REPORT ON MULTI-STATE EXAMINATION AS TO THE CONDITION MESA UNDERWRITERS SPECIALTY INSURANCE COMPANY. As of December 31, 2012

Transcription

1 REPORT ON MULTI-STATE EXAMINATION AS TO THE CONDITION OF MESA UNDERWRITERS SPECIALTY INSURANCE COMPANY As of December 31, 2012 NAIC Company Code NAIC Group Code 0242 FILED October 21, 2013 Commissioner Department of Banking & Insurance

2 Mesa Underwriters Specialty Insurance Company Financial Examination as of December 31, 2012 TABLE OF CONTENTS SCOPE OF THE EXAMINATION... 1 COMPANY HISTORY... 3 CAPITAL STOCK... 3 MANAGEMENT AND CONTROL... 3 CONFLICT OF INTEREST PROCEDURES... 4 CORPORATE RECORDS... 5 PARENT, SUBSIDIARIES AND AFFILIATES... 5 ORGANIZATIONAL CHART... 5 INTERCOMPANY AGREEMENTS... 5 FIDELITY BOND AND OTHER INSURANCE COVERAGE... 6 TERRITORY AND PLAN OF OPERATION... 8 REINSURANCE... 9 ACCOUNTS AND RECORDS FINANCIAL STATEMENTS EXHIBIT A - FINANCIAL STATEMENT AS OF DECEMBER 31, EXHIBIT B UNDERWRITING AND INVESTMENT EXHIBIT C CAPITAL AND SURPLUS NOTES TO FINANCIAL STATEMENTS SUBSEQUENT EVENTS CONCLUSION... 19

3 CHRIS CHRISTIE Governor KIM GUADAGNO Lt. Governor State of New Jersey DEPARTMENT OF BANKING AND INSURANCE OFFICE OF SOLVENCY REGULATION PO BOX 325 TRENTON, NJ TEL (609) FAX (609) KENNETH E. KOBYLOWSKI Commissioner September 19, 2013 Honorable Kenneth E. Kobylowski Commissioner New Jersey Department of Banking and Insurance 20 West State CN 325 Trenton, New Jersey Commissioner: In compliance with your instructions and pursuant to Insurance Laws and Rules of the State of New Jersey, a comprehensive risk focused examination has been made of the books, records and financial condition of Mesa Underwriters Specialty Insurance Company 40 Wantage Avenue Branchville, New Jersey hereinafter referred to as the Company or MUSIC. The following examination report as to the condition of the Company is respectfully submitted. SCOPE OF THE EXAMINATION The New Jersey Department of Banking and Insurance, hereinafter referred to as the NJDOBI or We, have performed a full scope coordinated multi-state risk focused examination of the Company, as the Lead State. The New York and Indiana Departments of Insurance participated in this examination. This examination covers the period beginning with the date the Company was authorized in New Jersey, January 1, 2012, through December 31, 2012, including any material transactions and/or events occurring subsequent to the examination date and noted during the course of the examination. The principal portion of the examination was conducted at the Company s statutory home office in Branchville, New Jersey. The current examination was conducted concurrent with the examinations of its affiliates, Selective Insurance Company of America (SICA), Selective Way Insurance Company 1

