QUARTERLY STATEMENT THE PARAMOUNT INSURANCE COMPANY

Transcription

1 QUARTERLY STATEMENT OF THE THE PARAMOUNT INSURANCE COMPANY Of PIKESVILLE in the state of MD to the Insurance Department of the State of For the Period Ended June 30, /14/ :56:13 AM

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3 ASSETS Current Statement Date Net Admitted December 31 Nonadmitted Assets Prior Year Net Assets Assets (Cols. 1-2) Admitted Assets 1. Bonds ,308, ,308, ,585, Stocks: 2.1 Preferred stocks Common stocks Mortgage loans on real estate: 3.1 First liens Other than first liens Real estate: 4.1 Properties occupied by the company (less $...0 encumbrances) Properties held for the production of income (less $...0 encumbrances) Properties held for sale (less $...0 encumbrances) Cash ($...162,339), cash equivalents ($...0) and short-term investments ($...1,165,599) ,327, ,327, ,122, Contract loans (including $...0 premium notes) Derivatives Other invested assets , , Receivables for securities Securities lending reinvested collateral assets Aggregate write-ins for invested assets Subtotals, cash and invested assets (Lines 1 to 11) ,637, , ,636, ,707, Title plants less $...0 charged off (for Title insurers only) Investment income due and accrued , , , Premiums and considerations: 15.1 Uncollected premiums and agents' balances in the course of collection , , , , Deferred premiums, agents' balances and installments booked but deferred and not yet due (including $...0 earned but unbilled premiums) Accrued retrospective premiums ($...0) and contracts subject to redetermination ($...0) Reinsurance: 16.1 Amounts recoverable from reinsurers ,125, ,125, , Funds held by or deposited with reinsured companies Other amounts receivable under reinsurance contracts Amounts receivable relating to uninsured plans Current federal and foreign income tax recoverable and interest thereon Net deferred tax asset , , Guaranty funds receivable or on deposit Electronic data processing equipment and software , , , , Furniture and equipment, including health care delivery assets ($...0) , , Net adjustment in assets and liabilities due to foreign exchange rates Receivables from parent, subsidiaries and affiliates , , Health care ($...0) and other amounts receivable Aggregate write-ins for other than invested assets , , , Total assets excluding Separate Accounts, Segregated Accounts and Protected Cell Accounts (Lines 12 through 25) ,543, ,526, ,017, ,065, From Separate Accounts, Segregated Accounts and Protected Cell Accounts Total (Lines 26 and 27) ,543, ,526, ,017, ,065,955 DETAILS OF WRITE-INS Summary of remaining write-ins for Line 11 from overflow page Totals (Lines 1101 thru 1103 plus 1198) (Line 11 above) Prepaid Expenses , , Miscellaneous Receivables , , Prepaid Premium Tax , , Summary of remaining write-ins for Line 25 from overflow page Totals (Lines 2501 thru 2503 plus 2598) (Line 25 above) , , , Q02 08/14/ :56:14 AM

