REPORT OF ASSOCIATION FINANCIAL EXAMINATION by jonathanscott

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									REPORT OF ASSOCIATION FINANCIAL EXAMINATION        AS OF: DECEMBER 31, 2006




                NATIONAL HOME INSURANCE COMPANY
                       (A Risk Retention Group)



                     10375 East Harvard Avenue, Suite 100
                           Denver, Colorado 80231




                                Conducted by:

                         DIVISION OF INSURANCE
                          STATE OF COLORADO




                                                                      FIN 08-07
                                  CERTIFICATE OF COPY

I, Marcy Morrison, Commissioner of Insurance of the State of Colorado, do hereby certify that
the attached is a true and correct copy of the Financial Examination Report as of December 31,
2006 for National Home Insurance Company (a Risk Retention Group) now on file as a
record of this office.

IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal of office at
the City and County of Denver on this 29th day of May 2008.




                                    Marcy Morrison
                                    Commissioner of Insurance
Report of Association Financial        National Home Insurance Company
Examination as of 12/31/06                  (A Risk Retention Group)




                    REPORT OF ASSOCIATION FINANCIAL EXAMINATION


                                                  OF


                           NATIONAL HOME INSURANCE COMPANY
                                  (A Risk Retention Group)

                                  10375 East Harvard Avenue, Suite 100
                                        Denver, Colorado 80231


                                                AS OF


                                         DECEMBER 31, 2006
Report of Association Financial                            National Home Insurance Company
Examination as of 12/31/06                                      (A Risk Retention Group)                                                             Page 1

                                                             TABLE OF CONTENTS

                                                                                                                                                         Page
SALUTATION ............................................................................................................................................. 2
SCOPE OF EXAMINATION....................................................................................................................... 3
HISTORY AND CAPITAL.......................................................................................................................... 4
    History ................................................................................................................................................... 4
    Capital.................................................................................................................................................... 4
    Dividends to Shareholders..................................................................................................................... 6
    Surplus Debentures................................................................................................................................ 7
AFFILIATED COMPANIES ....................................................................................................................... 7
    Organizational Chart.............................................................................................................................. 7
    Parent, Subsidiaries and Affiliates......................................................................................................... 7
    Acquisitions, Mergers or Sales .............................................................................................................. 8
    Holding Company Filings...................................................................................................................... 8
MANAGEMENT AND CONTROL ............................................................................................................ 8
    Shareholder Meetings ............................................................................................................................ 8
    Board of Directors ................................................................................................................................. 9
    Committees .......................................................................................................................................... 10
    Officers ................................................................................................................................................ 10
    Conflict of Interest...............................................................................................................................10
    Service and Management Agreements ................................................................................................ 11
CORPORATE RECORDS ......................................................................................................................... 12
    Fidelity Bond and Other Insurance...................................................................................................... 13
    Employees' and Agents' Welfare ......................................................................................................... 13
TERRITORY AND PLAN OF OPERATION ........................................................................................... 13
    Territory............................................................................................................................................... 13
    Plan of Operation................................................................................................................................. 13
GROWTH OF THE COMPANY ............................................................................................................... 14
    Premiums by State ............................................................................................................................... 14
    Loss and Underwriting Experience...................................................................................................... 16
REINSURANCE......................................................................................................................................... 16
    Ceded ................................................................................................................................................... 16
    Assumed .............................................................................................................................................. 16
STATUTORY AND SPECIAL DEPOSITS .............................................................................................. 17
ACCOUNTS AND RECORDS .................................................................................................................. 17
FINANCIAL STATEMENTS .................................................................................................................... 18
  ASSETS, LIABILITIES, SURPLUS AND OTHER FUNDS ................................................................ 19
  STATEMENT OF INCOME .................................................................................................................. 21
  CAPITAL AND SURPLUS ACCOUNT................................................................................................ 22
  RECONCILIATION OF CAPITAL AND SURPLUS ........................................................................... 23
  ANALYSIS OF EXAMINATION CHANGES...................................................................................... 24
  COMPARATIVE FINANCIAL STATEMENTS................................................................................... 25
NOTES TO FINANCIAL STATEMENTS................................................................................................ 27
SUMMARY................................................................................................................................................ 28
RECOMMENDATIONS ............................................................................................................................ 29
CONCLUSION........................................................................................................................................... 30
Report of Association Financial         National Home Insurance Company
Examination as of 12/31/06                   (A Risk Retention Group)                         Page 2

                                                                                    Denver, Colorado
                                                                                    February 29, 2008


Honorable Alfred W. Gross, Commissioner
Chair, Financial Condition (E) Committee, NAIC
State Corporation Commission
Bureau of Insurance
1300 East Main Street
Richmond, Virginia 23219

Honorable Morris Chavez, Superintendent
Secretary, Western Zone, NAIC
New Mexico Insurance Division
PERA Building
1120 Paseo de Peralta
Santa Fe, New Mexico 87501

Honorable Marcy Morrison, Commissioner
Division of Insurance
State of Colorado
1560 Broadway, Suite 850
Denver, Colorado 80202


Commissioners and Superintendent:

Pursuant to your instructions and in compliance with the requirements of Section 10-1-201, et seq.,
C.R.S., an association financial examination has been made of the financial condition and affairs of:

                             NATIONAL HOME INSURANCE COMPANY
                                    (A Risk Retention Group)

                                  10375 East Harvard Avenue, Suite 100
                                        Denver, Colorado 80231

and the report thereon is respectfully submitted.

National Home Insurance Company (A Risk Retention Group), hereinafter referred to as the “Company”,
was last examined as of December 31, 2001, under the Association Plan of the National Association of
Insurance Commissioners “NAIC”. The current examination was conducted by the Colorado Division of
Insurance, “Division” under the Association Plan of the NAIC. No other states participated on this
examination.

All recommendations contained in the prior report of examination have been adequately addressed by the
Company.
Report of Association Financial        National Home Insurance Company
Examination as of 12/31/06                  (A Risk Retention Group)                              Page 3

                                      SCOPE OF EXAMINATION

This examination encompasses the period from January 1, 2002 through December 31, 2006. During the
course of the examination, assets were verified and valued and all known liabilities were established as of
December 31, 2006. Accounting and other pertinent records were reviewed to the extent deemed
appropriate. The work performed was in accordance with statutory requirements and followed procedures
prescribed in the Colorado Examiners Handbook and the NAIC Financial Condition Examiners
Handbook. The extent of review on any given account or activity was based on the results of a planning
process that included an evaluation of the Company’s internal controls, as well as other factors, which
included an analytical review of financial data, the Company's financial performance during the
examination period, prior examination findings and materiality. Consideration was also given to the use
of audit work performed by the Company’s independent accounting firm and where appropriate, has been
relied upon. All phases of the examination were conducted to determine compliance with the insurance
laws and regulations of the State of Colorado. Specific details pertaining to the various phases of the
examination are set forth under the appropriate caption in subsequent sections of this report.