4 (SWIC), Selective Insurance Company of New York (SICNY), Selective Auto Insurance Company of New Jersey (SAICNJ), Selective Fire and Casualty Insurance Company (SFCIC), Selective Insurance Company of New England (SICNE), Selective Casualty Insurance Company (SCIC), Selective Insurance Company of South Carolina (SICSC) and Selective Insurance Company of the Southeast (SICSE) (collectively, the Group). The examination was conducted in accordance with the NAIC Financial Condition Examiners Handbook. The Handbook requires that the examination be planned and performed to evaluate the financial condition and identify prospective risks of the company by obtaining information about the company, including corporate governance, identification and assessment of inherent risks within the company and evaluation of system controls and procedures used to mitigate those risks. An examination also includes assessment of the principles used and significant estimates made by management, as well as evaluation of the overall financial statement presentation, management s compliance with Statutory Accounting Principles and annual statement instructions when applicable to domestic state regulations. The general procedure of the examination followed the rules established by the Financial Condition, Examination and Reporting Committee of the NAIC and included such other examination procedures as were deemed necessary. During the course of this examination, consideration was given to work performed by both the Company s Internal Audit Department as regards to its oversight of compliance with Sarbanes-Oxley, risk analysis, documentation, test work, remediation efforts over weaknesses identified and by the Company s external accounting firm. Certain auditor work papers have been incorporated into the work papers of the examiners and have been utilized in determining the scope and areas of emphasis in conducting the examination. In addition to the review of the Company's operations during the period ending December 31, 2012, and a determination of its financial condition as of that date, transactions occurring subsequent to the examination date were reviewed and incorporated herein when deemed appropriate. A review was made of the following matters to ascertain the Company's financial condition and its conformity with the insurance laws of the various jurisdictions in which it operates: History and Kind of Business Territory and Plan of Operation Management and Control Corporate Records Policy on Conflict of Interest Holding Company System Intercompany Agreements Fidelity Bond and Other Insurance Coverages Reinsurance Accounts and Records No market conduct examination activities were undertaken. This report is confined to financial statements and comments on matters that involve departures from law, regulations, rules or any other matters, which are deemed to require special explanation or description. 2

5 COMPANY HISTORY The Company was incorporated under the laws of the State of Oklahoma on November 11, 1978 and commenced business on February 2, 1979 as a property and casualty insurance company. In 2006 the Company was a wholly-owned subsidiary of GAINSCO, Inc. (GAINSCO), a publicly traded insurance holding company incorporated in the State of Texas. The Company was licensed only in the State of Oklahoma, but was approved on a surplus lines basis in thirty seven states and the District of Columbia. The Company did not write any new business, but instead assumed all business from a subsidiary company, MGA Insurance Company, under the provisions of a reinsurance pooling agreement. On November 1, 2007, Montpelier Re U.S. Holdings, Ltd. (MRUSHL) purchased the Company from GAINSCO. As of December 31, 2009, the Company was a wholly-owned subsidiary of MRUSHL, which is a wholly-owned subsidiary of Montpelier Holdings, Ltd. of the United Kingdom, which is a wholly-owned subsidiary of Montpelier Re Holdings, Ltd., a Bermuda exempted limited liability company publicly traded on the New York Stock Exchange (ticker symbol MRH) and the Bermuda Stock Exchange. On December 31, 2011, SIGI acquired all of the issued and outstanding stock of the Company. At that time, the Company redomesticated from Oklahoma to New Jersey, changed its name from Montpelier U.S. Insurance Company to Mesa Underwriters Specialty Insurance Company and amended and restated its Certificate of Incorporation. The Company is a member of an insurance company holding system as defined in N.J.S.A. 17:27A-1. Accordingly, the Company has registered with the State of New Jersey under the registration filed by its parent, Selective Insurance Group, Inc. (SIGI). As of January 1, 2012, the Company is a stock company recognized as an Eligible Unauthorized Domestic Insurer in New Jersey to engage in the kinds of insurance specified in paragraphs a, b, e, f, g, j, k, l, n, and o and Legal Services Insurance pursuant to N.J.S.A. 17:46C-4a.(1). The Company is authorized to issue both participating and nonparticipating policies. The Company s statutory home office in the State of New Jersey is located at 40 Wantage Avenue, Branchville, New Jersey Capital Stock The Company has 4,000,000 authorized shares issued and outstanding with $1.00 par value per share. SIGI owns 100% of the Company s outstanding capital stock. The Company has no preferred stock outstanding. Management and Control The Company s By-laws state that the number of directors who shall serve on the Board be not less than one or more than fifteen, the exact number of which shall be fixed from time to time by resolution of the Board. At December 31, 2012, there were eight board members as follows: Directors Gregory E. Murphy Dale A. Thatcher Principal Occupation Chairman of the Board, President and CEO Executive Vice President and Chief Financial Officer 3

