United States Aircraft Insurance Group - Exam Report by ffq12461

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									                         REPORT ON EXAMINATION


                                 OF THE


                 UNITED STATES AIRCRAFT INSURANCE GROUP


                                 AS OF


                            NOVEMBER 30, 2002




DATE OF REPORT                                  JULY 9, 2004

EXAMINER                                        VERONICA DUNCAN BLACK
                                    TABLE OF CONTENTS


ITEM NO.                                                        PAGE NO.


   1       Scope of examination                                     2

   2.      Description of USAIG and CAIG                            3

           A.   Management                                          8
           B.   Territory and plan of operation                    11
           C.   Reinsurance                                        15
           D.   Financial reports                                  20
           E.   Accounts and records                               21
           F.   Significant operating ratios                       21

   3.      Financial statements                                    23

           A-1.   Balance sheet – USAIG hull and casualty          23
           A-2.   Underwriting and investment exhibit              24
           B-1.   Balance sheet – CAIG hull and casualty           25
           B-2.   Underwriting and investment exhibit              26
           C-1.   Balance sheet – USAIG satellite                  27
           C-2.   Underwriting and investment exhibit              28
           D-1.   Balance sheet – USAIG workers’ compensation      29
           D-2.   Underwriting and investment exhibit              30

   4.      Losses and loss adjustment expenses                     31

   5.      Market conduct activities                               31

   6.      Compliance with prior report on examination             31

   7.      Summary of comments and recommendations                 32
                                     STATE OF NEW YORK
                                   INSURANCE DEPARTMENT
                                      25 BEAVER STREET
                                  NEW YORK, NEW YORK 10004

                                                                                            July 9, 2004


Honorable Gregory V. Serio
Superintendent of Insurance
Albany, New York 12257

Sir:

         Pursuant to the requirements of the New York Insurance Law, and in compliance with the
instructions contained in Appointment Number 22108 dated November 28, 2003 attached hereto, I have
made an examination into the condition and affairs of United States Aircraft Insurance Group as of
November 30, 2002, and submit the following report thereon.


         Wherever the designations “USAIG” or “the Group” appears herein without qualification, they
should be understood to indicate United States Aircraft Insurance Group. Where the designation, “CAIG”
appears herein without qualification, it should be understood to indicate Canadian Aircraft Insurance
Group.     Where the designations “USAU” or “CAIM” or the “Managers” appear herein without
qualification, they should refer to as the United States Aviation Underwriters, Ltd., and the Canadian
Aviation Insurance Managers, Ltd., Managers for USAIG and CAIG, respectively.


         Wherever the term “Department” appears herein without qualification, it should be understood to
mean the New York Insurance Department.


         The examination was conducted at 199 Water Street, One Seaport Plaza, New York, New York
10038, where the executive, administrative and principal operational functions are performed and records
are maintained by the Managers, for both USAIG and CAIG.
                                             2
                              1.      SCOPE OF EXAMINATION


       The previous examination was conducted as of November 30, 1999.           This examination
covered the three year period from December 1, 1999 through November 30, 2002. Transactions
occurring subsequent to this period were reviewed where deemed appropriate by the examiner.

       A review or audit was also made of the following items as called for in the Examiners
Handbook of the National Association of Insurance Commissioners:




                                   History of Group
                                   Management and control
                                   Corporate records
                                   Territory and plan of operation
                                   Growth of the Group
                                   Business in force
                                   Loss experience
                                   Reinsurance
                                   Accounts and records




       A review was also made to ascertain what action was taken by the Group with regard to
comments in the prior report on examination.

       This report on examination is confined to financial statements and comments on those matters
which involve departure from the laws, regulations or rules, or which are deemed to require
explanation or description.
                                                 3

                         2.       DESCRIPTION OF USAIG AND CAIG



       The United States Aircraft Insurance Group was established in 1928 as a joint underwriting
association, composed of independent insurance companies under the management of a separate
corporation, United States Aviation Underwriters (“USAU”), a wholly owned subsidiary of General
Re Corporation, a Delaware corporation. The Group was formed for the purposes of writing all
forms of aviation insurance, which currently include hull physical damage and spacecraft, as well as
airport, aircraft and hangarkeeper liability and workers’ compensation coverages. Its counterpart
Canadian Aircraft Insurance Group (“CAIG”) was established in 1938 under the management of the
Canadian Aviation Insurance Managers, Ltd., (“CAIM”), a subsidiary of USAU, to manage the
aviation related business in Canada.


       Membership

       Membership in USAIG and CAIG during the period under examination was under four
separate management agreements: Hull (effective 1928), Casualty (effective 1944), Satellite
(effective 1981) and Workers’ Compensation (effective 1995), collectively called the “Members
Agreement.” The liability of USAIG members under the Members Agreement was joint and several.
Effective October 1, 2002, the Casualty and Hull Agreements were amended to change the members’
liability to several only.    Similar amendments were added to the Workers’ Compensation and
Satellite Agreements in 2003. Effective January 1, 2004, the Casualty and Hull Agreements were
superseded on a prospective basis by the current USAIG Aviation Group Agreement and CAIG
Aviation Agreement (the “2004 Agreements”)

       These agreements specify the relationship of the Managers and members of the group and
specify the type of insurance coverage to be written as well as the management services to be
provided by USAU.

       Membership to a group requires approval by a majority of the current members as well as a
subscription to the agreement for which the membership is being applied for. Members of the group
who own or control other insurance companies may have such companies recognized as associate
members. The associate member, however, will not have the right to participation in any group nor
any rights or liability under the agreements. For the purpose of the agreements, any policy issued or
                                               4
any obligation in the name of any associate member shall be deemed the policy or obligation of the
member company sponsoring such associate member.

        Under the agreements in effect during the period of examination, if any member defaults in
the performance of any of its obligations under any of the members’ agreements, or if it was
proceeded against as insolvent or placed in liquidation, receivership or rehabilitation, it would be
deemed a defaulting member.         The defaulting member’s participation in current and future
commitments shall be assumed by the remaining members in the respective proportions that their
individual net participations therein bear to the aggregate net participation of all the remaining
members.      The defaulting member is obligated to: (a) repay the unearned premiums on all
outstanding policies net as to reinsurance ceded and other credits and; (b) pay all of its obligations
which are assumed by the remaining members. Each policy of a defaulting member shall be replaced
by the Managers with a policy of one or more of the remaining members. The 2002 and 2003
amendments and the 2004 Agreements modified the obligations of members remaining in USAIG
after a defaulting member leaves to be consistent with the change from joint and several liability to
several liability.

