treaties                                        SO,664,74S               8O.664,74S                    0                 70,980,473
Amoa.nu Withladd. er Retained Iry" COmpa.a:l"          r... Acao1Ul( or 0tJaH'S                      1,.218,406                1.118,406                   0                   5.110,919
Prorlsiou for Rd.slln.n«                                                                             2,851.174                 1.851.174                   0                   5.56.3,11-0
:'-iM Adjustmellt, o.e to Feffip I:tdl. .        ,e   R.a.te~                                                  0                         0                 6                           1.161
PI"~"J.Ole    (0   Punt. Sullsidiaries and Affiliate,                                                        50                         50                 0                                 0
PJ.~...\It"   fol" 5«uritits                                                                         2,494,361                 1,41>4,361                  0                 1~,.100,.8.38

_-\t:~~,a(e Writ~ins          fer LiDilldes                                                            ~                         ~                         2                        127.&22

Total U.t,UidM                                                                                    ~g"";12~f'              ~n~p""oi"            ~p 2~'"   QQSl          51   Q£I:i   ~g~ ~">:


Sa!"!I,'!; ;and Othtr Fu.nd;


CQrnmolS Capital StlKk                                                                              54';00.000                S4.200,000                  SO                 $4.100.000
'Sarpl's :-ott3                                                                                     40,000,000                {O.OOO.OOO                   0                 -10.000.000
Gros, Pud in ud C ollni.lIuttd Surplus                                                               6.150,708                 6,.250.708                  0                   6..1;50.708
rll;usis:ud Faad, (SUrpills)                                                                       111688.143                140.045,14,3       <18,357 909)      •         1294-08...$63)


                                                                                                  ~1.~.J_~..2~.l          Sl9<lA95.951         (S18.g~.oo.Ol
                                                                                                                                                                  •         S~l     041.145


I otal   Liilbi.lirie~,   Surplus and Other fUl1ds                                           ~l    IW" l§§ Qg~        ~}     qQ" ~n 1   92~      ~~                    S1 p".r; ";ill     ~"'g


                                                                                           30
                                                                                        EXHIBITB

                                    PRI:"CETO); ['\SntA]I,CE CO~IP~~'\oiY
                                   SnUfARY OF OPER~TIONS FOR THE
                               THREE YEAR PERIOD E);DING DEcamER 31, 2005




               UiDER\YRITlNG INCOME                      ~                ~               ~

Premiams Eamed                                         5194,122,005     S19O,203,306    5177,428,902

Dedllclioas:

   Losses aad Loss E"Peases l.clUTed                   5189,076,202     5176,629,819    SI02,831,489
   Othr l.'aderwritiag E:xpeases lac.rred                30,398,746       29,794,068      38,756,214

    T obi Dedactioas                                   5219,474,948     5206,423,887    5141,587,703

    Net t'aderwritiag gao. or (Loss)                   (S25,352,943)    (516,220,581)    $35,841,199

                ThTESThIEl'jT INCO~IE

Net I.Yestmeat lacome Earaed                            525,226,954      524,418,857     525,260,096
:\Tel Realized Capital Gaias or (-) Losses                1,780,652       12,034,240      20,289,829

    Net IIIYestment Gaia                                $27 ,007 ,606    536,453,097     $45549,925

                   OTHERINCO~IE


Net Gao. or Loss (-) From Age.Is' Bahllces
 nargedOrr                                                ($515,343)     (55,134,342)      $470,489
Fiance or Senice na'1le wt ladllded ia Premium
Aggregate W rite-ills for ~Iiscella.eo.s Jacome             522,040°               °
                                                                           3,693,065
                                                                                                   0
                                                                                           8,349,060

    T obi OO"r I.com"                                        $6,697      (51,441,277)     $8,819,549

Net lacome Before DnideDds To Policyholders
 alld Before Federal aDd F oreigll lacome Taxes          SI,661,360      SI8,791,239     S9O,210,673
Dnideads To Policyholders                                         0                2          77,427

Net Illcome Before Federallacome Taxes                   51,661,360      518,791,239     S90,133,246
Federal and ForeigD lacome Taxes Iacurred                   660,650          587.263               0

    ~et   Income                                         $1.000,710      S18J03,976      S90.1~3J42




                                                  31
                                                                                                   LXHIBITC



                                         PRL~CETO~ L\SlR·\~CE CO:\[P.~'·Y
                                   CAPITAL .~"D Sl~LLS ACCOl".'iT FOR THE
                                 THREE YEAR PERIOD E,,-nI:'iG DECnmER 31, 2005