4 LIABILITIES, SURPLUS AND OTHER FUNDS 1 2 Current December 31 Statement Date Prior Year 1. Losses (current accident year $...1,511,448) ,284, ,571, Reinsurance payable on paid losses and loss adjustment expenses Loss adjustment expenses ,067, ,052, Commissions payable, contingent commissions and other similar charges , , Other expenses (excluding taxes, licenses and fees) , , Taxes, licenses and fees (excluding federal and foreign income taxes) , Current federal and foreign income taxes (including $...0 on realized capital gains (losses)) Net deferred tax liability Borrowed money $...0 and interest thereon $ Unearned premiums (after deducting unearned premiums for ceded reinsurance of $...2,863,382 and including warranty reserves of $...0 and accrued accident and health experience rating refunds including $...0 for medical loss ratio rebate per the Public Health Service Act) ,938, ,560, Advance premium Dividends declared and unpaid: 11.1 Stockholders Policyholders Ceded reinsurance premiums payable (net of ceding commissions) ,159, ,621, Funds held by company under reinsurance treaties Amounts withheld or retained by company for account of others Remittances and items not allocated Provision for reinsurance (including $...0 certified) Net adjustments in assets and liabilities due to foreign exchange rates Drafts outstanding Payable to parent, subsidiaries and affiliates , Derivatives Payable for securities Payable for securities lending Liability for amounts held under uninsured plans Capital notes $...0 and interest thereon $ Aggregate write-ins for liabilities Total liabilities excluding protected cell liabilities (Lines 1 through 25) ,733, ,245, Protected cell liabilities Total liabilities (Lines 26 and 27) ,733, ,245, Aggregate write-ins for special surplus funds Common capital stock , , Preferred capital stock Aggregate write-ins for other than special surplus funds Surplus notes ,385, ,385, Gross paid in and contributed surplus , , Unassigned funds (surplus)......(2,470,567)...(1,933,475) 36. Less treasury stock, at cost: shares common (value included in Line 30 $...0) shares preferred (value included in Line 31 $...0) Surplus as regards policyholders (Lines 29 to 35, less 36) ,283, ,820, Totals (Page 2, Line 28, Col. 3) ,017, ,065,955 DETAILS OF WRITE-INS Summary of remaining write-ins for Line 25 from overflow page Totals (Lines 2501 thru 2503 plus 2598) (Line 25 above) Summary of remaining write-ins for Line 29 from overflow page Totals (Lines 2901 thru 2903 plus 2998) (Line 29 above) Summary of remaining write-ins for Line 32 from overflow page Totals (Lines 3201 thru 3203 plus 3298) (Line 32 above) Q03 08/14/ :56:14 AM

5 STATEMENT OF INCOME Current Year Prior Year Prior Year Ended to Date to Date December 31 UNDERWRITING INCOME 1. Premiums earned: 1.1 Direct... (written $...5,416,039) ,696, ,998, ,311, Assumed... (written $...0) Ceded... (written $...2,678,840) ,309, ,353, ,999, Net... (written $...2,737,199) ,386, ,644, ,312,450 DEDUCTIONS: 2. Losses incurred (current accident year $...1,975,910): 2.1 Direct ,180, ,282, ,637, Assumed Ceded ,958, , ,702, Net ,221, ,533, ,934, Loss adjustment expenses incurred , , ,346, Other underwriting expenses incurred ,210, ,027, ,868, Aggregate write-ins for underwriting deductions Total underwriting deductions (Lines 2 through 5) ,114, ,212, ,149, Net income of protected cells Net underwriting gain (loss) (Line 1 minus Line 6 + Line 7)......(727,333)...(567,623)...163,241 INVESTMENT INCOME 9. Net investment income earned , , , Net realized capital gains (losses) less capital gains tax of $ (9,547) Net investment gain (loss) (Lines ) , , ,376 OTHER INCOME 12. Net gain or (loss) from agents' or premium balances charged off (amount recovered $...0 amount charged off $...16,539)......(16,539)...(11,480)...(26,583) 13. Finance and service charges not included in premiums Aggregate write-ins for miscellaneous income , ,627...(141,383) 15. Total other income (Lines 12 through 14) ,796...(7,853)...(167,966) 16. Net income before dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes (Lines )......(610,679)...(503,754)...147, Dividends to policyholders Net income, after dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes (Line 16 minus Line 17)......(610,679)...(503,754)...147, Federal and foreign income taxes incurred Net income (Line 18 minus Line 19) (to Line 22)......(610,679)...(503,754)...147,651 CAPITAL AND SURPLUS ACCOUNT 21. Surplus as regards policyholders, December 31 prior year ,820, ,499, ,499, Net income (from Line 20)......(610,679)...(503,754)...147, Net transfers (to) from Protected Cell accounts Change in net unrealized capital gains or (losses) less capital gains tax of $ Change in net unrealized foreign exchange capital gain (loss) Change in net deferred income tax , ,112...(382,207) 27. Change in nonadmitted assets......(56,712)...(161,430)...(194,228) 28. Change in provision for reinsurance Change in surplus notes , , Surplus (contributed to) withdrawn from protected cells Cumulative effect of changes in accounting principles Capital changes: 32.1 Paid in Transferred from surplus (Stock Dividend) Transferred to surplus Surplus adjustments: 33.1 Paid in Transferred to capital (Stock Dividend) Transferred from capital Net remittances from or (to) Home Office Dividends to stockholders Change in treasury stock Aggregate write-ins for gains and losses in surplus Change in surplus as regards policyholders (Lines 22 through 37)......(537,092)...(42,072)...321, Surplus as regards policyholders, as of statement date (Lines 21 plus 38) ,283, ,457, ,820,525 DETAILS OF WRITE-INS Summary of remaining write-ins for Line 5 from overflow page Totals (Lines 0501 thru 0503 plus 0598) (Line 5 above) Miscellaneous Income , , , Other expense - litigation costs (145,004) Summary of remaining write-ins for Line 14 from overflow page Totals (Lines 1401 thru 1403 plus 1498) (Line 14 above) , ,627...(141,383) Prior Period Adjustment - reversal of 2011 ceding commission bonus Summary of remaining write-ins for Line 37 from overflow page Totals (Lines 3701 thru 3703 plus 3798) (Line 37 above) Q04 08/14/ :56:14 AM