The determination to reflect financial adjustments in the financial statements was dependent upon: the
materiality of a particular adjustment; the materiality of the total of all immaterial adjustments; and/or
compliance with pertinent laws and regulations. Materiality was determined based on the Company’s
surplus, admitted assets and/or operating results.

This examination does not address market conduct issues related to policy forms or rates, policyholder
treatment and claims settlement practices. These issues are addressed in separate market conduct
examinations conducted periodically by the Division.
Report of Association Financial         National Home Insurance Company
Examination as of 12/31/06                   (A Risk Retention Group)                              Page 4

                                       HISTORY AND CAPITAL

History

The Company was incorporated in the State of Colorado on May 21, 1986 under the name of National
Home Insurance Corporation. The Company’s name was amended to read National Home Insurance
Company on June 11, 1986. The Company was issued a Certificate of Authority by the Division on June
19, 1986.

On January 9, 1991 the Company filed amended Articles of Incorporation with the Division for the
purpose of changing the name of the Company to include the phrase “ a risk retention group” in order to
meet the requirements of the Liability Risk Retention Act of 1981, as amended in 1986 (LRRA86). The
amended Articles of Incorporation were approved by the Division on April 22, 1991 and a revised
Certificate of Authority was issued on April 29, 1991.

The Company’s Articles of Incorporation state that the purposes for which it is organized and its powers
are: “...to engage in any lawful act or activity for which corporations may be organized under the
Colorado Corporation Code, and specifically to engage directly or indirectly in the insurance business and
in all business acts and/or activities reasonably and necessarily incidental to the insurance business,
lawful for a corporation organized under the insurance laws of the State of Colorado, as these laws may
be amended from time to time; provided, however, the corporation shall not engage in any business acts
and/or activities which are not consistent with the corporation’s intended status as a risk retention group,
as that term is defined in the Risk Retention Act.”

Capital

The initial authorized capital stock consisted of 1,000,000 shares of common stock with a par value of
one dollar per share. The Company had issued and outstanding 400,000 shares with a value of $400,000.
Since LRRA86 requires that insureds have an ownership interest in the Company and that owners be
insureds of the Company, the Division directed the Company to develop and implement a plan to meet
this requirement. The resulting plan converted the 400,000 shares of common stock issued and held by
the Company’s parent to Class B common stock having a par value of one dollar per share. Pursuant to
the plan each existing member/builder, and any new member/builders, purchased one share of newly
created class of stock, Class A common stock, (no par value), for one dollar per share.

The authorized capital stock is currently set at 2,000,000 shares of common stock, comprised of
1,000,000 shares of Class A common stock with no par value and 1,000,000 shares of Class B common
stock with a par value of one dollar per share.

Per the Articles of Incorporation, five percent of the ownership and voting rights in the corporation shall
pertain to all Class A shares, in the aggregate, regardless of the number of shares of Class A stock which
are outstanding at any particular time. Per the Articles of Incorporation, 95% of the ownership and voting
rights in the corporation shall pertain to all Class B shares, in the aggregate, regardless of the number of
shares of Class B stock which are outstanding at any particular time.

The Class A shares of stock of the corporation shall be redeemable upon certain terms and conditions.
All stock owned by any shareholder shall be called for redemption and shall be redeemed by the
corporation upon any of the following conditions:

•   The failure of a shareholder to qualify for and obtain coverage from the corporation within a
    reasonable time as determined by the board of directors of the corporation; or
•   The expiration of all insurance coverage issued by the corporation naming the shareholder as the
    insured; or
Report of Association Financial         National Home Insurance Company
Examination as of 12/31/06                   (A Risk Retention Group)                               Page 5

•   A shareholder becoming an insurance company; or
•   The voluntary or involuntary termination of the shareholder’s right to enroll homes in the Home
    Buyers Warranty program (administered by Home Buyers Warranty Corporation), as evidenced by
    notice to the corporation of such termination from a duly authorized representative of the Home
    Buyers Warranty program; or
•   A determination that the board of directors of the corporation, in its sole discretion, that a redemption
    is necessary to preserve or reinstate the status of the corporation as a risk retention group.

Changes to the Company’s issued and outstanding Common Capital Stock and to Gross Paid In and
Contributed Surplus as reported in the Company’s December 31, 2001 through and including December
31, 2006 annual statements, are as follows:

                                      Number       Number
                                      of Shares    Of Shares
                                       Class A      Class B         Par /                      Paid In and
                                      Common       Common        Redemption        Capital     Contributed
Year/
Description                             Stock        Stock          Value         Paid Up        Surplus

Total as of
December 31, 2001                      10,584        400,000                $1   $410,584        $8,667,892

2002
Net Class A Common Stock Change         1,541                0              $1       1,541                 0

2003
Net Class A Common Stock Change            18                0              $1          18                 0

2004
Net Class A Common Stock Change           503                0              $1         503                 0

2005
Net Class A Common Stock Change           428                0              $1         428                 0

2006
Net Class A Common Stock Change          (183)               0              $1        (183)                0

Total as of
December 31, 2006                      12,891        400,000                     $412,891        $8,667,892
Report of Association Financial        National Home Insurance Company
Examination as of 12/31/06                  (A Risk Retention Group)                                Page 6

The following table reflects the examination findings concerning the Company’s Common Capital Stock
and Gross Paid In and Contributed Surplus during the examination period:

                                     Class A       Class B         Par /                     Paid In and
Year/                                Common        Common       Redemption     Capital       Contributed
Description                           Stock         Stock         Value        Paid Up        Surplus

Class A                               10,584                             $0            0
Class B                                             400,000              $1     $400,000

Total as of
December 31, 2001                                                               $400,000     $8,678,476


2002
Net Class A Common Stock Change         1,541                            $1                       1,541

2003
Net Class A Common Stock Change             18                           $1                           18

2004
Net Class A Common Stock Change            503                           $1                          503

2005
Net Class A Common Stock Change            428                           $1                          428

2006
Net Class A Common Stock Change            (183)                         $1                         (183)

Total as of
December 31, 2006                     12,891        400,000                     $400,000     $8,680,783


The Company’s Class A common stock has no par value and therefore the $1.00 per share contribution
and the $1.00 per share redemption should be reflected in Gross Paid In and Contributed Surplus and not
Common Capital Stock.

 RECOMMENDATION No. 1:

 It is recommended that the Company properly report the zero par value of Class A stock in the
 common stock accounts and report the amounts received in connection with the redemption
 value of the stock in the Company’s Gross Paid-in and Contributed Surplus.