6 Ronald J. Zaleski, Sr Michael H. Lanza John J. Marchioni Ronald E. St. Clair Charles A. Musilli, III Susan B. Sweeney Executive Vice President and Chief Actuary Executive Vice President, General Counsel and Chief Compliance Officer Executive Vice President, Insurance Operations Executive Vice President and Chief Information Officer Senior Vice President, Northeast Region Manager and Agency Development Senior Vice President and Chief Investment Officer The members serving on the SIGI Audit Committee as of December 31, 2012, were as follows: Ronald L. O Kelley, Chairperson Paul D. Bauer Annabelle G. Bexiga John C. Burville J. Brian Thebault The audit committee of SIGI is comprised entirely of independent directors. Ronald L. O Kelley is currently designated as the committee s financial expert. N.J.S.A. 17:27A-4d.(3) requires that no less than one-third of the directors be directors who are not officers or employees of the corporation or of any entity controlling, controlled by or under common control with the corporation and who are not beneficial owners of a controlling interest in the voting securities of the corporation or any such entity. N.J.S.A. 17:27A-4d.(5) provides that the provisions of paragraphs (3) and (4) of subsection N.J.S.A. 17:27A-4d. shall not apply to a domestic insurer if the person controlling the insurer is an entity having a board of directors and committees thereof that substantially meet the requirements of those paragraphs. SIGI is the parent of the Company, and SIGI has a board of directors and committees thereof that substantially meet the requirements of N.J.S.A. 17:27A-4d.(3) and (4). The Company, therefore, was found to be in compliance with these statutes. The executive officers of the Company as of December 31, 2012, were as follows: Executive Officer Title Richard R. Nenaber President Scott A. Wilson Chief Financial Officer Michael H. Lanza Executive Vice President & Corporate Secretary Jennifer W. DiBerardino Senior Vice President & Treasurer Sarita G. Chakravarthi Senior Vice President Susan B. Sweeney Senior Vice President Conflict of Interest Procedures The Company has established a procedure for disclosure to its Board of any material interest or affiliation on the part of its officers, directors and employees that are in conflict with the official duties of such persons. Each year, the Company requires its directors, officers and employees to sign a conflict of interest questionnaire and to divulge any potential conflicts of interest that could have an 4

7 impact on the way they conduct the Company s business. A review of the conflict of interest questionnaires revealed conflicts were being reported as instructed. CORPORATE RECORDS A review was made of the Board minutes and committee minutes for the period of examination. This examination determined that the minutes adequately approve and support the Company s transactions and events. PARENT, SUBSIDIARIES AND AFFILIATES The Company is a member of an insurance company holding system as defined in N.J.S.A. 17:27A-1 et seq. Accordingly, the Company has filed with the State of New Jersey an insurance holding company registration as is required under N.J.S.A. 17:27A-3. The following organizational chart at December 31, 2012, identifies the companies within the holding company organization. Organizational Chart Selective Insurance Group, Inc. Ultimate Parent Company Wantag e Avenue Ho lding Co mpany, Inc. Stonecreek Specialty Und e rwrite rs, LLC Selective Insurance Co mpany of America NAIC CO CODE (NJ) Selective Way Insurance Co mpany NAIC CO CODE (NJ) Selective Insurance Co mpany of the S o utheas t NAIC CO CODE (IN) Selective Ins ura nc e Co mpany o f S o uth Caro lina NAIC CO CODE (IN) Selective Insurance Company of New York NAIC CO CODE (NY) Selective Ins ura nc e Co mpany of New Eng land NAIC CO CODE (NJ) Selective Auto Insurance Co mpany of New Jersey NAIC CO CODE (NJ) Mesa Und erwrit ers Specialty Insurance Co mpany NAIC CO CODE (NJ) Selective Casualty Insurance Company NAIC CO CODE (NJ) Selective Fire and Casualty Insurance Co mpany NAIC CO CODE (NJ) SRM Insurance Brokerage, LLC 5