    ~et   Income                                                     $1,000,710    518,203,976      S9Q,133,146

       OTHER SCRPLLS GAINS OR (.) LOSSES

Cboge I. Net rarealized Capital Gaias or (Losses)                    51,864,489        5443,783     S12,49Q,905
Ch'0l:e ia Net rorealized Foreij:o Excltaace Capital Gaia (Loss)           (518)            292           3,065
Chaoge ia Net Deferred Iacome Tax                                    (7,004,016)      2,158,961       1,274,108
Chaa&e ia Noo Admitted Assets                                        10,484,011      11,234,176       6,097,472
C~allle ia Pro\'isioll for Reias ....ce                                (840,341)     (1,104,018)      4,656,405

    Total Wer Sorp"s Gaios or (Losses)                               $4,503,625     512,733,194     524,521,955

                                                                     55,504,335     SJO,937,170    5114,655,201

Sorp/os as Re&ards Policyholders, December 31 Preyious Year        5166,634,616    S135,697,446     521,042,245

Sorplos as Ree;3n1s Policyholders, December 31 Carrea' Year        ~17'.1~§!2~1    ~l§;§a§J~,§l~   ~1~~,~27,i4~




                                                          32
NOTES TO THE FINANCIAL STATEMENTS

NOTE 1: BONDS AND STOCKS

Princeton Insurance Company reported admitted assets for bonds, preferred stocks and
common stocks of $751,912,150, $4,554,870 and $73,456,474, respectively at December 31,
2005. Tbese amounts will be accepted as stated by tbis examination.

The foUowing securities were being held by states on behalf of the Company as of December
31,2005:

State                  Deposit Description                      Book Value        Fair Value

Arizona                US Treasury Note, 5.5% due 2115/08       $1,277,352        $1,277,975
                       US Treasury Note, 5.5% due 5/15/09          994,545         1,034,490

Delaware               US Treasury Note, 4.75% due 11/15/08        159,188           161,538

Georgia                 US Treasury Note, 4.75% due 11/15/08       125,314           126,201

North Carolina          US Treasury Note, 4.75% due 11/15/08      310,323            306,921

South Carolina          US Treasury Note, 4.75% due 11/15/08       992,446          1,009,610

Virginia                US Treasury Note, 6.125%, due 8/15/07     316,767            307,944
                        US Treasury Note, 4.75% due 1U15/08       248,668            252,403

NCCI                    US Treasury Note, 6.125% due 8/15/07 7,559,978              7,441,980

Commonwealth of PA                                              24,780,787        24,351,055

Superior Court of DE                                            15,926,766        15,926,766

Superior Court of NJ                                            14,336,343        14,336,343

The Commonwealth of Pennsylvania, Superior Court of Delaware and Superior Court of New
Jersey securities were special deposits reported under Schedule E - Part 3 - Special Deposits.
The special deposits were securities ordered by the various courts while the Company appeals
the various court decisions.

The examination noted that the Company incorrectly reported a special deposit with the State
of Arizona as a special deposit with the State of Arkansas in its 2005 annual statement
Schedule E - Part 3. It is recommended by this examination that the Company properly
complete Schedule E - Part 3 - Special Deposits in future annual statement filings.




                                             33
Im'estment Basket Clause Provision

The investment "basket clause" provision allows the Company the flexibility to invest in
certain securities that may not otherwise be considered permissible investments under
N..J.S.A. 17:24-1. However, a limitation (5% of prior year total admitted assets) is placed on
the carrying value of investments that can be classified under this "basket clause" provision.

A review of the Company's 2005 annual statement Schedule D showed numerous investments
in securities of foreign countries that were not in compliance with the provisions of N~J.S.A.
17:24-1 0 concerning investments in foreign securities. The book carrying value of these
foreign investments at December 31, 2005 was $25,741,635. Additionally, a review of dividend
records of common stocks purchased during the examination period and owned at the
examination date was conducted for compliance with the five-year dividend record
requirement as outlined in N..J.s.A. 17:24-1(e). It was determined by this examination that
common stocks having a market value of $19,228,683 did not meet this statutory requirement.
The examination has determined that these assets should be classified as admitted assets
under the investment "basket clause" provision, in accordance with N..J.S.A. 17:24-1(g). The
investment "basket clause" provision calculation has been documented below:

 Basket Clause Provision:
Basket Clause Limit (5% of 2004 total admitted assets of $976,378,364)            $48,818,918

 Basket Clause assets at December 31, 2005
 Bonds and Stocks:

       Investments in foreign securities                 25,741,635
       Stocks without a five year dividend history       19,228,683

               Sub-total                                                           44,970,318
 Total remaining allowance under Basket Clause provision                          $ 3,848,600
                                                                                  ==
 Upon review, and in accordance with NJ.S.A. 17:24-l(g), it was determined by this
 examination that the above investments fall within the provisions of the investment basket
 clause. As such, those securities classified as foreign investments and Company common
 stock investments not having a five-year dividend history may be reported as admitted assets
 under the investment basket clause provision.

 NOTE 2: AGGREGATE WRITE-INS FOR OTHER THAN INVESTED ASSETS

 The Company reported a balance for the above captioned account of $42,307,139 that was
 $425,000 more than the amount as determined by this examination of $41,882,139. This
 difference stems from the examination write-off of an impress receivable balance due from




                                             34
Integrated Securities Inc. under the terms of a service agreement with Princeton that is over
ninety days past due.

The examination noted that the Company's reported receivable balance for NJPLIGA was
overstated by $2,698,744 at December 31, 2005. This overstatement arose from the
Company's failure to collect over two years worth of assessments since the Company was
using the wrong NJPLIGA recoupment rate during this time period. The Company
recognized this accounting error in calendar year 2006 and wrote-off the portion of its
NJPLIGA balance deemed uncollectible ($2,698,744). Since the Company recognized their
accounting error and wrote off the receivable balance in 2006, the examination will accept
the Company's 2005 NJPLIGA receivable balance of $3,805,374. The examination
recommends that the Company write-off any NJPLIGA balances that have remained
outstanding for more than two years in future financial statement filings.

NOTE 3: LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

The Company reported a net liability for loss and loss adjustment expenses of $616,738,201
at December 31, 2005 which was $17,932,000 less than the amount determined by this
examination of $634,670,201.

The NJDOBI contracted with MBA Actuaries, Inc. (MBA) to complete a comprehensive
review as to the reasonableness of the Company's loss and loss adjustment expense reserves
as of December 31, 2005. MBA segregated and analyzed reserves by business segment and
provided an analysis on all lines of business. A comparison of MBA Actuaries findings with
the net loss and LAE reserves as reported by the Company is documented as follows:




                                          Company         MBA Actuaries
                                       Net Loss and         Net Loss and
Segment                               LAE Reserves         LAE Reserves             Difference

NJ HPL In-Force                          $35,674,000          $46,993,000          $11,319,000
NJ HPL Run-Off                            31,561,000           31,654,000                93,000
PSRM Workers' Compensation                49,122,000           57,102,000             7,980,000
Physicians' Purchased Tail                10,556,000           11,703,000             1,147,000
Other Segments                           489,828,000          487 ,221,000          (2,607 ,000)

  Totals                                $6Hi,741,000         $KH,673,!.!!;!!!      $17,~32.!.!00

Of the $17,932,000 reported deficiency, $7,980,000 was in the Company's PSRM workers'
compensation business, which is no longer underwritten by the Company.

The examination recommends, based on the in-depth analysis performed by MBA Actuaries,
that the Company maintain loss and loss adjustment expense reserves at a level adequate to
meet its incurred loss and loss adjustment expense obligations.


                                            35
As part of the review of this liability, the examination reconciled and verified data
concerning case reserves, paid losses and paid LAE to Company actuarial reports and to the
2005 annual statement Schedule P by line of business and by accident year. A statistical
sample of losses paid, LAE paid and case reserves was selected using ACL sampling
techniques, with the information contained in the sample items being traced/agreed to actual
claim files and/or to the Company's computerized loss system to verify underlying claims
attributes.

The Company recorded amounts of reserve credit for high deductibles on Unpaid Losses of
$17,724,781 and Unpaid Loss Adjustment Expenses of $3,203,637 for year end 2005. There
were no amounts paid by the Company that exceeded deposits and/or letters of credit held
for this purpose.

The Company disclosed this amount in the 2005 annual statement under Notes to Financial
Statements, Note Number 31 - High Deductibles.