Dividends to Shareholders

Dividends declared by the Board and paid during the five year period under review are as follows:

    Date Declared              Date Paid                     Form                Amount

  December 9, 2002            December 26                    Cash               $1,699,700

  October 30, 2003            December 1                     Cash                2,213,000

Pursuant to Section 10-3-805(3), C.R.S., since the two dividends were paid within one year, the two
dividends are added together to determine whether the Company exceeded 10% of the Company’s 2002
Report of Association Financial        National Home Insurance Company
Examination as of 12/31/06                  (A Risk Retention Group)                           Page 7

total capital and surplus The October 30, 2003, dividend was deemed extraordinary. The above
dividends were reported to the Division per Section 10-3-805(4.5), C.R.S., and Colorado Insurance
Regulation 3-4-1(Section 18)(B).

Surplus Debentures

The Company had no surplus debentures outstanding during the examination period.


                                      AFFILIATED COMPANIES

Organizational Chart

An abbreviated organizational chart depicting the Company’s relationship with its ultimate controlling
person and other affiliates, as of December 31, 2006 is presented below.


                                        Limited Partners (99.8%)
                                           (Each under 10%)
                                              (Delaware)

                                      Brera Capital Partners Limited
                                           Partnership (99.8%)
                                               (Delaware)

                                        Brera HBW, LLC (91%)
                                              (Delaware)


                                      Residential Loss Control, LLC
                                                  (100%)
                                               (Delaware)

  Swannanoa Home Builders, Inc.                                        Home Construction Management,
            (99.5%)                                                             Inc. (95%)
        (North Carolina)                                                        (Colorado)

  Residential Insurance Company                                          National Home Insurance
             (A RRG)                                                       Company (A RRG)


Parent, Subsidiaries and Affiliates

The Company is a Colorado domiciled casualty insurer that has elected to operate as a risk retention
group. The Company is a member of an insurance holding company system referred to as NHIC’s
Insurance Company Holding System. The Ultimate Controlling Person of the NHIC’s Insurance
Company Holding System is Brera Capital Partners Limited Partnership “Brera”. As a risk retention
group, the Company is limited to issuing policies to owners/members; in this organization the
owner/members are home builders/developers. Home Construction Management, Inc. “HCM”, a
residential construction affiliate and member of the risk retention group directly owns 95% of the
Company’s issued and outstanding common class B stock. The remaining 5% equity interest in the
Report of Association Financial         National Home Insurance Company
Examination as of 12/31/06                   (A Risk Retention Group)                              Page 8

Company is owned in the aggregate by the other members of the risk retention group, which at December
31, 2006 consisted of 12,891 homebuilders. HCM is a wholly owned subsidiary (100%) of Residential
Loss Control, LLC “RLC”, which is owned by Brera HBW, LLC (91%). Brera HBW, LLC is owned by
Brera Capital Partners Limited Partnership (99.8%) “Brera”, a Delaware limited partnership. No one
person owns or controls ten percent or more of Brera. The Company has no subsidiaries.

Acquisitions, Mergers or Sales

On October 17, 2002, the Division approved a “Stock Purchase Agreement”, filed on May 21, 2002,
whereby Arias Acquisitions, Inc. “Arias”, a Florida corporation, was acquired by HBW Holdings, Inc., a
Delaware corporation. Under the “Stock Purchase Agreement,” HBW Holdings, Inc. acquired 100% of
the outstanding common stock of Arias. HBW Holdings, Inc. was established for the purpose of
acquiring Arias by Brera. HBW Holdings, Inc. is controlled by Brera HBW, LLC which is controlled by
Brera.

On September 30, 2004, the Company filed a “Proposed Reorganization within the Insurance Holding
Company System” whereby the system would be divided into separate systems, an insurance holding
system and a services holding system. As part of the reorganization a new intermediary company, RLC, a
Delaware limited liability company, would own 100% of HCM, the Company’s immediate parent and
RLC would become a direct subsidiary of Arias. The Division approved the filing as a transaction that is
exempt from the Form A filing, as Brera remained as the ultimate controlling person, and that the
transaction would not have a negative impact on the solvency of the Company.

On August 2, 2005, Arias distributed 100% of its ownership interest in RLC to the shareholders of HBW
Holdings, Inc. This transaction was approved by the Division on June 27, 2005. The restructuring did
not affect or influence ultimate control of the Company nor did it affect the financial condition,
operations, or management of the Company and Brera remains the ultimate controlling person of the
Company.

Holding Company Filings

The Company is a member of an insurance holding company system, and as such is subject to the
registration requirements of Section 10-3-804, C.R.S., and Colorado Insurance Regulation 3-4-1. The
ultimate controlling person of the holding company system, as defined pursuant to Section 10-3-801(3),
C.R.S., and Colorado Insurance Regulation 3-4-1(Section 3), is Brera, whose principal business is to
invest in controlling positions in select companies, largely in the United States, with unique potential for
sustained capital appreciation.

During the examination period, the Company made the required Form B, and C annual holding company
registration statement filings with the Division. The filings generally contained the required information
pertaining to transactions, relationships and agreements with the parent and affiliates.


                                   MANAGEMENT AND CONTROL

Shareholder Meetings

Pursuant to the Company’s by-laws, the annual meeting of the shareholders is to be held during the
second quarter of each fiscal year of the Company. The annual meeting shall be held at such time and
place and on such date as the directors shall determine and shall be specified in the notice of the meeting.
The shareholders are to elect directors and transact any other business that may properly come before
them at the annual meeting. At all meetings of shareholders, the holders of a majority of the outstanding
shares of stock shall constitute a quorum for the transaction of business. Special meetings of the
Report of Association Financial           National Home Insurance Company
Examination as of 12/31/06                     (A Risk Retention Group)                             Page 9

shareholders may be called at any time by the president, the board of directors or any holder or holders of
at least one-tenth of all shares entitled to vote at the meeting. Special meetings shall be held at such time
and place and on such date as shall be specified in the notice of the meeting.

At all meetings of shareholders, the holders of a majority of the outstanding shares of stock shall
constitute a quorum for the transaction of business, and no resolution or business shall be transacted
without the favorable vote of the holders of a majority of the shares represented at the meeting and
entitled to vote. At every meeting of the shareholders, including meetings of shareholders for the election
of directors, any shareholder having the right to vote shall be entitled to vote in person or by proxy. Five
percent of the voting rights in the Company shall pertain to all Class A shares, in the aggregate, regardless
of the number of shares of Class A stock which are outstanding at any particular time. Ninety-five
percent of the voting rights in the Company shall pertain to all Class B shares, in the aggregate, regardless
of the number of shares of Class B stock which are outstanding at any particular time.

During the examination period, the shareholders held five annual meetings in compliance with the by-
laws.

Board of Directors

Pursuant to the by-laws, the business and affairs of the Company shall be managed by the board of
directors, which shall have and may exercise all of the powers that may be exercised or performed by the
Company.