8 Intercompany Agreements Service Agreement Effective July 1, 1995, the Company s affiliates SWIC, SICSC and SICSE entered into a Service Agreement with SICA, with SICNE as an additional signatory on January 1, 2004 and SAICNJ as an additional signatory effective July 1, In addition, SICA entered into Service Agreements with the Company (effective January 1, 2012), SFCIC (effective July 1, 2012) and SCIC (effective July 1, 2012). Under these agreements, SICA performs certain administrative and other services for its affiliates in their operations and makes use of certain properties, equipment, and facilities. SICA allocates these expenses back to its affiliates to be reimbursed based on the percentages set forth in the Amended and Restated Pooling Agreement (2012) (see Reinsurance Section of this Report for further details). Reinsurance Pooling Agreement Effective July 1, 2012, the Company, entered into the Second Amended and Restated Reinsurance Pooling Agreement (2012) with SICA, SWIC, SICSC, SICSE, SAICNJ, SICNE, SICNY, SCIC, and SFCIC (collectively, pool members). Under this agreement, each pool member cedes 100% of its underwriting activity (net of inuring third party reinsurance) to SICA, the lead company in the pool (see Reinsurance Section of this Report for further details). Tax Allocation Agreement The Company and its affiliates, along with the ultimate parent, SIGI, file a consolidated federal income tax return. Effective January 1, 2012, the Company and certain affiliates entered into the Amended and Restated Tax Allocation Agreement (2012), which covers the allocation, settlement, and financial statement presentation of current federal income taxes among companies in the consolidated income tax return of SIGI and its subsidiaries. The Company entered into the First Amendment to the Amended and Restated Tax Allocation Agreement (2012) effective July 1, 2012, to add SCIC and SFCIC to the agreement. Investment Services Agreement Effective July 1, 1995, SICA entered into a Joint Investment Operation Agreement with SWIC, SICSE, and SICSC (with amendments and additional signatories effective January 1, 2004 (SICNE), July 1, 2006 (SAICNJ) and June 30, 2008). In addition, SICA entered into Investment Services Agreements with the Company (effective January 1, 2012), SCIC (effective July 1, 2012) and SFCIC (effective July 1, 2012). Under these agreements, SICA is appointed as investment manager with full power and authority to act on behalf of the aforementioned affiliates as to all monies, stocks, bonds, and securities that are entrusted to the SICA under these agreements. SICA incurs and pays expenses, receives and collects monies and undertakes any of the activities involved in the investment operations. In addition, SICA maintains each affiliates monies or investments in separate custodial accounts in the name of the applicable affiliate with a qualified fiduciary agent. Effective January 1, 1993, SICA entered into an Investment Services Agreement with SICNY whereby SICA performs certain investment and related services to help achieve certain operating economies and improve the investment performance of SICNY. 6

9 FIDELITY BOND AND OTHER INSURANCE COVERAGE As of December 31, 2012, SIGI, on behalf of itself and its subsidiaries, including the Company, maintains a fidelity bond with the Federal Insurance Company and has a single loss limit of $5 million and a shared aggregate limit of liability of $10 million. The aggregate limit of liability exceeds the NAIC suggested minimum. As of December 31, 2012, the Company is also a party to an insurance program whereby its parent, SIGI, has purchased policies to protect itself and its subsidiaries in the following areas, as applicable: Property - policy provides protection for buildings and contents, business income, earthquake, flood and inland marine coverage. It is underwritten by SWIC and has the following limits: Building & Business Personal Property - $136,377,163 Business Income - $25,874,160 Difference In Conditions (Flood & Earthquake) - $50,000,000 Inland Marine various ($10M Equipment; $1M property in transit; $305,000 unscheduled) Boiler & Machinery - provided by Hartford Steam Boiler Inspection and Insurance Company with a limit of $100 million. Workers Compensation - provided by SICSC for all Selective employees except those in AZ, CA, FL, NE, TX and WV. Coverage for those states is provided by the Federal Insurance Company. Both policies provide the following limits: Workers Compensation - statutory requirements Employers Liability - $1 million each accident, $1 million policy limit and $1 million each employee Directors & Officers - total of 10 layers providing a total limit of $100 million with an additional $30 million of Side A only coverage. There are 10 carriers that provide the 10 layers of coverage. Fiduciary Liability - provided by St. Paul Mercury Insurance Company (Travelers) with a limit of $15 million and $100,000 retention. Pollution Liability - provided by Admiral Insurance Company with limits of $2 million per pollution condition and $2 million total of all claims and $10,000 deductible. General Liability - provided by SWIC with limits of $1 million each occurrence and $3 million aggregate. Automobile Liability - provided by SWIC with a $1 million combined single limit. 7