        Any member may retire from any agreement by giving at least 180 days prior written notice
to the remaining members and the Managers. All liability assumed by such member during its active
membership shall continue in full force and effect, provided that the remaining members exercise one
of three options: (a) assume all unexpired portions of the retiring member’s liability under all
outstanding risks, subject to provision 2 of the agreement; (b) assume total liability of the retiring
member for losses already incurred in addition to exercise option (a), subject to provision 3 of the
agreement and; (c) assume unexpired portion of all the retiring member’s liability under all business
for a term longer than one year, as of any anniversary prior to the renewal date of each policy, subject
to provision 2 of the agreement.

        As of November 30, 2002, the memberships in the four members’ agreements were as
follows:
                                                  5

       Hull and Casualty Group

Members                                                                   Percentage of Participation

                                                                         USAIG               CAIG
ACE American Insurance Company                                           20.00%               0.00%
ACE INA Insurance Company                                                 0.00               20.00
Cincinnati Insurance Company                                             10.00               10.00
Hartford Fire Insurance Company                                          20.00               20.00
Liberty Mutual Insurance Company                                         17.00               17.00
Wesco-Financial Insurance Company                                        13.00               13.00
Zurich American Insurance Company                                        20.00               20.00
Totals                                                                  100.00%             100.00%


       Satellite Group

Members                                                                   Percentage of Participation

Zurich Insurance Company                                                          60.00%
Liberty Mutual Insurance Company                                                  40.00
Total                                                                            100.00%



       Workers’ Compensation Group

Members                                                              Percentage of Participation

Cincinnati Insurance Company                                                     10.00%
Zurich Insurance Company                                                          8.00
Employer Mutual Insurance Company                                                33.00
Wesco-Financial Insurance Company                                                 3.00
Liberty Mutual Insurance Company                                                 33.00
St. Paul Fire and Marine Insurance Company                                       13.00
Total                                                                           100.00%


       Security Agreement

       Included in all three management agreements are security agreements under which member
companies are obligated to establish and maintain security deposits in a designated Depository for the
basic purpose of providing security for the performances of obligations of each member, to other
members and to the managers. Each member is required to deposit funds (cash, bonds or corporate
equity securities which are part of the Standard and Poors 100) equal to its proportionate share of net
                                                   6
liabilities, which is defined as outstanding reserves for losses including Incurred But Not Reported
(“IBNR”), plus reserves for unearned premiums.

       Effective January 1, 2003, the Group established Financial Security Guidelines setting forth
the required AM Best and Standard and Poor’s ratings and statutory surplus requirements for member
companies as well as its reinsurance companies. Each member must maintain a financial condition
rating of A from Best Rating and Standards and Poor’s, respectively, and statutory surplus of $1
billion or more. Each reinsurer must maintain a financial condition rating of A from Best Rating and
Standards and Poor’s, respectively, and as statutory surplus of at least $300 million.

       The security agreement requires each current and former member company meeting the
financial condition rating and surplus requirement to fund a trust account at a depository bank. Chase
Bank was appointed as the depository of record under the agreements. Under the security agreement,
the Depository agrees to accept and hold all property received by it as one fund, but divided into sub-
accounts for the members. Each member has granted to the other members and to the Managers a
security interest in all assets constituting the principal held by the Depository.

       The following exhibits shows the net liabilities and applicable deposits (in thousands) as
reported by the Managers to the group members as of November 30, 2002 (net liabilities include
unearned premium reserves and loss adjustment expenses reduced by premium balances due
members and deposits with assuming reinsurers):

       USAIG and CAIG – Hull and Casualty

                                                                            Security     Excess of Deposit
Group Member                                           Net Liabilities      Deposit       over Liabilities

Cincinnati Insurance Company                            $   20,490         $   21,097         $ 607
Wesco-Financial Insurance Company                           20,018              9,229         (10,789)
Hartford Mutual Insurance Company                           50,052             41,680          (8,372)
Liberty Mutual Insurance Company                            36,114             31,279          (4,835)
Zurich American Insurance Company                           39,019             36,878          (2,141)
ACE American Insurance Company                              12,887              3,567          (9,320)
Retired Members                                            134,106            212,445          78,339
1938 Deposit                                                 1,273                995            (278)
Totals                                                   $ 313,959          $ 357,170         $43,211
                                             7

       USAIG – Satellite Group

                                                                   Security   Excess of Deposit
Group Member                                     Net Liabilities   Deposit     over Liabilities

Zurich American Insurance Company                   $ 2,682        $ 3,938        $ 1,256
Liberty Mutual Insurance Company                      3,358           3,986           628
Cincinnati Insurance Company                          3,606           5,484         1,878
St. Paul Fire and Marine Insurance Co.                5,680           6,622           942
Wesco-Financial Insurance Co.                             9             238           229
Retired Members                                      12,906          21,309         8,403
Totals                                             $ 28,241        $ 41,577      $ 13,336


       USAIG – Workers’ Compensation Group

                                                                   Security   Excess of Deposit
Group Member                                     Net Liabilities   Deposit     over Liabilities

Cincinnati Insurance Company                       $  8,592         $ 8,083        $ (529)
Zurich American Insurance Company                     3,273           2,521           (752)
Employers of Wausau                                  26,157          24,753         (1,404)
Wesco-Financial Insurance Company                     2,049           1,927           (122)
Liberty Mutual Insurance Group                       26,899          24,931         (1,968)
St. Paul Fire and Marine Insurance Co.               10,725           8,895         (1,830)
Retired Members                                       3,914          10,329          6,415
Totals                                             $ 81,609        $ 81,439        $ (170)
                                                 8
A.     Management

       Since inception, USAIG has been managed and supervised by USAU, a New York
corporation organized in 1928 and acquired by General Re Corp. headquartered in Stamford,
Connecticut in 1982. Since 1938, CAIG has been managed and supervised by CAIM, a Canadian
corporation, which is a wholly-owned subsidiary of USAU. With certain exceptions, the members
have vested USAU and CAIM with exclusive authority to bind insurance, settle claims and place
reinsurance for all of the business described in the members agreement.