6 CASH FROM OPERATIONS CASH FLOW Current Year Prior Year Prior Year Ended to Date To Date December Premiums collected net of reinsurance ,903, ,354, ,452, Net investment income , , , Miscellaneous income ,796...(7,853)...(167,966) 4. Total (Lines 1 through 3) ,053, ,419, ,454, Benefit and loss related payments ,403, ,743, ,994, Net transfers to Separate Accounts, Segregated Accounts and Protected Cell Accounts Commissions, expenses paid and aggregate write-ins for deductions ,626, ,694, ,248, Dividends paid to policyholders Federal and foreign income taxes paid (recovered) net of $...0 tax on capital gains (losses) Total (Lines 5 through 9) ,029, ,437, ,242, Net cash from operations (Line 4 minus Line 10)......(976,464)...1,982, ,211,645 CASH FROM INVESTMENTS 12. Proceeds from investments sold, matured or repaid: 12.1 Bonds ,857, , ,856, Stocks Mortgage loans Real estate Other invested assets Net gains or (losses) on cash, cash equivalents and short-term investments Miscellaneous proceeds Total investment proceeds (Lines 12.1 to 12.7) ,857, , ,856, Cost of investments acquired (long-term only): 13.1 Bonds , ,227, ,111, Stocks Mortgage loans Real estate Other invested assets Miscellaneous applications Total investments acquired (Lines 13.1 to 13.6) , ,227, ,111, Net increase or (decrease) in contract loans and premium notes Net cash from investments (Line 12.8 minus Line 13.7 and Line 14) ,253,672...(4,470,957)...(5,255,397) 16. Cash provided (applied): CASH FROM FINANCING AND MISCELLANEOUS SOURCES 16.1 Surplus notes, capital notes , , Capital and paid in surplus, less treasury stock Borrowed funds Net deposits on deposit-type contracts and other insurance liabilities Dividends to stockholders Other cash provided (applied)......(71,811)...(12,687)...(396,804) 17. Net cash from financing and miscellaneous sources (Lines 16.1 through 16.4 minus Line 16.5 plus Line 16.6)......(71,811)...622, ,196 RECONCILIATION OF CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS 18. Net change in cash, cash equivalents and short-term investments (Line 11 plus Line 15 plus Line 17) ,397...(1,866,500)...(1,690,556) 19. Cash, cash equivalents and short-term investments: 19.1 Beginning of year ,122, ,813, ,813, End of period (Line 18 plus Line 19.1) ,327, , ,122,541 Note: Supplemental disclosures of cash flow information for non-cash transactions: Q05 08/14/ :56:14 AM