NOTE 4: SURPLUS AS REGARDS POLICYHOLDERS
        UNASSIGNED FUNDS (SURPLUS)

The Company's surplus as regards to policyholders at December 31, 2005 was $190,495,951,
which consisted of common capital stock of $4,200,000, surplus notes of $40,000,000, gross
paid in and contributed surplus of $6,250,708 and unassigned funds of $140,045,243. The
examination reported surplus as regards to policyholders of $172,138,951 that was
$18,357,000 less than the amount reported by the Company. This decrease is due to
examination changes to certain asset and liability accounts, which ultimately affected the
unassigned funds (surplus) account as follows:

Unassigned Funds (Surplus) at December 31, 2005 (per Company)             $140,045,243

Decreases in Surplus:

  Aggregate Write-ins for Other Than Invested Assets        $ 425,000
  Losses and Loss Adjustment Expenses                        17,932,000

Net Decrease in Unassigned Funds (Surplus)                                  18,357,000

Unassigned Funds (Surplus) at December 31, 2005 (per examination)         $121,688,243
                                                                          =======




                                           36
SUMMARY OJ' RECOMMENDATIONS


COMPLIANCE WITH PRIOR REPORT RECOMMENDATIONS                          (pg.3)

Continuity of Operations   (pg.4)

It is again recommended, as was in the prior examination report, that the Company
formalize, test and distribute to designated employees a comprehensive business continuity
and disaster recovery plan.

Reinsurance Payable on Paid Losses and Loss Adjustment Expenses     (pg.4)

It is again recommended, as was in the prior examination report, that the Company settle its
reinsurance balances payable due to the Hospital Trust for Workers' Compensation in a
timely manner.

REINSURANCE          (pg.21)

The examination recommends that the Company update its general interrogatories page to
properly reflect their largest net aggregate amount insured in anyone risk.

BONDS AND STOCKS (pg. 33)

It is recommended by this examination that the Company properly complete Schedule E -
Part 3 - Special Deposits in future annual statement filings.

AGGREGATE WRITE-INS FOR OTHER THAN INVESTED ASSETS                           (pg.34)

The Company reported a balance for aggregate write-ins for other than invested assets of
$42,307,139 that was $425,000 more than the amount as determined by this examination of
$41,882,139.

The examination recommends that the Company write-off any NJPLIGA balances that have
remained outstanding for more than two years in future financial statement filings.

LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES                      (pg.35)

The Company reported a net liability for loss and loss adjustment expenses of $616,738,201
at December 31, 2005 which was $17,932,000 less than the amount determined by this
examination of $634,670,201.

The examination recommends, based on the in-depth analysis performed by MBA Actuaries,
that the Company maintain loss and loss adjustment expense reserves at a level adequate to
meet il~ incurred loss and loss adjustment expense obligations.



                                           37
SUBSEQUENT EVENTS

For annual statement year ending 2006 and for all future annual statements, the New Jersey
Department of Banking and Insurance Office of Solvency Regulation Division prescribed
that Princeton Insurance Company reclassify all of its medical malpractice claims made
policies with the prepaid extended reporting period (tail) to occurrence policies.

For annual statement reporting purposes, this requires that all medical malpractice claims
made policies with the prepaid extended reporting period (tail) be reported under the line of
business Medical Malpractice - Occurrence on an accident year basis.

The examination verified that the Company has reclassified all medical malpractice claims
made policies with the prepaid extended reporting period (tail) transactions to the Medical
Malpractice - Occurrence line of business on an accident year basis in its fIled 2006 annual
statement.




                                            38
CONCLUSION

A regular statutory condition examination was conducted by the undersigned with the
assistance of fellow examiners of the New Jersey Department of Banking and Insurance
examination staff.

The examination and audit was conducted at Princeton Insurance Company's statutory
home office located in Princeton, New Jersey. The courteous assistance and cooperation of
the Company's officers and employees is acknowledged.


                                                         Respectfully Submitted,




                                                           Vincent Kaighn
                                                     Supervising Insurance Examiner




                                          39
                          PRINCETON INSURANCE COMPANY

I, Vincent Kaighn, do solemnly swear that the foregoing report of examination is hereby
represented to be a full and true statement of the condition and affairs of the subject
insurer as of December 31, 2005 to the best of my information, knowledge and belief.


                                                 Respectfully Submitted,




                                                     Vincent Kaighn
                                                    Examiner-In-Charge
                                         New Jersey Department of Banking & Insurance




State of New Jersey
County of Mercer


Subscribed and sworn to before me,
on this i I S "day of ,r., h e.. 2007.




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