       The Hull, Casualty, Satellite and Workers’ Compensation agreements each provide for an
Advisory Council to review the underwriting and administration of the Groups as conducted by the
Managers. The Advisory Council’s responsibility is to review the experience of the Group’s business
at regular intervals for the purpose of directing USAU and CAIM. Each member of the respective
group appoints a representative to the Advisory Councils (“Councils”). Since 1968, the Advisory
Councils for the Hull and Casualty groups have been combined into one. The representatives to the
Councils as of November 30, 2004 were as follows:

Hull and Casualty Group

Member                                      Representative                 Associate/Alternate

ACE American Insurance Company              John J. Lupica,                Robert J. Giarrusso,
                                            President                      Vice President
Cincinnati Insurance Company                Jody L. Wainscott,
                                            Vice President
Hartford Fire Insurance Company             Raymond Sprague,
                                            Executive Vice President
Liberty Mutual Insurance Company            Douglas L. Weymouth,           Richard W. Steele,
                                            Senior Vice President          Manager, Reinsurance
Wesco-Financial Insurance Company           Donald F. Wurster,
                                            Vice President
Zurich American Insurance Company           Pierre G. Laurin,              Michael Kerner,
                                            Senior Vice President and      Executive Vice President,
                                            Director or Reinsurance        Reinsurance
                                                     9
Satellite Group

Member                                                     Representative

Cincinnati Insurance Company                               Jody L. Wainscott,
                                                           Vice President
Liberty Mutual Insurance Company                           Douglas L. Weymouth,
                                                           Senior Vice President
St. Paul Fire and Marine Insurance Co.                     Kerry Spaven,
                                                           Vice President – Corporate Ceded
                                                            Reinsurance
Wesco-Financial Insurance Company                          Donald F. Wurster,
                                                           Vice President
Zurich American Insurance Company                          Pierre G. Laurin,
                                                           Senior Vice President and
                                                            Director of Reinsurance


Workers’ Compensation Group


Member                                                     Representative

Cincinnati Insurance Company                               Jody L. Wainscott,
                                                           Vice President
Employers Insurance of Wausau                              Thomas J. Daley,
                                                           Assistant Vice President
Liberty Mutual Insurance Company                           Douglas L. Weymouth,
                                                           Senior Vice President
St. Paul Fire and Marine Insurance Co.                     Kerry Spaven,
                                                           Vice President – Corporate Ceded
                                                            Reinsurance
Wesco-Financial Insurance Company                          Donald F. Wurster,
                                                           Vice President
Zurich American Insurance Company                          Pierre G. Laurin,
                                                           Senior Vice President and
                                                            Director of Reinsurance


       The directors and officers as of November 30, 2002 were as follows:

USAU
                                         Directors

Harold J. Clark                                           Michael L. Sweeney
William Barnett, Jr.                                      Leslie J. Davis
Timothy T. McCaffrey                                      William A. Welbourn
                                                 10

                                      Officers

Name                                                  Title
William Barnett, Jr.                                  Executive Vice President and Chief Financial
                                                       Officer
Anthony Bouscaren                                     Senior Vice President, Manufacturing and
                                                       Special Risks
Thomas Callahan                                       Senior Vice President, Reinsurance
Harold Clark                                          Chairman and Chief Executive Officer
Victor D’Avanzo                                       Senior Vice President, Eastern Department
                                                       Branch Manager
Leslie Davis                                          Senior Vice President, Secretary and General
                                                       Counsel
Dennis Doody                                          Senior Vice President, Client Services
Christopher T. Kunstadter                             Senior Vice President, Satellite
William Lichte                                        Senior Vice President, Reinsurance
Timothy T. McCaffrey                                  Assistant Secretary and Assistant General Counsel
David McKay                                           Senior Vice President, Airline and Manufacturing
                                                       Special Risks
Matthew McMahon                                       Vice President/ Treasurer and Finance
William McSwain                                       Senior Vice President, General Aviation
Russell Mirabile                                      Senior Vice President, Director of Claims
David Mulhall                                         Senior Vice President, General Aviation Chief
                                                       Financial Officer
Joseph Paino                                          Senior Vice President and Controller
John Pansy                                            Senior Vice President, Information Systems
Karen Rafferty                                        Senior Vice President, Human Resources
Michael Sweeney                                       President and Chief Operating Officer
Joseph Taccetta                                       Senior Vice President, Airlines
William A. Welbourn                                   Executive Vice President, General Aviation and
                                                       Workers’ Compensation

CAIM

       The sole director of CAIM is James G. Matthews.
       The officers of CAIM as of November 30, 2004 were as follows:
Name                                                  Title

Kyle A. Anderson                                      Vice President, Manager/CAIM
William Barnett, Jr.                                  Senior Vice President and Chief Financial Officer
Harold J. Clark                                       Chairman
James G. Matthews                                     Secretary
Joseph Paino                                          Controller
Michael L. Sweeney                                    President
Geoffrey D. Watkins                                   Vice President/CAIM
                                                 11
B.        Territory and Plan of Operation

          The members’ agreements authorize USAU and CAIM to transact the kinds of insurance
defined in each agreement:

Hull Agreement                                         Coverage

1. Hull insurance                                      Covering physical loss of or damage to or loss of
                                                       use of aircraft.

2. Personal effects and baggage insurance              Covering liability of aircraft owners or operators
                                                       for loss of or damage to personal effects or
                                                       baggage of passengers.

3. Hangarkeepers’ or other bailees’ liability          Covering liability of owner or operators of airport,
                                                       hangars or other aircraft facilities for loss or
                                                       damage to aircraft or other property in their
                                                       custody.

4. Aircraft spare parts                                Transportation floaters or endorsements to aircraft
                                                       hull policies covering aircraft spare parts, spare
                                                       engines and other necessary and customary spare
                                                       parts.

5. Freight and cargo liability insurance               Covering the liability of aircraft owners or
                                                       operators for loss of or damage to merchandise or
                                                       other cargo in their control.

6. Incidental coverages                                Customarily a part of umbrella or excess coverages
                                                       carried by aviation insureds.


          The authority of the managers with respect to any risk described above in paragraphs 1
through 3 is exclusive, while any risk described in paragraphs 4 through 6 above is non-exclusive and
may be written by members and associate members through their usual office or agency channels.
Members may also write reinsurance or excess insurance with respect to any aviation insurance risks,
unless such writing is in effect the same as writing of the primary insurance coverage of the risks
herein.


Casualty Agreement                                     Coverage

1. Aircraft liability                                  Covering all liability of insureds for bodily
                                                       injury, death or damage to property arising from
                                                       ownership, maintenance or use of aircraft.
                                                  12
Casualty Agreement                                     Coverage

2. Aviation indemnity and seat accident insurance      Covering death or injuries of persons insured.

3. Aviation accident insurance                         Covering death or injuries of pilots, other crew
                                                       members or technicians insured.