7 NOTES TO FINANCIAL STATEMENTS Note 1 Summary of Significant Accounting Policies and Going Concern A. Accounting Practices SSAP # F/S Page F/S Line # NET INCOME (1) The Company state basis (Page 4, Line 20, Columns 1 & 3) XXX XXX XXX $ (610,679) $ 147,651 (2) State Prescribed Practice that are an increase/(decrease) from NAIC SAP $ $ (3) State Permitted Practice that are an increase/(decrease) from NAIC SAP $ $ (4) NAIC SAP (1 2 3 = 4) XXX XXX XXX $ (610,679) $ 147,651 SURPLUS (5) The Company state basis (Page 3, line 37, Columns 1 & 2) XXX XXX XXX $ 1,283,433 $ 1,820,525 (6) State Prescribed Practice that are an increase/(decrease) from NAIC SAP $ $ (7) State Permitted Practice that are an increase/(decrease) from NAIC SAP $ $ (8) NAIC SAP (5 6 7 = 8) XXX XXX XXX $ 1,283,433 $ 1,820,525 The accompanying financial statements of The Paramount Insurance Company (the Company) have been prepared on the basis of accounting practices prescribed or permitted by the Maryland Insurance Administration. The state of Maryland requires insurance companies domiciled in the state of Maryland to prepare their statutory financial statements in accordance with the National Association of Insurance Commissioners (NAIC) Accounting Practices and Procedures Manual subject to any deviations prescribed or permitted by the Maryland Insurance Administration. There were no differences between the Maryland prescribed or permitted practices and NAIC statutory acounting practices (NAIC SAP). B. Use of Estimates in the Preparation of the Financial Statement The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in these financial statements and notes. Actual results could differ from these estimates. C. Accounting Policy Premiums are earned over the terms of the related policies and reinsurance contracts. Unearned premiums are established to cover the unexpired portion of premiums written. Such reserves are computed using pro rata methods for direct business. Expenses incurred in connection with acquiring new insurance business, including acquisition costs such as sales commissions and state premium taxes, are charged to operations as incurred. Expenses incurred are reduced for ceding allowances received or receivable. Net investment income earned consists primarily of interest and dividends less investment related expense. Interest is recognized on an accrual basis and dividends are recognized on an ex-dividend basis. Net realized capital gains (losses) are recognized on a specific identification basis when securities are sold, redeemed or otherwise disposed. Realized capital losses include writedowns for impairments considered to be other than temporary. In addition, the Company uses the following accounting policies: 1. Short-term investments are stated at amortized value using the interest method. Non-investment grade short-term investments are stated at the lower of amortized value or fair value. 2. Investment grade bonds not backed by other loans are stated at amortized value using the interest method. Non-investment grade bonds with NAIC designations of 3 through 6 are stated at the lower of amortized value or fair value. 3. Common stocks, other than investments in stocks of subsidiaries and affiliates, are stated at fair value. 4. Investment grade redeemable preferred stocks are stated at amortized value. Investment grade perpetual preferred stocks are stated at fair value. Non-investment grade preferred stocks are stated at the lower of amortized value or fair value. 5. The Company does not have any investments in mortgage loans. 6. Investment grade loan-backed securities are stated at amortized value. The prospective adjustment method is used to value all loan-backed securities. Non-investment grade loan-backed securities are stated at the lower of amortized value or fair value.the carrying value and final NAIC designation for non agency commercial and residential mortgage backed securities are determined using a special two-step NAIC process. Those assigned a NAIC designation in the first step of 1 or 2 are stated at amortized value and those assigned a 3 through 6 designation are stated at the lower of amortized value or fair value. The NAIC designation assigned under the second step of the process is reported for these securities in Schedule D and is used in the risk-based capital calculation. 7. The Company does not have any investments in subsidiaries, controlled or affiliated companies. 8. The Company does not have any investments in joint ventures, partnerships or limited liability companies. 9. The Company does not have any investments in derivatives. 10. The Company does not anticipate investment income when evaluating the need for a premium deficiency reserve. 11. Unpaid losses and loss adjustment expense include an amount determined from individual case estimates and loss reports and an amount, based on past experience, for losses incurred but not reported. Such liabilities are necessarily based on assumptions and estimates and while management believes the amount is adequate, the ultimate liability may be in excess of or less than the amount provided. The methods for making such adjustments and for establishing the resulting liabilities are continually reviewed and any adjustments are reflected in the period determined. Q06 08/14/ :56:16 AM