10 Professional Liability, Errors & Omissions - provided by SICA with a $17 million limit of liability per claim and in the aggregate. Commercial Umbrella Liability - first layer provided by SWIC with a limit of $20 million; second layer provided by St. Paul Fire & Marine Insurance Company (Travelers) with a limit of $21 million in excess of underlying $20 million. Employment Practices Liability - provided by Lloyds of London Syndicate 623/2623 (Beazley) with an aggregate limit of liability of $10 million and $250,000 retention. ERISA Bond - provided by the Federal Insurance Company with a $2.5 million limit of liability. TERRITORY AND PLAN OF OPERATION The Company is 100% owned by SIGI. SIGI is a publicly traded stock company, which through its insurance subsidiaries writes a broad range of property and casualty insurance products. SICA and its admitted affiliated insurance companies (the Admitted Companies) provide a broad range of insurance and alternative risk management products and services to businesses, public entities and individuals. As of December 31, 2012, the Admitted Companies distributed these products and services through approximately 1,100 independent agencies primarily in 22 states and the District of Columbia. In addition, the Company writes excess and surplus business in all fifty states and the District of Columbia through approximately 95 wholesale agencies. Furthermore, they have approximately 5,000 agents selling the flood insurance products written under the NFIP s WYO program. The Admitted Companies employ a field-based operating model that is supported by its home office in Branchville, New Jersey, and five full-service regions utilizing branch offices. The Admitted Companies business strategy targets small and midsized "main street" commercial accounts. This strategy is supported by the group's formation of strategic business units (SBUs) and regional field offices, along with significant advancements in its information technology platforms, integrated systems and internet-based applications. Under this structure, each SBU specializes in a particular market or customer class to provide better service to its customers, become more attuned to areas of opportunity and enhance productivity. All products and services are developed through SBUs in conjunction with Agency Management Specialists (AMSs), the branch office network and the respective agents. Under the group's regional branch office strategy, agents directly interact with approximately 100 AMSs, who live and work in the geographic vicinity of the Admitted Companies appointed agents and act as local field underwriters to this group of agencies. AMSs are experienced underwriters who are supported by branch office and corporate underwriters and technical personnel. AMSs work closely with agencies to determine growth and profitability objectives. They also utilize on-site claims adjusters known as Claims Management Specialists (CMSs) and Safety Management Specialists (SMSs) - both of which are located throughout their operating territories. The Admitted Companies utilize their field and corporate claim expertise in their claims processing and continues to emphasize personal, local claims handling. 8

11 The Group is committed to the independent agency system and works closely with agents and field underwriters to identify new business opportunities and to develop and market product. Administrative Offices While the primary management and financial reporting activities are conducted from the Home Office in Branchville, New Jersey, the Admitted Companies maintain other regional offices, including the following, as of December 31, 2012: Region Heartland New Jersey Northeast Mid Atlantic Southern Office Location Carmel, Indiana Hamilton, New Jersey Branchville, New Jersey Allentown, Pennsylvania and Hunt Valley, Maryland Charlotte, North Carolina Also, the Company maintains offices in Horsham, Pennsylvania and Scottsdale, Arizona. REINSURANCE Reinsurance Agreements with Affiliates The Company is a participant in the Second Amended and Restated Reinsurance Pooling Agreement (2012). Under this agreement, each pool member cedes 100% of its underwriting activity (net of inuring third party reinsurance) to SICA. The remaining net underwriting activity is retroceded to each pool member in accordance with each company's pooling percentage as set forth in the Second Amended and Restated Reinsurance Pooling Agreement (2012). The pooled percentages as of December 31, 2012, by Company, are as follows: Selective Insurance Company of America 32% Selective Way Insurance Company 21% Selective Insurance Company of South Carolina 9% Selective Insurance Company of the Southeast 7% Selective Insurance Company of New York 7% Selective Casualty Insurance Company 7% Selective Auto Insurance Company of New Jersey 6% Mesa Underwriters Specialty Insurance Company 5% Selective Insurance Company of New England 3% Selective Fire and Casualty Insurance Company 3% Reinsurance Agreements with Non-Affiliates The Group assumes required business from its participation from various voluntary and involuntary pools. The Group had the following reinsurance program in effect at December 31, 2012: 9