4. Workers’ compensation and employers’ liability      Covering workers’ compensation for employers
                                                       engaged principally in the aviation industry:

                                                         (a) for employers, other than manufacturers
                                                             engaged principally in the aviation industry
                                                         (b) for manufacturers engaged principally in the
                                                             aviation industry
                                                         (c) for employers not engaged principally in the
                                                             aviation industry, but who own or operate
                                                             for their own business or pleasure.

                                                       Effective January 1, 1995, USAIG has ceased
                                                       writing all new and renewal workers’
                                                       compensation business under this agreement.
                                                       Policy year 1994 and prior business will continue
                                                       to be handled as run-off business.

5. Hangarkeepers’ or other bailees’ liability          Covering liability of owners or operators of
                                                       airports, hangar, or other aircraft facilities for loss
                                                       of or damage to personal effects or baggage.

6. Personal effects and baggage insurance              Covering liability of aircraft owners or operations
                                                       for loss of or damage to personal effects or
                                                       baggage.

7. Airport liability                                   Covering all liabilities of insured for death of or
                                                       bodily injury to members of the public and for
                                                       damage to property arising out of the ownership,
                                                       rental maintenance or use of an airport.

8. Products’ liability and defective parts insurance   Covering liability of manufacturers of aircraft and
                                                       parts for bodily injury or loss of use or for other
                                                       damage caused by defective workmanship or
                                                       materials supplied by:
                                                        (a) manufacturers of aircraft
                                                        (b) manufacturers of aircraft engines
                                                        (c) manufacturers of aircraft propellers
                                                        (d) manufacturers of other aircraft accessories
                                                        (e) aircraft repair stations

9. General liability                                   Covering general liability for insureds:
                                                        (a) other than manufacturers and
                                                        (b) Manufacturers engaged principally in the
                                                   13
Casualty Agreement                                       Coverage

                                                          aviation industry.

10. Automobile liability and physical damage             Covering automobile liability and physical
                                                         damage for insurers engaged principally in the
                                                         aviation industry.

11. Contractual liability insurance                      Covering contractual liability insurance for the
                                                         indemnification provided for in Article XVII of
                                                         the Casualty Agreement and Article XIV of the
                                                         Hull Agreement on such terms and with such
                                                         limits as the member shall authorize.

12. Incidental coverages                                 Customarily a part of umbrella or excess
                                                         coverages by aviation insureds.

15. Freight and Cargo liability                          Covering the liability of aircraft owners or
                                                         operators for loss of or damage to merchandise in
                                                         their control or custody.


       The authority of the managers with respect to any risk described in the above paragraphs 1
through 3, 4(a), 5, 6, 8(a) – (d) and 9(a) is exclusive; while any risk described in paragraph 4(b) and
(c), 7, 8(e) – (d), 9(b), 10, 12 and 15 is non-exclusive and may be written by the members and
associate members through the usual agency channels. Members may also write reinsurance or
excess insurance with respect to any aviation insurance risks, unless such writing in effect is the same
as the writing of the primary insurance coverage of the risks herein.

       Satellite Agreement

       The satellite agreement grants USAU exclusive authority to transact business of insurance
covering loss of or damage to the use of launch vehicle, spacecraft or satellite (including cargo or
freight carried therein) and such other coverages related to said losses or damages as may be devised
to meet the requirements of owners, operators or users of launch vehicles, spacecraft or satellites.


       Workers’ Compensation Agreement

       The workers’ compensation agreement grants USAU exclusive authority to transact the
business of insurance covering losses for employers engaged principally in the aviation industry,
other than manufacturers and airlines operating large aircraft. For manufacturers engaged principally
in the aviation industry, the authority of USAU shall be limited to reinsuring the flight hazard under
                                               14
any risk written by any member which, at its option is offered to the manager for reinsurance. For
employers not engaged principally in the aviation industry but who own or operate for their own
business or pleasure one or more aircraft or whose employees are subject to substantial aviation
hazard and for airlines operating large aircraft, the authority of the managers shall be non-exclusive.
Members may also write reinsurance or excess insurance with respect to any aviation insurance risks,
unless such writing is in effect the same as writing of the primary insurance coverage of the risks
herein.

          Direct business is produced by brokers and licensed agents of member and associate member
companies, whereas reinsurance is obtained through intermediaries.

          The insurance operations of USAU and CAIM are conducted in New York (Home Office)
and through offices located in the following cities of the United States and Canada:
          Atlanta, GA                       Los Angeles, CA                     San Francisco, CA
          Chicago, IL                       Memphis, TN                         Seattle, WA
          Dallas, TX                        Minneapolis, MN                     St. Louis, MO
          Denver, CO                        Pittsburgh, PA                      Toledo, OH
          Houston, TX                                                           Wichita, KS

          Toronto, Canada                   Vancouver, Canada


          The following schedule shows the direct premiums written by the Group under the Hull and
Casualty (U.S only), Satellite and Workers’ Compensation Agreement by fiscal year during the
period covered by this examination, 2000 – 2002 in New York State and countrywide and the
percentage which the New York State premiums bear to the countrywide premiums:



          Hull and Casualty Agreement

                                  DIRECT PREMIUMS WRITTEN

                                                                      Percentage of
                                                                      New York State
                        Year       New York         Countrywide       to Countrywide
                        2000     $10,837,969       $332,564,624            3.26%
                        2001     $11,771,655       $411,521,136            2.86%
                        2002     $22,536,432       $734,763,133            3.07%
                                                 15
Satellite Agreement


                                 DIRECT PREMIUMS WRITTEN

                                                                     Percentage of
                                                                     New York State
                      Year        New York         Countrywide       to Countrywide
                      2000        $        0       $43,049,288             0.00%
                      2001        $ 53,999         $ 9,569,679             0.56%
                      2002          $187,056       $17,887,500             1.05%


       Workers’ Compensation Agreement

                                 DIRECT PREMIUMS WRITTEN

                                                                     Percentage of
                                                                     New York State
                      Year       New York          Countrywide       to Countrywide
                      2000      $1,138,070         $35,149,007            3.24%
                      2001      $1,575,204         $45,240,773            3.48%
                      2002      $1,364,308         $54,068,446            2.52%


C.     Reinsurance

       Assumed

       During the examination period, USAIG assumed less than 5% of the total gross premiums
written. The majority of business assumed by the Group was the international general aviation
business that, due to local restrictions, must be written locally and assumed by the Group. There was
no assumed airlines and products business. It was noted that for the examination period ended
November 30, 2002, USAIG no longer participates on assumed reinsurance treaty business.