Directors are to be elected annually at the annual meeting of the shareholders or at a special meeting held
in lieu of the annual meeting of shareholders. The directors shall serve for a term of one year and until
their successors are elected. The board of directors shall fix by resolution the precise number of directors;
provided however, there shall be no fewer than three directors and no more than seven directors. At all
meetings of the board of directors, the presence of a majority of the authorized number of directors, but
not less than two directors, shall be necessary and sufficient to constitute a quorum for the transaction of
business.

During the examination period, the board of directors held five annual meetings.

Directors duly elected and serving at December 31, 2006, together with their business affiliation are as
follows:

 Name & Address                            Business Affiliation

 John Francis Svoboda                      President
 Denver, Colorado                          National Home Insurance Company
 Stephen Paul Chaffee                      Vice President Accounting and Finance and Treasurer
 Castle Rock, Colorado                     National Home Insurance Company
 Wallace Emory Fluhr                       President and Chief Executive Officer
 Parker, Colorado                          Home Buyers Warranty Corporation
 Alison Merritt Short                      Vice President Corporate Operations
 Parker, Colorado                          Home Buyers Warranty Corporation

As of the date of this report, all of the above directors were still serving.

The investment transactions are reported to the board of directors annually for approval and recorded in
the minutes. During the review of the investment authorization process it was noted that the Company’s
board, or a committee thereof, did not ratify on a quarterly basis the Company’s investment activity.
Report of Association Financial          National Home Insurance Company
Examination as of 12/31/06                    (A Risk Retention Group)                           Page 10

 RECOMMENDATION No. 2:

 It is recommended that the Company's board of directors ratify investment transactions
 quarterly or delegate such authority to a committee of the board or an appropriate officer of the
 Company to comply with the provisions of Section 10-3-234(b)(II), C.R.S.

It was noted that the Company provided copies of the 2007 actions taken by the Company’s board of
directors to ratify the investment activity subsequent to the examination period.

Committees

Pursuant to the by-laws, the board of directors may designate an executive committee and any other such
committees as may be deemed necessary. The Company has not established any committees as allowed
for under the by-laws.

Officers

Pursuant to the by-laws, the officers of the Company shall consist of a president, a secretary and a
treasurer. Other officers, including a chairman of the board, a vice chairman of the Board and one or
more vice presidents, may be elected at the Company’s discretion. The officers shall be elected by the
board of directors at the first meeting of the board of directors after the annual meeting of the
shareholders in each year or shall be appointed as provided for in the by-laws. All officers shall hold
office until the meeting of the board of directors following the next annual meeting of the shareholders in
each year or shall be appointed otherwise as provided in the by-laws. Any two or more offices may be
held by the same person.

Officers serving at December 31, 2006 are as follows:

 Name                                     Title

 John F. Svoboda                          President
 Stephen P. Chaffee                       Vice President and Treasurer
 W.E. Fluhr                               Vice President
 Wendy S. Fisher                          Secretary

All of the above officers were serving as of the date of this report.

Conflict of Interest

The Company has an established procedure for the annual disclosure of any material interest or affiliation
that might conflict with the respective duties of all directors, officers and key employees. All directors,
officers and key employees execute an affidavit acknowledging compliance with the Company’s
“Corporate Policy On Ethics In Business”. A review of the Company’s statement and completed
affidavits indicate that the procedure meets the requirements and intent of the general interrogatories
included in the statutory annual statement.
Report of Association Financial      National Home Insurance Company
Examination as of 12/31/06                (A Risk Retention Group)                           Page 11

Service and Management Agreements

Administration Agreement:
   The Company is provided administrative services pursuant to an Administration Agreement
   (Agreement) with Home Buyers Warranty Corporation (HBW). The Agreement was last amended
   and restated as the Second Amended and Restated Administration Agreement on August 2, 2005.
   Duties performed by HBW include operation tasks such as: claims coordination, internal audits and
   expense control; continual investment in and improvement of the customer service process and
   technology; assistance in the preparation of reports; coordination and payment of premium taxes and
   related fees; support for management information services, payroll and related human resource
   management services, telecommunication and other agreed upon services.

   The amended agreement was filed with the Division in accordance with Section 10-3-805(4)(a),
   C.R.S., and Colorado Insurance Regulation 3-4-1. Review of transactions related to this agreement
   indicated that amounts were settled in accordance with the terms of the agreement.

Capacity Agreement:
   The Company has also entered into a Capacity Agreement effective August 2, 2005 with HBW. This
   agreement adds the Company as one of the insurers of member/builders under the HBW warranty
   programs. Under the agreement HBW markets the warranty program, assists the Company in
   obtaining reinsurance in connection with the program, provides enrollment and other related
   administrative functions and insurance services.

   The Company was obligated to pay HBW for certain allocated joint expenses, as detailed in the
   agreement. The agreement delineates additional respective duties and responsibilities of the parties
   with respect to marketing the HBW Home Warranty Program, home warranty enrollment and
   customer service for member builders, certain administrative services, management information
   services, and compensation between the parties for such services.

   The agreement was filed with the Division in accordance with Section 10-3-805(4)(a), C.R.S., and
   Colorado Insurance Regulation 3-4-1. A review of the transactions related to this agreement
   indicated that amounts were settled in accordance with the terms of the agreement.

Management Fee Agreement:
   On November 8, 2002, a management fee agreement between Brera and HBW Holdings, Inc. was
   entered into, which required the Company to reimburse HBW Holdings, Inc. for certain management
   fees and out of pocket expense related to management services provided by Brera.

   This agreement does not include the Company as a signatory nor has the agreement been disclosed
   within the annual registration statement required under Section 10-3-804, C.R.S., and Colorado
   Insurance Regulation 3-4-1. Review of the agreement indicates that the terms are insufficient to
   determine that they meet the standards for material transactions within a holding company system
   under Section 10-3-805, C.R.S. Additionally, the agreement also does not include sufficient terms to
   meet SSAP No. 96, regarding settlements and admissibility of amounts 90 days past due.
Report of Association Financial        National Home Insurance Company
Examination as of 12/31/06                  (A Risk Retention Group)                            Page 12


 RECOMMENDATION No. 3:

 It is recommended that the Company enter into a written management fee agreement with Brera
 which:

     a) discloses the management services and any other anticipated services to be rendered and
        the fees to be charged to the Company. This information is necessary to determine if the
        terms of the agreement are fair and reasonable and whether the terms comply with the
        requirements of Section 10-3-805, C.R.S.
     b) complies with the timely settlement provisions contained in SSAP No. 96.

 This agreement must be included in the annual registration statement required under Section 10-
 3-804, C.R.S., and Colorado Insurance Regulation 3-4-1.

Managing General Underwriter Agreement:
   The Company entered into a Managing General Underwriter Agreement dated August 2, 2005, with
   HBW Warranty Adminstration, LLC (HBWWA), a Delaware limited liability company, and an
   affiliate of the Company. The agreement provides that HBWWA will provide customer services,
   including complaint services, for homeowners whose homes are insured by the Company.
   Additonally, HBWWA provides underwriting, risk management and document imaging services to
   the Company. This agreement was last amended on July 31, 2006, effective retroactively to August
   2, 2005.