12 CASUALTY 2012 Workers Compensation & Casualty Excess of Loss Treaty (various reinsurers) Standard Lines Maximum Reinsurance Retention Limit Total Each Occurrence Each Occurrence Limits First Layer $2,000,000 $3,000,000 $5,000,000 Second Layer $5,000,000 $7,000,000 $12,000,000 Third Layer $12,000,000 $9,000,000 $21,000,000 Fourth Layer $21,000,000 $9,000,000 $30,000,000 Fifth Layer $30,000,000 $20,000,000 $50,000,000 Sixth Layer $50,000,000 $40,000,000 $90,000,000 PROPERTY 2012 Property Excess of Loss Treaty (various reinsurers) Maximum Reinsurance Retention Limit Total Each Occurrence Each Occurrence Limits First Layer $2,000,000 $8,000,000 $10,000,000 Second Layer $10,000,000 $20,000,000 $30,000, Property Catastrophe Maximum Reinsurance Retention Limit Total Each Occurrence Each Occurrence Limits First Layer 40,000,000 60,000, ,000,000 Second Layer 100,000, ,000, ,000,000 Third Layer 225,000, ,000, ,000,000 The Company retains 5% in layer one and 10% in the second and third layers. In 2013, the Company added a fourth layer to their Property Catastrophe Program. This layer protects the Company for ninety eight percent of losses for $150,000,000 excess $475,000,

13 OTHER REINSURANCE 2012 Surety and Fidelity Excess of Loss Maximum Retention Reinsurance Limit Total Each Occurrence Each Occurrence Limits First Layer $1,000,000 $3,000,000 $4,000,000 Second Layer Contract Surety $4,000,000 $5,000,000 $9,000,000 Commercial Surety $4,000,000 $2,000,000 $6,000,000 Third Layer Contract Surety $9,000,000 $3,000,000 $12,000,000 The Company and its affiliates, as the case may be, retain the first $1 million and 10 percent co-participation of each layer. Excess and Surplus Lines As part of the Company s acquisition by SIGI on December 31, 2011, the Company entered into several reinsurance agreements that together provide protection for losses on policies written prior to the acquisition and any development on reserves established by the Company as of the date of acquisition. The reinsurance recoverables under these treaties are 100% collateralized. ACCOUNTS AND RECORDS The Company s accounting books and records are maintained at its main administrative office located at 40 Wantage Avenue, Branchville, New Jersey Lawson-Hyperion general ledger system is utilized by the Group to record, analyze and report financial results. Standard Insurance Operations premiums and losses are recorded through the use of its in-house computerized systems, CLAS commercial lines underwriting system, SelectPLUS - personal lines underwriting system, esurety TM surety/fidelity bond underwriting system and MCS claims system. Excess and surplus lines ( E&S ) premium and losses are recorded within purchased systems, Dragon One Shield and Claim Zone. Reinsurance premium and loss transactions are primarily recorded in a purchased system ProCede. Standard Insurance Operations premiums are billed and tracked through the TARABs system and E&S premium receipts are billed and tracked within the EBIS system. The premium receipts are primarily processed through the following sources: 1. Lock Box with Bank of NY Mellon N.A. 2. ORCC electronic payments, includes ACH and credit cards 3. Agent Payment System ACH method for agents The insurance affiliates are parties to a reinsurance pooling agreement and various intercompany service and other agreements under which SICA is the lead insurance company. Premium and losses are received and paid by SICA and are settled with its affiliated insurance companies through intercompany accounts. Transactions to be settled as 11