       Ceded

       The high value aviation risks necessitate a comprehensive ceded reinsurance program to
reduce the limit of exposure. Reinsurance has been ceded to various authorized and unauthorized
companies by means of quota share, excess of loss and catastrophe treaties. For fiscal year 2002,
USAIG’s maximum retention for the hull and casualty and the satellite groups were as follows:
$162,500,000 and $43,500,000, respectively.
                                               16
       The examiner reviewed all ceded reinsurance contracts in effect at November 30, 2002. The
contracts all contained the required standard clauses including insolvency clauses meeting the
requirements of Section 1308 of the New York Insurance Law.

       A review of the workers’ compensation contract showed that the contract included an offset
clause that was not in compliance with Section 7427 of the New York Insurance Law. The clause in
the contract reads as follows:

         “The Company and the Reinsurer may offset any balances or amounts due
         from one party to the other under this Agreement or any other agreement
         heretofore or hereafter entered into between the Company and the
         Reinsurer.”


       It is recommended that the Group amend the captioned agreement to include the following
wording, “In the event of the insolvency of either party to this agreement then offset shall be allowed
to the extent permitted by the provisions of Section 7427 of the New York Insurance Law”.

       A review of the contracts also show that all of the contracts except for two (seventh layer of
the catastrophe excess of loss and the aviation liability treaty) were not signed by any of the
participating reinsurers to the contract.

       Statements of Statutory Accounting Principles (“SSAP 62”) of the National Association of
Insurance Commissioners Accounting Practices and Procedures Manual states the following:

       “… if a contract entered into, renewed or amended on or after January 1, 1994 has
       not been finalized, reduced to a written form and signed by the parties within nine
       months after commencement of the policy period covered by the reinsurance
       arrangement, the arrangement is presumed to be retroactive and must be accounted
       for as a retrospective reinsurance contract.”


       A review of the Group’s 2002 ceded premiums and losses in regard to its business shows that
the amounts involved in restating the accounting of the contract were not materially significant to
warrant an examination change in this report.

       It is recommended that the Group comply with SSAP 62 of the National Association of
Insurance Commissioners Accounting Practices and Procedures Manual regarding the signing of
reinsurance agreements within nine months of the commencement date. The agreements not signed
within this time period must be accounted for as a retrospective reinsurance contract.
                                            17
      USAIG had the following ceded reinsurance program in effect at November 30, 2002 for the
Hull and Casualty Group:


 Type of Treaty                            Coverage and Cession

 Quota Share Program

 Western Hemisphere                        30% quota share of aircraft hull and casualty risk, subject to
 65.50% Authorized                         a maximum cession of up to $150,000,000 any one aircraft
 34.50% Unauthorized                       or risks for business insured within North and South
                                           America

 Eastern Hemisphere                        30% quota share of aircraft hull and casualty covering
 65.50% Authorized                         general aviation business, subject to a maximum cession of
 34.50% Unauthorized                       $150,000,000 any one aircraft or risk for business insured
                                           outside of North and South America

 Catastrophe Excess of Loss Program
 7 layers

 Layers 1- 6                               Layers 1- 6:
 Minimum of 5% and maximum of 72%          Limit of $160,000,000 excess of $5,000,000 ultimate net
 authorized                                loss each and every occurrence covering hull and casualty
 Minimum of 5% and maximum of 15%          losses
 unauthorized

 Layer 7                                   Layer 7
 100% Unauthorized                         Section A:
                                           Limit of $30,000,000 maximum loss payable to protect
                                           USAIG net line only excess of original loss $750,000,000.
                                           (This section affords coverage for policy year 2000 airline
                                           hull and casualty business only for the period October 25,
                                           2001 to December 31, 2001).

                                           Section B:
                                           Limit of $30,000,000 excess $165,000,000 excess
                                           underlying per occurrence.
                                           (This section affords coverage for all policy year 2001 and
                                           2002 business for the period January 1, 2002 to December
                                           31, 2002).

 Third Party Aviation War Excess of Loss   Limit of $250,000,000 excess $50,000,000 ultimate net loss
                                           combined single limit any one occurrence, and in the
 29.29% Authorized                         aggregate bodily injury and property damage liability
 74.71% Unauthorized                       arising out of the use of aircraft.
                                              18
Type of Treaty                               Coverage and Cession

CURE Program (Credit Underwriting            War Liability:
Results Equitably)                           Limit of $10,000,000 ultimate net loss in any one
                                             person/any one accident/any one aircraft in respect of any
35.00% Authorized                            one original assured.
65.00% Unauthorized
                                             Horizontal Products:
                                             Limit of $4,300,000 excess $700,000 each occurrence.

                                             Manufacturing Hull:
                                             Limit of $4,300,000 excess $700,000 ultimate net loss each
                                             and every aircraft, each and every loss occurrence.

                                             Hull Specific Property:
                                             Limit of $7,000,000 excess $3,000,000 each and every
                                             aircraft, each and every loss occurrence.

                                             Excess Liabilities (General Aviation and Airport Liability):
                                             Limit of $3,500,000 excess $3,500,000 each
                                             cession/occurrence.

                                             Reinstatement Premium Protection:
                                             Reinstatement protection coverage up to $10,000,000 in
                                             respect of any loss.

                                             General Aviation Hull War:
                                             100% quota share of original policy limits on all business
                                             subject to a maximum original policy limit of $10,000,000
                                             any one aircraft.

                                             Catastrophe Excess of Loss Program:
                                             Limit of $10,000,000 ultimate net loss in respect any loss
                                             occurrence for the second, third and fourth excess of loss
                                             contract, which afford coverage of $85,000,000 excess
                                             $20,000,000.


     The following treaties protect the Group members and their quota share reinsurers:

Type of Treaty                               Coverage and Cession

Excess of Loss Program

General Aviation Hull Risk                   Limit of 40,000,000 excess of $10,000,000 each
                                             occurrence, any one aircraft for western hemisphere risks,
72.50% Authorized                            but in respect to eastern hemisphere risk where
27.50% Unauthorized                          USAIG/CAIG does not write 100%, then the maximum
                                             limit thereon is $20,000,000 excess of $10,000,000.
                                        19
Type of Treaty                         Coverage and Cession

General Aviation Hull War Risk         Limit of $40,000,000 excess of $10,000,000 each
                                       occurrence, any one aircraft for western hemisphere risks,
95.00% Authorized                      but in respect to eastern hemisphere risk where
 5.00% Unauthorized                    USAIG/CAIG does not write 100%, then the maximum
                                       limit thereon is $30,000,000.