    The agreement was filed with the Division in accordance with Section 10-3-805(4)(a), C.R.S., and
    Colorado Insurance Regulation 3-4-1. Review of transactions related to this agreement indicated that
    amounts were settled in accordance with the terms of the agreement.

Tax Consolidation Agreement:
   The Company was party to a Tax Consolidation Agreement during the examination period with
   affiliated companies dated September 14, 2000, retroactive for the taxable year ending December 31,
   1999. This tax agreement was subsequently revised on May 15, 2002, December 31, 2002, July 12,
   2005, and August 3, 2006, and shall continue unless the parties agree to terminate the Tax
   Agreement.

    The tax agreement was filed with the Division pursuant to Section 10-3-805(4)(a), C.R.S., and
    Colorado Insurance Regulation 3-4-1. Review of the transactions related to this agreement indicated
    that tax liabilities were being computed and settlements conducted in accordance with the terms of the
    agreement.


                                       CORPORATE RECORDS

The Articles of Incorporation, by-laws and minutes of the meetings of shareholders and board of directors
were reviewed for the period under examination. The minutes were well maintained and adequately
described the corporate activity of the Company.

No changes were made to the Articles of Incorporation or the by-laws during the examination period.

The Company has a formal investment policy and related guidelines approved by its board of directors.
Report of Association Financial        National Home Insurance Company
Examination as of 12/31/06                  (A Risk Retention Group)                            Page 13

Fidelity Bond and Other Insurance

The Company maintained fidelity coverage for dishonest or fraudulent acts through a commercial crime
policy providing coverage up to $400,000, with a $25,000 deductible. In addition to this crime policy, the
Company is afforded additional fidelity protection in an amount not to exceed $5,000,000 against any loss
through dishonest or fraudulent acts committed by an employee acting alone or in collusion with others,
subject to a deductible of $100,000. This additional coverage is provided through a policy issued to an
affiliate and covers the Company and other its affiliates. The single loss limits are sufficient per the
calculation and schedule contained in Colorado Insurance Regulation 3-1-1.

The Company is a named insured, along with its parent and affiliates, on policies which provide various
business insurance coverages including: property, general liability, umbrella liability, EDP equipment,
business auto, workers’ compensation, fiduciary liability, director and officer liability, and errors and
omissions liability.

Employees' and Agents' Welfare

The Company provides its employees and their dependents with a basic benefit package, which includes
life, health, and dental insurance on a contributory basis through the Company’s affiliate, HBW. Eligible
employees may participate in a 401(k) plan sponsored by HBW with partial matching by HBW. HBW’s
costs for the benefits provided to the Company’s employees are then allocated back to the Company. No
other retirement benefits, stock ownership plans or employment contracts are provided for employees.


                              TERRITORY AND PLAN OF OPERATION

Territory

The Company is a licensed casualty insurer only in the State of Colorado and operates in other states
under the federal Risk Retention Act as a risk retention group. During the examination period, the
Company conducted business as a risk retention group in the District of Columbia and all states, except
Alaska and Hawaii.

Plan of Operation

The Company provides insurance for the member/builder participants in the 2-10 Home Buyers Warranty
programs issued by HBW. The warranty programs cover certain product liability risks associated with
the construction of new homes and include workmanship defects in the first year, system defects in the
first and second years, and limited structural defects through the tenth year. HBW also provides a second
year manufactured home warranty program for appliance coverage to certain builder members.

The builder participants in HBW’s warranty programs are the members of the Company (risk retention
group) and must own shares of the Company’s common stock. The Company has no insurance agents
soliciting business and receiving commissions. As the builder participants’ homes are enrolled into the
HBW warranty programs, the warranties are automatically insured by the Company. HBW then submits
the predetermined amount of insurance premium from each warranty to the Company.
Report of Association Financial       National Home Insurance Company
Examination as of 12/31/06                 (A Risk Retention Group)                            Page 14

                                    GROWTH OF THE COMPANY

The growth of the Company for the period under examination as taken from its filed annual statements is
as follows:

    Year          Admitted assets          Liabilities             Capital                 Surplus

    2002            $34,846,265           $17,851,439              $412,125              $16,582,701
    2003             42,480,837            27,659,855               412,143               14,408,839
    2004             48,210,122            33,275,257               412,646               14,522,219
    2005             57,045,777            41,567,214               413,074               15,065,489
    2006             70,886,417            55,723,278               412,891               14,750,248

The above amounts were compiled from the Company’s filed annual statements. The amounts for 2006
were verified in connection with this examination.

Premiums by State


 State                                   Direct premiums written              Direct premiums earned

 Alabama                                       $     730,837                       $     413,662
 Arizona                                           2,061,932                           1,022,270
 Arkansas                                             34,686                              71,079
 California                                        4,862,779                           3,089,727
 Colorado                                            489,995                             591,049
 Connecticut                                           1,720                               6,085
 Delaware                                            323,710                             173,444
 District of Columbia                                    762                               9,517
 Florida                                           4,718,641                           2,342,200
 Georgia                                           3,549,945                           2,310,907
 Idaho                                               211,200                              84,743
 Illinois                                            261,388                             189,534
 Indiana                                             400,413                             347,351
 Iowa                                                  2,734                               4,684
 Kansas                                              220,270                             122,613
 Kentucky                                            393,167                             331,058
 Louisiana                                           414,014                             266,646
 Maine                                                21,444                              21,401
 Maryland                                            660,084                             575,807
 Massachusetts                                         2,921                               8,396
 Michigan                                            128,943                             119,252
 Minnesota                                           367,308                             466,265
 Mississippi                                         743,722                             369,755
 Missouri                                            489,130                             417,625
 Montana                                               3,352                               1,881
 Nebraska                                            226,915                             195,623
 Nevada                                            1,369,083                           1,023,023
 New Hampshire                                        21,128                              23,127
 New Jersey                                        2,235,408                           1,408,561
 New Mexico                                          504,425                             276,263
 New York                                            175,099                             189,069
Report of Association Financial       National Home Insurance Company
Examination as of 12/31/06                 (A Risk Retention Group)                        Page 15

 State                                     Direct premiums written       Direct premiums earned

 North Carolina                                 $ 1,388,889                   $      814,067
 North Dakota                                         5,322                            3,206
 Ohio                                               111,844                          184,377
 Oklahoma                                            12,619                           10,138
 Oregon                                           1,061,080                          492,861
 Pennsylvania                                       307,007                          201,466
 Rhode Island                                            59                            3,030
 South Carolina                                     809,517                          408,298
 South Dakota                                           482                            1,107
 Tennessee                                          882,443                          641,934
 Texas                                            5,063,211                        2,693,131
 Utah                                               643,242                          273,170
 Vermont                                                148                              536
 Virginia                                         1,155,823                        1,050,469
 Washington                                       2,387,751                        1,103,522
 West Virginia                                       24,252                           11,801
 Wisconsin                                            9,785                           25,018
 Wyoming                                              1,408                            2,240