14 a result of the intercompany pooling agreement are recorded in the respective assumed and ceded reinsurance accounts. Investments are recorded in a purchased system, Princeton Asset Management. Each insurance affiliate owns and controls its funds via their respective custodial accounts at State Street Bank and Trust Company. FINANCIAL STATEMENTS The following pages contain financial statements showing the Company s financial position as of December 31, 2012, (Exhibit A) and the results of its operations for the five year period ending December 31, 2012, (Exhibit B), including capital and surplus (Exhibit C). 12

15 Exhibit A - Financial Statement as of December 31, 2012 Comparative Statement of Assets Liabilities, Surplus and Other Funds at December 31, 2012 Exhibit A Current Balance per Examination Company Assets: at 12/31/12 at 12/31/12 Note Bonds $204,264,030 $204,264,030 Cash, Cash Equivalents & Short term investments 7,269,245 7,269,245 Investment Income due and accrued 1,972,217 1,972,217 Uncollected premium and agents' balances in the course of collection 9,813,951 9,813,951 Deferred premiums, agents' balances and installments booked but deferred and not yet due 20,357,216 20,357,216 Accrued retrospective premiums 44,315 44,315 Amounts recoverable from reinsurers 670, ,986 Current Federal & Foreign income tax recoverable and interest 4,441,975 4,441,975 Net deferred tax asset 6,993,753 6,993,753 Guaranty funds receivable or on deposit 59,347 59,347 Aggregate write-ins for other than invested assets 1,926,621 1,926,621 Total Assets $257,813,656 $257,813,656 Liabilities: Losses $111,342,909 $111,342,909 1 Reinsurance payable on paid loss and LAE 4,760,409 4,760,409 Loss adjustment expenses 21,378,013 21,378,013 1 Commission payable, contingent commissions and other similar charges 2,615,209 2,615,209 Other expenses 2,103,813 2,103,813 Taxes, licenses and fees 1,304,924 1,304,924 Unearned premiums 42,103,421 42,103,421 Advance premiums 203, ,876 Dividends declared and unpaid: policyholders 133, ,239 Ceded reinsurance premium payable 9,189,333 9,189,333 Funds held by Company under reinsurance treaties 41,067 41,067 Amounts withheld or retained by Company for account of others 273, ,143 Provision for reinsurance 77,064 77,064 Payable to parent, subsidiares and affiliates 1,192,889 1,192,889 Payable for securities 3,935,137 3,935,137 Aggregate write ins for liabilities 3,549,228 3,549,228 Total Liabilities $204,203,674 $204,203,674 Capital and Surplus: Common capital stock $4,000,000 $4,000,000 2 Gross paid in and contributed surplus 64,505,128 64,505,128 2 Unassigned Funds (surplus) (14,895,146) (14,895,146) 2 Surplus as regards policyholders $53,609,982 $53,609,982 2 Total Liabilities and Surplus and Other Funds $257,813,656 $257,813,656 13

16 Exhibit B Underwriting and Investment Underwriting and Investment Exhibit for the two year period ending December 31, 2012 Exhibit B Underwriting Income Premiums earned $12,550,544 $79,193,439 Deductions: Losses incurred 7,786,227 47,672,452 Loss adjustment expenses incurred 3,985,269 8,336,783 Other underwriting expenses incurred 4,928,745 27,395,831 Aggregate write-ins for underwriting deductions 0 35,855 Total underwriting deductions $16,700,241 $83,440,921 Net underwriting loss ($4,149,697) ($4,247,482) Investment Income Net investment income earned $1,953,751 $4,845,693 Net realized capital gains 1,810, ,397 Net investment gain $3,764,042 $4,988,090 Other income Net gain or loss from agents' or premium balances charged off ($77,345) ($169,925) Finance and service charges not included in premiums 0 345,141 Aggregate write-ins for miscellaneous income 0 128,518 Total other income ($77,345) $303,734 Net income, before dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes ($463,000) $1,044,342 Dividends to policyholders 0 172,420 Net income after dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes (463,000) 871,922 Federal and foreign income taxes incurred 0 (75,261) Net income (loss) ($463,000) $947,183 14