Aircraft and Airport Legal Liability   Western Hemisphere
                                       Section 1:
62.50% Authorized                      Limit of $90,000,000 excess of $10,000,000 each
37.50% Unauthorized                    cession/aircraft/occurrence covering western hemisphere
                                       general aviation non-commuter aircraft liability business.

                                       Section 2:
                                       Limit of $90,000,000 excess of $10,000,000 each
                                       cession/occurrence covering western hemisphere airport
                                       liability business.

                                       Eastern Hemisphere
                                       Limit of $90,000,000 excess of $10,000,000 each
                                       cession/aircraft/occurrence covering eastern hemisphere
                                       general aviation commuter aircraft liability business.
Excess of Loss Program

Aircraft and Airport Legal Liability   Western Hemisphere
                                       Section 1:
55.00% Authorized                      Limit of $200,000,000 excess of $100,000,000 each
45.00% Unauthorized                    cession/aircraft/occurrence covering western hemisphere
                                       general aviation non-commuter aircraft liability business.

                                       Section 2:
                                       Limit of $200,000,000 excess of $100,000,000 each
                                       cession/occurrence covering western hemisphere airport
                                       liability business.

                                       Eastern Hemisphere
                                       Limit of $200,000,000 excess of $100,000,000 each
                                       cession/aircraft/occurrence covering eastern hemisphere
                                       general aviation non-commuter aircraft liability business.

Aviation Liability                     Limit of $200,000,000 excess $300,000,000 each
                                       cession/aircraft/occurrence excess covering western
100% Authorized                        hemisphere general aviation aircraft liability business.


Profit Commission Protection           This treaty protects the profit commission provision
                                       included in the first layer of the aircraft and airport legal
72.50% Authorized                      liability treaty, the general aviation hull risk, and the
27.50% Unauthorized                    general aviation hull war risk treaty.
                                           20
       USAIG had the following reinsurance treaties in effect for the Satellite and Workers’
Compensation Group:

Type of Treaty                              Coverage and Cession

Satellite Group

Aerospace Quota Share Treaty                Limit of 66.60% of $43,500,000 on all insurance written
                                            under one or more policies against the same peril on the
36.14% Authorized                           same risk based on the sum of all insurance against the
63.84% Unauthorized                         same peril and the same risk.

Workers’ Compensation Group
Workers’ Compensation Excess of Loss
2 Layers
First Layer                                 First Layer
100% Unauthorized                           Limit of $4,000,000 excess of $1,000,000 ultimate net loss,
                                            each and every occurrence.

Second Layer                                Second Layer
40.00% Authorized                           Limit of $5,000,000 excess of $5,000,000 ultimate net loss,
60.00% Unauthorized                         each and every occurrence, subject to maximum any one
                                            life, any one loss occurrence.


D.     Financial Reports


       Financial reports submitted annually on a fiscal year basis by the Managers to the member
companies consist primarily of the statement of assets and liabilities. The Managers also submit
monthly statistical data on premiums and losses in order to provide information needed by the
members to produce quarterly statements.     Balance sheets and income statements are prepared
annually on a fiscal year basis mainly for the purposes of annual audits by the Groups’ independent
certified public accountant. The financial statements included in this report on examination are
prepared from the foregoing reports and presented in a format conforming to the NAIC Property and
Casualty Companies Annual Statement Instructions.
                                                   21
E.       Accounts and Records


         While conducting a pre-examination review of the Company at the Department, the examiner
noted that the Group did not file any financial information with the Department for the period under
examination.

         It is recommended that the Group file its annual audited financial reports with the Department
as an accommodation to allow the Department to monitor the operations of the Group on an annual
basis.

F.       Significant Operating Ratios

         The underwriting ratios presented below are earned/incurred basis and encompass a three-year
period covered by this examination:

USAIG – Hull and Casualty

                                                           Amounts                   Ratios

Losses and loss adjustment expense incurred             $ 456,179,600                72.34%
Other underwriting expenses                               166,562,081                26.41
Net underwriting gain (loss)                                7,822,557                 1.24

Premiums earned                                         $ 630,564,238               100.00%

CAIG – Hull and Casualty

                                                           Amounts                   Ratios

Losses and loss adjustment expenses incurred             $ 23,597,183                78.63%
Other underwriting expenses                                 7,602,641                25.33
Net underwriting gain (loss)                               (1,189,059)               (3.96)

Premiums earned                                          $ 30,010,765               100.00%

USAIG - Satellite

                                                           Amounts                   Ratios

Losses and loss adjustment expenses incurred             $ 47,807,348               107.33%
Other underwriting expenses                                 4,808,265                10.79
Net underwriting gain (loss)                               (8,072,065)              (18.12)

Premiums earned                                          $ 44,543,543               100.00%
                                               22
USAIG – Workers’ Compensation

                                                       Amounts      Ratios

Losses and loss adjustment expenses incurred         $ 82,176,923   68.36%
Other underwriting expenses                            37,979,156   31.59
Net underwriting gain (loss)                               57,263   00.05

Premiums earned                                     $ 120,213,342   100.00%
                                               23
                                 3.     FINANCIAL STATEMENTS

         The Managers do not retain assets corresponding to the amount of the liabilities; therefore, the
financial statements contained in this report show a deficit or an excess of liabilities over assets. The
member companies are held accountable for the deficiency that exists.

A-1.     Balance Sheet – USAIG Hull and Casualty

         The following shows the assets, liabilities and surplus as regards policyholders as determined
by this examination as of November 30, 2002:
                                                  Ledger            Not-Admitted          Admitted
Assets                                            Assets               Assets              Assets

Cash and short-term investments               $ 113,264,381                           $ 113,264,381
Premiums and agents’ balances in
 course of collection                            74,262,387         $ 6,760,281          67,502,106
Accrued retrospective premiums                    4,183,130                               4,183,130
Receivable from parent, subsidiaries
 and affiliates                                   (7,480,470)                             (7,480,470)
Reinsurance recoverable on loss
 adjustment expense payments                     (35,425,129)                            (35,425,129)
Amounts billed and receivable under
 high deductible policies                          5,634,967        ___________            5,634,967

Total assets                                  $ 154,439,266          $ 6,760,281      $ 147,678,985

Liabilities                                           Per
                                                   Examination        Per Group         Difference

Losses and loss adjustment expenses                $ 386,918,838     $ 286,864,838     $(100,054,000)
Commissions payable                                    7,018,331         7,018,331
Federal and foreign income taxes                         254,553           254,553
Unearned premiums                                    109,996,850       109,996,850
Loss advances payments                                13,606,041        13,606,041
Provision for reinsurance                             22,523,037        22,523,037
Drafts payable                                         2,109,807         2,109,807
Other liabilities                                      3,253,890         3,253,890
Reinsurance reinstated premiums                       22,681,373        22,681,373                   0