 Total (Direct Business)                        $39,492,037                   $24,392,988

A schedule of direct premiums written, reinsurance assumed and ceded and net premiums written and
earned follows:

                 Direct                                                 Net                 Net
               premiums           Reinsurance        Reinsurance     premiums            premiums
  Year          written            assumed              ceded         written             earned

  2002        $19,309,489             $0             $15,424,560     $ 3,884,929        $3,453,236
  2003         27,988,288              0              22,413,987       5,574,301         1,596,066
  2004         34,725,898              0              27,781,021       6,944,877         2,020,659
  2005         42,644,198              0              32,158,993     10,485,205          2,872,256
  2006         39,492,037              0              30,287,587       9,204,450         3,012,620
Report of Association Financial          National Home Insurance Company
Examination as of 12/31/06                    (A Risk Retention Group)                             Page 16

Loss and Underwriting Experience

The following schedule shows the underwriting results of the Company. The amounts were compiled
from the Company’s filed annual statements. The amounts for 2006 were verified in connection with this
examination.

                                                    Underwriting   Loss and
            Net premiums          Loss and loss        expense     loss exp.     Underwriting     Combined
  Year         earned           expense incurred     incurred **    ratio%         ratio%          ratio %*

 2002           $3,453,263       $4,054,243         $(3,239,378)    117.40          (93.81)         23.59
 2003            1,596,066        3,830,049          (1,790,976)    239.97         (112.21)        127.76
 2004            2,020,659        4,204,026          (1,832,378)    208.05          (90.68)        117.37
 2005            2,872,256        5,358,983          (2,582,521)    186.58          (89.91)         96.67
 2006            3,012,620        6,220,965          (1,379,646)    206.50          (45.80)        160.70
* A combined ratio of greater than 100% is the result of a net underwriting loss
** The underwriting expense incurred has been reduced by payments made by the reinsurer which exceed
the Company’s incurred expenses

                                                                                                Net income
                   Total                                     Net               Investment          before
  Year           operating        Total operating        underwriting           and other        dividends
                  income            deductions            gain/(loss)            income          and taxes

  2002          $3,453,236           $ 814,865          $ 2,638,371            $1,193,949       $3,832,320
  2003           1,596,066           2,039,073             (443,007)              670,035          227,028
  2004           2,020,659           2,371,648             (350,989)            1,261,951          910,962
  2005           2,872,256           2,776,462               95,794             1,317,661        1,413,455
  2006           3,012,620           4,841,319           (1,828,699)            1,921,592           92,893


                                              REINSURANCE

Ceded

The Company has a reinsurance program in place in which it reduces its exposure to losses by sharing and
fully reinsuring the underlying insured warranty risks with reinsurers through quota share and excess of
loss arrangements, respectively. Based on the reinsurance agreements received, the following Company
retentions and reinsurer maximums were noted:

        Layer                Company Retention                      Reinsurer Maximum Liability

      First            Max $1,500,000 (15% of loss)       $10,000,000 – Quota Share
     Second                        $0                     $10,000,000 -30,000,000 excess of retention

The quota share agreement includes additional coverage that in the event that the Company’s 15%
retention of risk on a multi-family unit exceeds ten percent of the Company’s capital and surplus, the
reinsurer may accept 100% of the amount that exceeds ten percent of the Company’s capital and surplus.

Assumed

The Company did not assume any insurance.
Report of Association Financial        National Home Insurance Company
Examination as of 12/31/06                  (A Risk Retention Group)                           Page 17

                              STATUTORY AND SPECIAL DEPOSITS

As of December 31, 2006, the Company also maintained the following securities on deposit with the State
of Colorado for the protection of all policyholders:


                           Security                                   Statement
    Location                Type                 Par Value              Value            Market Value

Colorado           US Treasury Notes           $1,400,000           $1,402,281          $1,389,505
Colorado           Fed Home Loan                  500,000              499,964             498,125
Total                                          $1,900,000           $1,902,245          $1,887,630

The Statutory Deposit held with the State of Colorado complies with the provisions of Sections 10-3-201,
206, and 210, C.R.S., as well as Colorado Insurance Regulation 3-1-2.


                                      ACCOUNTS AND RECORDS

The accounts and records of the Company are generated and maintained through an electronic data
processing system that is PC based. The system generates a general ledger, cash receipts and
disbursements information, as well as subsidiary records common to the property and casualty insurance
industry.

Trial balances of the Company’s general ledger were traced to the appropriate assets, liabilities, income
and expense exhibits of the filed annual statements. Tests of postings from original documents to the
general ledger revealed no material differences.

The Company’s financial statements are audited annually by an independent auditor in accordance with
Colorado Insurance Regulation 3-1-4. The work papers of this firm were made available to the
examination team.

The Company is provided internal audit services pursuant to its agreement with HBW (see Service and
Management Agreements under Management and Control regarding this agreement).

The Company has filed the actuarial opinions for the period under review as required by Colorado
Insurance Regulation 3-1-3.

The Company’s custodial safekeeping agreement was reviewed and determined to be in compliance with
Colorado Insurance Regulation 3-1-6.

The Company’s unclaimed property filings are in compliance with the requirements of Section 38-13-
101, C.R.S.
Report of Association Financial       National Home Insurance Company
Examination as of 12/31/06                 (A Risk Retention Group)                           Page 18

                                    FINANCIAL STATEMENTS

The following pages present a statement of Assets, Liabilities, Surplus and Other Funds, as of December
31, 2006, as determined by this examination. This statement is followed by supporting statements and
reconciliations presented in the following order:

               Statement of Income, for the Year Ended December 31, 2006

               Capital and Surplus Account, for the Year Ended December 31, 2006

               Reconciliation of Capital and Surplus, December 31, 2001 through December 31, 2006

               Analysis of Examination Changes, as of December 31, 2006

               Comparative Financial Statements, as of December 31, 2001 and December 31, 2006
Report of Association Financial      National Home Insurance Company
Examination as of 12/31/06                (A Risk Retention Group)                          Page 19

                      ASSETS, LIABILITIES, SURPLUS AND OTHER FUNDS
                                    DECEMBER 31, 2006
                                                ASSETS

                                                                       Assets not       Net admitted
                                                          Assets       admitted            assets

 Bonds                                                   $50,824,683   $            0    $50,824,683
 Mortgage loans on real estate                                80,321                0         80,321
 Real estate properties held for sale                      1,511,816                0      1,511,816
 Cash and short-term investments                           6,778,344                0      6,778,344
 Investment income due and accrued                           524,578                0        524,578
 Uncollected premiums in course of collection
   (Note 1)                                                7,763,301            0          7,763,301
 Amounts recoverable from reinsurers                       2,298,124            0          2,298,124
 Current federal income tax recoverable                      330,908            0            330,908
 Net deferred tax asset                                    3,147,390    2,411,921            735,469
 Electronic data processing equipment                          8,297            0              8,297
 Furniture and equipment                                      11,950       11,950                  0
 Receivable for parent and affiliates                         30,576            0             30,576
 Aggregate write-ins - prepaid expenses                        6,709        6,709                  0