17 Exhibit C Capital and Surplus Capital and Surplus for the two year period ending December 31, 2012 Exhibit C Capital and Surplus Account Surplus, December 31, prior year Net income or (loss) (463,001) 947,183 Change in net unrealized capital gains or losses 14,063 0 Change in net deferred income tax (1,518,533) 432,828 Change in non-admitted assets 1,233,460 62,735 Change in provision for reinsurance 8,300 (77,064) Capital changes: Transferred from surplus (stock dividend) 1,000,000 Surplus adjustments: Paid in 230,128 13,275,000 Transferred to capital (stock dividend) (1,000,000) 0 Aggregate write-ins for gains and losses in surplus (890,492) Change in Surplus as regards to policyholders for (495,583) 13,750,190 the year Surplus December 31 previous year 40,355,375 39,859,792 Surplus December 31 current year 39,859,792 53,609,982 15

18 NOTES TO FINANCIAL STATEMENTS (NOTE 1) LOSSES AND LOSS ADJUSTMENT EXPENSES The Company s reported liabilities at December 31, 2012, for unpaid losses and unpaid loss adjustment expenses, net of reinsurance, amounted to $111,342,909 and $21,378,013, respectively. The Property and Casualty Actuarial Unit of the NJDOBI, Office of Solvency Regulation performed a review and evaluation of the outstanding gross and net loss and loss adjustment expense reserves. This review determined the year-end loss provisions established by the Company to be reasonable. Data supplied to the Department s Actuarial Staff was reconciled to the Company s Annual Statement. Detail supporting loss payments and case reserves was provided by the Company and reconciled to Schedule P of the Annual Statements for the years under examination. Samples of reserves and payments were selected and verified to source documents. (NOTE 2) SURPLUS AS REGARDS POLICYHOLDERS Common Capital Stock, Gross Paid In and Contributed Surplus and Unassigned Fund (Surplus) reported by the Company and as determined by this examination were $4,000,000, $64,505,128 and ($14,895,146), respectively. Total Surplus as Regards Policyholders was $53,609,982, as of December 31, 2012, reported by the Company and as determined by this examination. 16

19 LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES-STATEMENT BY NJDOBI ACTUARY Mesa Underwriters Specialty Insurance Company I, Boris Privman, FCAS, MAAA, Managing Actuary for the New Jersey Department of Banking and Insurance, Office of Solvency Regulation, Actuarial Unit have performed an actuarial review of the reported December 31, 2012, loss and loss adjustment expense reserves for the Mesa Underwriters Specialty Insurance Company. Based upon this review the Company s booked gross and net loss reserves should be accepted without adjustments. Actuarial findings as stated above and in this examination report are the sole responsibility of the New Jersey Department of Banking and Insurance s Property and Casualty Actuarial Unit of the Office of Solvency Regulation. /S/ Boris Privman, FCAS, MAAA 17

20 SUBSEQUENT EVENTS The subsequent events period considered for the examination was December 31, 2012, through the date of the completion of this examination report. The only significant subsequent event noted was SIGI issued debt in February SIGI then contributed capital to the following companies: SICA $30,500,000 SWIC 5,375,000 SICSE 6,000,000 SICSC 10,000,000 SICNY 375,000 SICNE 375,000 SAICNJ 4,500,000 18

21 CONCLUSION The undersigned hereby certifies that an examination has been made of the Mesa Underwriters Specialty Insurance Company and the foregoing report is true to the best of my knowledge and belief. Respectfully submitted, /S/ Hails Taylor, CFE Examiner-In-Charge Representing the State of New Jersey Under the supervision of, /S/ Robert Redden, CFE CFE Reviewer New Jersey Department of Banking and Insurance State of New Jersey County of Mercer Subscribed and sworn to before me, Linda L. Boone, on this 25th day of September, /S/ Notary Public of New Jersey My commission expires: 3/26/