Total liabilities                                  $ 568,362,720     $ 468,308,720     $(100,054,000)

Accountability

Accountability (deficit) of member companies        (420,683,735)     (320,629,735)     (100,054,000)

Total liabilities and member companies’
accountability                                     $ 147,678,985     $ 147,678,985
                                                 24
A-2.   Underwriting and Investment Exhibit

       Accountability for deficiency by members increased $186,137,402 during the three-year
examination period, December 1, 1999 through November 30, 2002, is detailed below:

                                       Statement of Income
Underwriting Income

Premiums earned                                                                $630,564,238
Deductions:
  Losses and loss adjustment expenses incurred               $556,233,600
  Other underwriting expenses incurred                        166,562,081

Total underwriting deductions                                                   722,795,681

Net underwriting gain or (loss)                                                 $(92,231,443)

Other Income

Interest and other income                                      $4,712,268
Other expenses                                                   (380,227)

Net gain from other income                                                         4,332,041

Net Income before federal income taxes                                          $(87,899,402)

Federal income taxes incurred                                                              0

Net Income                                                                      $(87,899,402)

                                      Member Companies’Accountability

Accountability of member companies per report
 on examination as of November 30, 1999                                                  $ (229,143,065)
Reclassification for financial presentation                                                  (5,403,268)
Adjusted Accountability for prior period                                                 $ (234,546,333)
                                                          Gains           Losses
Net income (loss)                                                       $87,899,402
Account Settlements                                                      99,066,000
Change in non-admitted assets                          $ 5,941,000
Change in provision for reinsurance                                        5,069,000
Foreign currency translation                                                  44,000
                                                      ____________    ____________
Total gains and losses                                  $ 5,941,000    $ 192,078,402

Change in accountability                                                                   (186,137,402)

Accountability of member companies per report
  on examination as of November 30, 2002                                                 $ (420,683,735)
                                                   25

B-1.     Balance Sheet – CAIG Hull and Casualty


         Canadian operations are reported in Canadian currency but are adjusted for the difference in
the value of United States currency through the “Foreign Exchange Rate Adjustment” account. The
conversion rate as of November 30, 2002 was US $.6391 to Can. $1.00.

         The following balance sheet shows the assets and liabilities as determined by the examination
as of November 30, 2002:

                                                 Ledger       Not-Admitted          Admitted
Assets                                           Assets          Assets              Assets

Cash and short-term investments              $ 4,096,696                          $ 4,096,696
Premiums and agents’ balances in
  course of collection                           2,771,699          $35,647          2,736,052
Receivable from parent, subsidiaries
  and affiliates                                  636,424                             636,424
Reinsurance recoverable on loss
  adjustment expense payments                     242,021                             242,021
Miscellaneous receivables                           7,846          _______              7,846

Total assets                                 $ 7,754,686            $35,647       $ 7,719,039


Liabilities

Losses and loss adjustment expenses                                              $ 12,238,814
Commissions payable                                                                   393,016
Unearned premiums                                                                   5,413,798
Provision for reinsurance                                                           3,334,081
Drafts payable                                                                        254,148
Payable to parent, subsidiaries and affiliates                                        378,975

Total liabilities                                                                $ 22,012,832

Accountability

Accountability (deficit) of member companies                                      (14,288,795)

Total liabilities and member companies’ accountability                            $ 7,719,039
                                                  26
B-2.   Underwriting and Investment Exhibit

       Accountability for deficiency by members increased $1,523,100 during the three-year
examination period, December 1, 1999 through November 30, 2002, is detailed below:
                                      Statement of Income
Underwriting Income

Premiums earned                                                                  $30,010,765
Deductions:
  Losses and loss adjustment expenses incurred                $23,597,183
  Other underwriting expenses incurred                          7,602,641

Total underwriting deductions                                                     31,199,824

Net underwriting gain or (loss)                                                  $(1,189,059)

Other Income

Interest and other income                                          $105,959
Other expenses                                                            0

Net gain from other income                                                             105,959

Net Income before federal income taxes                                           $(1,083,100)

Federal income taxes incurred                                                               0

Net Income (Loss)                                                                $(1,083,100)


                                  Member Companies’ Accountability

Accountability of member companies per report
 on examination as of November 30, 1999                                                  U.S. $ (14,167,598)
Reclassification for financial presentation                                                       1,402,752
Adjusted Accountability for prior period                                                      $ (12,764,846)
                                                           Gains          Losses
Net income (loss)                                                        $ 1,083,100
Account Settlements                                                          941,000
Change in non-admitted assets                                                360,000
Change in provision for reinsurance                                          125,000
Foreign currency translation                           $   986,000
                                                        _________         _________
Total gains and losses                                 $ 986,000         $ 2,509,100

Change in accountability                                                                         (1,523,100)

Accountability of member companies, per report
 on examination as of November 30, 2002                                                      $ (14,287,946)
                                                  27
C-1.     Balance Sheet – USAIG Satellite

         The following balance sheet shows the assets and liabilities as determined by the examination
as of November 30, 2002:

                                                Ledger         Not-Admitted          Admitted
Assets                                          Assets            Assets              Assets

Cash and short-term investments              $ 2,174,340                           $ 2,174,340
Premiums and agents’ balances in
 course of collection                            375,000                               375,000
Reinsurance recoverable on loss
 adjustment expense payments                   2,955,856        __________           2,955,856

Total assets                                 $ 5,505,327        $          0       $ 5,505,327


Liabilities

Losses and loss adjustment expenses                                              $ 23,847,390
Commissions payable                                                                   125,926
Unearned premiums                                                                   4,581,786
Advance premiums                                                                    3,626,165
Provision for reinsurance                                                          10,734,196
Other liabilities                                                                   1,626,217

Total liabilities                                                                $ 44,451,680

Accountability

Accountability (deficit) of member companies                                       (39,036,353)

Total liabilities and member companies’ accountability                             $ 5,505,327
                                                 28
C-2.   Underwriting and Investment Exhibit
       Accountability for deficiency by members decreased $17,398,162 during the three-year
examination period, December 1, 1999 through November 30, 2002, is detailed below:

                                       Statement of Income
Underwriting Income

Premiums earned                                                                    $44,543,548
Deductions:
  Losses and loss adjustment expenses incurred               $47,807,348
  Other underwriting expenses incurred                         4,808,265

Total underwriting deductions                                                          52,615,613

Net underwriting gain or (loss)                                                    $(8,072,065)