 Total assets                                            $73,316,997   $2,430,580        $70,886,417
Report of Association Financial          National Home Insurance Company
Examination as of 12/31/06                    (A Risk Retention Group)                Page 20

                     ASSETS, LIABILITIES, SURPLUS AND OTHER FUNDS (continued)
                                         DECEMBER 31, 2006
                             LIABILITIES, SURPLUS AND OTHER FUNDS

 Losses                                                                           $ 3,397,093
 Loss adjustment expenses                                                           2,480,151
 Commissions payable                                                               (2,605,358)
 Other expenses                                                                       657,197
 Taxes, licenses and fees                                                             518,667
 Unearned premiums                                                                 43,162,329
 Advance premiums                                                                      17,400
 Ceded reinsurance premiums payable                                                 4,380,224
 Funds held by company under reinsurance treaties                                   2,694,354
 Amounts withheld or retained by company for account of others                        560,364
 Payable to parent and affiliates                                                     582,373
 Aggregate write-in for liabilities - Retroactive reinsurance
 reserves                                                                            (121,516)
 Total liabilities                                                                $55,723,278

 Aggregate write-ins for other surplus – member contributions     $ 28,259,837
 Common capital stock                                                  412,891
 Aggregate write-ins for special surplus – paid in surplus           8,667,892
 Unassigned funds (surplus)                                        (22,177,481)
 Surplus as regards policyholders (Note 2)                                         15,163,139

 Total liabilities, surplus and other funds                                       $70,886,417
Report of Association Financial         National Home Insurance Company
Examination as of 12/31/06                   (A Risk Retention Group)                 Page 21

                                   STATEMENT OF INCOME
                           FOR THE YEAR ENDED DECEMBER 31, 2006


 Underwriting income
 Premiums earned                                                                $ 3,012,620

 Deductions
 Losses incurred                                                 $ 2,676,578
 Loss expenses incurred                                            3,544,387
 Other underwriting expenses incurred                             (1,379,646)
 Total underwriting deductions                                                      4,841,319
 Net underwriting gain (loss)                                                   $(1,828,699)

 Investment income
 Net investment income earned                                    $ 1,809,613
 Net realized capital gains                                           (6,568)
 Total investment gain                                                              1,803,045

 Other income
 Total other income                                                                  118,547

 Net income before federal income taxes                                         $     92,893
 Federal income taxes incurred                                                       495,110

 Net income (loss)                                                              $ (402,217)
Report of Association Financial        National Home Insurance Company
Examination as of 12/31/06                  (A Risk Retention Group)              Page 22

                              CAPITAL AND SURPLUS ACCOUNT
                           FOR THE YEAR ENDED DECEMBER 31, 2006

Surplus as regards policyholders December 31, previous
  year                                                                       $15,478,563

Net income                                                     $ (402,217)
Change in net deferred income tax                                 468,428
Change in non-admitted assets                                    (381,452)
Change in paid-in capital                                            (183)
Change in surplus as regards policyholders for the year                         (315,424)

Surplus as regards policyholders December 31, 2006                           $15,163,139
Report of Association Financial       National Home Insurance Company
Examination as of 12/31/06                 (A Risk Retention Group)                      Page 23

                        RECONCILIATION OF CAPITAL AND SURPLUS
                      DECEMBER 31, 2001 THROUGH DECEMBER 31, 2006

                                      2002         2003          2004        2005        2006

 Surplus as regards policyholders
   December 31, previous year $16,997,871 $16,994,834 $14,820,990 $14,934,865 $15,478,563

 Net income                      $ 2,298,661 $ (93,049) $   12,584 $ 416,658 $ (402,217)
 Change in net realized capital
   gains (losses)                   (673,973)   736,043    (60,786)         0         0
 Change in net deferred income
   Tax                            (1,100,156)    94,796    481,709    881,870   468,428
 Change in non-admitted assets     2,260,386   (698,652)  (418,465)  (755,258) (381,452)
 Capital changes:
   Paid in                             1,541         18        503        428      (183)
 Cumulative effect of changes in
   accounting principal           (1,089,796)         0          0          0         0
 Aggregate write-ins – prior
   years change in non-admitted
   assets                                  0          0     98,330          0         0

 Dividends to stockholders        (1,699,700)    (2,213,000)            0           0           0

 Change in surplus as regards
   policyholders for the year     $    (3,037) $ (2,173,844) $   113,875 $   543,698 $   (315,424)

 Surplus as regards policyholders
   December 31, current year      $16,994,834 $14,820,990 $14,934,865 $15,478,563 $15,163,139


The above amounts were compiled from the Company’s filed annual statement from 2002-2006. The
2006 amounts were determined by examination.
Report of Association Financial        National Home Insurance Company
Examination as of 12/31/06                  (A Risk Retention Group)                   Page 24

                                 ANALYSIS OF EXAMINATION CHANGES
                                         DECEMBER 31, 2006

                                                                                    Surplus
                                                  Per annual         Per            increase
                     Admitted assets              statement      examination       (decrease)


 Total assets                                    $ 70,886,417   $ 70,886,417   $            0

                       Liabilities


 Total liabilities                              $ 55,723,278    $ 55,723,278   $            0

                Capital and surplus


 Total capital and surplus                      $ 15,163,139    $ 15,163,139   $            0

 Net change per examination                                                    $            0

 Capital and surplus per annual statement                                      $15,163,139
 Net change per examination                                                              0

 Capital and surplus per examination                                           $15,163,139
Report of Association Financial       National Home Insurance Company
Examination as of 12/31/06                 (A Risk Retention Group)                   Page 25

                           COMPARATIVE FINANCIAL STATEMENTS
                          DECEMBER 31, 2001 AND DECEMBER 31, 2006
                                         ADMITTED ASSETS

                                                               December 31,     December 31,
                                                                  2001*            2006*

 Bonds                                                            $20,343,294      $50,824,683
 Common Stocks                                                      3,984,330                0
 Mortgage loans on real estate                                        135,965           80,321
 Real estate occupied by the company                                1,742,611                0
 Real estate held for the production of income                        216,741                0
 Real estate held for sale                                                  0        1,511,816
 Cash and short-term investments                                    2,186,486        6,778,344
 Investment income due and accrued                                    298,234          524,578
 Uncollected premiums in course of collection                       2,280,276        7,763,301
 Amounts recoverable from reinsurers                                1,773,471        2,298,124
 Current federal income tax recoverable and interest thereon        1,792,997          330,908
 Net deferred tax asset                                                     0          735.469
 Electronic data processing equipment                                  55,699            8,297
 Receivable from parent, subsidiaries, and affiliates                 186,101           30,576

 Total assets                                                     $34,996,205      $70,886,417
*The 2001 and 2006 amounts were determined by examination.
Report of Association Financial          National Home Insurance Company
Examination as of 12/31/06                    (A Risk Retention Group)                 Page 26

                       COMPARATIVE FINANCIAL STATEMENTS (continued)
                         DECEMBER 31, 2001 AND DECEMBER 31, 2006
                             LIABILITIES, SURPLUS AND OTHER FUNDS

                                                                 December 31,     December 31,
                                                                    2001*            2006*

 Losses                                                            $ 1,731,022     $ 3,397,093
 Loss adjustment expenses                                            1,749,651       2,480,151
 Commissions payable                                                (9,592,092)     (2,605,358)
 Other expenses                                                        319,314         657,197
 Taxes, licenses and fees                                              236,495         518,667
 Unearned premiums                                                  20,023,404      43,162,329
 Advance premiums                                                            0          17,400
 Ceded reinsurance premiums payable                                  2,479,637       4,380,224
 Funds held by company under reinsurance treaties                      618,375       2,694,354
 Amounts withheld or retained for account of others                          0         560,364
 Payable to parent, subsidiaries and affiliates                        380,451         582,373
 Aggregate write-ins for liabilities                                    52,077        (121,516)
 Total liabilities                                                 $17,998,334     $55,723,278

 Special surplus funds - member contributions                      $28,259,837     $28,259,837
 Common capital stock                                                  410,584         412,891
 Other special surplus funds – member paid in surplus                8,667,892       8,667,892
 Unassigned funds (surplus)                                        (20,340,442)    (22,177,481)
 Surplus as regards policyholders                                  $16,997,871     $15,163,139

 Total liabilities, surplus and other funds                        $34,996,205     $70,886,417
*The 2001 and 2006 amounts were determined by examination.
Report of Association Financial       National Home Insurance Company
Examination as of 12/31/06                 (A Risk Retention Group)                           Page 27

                              NOTES TO FINANCIAL STATEMENTS

Note 1: Uncollected Premiums in Course of Collection

The admitted balance of this asset, $7,763,301, consists of $5,732,644 for amounts due from Home
Buyers Warranty Corporation (HBW), the administrator, for enrolled warranty applications and premiums
to be remitted to the Company, and the net balance of $2,030,657 for premiums not reported and
collected, commonly referred to as “pipeline” premium. The pipeline premium represents an estimate for
new home warranty enrollments that have been incurred and have not been reported to HBW, and for
which premiums have not yet been received. The Company utilizes a link ratio methodology to estimate
the amount of the premiums in the pipeline. The methodology has been reviewed by the examination
team and was determined to make a reasonable estimate of the premiums not yet reported and received.

Note 2: Surplus as Regards Policyholders

Pursuant to Section 10-3-201, C.R.S., and Colorado Insurance Regulation 3-1-11, the Company is
required to maintain a minimum surplus level of at least $1,500,000 or an amount equivalent to the risk-
based capital (RBC) requirements set forth in the regulation. As of December 31, 2006, the Company’s
“authorized control level” RBC was determined to be $5,053,135. As of December 31, 2006, the
Company’s adjusted capital and surplus of $15,163,139 was 300% of the calculated “authorized control
level”.
Report of Association Financial       National Home Insurance Company
Examination as of 12/31/06                 (A Risk Retention Group)                           Page 28

                                             SUMMARY

Based upon the results of this examination, as of December 31, 2006, the Company had admitted assets of
$70,886,417, liabilities of $55,723,278 and surplus as regards policyholders of $15,163,139. As a result
of this examination, no changes were made to the Company’s reported surplus.
Report of Association Financial        National Home Insurance Company
Examination as of 12/31/06                  (A Risk Retention Group)                          Page 29

                                        RECOMMENDATIONS

Recommendations made as a result of this examination are as follows.

                                               REC.   PAGE
                   ISSUE                       NO.     NO.             RECOMMENDATION
 The Company has been classifying the           1       6      It is recommended that the Company
 one dollar received for each share of Class                   properly report the zero par value of Class
 A common stock as a capital contribution                      A stock in the common stock accounts
 instead of Paid In and Contributed                            and report the amounts received in
 Capital.                                                      connection with the redemption value of
                                                               the stock in the Company’s Paid-in and
                                                               Contributed Surplus capital accounts.

 During the review of the investment            2       9      It is recommended that the Company's
 authorization process it was noted that the                   board of directors ratify investment
 Company’s board of directors or a                             transactions quarterly or delegate such
 committee thereof did not ratify its                          authority to a committee of the board or
 investment activity on a quarterly basis.                     an appropriate officer of the Company to
                                                               comply with the provisions of Section 10-
                                                               3-234(b)(II), C.R.S.

 The Company has been paying under a            3       11     It is recommended that the Company
 management fee agreement that does not                        enter into a management fee agreement
 include the Company as a signatory nor                        with Brera which includes the following
 has the agreement been disclosed within                       information:
 the annual registration statement required
 under Section 10-3-804, C.R.S. and                                a) discloses     the      management
 Colorado Insurance Regulation 3-4-1.                                 services and any other anticipated
 Review of the agreement indicates that the                           services to be rendered and
 terms are insufficient to determine that                             discloses the fees to be charged to
 they meet the standards for material                                 the Company. This information
 transactions within a holding company                                is necessary to determine if the
 system under Section 10-3-805, C.R.S.                                agreement is fair and reasonable
 Additionally, the agreement also does not                            and complies with the standards
 include sufficient terms to meet SSAP No.                            of Section 10-3-805, C.R.S.
 96 regarding settlements and admissibility                        b) complies     with     the    timely
 of amounts 90 days due.                                              settlement provisions contained
                                                                      in SSAP No. 96.

                                                               This agreement must be included in the
                                                               annual registration statement required
                                                               under Section 10-3-804, C.R.S. and
                                                               Colorado Insurance Regulation 3-4-1.
Report of Association Financial       National Home Insurance Company
Examination as of 12/31/06                 (A Risk Retention Group)                           Page 30

                                           CONCLUSION

The courtesy, assistance and cooperation extended by the officers and employees of the Company during
the course of this examination are hereby acknowledged.

Patrick R. Knepler, Actuary, for the Division, conducted the actuarial phase of the examination. Philip
Gates, EDP Auditor, conducted the electronic data processing phase of the examination.

In addition to the undersigned, Brent Pearson and Keith Warburton, examiners for the Division,
participated in the examination.




                                                  Respectfully submitted,


                                                  _________________________________
                                                  Arthur D. Mowry, CFE
                                                  Examiner-in-Charge
                                                  Division of Insurance,
                                                  State of Colorado

								
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