Other Income

Interest and other income                                         $509,227
Other expenses                                                           0

Net gain from other income                                                               509,227

Net Income before federal income taxes                                             $(7,562,838)
Federal income taxes incurred                                                                0
Net income (Loss)                                                                  $(7,562,838)


                                      Member Companies Accountability

Accountability of member companies November                                                 $ (56,626,122)
 30, 1999 per prior report on examination
Reclassification for financial presentation                                                       191,873
Adjusted Accountability for prior period                                                    $ (56,434,249)

                                                          Gains               Losses

Net income (loss)                                                      $     7,562,838
Account Settlements                                   $ 12,409,000
Change in provision for reinsurance                     12,552,000
                                                        _________        __________
Total gains and losses                                $ 24,961,000      $ 7,562,838

Change in accountability                                                                       17,398,162

Accountability of member companies, per report
 on examination as of November 30, 2002                                                     $ (39,036,087)
                                             29
D-1.     Balance Sheet – USAIG Workers’ Compensation

         The following balance sheet shows the assets and liabilities as determined by the examination
as of November 30, 2002:

                                                         Ledger         Not-Admitted       Admitted
Assets                                                   Assets            Assets           Assets

Cash and short-term investments                        $ 5,453,330                        $ 5,453,330
Premiums and agents’ balances in course of
  collection                                            10,482,571       $3,874,321          6,608,250
Accrued retrospective premiums                          15,592,500                          15,592,500
Receivable from parent, subsidiaries and
  affiliates                                             9,008,396      __________           9,008,396

Total assets                                         $ 40,536,797       $ 3,874,321      $ 36,662,476



Liabilities                                             Per
                                                     Examination         Per Group        Difference
Liabilities

Losses and loss adjustment expenses                   $ 82,086,529      $ 71,474,529 $ (10,612,000)
Commissions payable                                        452,790           452,790
Taxes, licenses and fees                                (1,998,028)       (1,998,028)
Unearned premiums                                       15,781,470        15,781,470
Other liabilities                                        3,393,793         3,393,793             0

Total liabilities                                     $ 99,716,554      $ 89,104,554     $ (10,612,000)

Accountability

Accountability (deficit) of member companies            (63,054,078)      (52,442,078)     (10,612,000)

Total liabilities and member companies
accountability                                        $ 36,662,476      $ 36,662,476
                                                 30
D-2.   Underwriting and Investment Exhibit

       Accountability for deficiency by members increased $29,140,755 during the three-year
examination period, December 1, 1999 through November 30, 2002, is detailed below:
                                   Statement of Income

Underwriting Income

Premiums earned                                                               $ 120,213,342
Deductions:
  Losses and loss adjustment expenses incurred             $ 92,788,923
  Other underwriting expenses incurred                       37,979,156

Total underwriting deductions                                                   130,768,079

Net underwriting gain or (loss)                                               $ (10,554,737)

Other Income

Interest and other income                                  $     140,982
Other expenses                                                         0

Net gain from other income                                                            140,982

Net income before federal income taxes                                        $ (10,413,755)

Federal income taxes incurred                                                              0

Net income (Loss)                                                             $ (10,413,755)


                                  Member Companies’ Accountability

Accountability of member companies November
 30, 1999 per prior report on examination                                                $ (36,128,817)
Reclassification for financial presentation                                                  2,215,494
Adjusted Accountability for prior period                                                 $ (33,913,323)
                                                         Gains             Losses

Net income (loss)                                          $     0    $ 10,413,755
Account Settlements                                                      18,267,000
Change in non-admitted assets                                               460,000
                                                           _____      ___________
Total gains and losses                                      $ 0        $ 29,140,755

Change in accountability                                                                   (29,140,755)

Accountability of member companies, per report
 on examination as of November 30, 2002                                                  $ (63,054,078)
                                             31
                      4.        LOSSES AND LOSS ADJUSTMENT EXPENSES


       The examination liability for the USAIG Hull and Casualty of $386,918,838 is $100,054,000
more than the $286,864,838 reported by the Group in its November 30, 2002, annual statement. The
examination liability for the USAIG Workers’ Compensation of $ 82,086,529 is $ 10,612,000 more
than the $ 71,474,529 reported by the Group in its November 30, 2002, annual statement. The
examination change is based upon a review by the Department’s Actuary that indicated that the
Groups booked IBNR reserves for the Hull and Casualty and Workers Compensation Groups were
greater than the Groups carried reserves at November 30, 2003.

       No changes have been made to the captioned items as reported by Group to the member
companies for the CAIG Hull and Casualty and Satellite Groups.

       The examination analysis was conducted in accordance with generally accepted actuarial
principles and practices and was based on statistical information contained in the Companies internal
records. The examiner reviewed historical loss and loss adjustment expense maintained by the
Managers, as well as reports on actuarial analysis performed by the Group’s Actuary and an
independent actuarial consultant.



                           5.       MARKET CONDUCT ACTIVITIES


       In the course of this examination, a review was made of the manner in which the Group
conducts its business practices and fulfills its contractual obligations to policyholders and claimants.
The review was general in nature and is not to be construed to encompass the more precise scope of a
market conduct investigation, which is the responsibility of the Market Conduct Unit of the Property
Bureau. No problems were noted.



             6.     COMPLIANCE WITH PRIOR REPORT ON EXAMINATION


       The prior report on examination contained no comments or recommendations.
                                 32
          7.     SUMMARY OF COMMENTS AND RECOMMENDATIONS


ITEM                                                                               PAGE NO.

A.         Reinsurance

     i.    It is recommended that the Group amend its first and second workers’       16
           compensation excess of loss agreements to include the appropriate
           offset language pursuant to Section 7427 of the New York Insurance
           Law.

  ii.      It is recommended that in the future the Group comply with SSAP 62 of      16
           regarding the signing of reinsurance agreements within nine months of
           the commencement date.

 B.        Accounts and Records

           It is recommended that the Group file its annual audited financial         21
           reports with the Department as an accommodation to allow the
           Department to monitor the operations of the Group on annual basis.
                                                             Respectfully submitted,

                                                                           /s/
                                                             Veronica Duncan Black,
                                                             Senior Insurance Examiner




STATE OF NEW YORK  )
                   )SS:
                   )
COUNTY OF NEW YORK )


VERONICA DUNCAN BLACK, being duly sworn, deposes and says that the foregoing report,

subscribed to by her, is true to the best of her knowledge and belief.




                                                                   /s/
                                                             Veronica Duncan Black



Subscribed and sworn to before me

this            day of                        , 2004

								
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