8 NOTES TO FINANCIAL STATEMENTS D. Going Concern 12. The Company has a written capitalization policy for prepaid expenses and purchases of items such as electronic data processing equipment, software, furniture, vehicles, other equipment and leasehold improvements. The predefined capitalization threshholds under this policy have not changed from those of the prior year. 13. The Company does not have any pharmaceutical rebate receivables. The Company has incurred significant operating losses over the past several years. The losses were partially related to competitive market conditions which caused premium volume to decrease significantly from 2013 to In response to those factors, the Company developed a business plan designed to make it more competitive and to return the Company to profitability. In response to changes management made, and to improved market conditions, the Company experienced direct written premium growth of 39% AND 86% in 2017 and 2016, respectively. In connection with the Company s business plan, the Company has also invested in additional personnel, the assistance of consultants and the investment in new underwriting software. Factors contributing to the 2017 statutory operating loss included the rapid premium growth (due to the earnings lag and expensing of policy acquisition costs), additional personnel costs (which were incurred to handle the increased volume before the earnings from the increased writings have been realized), and additional consulting and software costs related to the new underwriting software implementation and conversion (which is still in process). In order to maintain required surplus levels during 2016 and 2017, the Company s parent had to infuse capital totaling $2,385,000 in the form of surplus notes. At December 31, 2017, the Company had total surplus of $1,820,525, which was below its company action level RBC amount of $2,012,856. As a result, on April 20, 2018, the District of Columbia Department of Insurance, Securities and Banking issued an order suspending Paramount s ability to write new business in in the District of Columbia (the Company may still issue renewal policies). At the end of May, 2018, the Company s surplus fell below the minimum surplus level for the State of Maryland of $1,425,000. On July 12, 2018 the Company was issued an order giving it 60 days to bring its surplus back up to at least $1,425,000. Paramount s parent corporation and management of the Company are seeking investors to provide additional capital. In order for the Company to continue as a going concern, it will need to secure adequate investor capital to increase its surplus to a level that is acceptable to the Maryland Insurance Administration by September 12, Note 2 Accounting Changes and Corrections of Errors Note 3 Business Combinations and Goodwill Note 4 Discontinued Operations Note 5 Investments D. Loan-Backed Securities 1. Prepayment assumptions for loan-back securities were obtained from broker dealer survey values or internal estimates. 2. The following table summarizes unrealized losses on loan-backed securities by the length of time that the securities have continuously been in unrealized loss positions. Less than 12 Months 12 Months or Greater Fair Unrealized Fair Unrealized Fair Value Losses Value Losses Value Mortgage-backed securities $85,860 $376 $2,466,096 $94,179 $2,551,956 The unrealized losses on investments in mortgage-backed securities were caused by the financial market's response to various factors including market liquidity, unemployment, default rates and the velocity of money. It is expected that the securities would not be settled by the issuer at a price less than par value. Because the decline in market value is not attributable to changes in credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, Note 6 Joint Ventures, Partnerships and Limited Liability Companies Note 7 Investment Income Note 8 Derivative Instruments Note 9 Income Taxes A. Deferred Tax Assets 1. Components of Net Deferred Tax Assets June 30, 2018 December 31, 2017 Change Total gross deferred tax assets $ 786,445 $ 653,796 $ 132,649 Statutory valuation allowance adjustments Q /14/ :56:16 AM

9 NOTES TO FINANCIAL STATEMENTS Adjusted gross deferred tax assets 786, , ,649 Deferred tax assets nonadmitted 672, , ,299 Net admitted deferred tax asset 114, ,825 2,350 Deferred tax liabilities 114, ,825 2,350 Net admitted deferred tax assets $ 0 $ 0 $ 0 2. Admission Calculation Components : Federal income taxes paid in prior years recoverable through loss carrybacks Adjusted gross deferred tax assets expected to be realized following the balance sheet date Adjusted gross deferred tax assets allowed per limitation threshold Adjusted gross deferred tax assets offset by deferred tax liabilities Deferred tax assets admitted as the result of SSAP 101 June 30, 2018 December 31, 2017 Change $ 0 $ 0 $ 0 786, , , , ,825 2,350 (114,175) (111,825) (2,350) $ 0 $ 0 $ 0 All deferred tax assets are ordinary in character. There were no significant capital deferred tax assets at June 30, 2018 or December 31, 2017, respectively. 3. The ratio percentage used to determine the recovery period and threshold limitation amount was 126% and 180% for the quarters ended June 30, 2018 and December 31, 2017, respectively. The amount of total adjusted capital and surplus used to determine the recovery period and threshold limitation was $1,264,291 and $1,802,901 at June 30, 2018 and December 31, 2017, respectively. 4. There was no impact of tax-planning strategies for the quarters ended June 30, 2018 and December 31, 2017, respectively. B. Unrecognized Deferred Tax Liabilities Not applicable C. Current Tax and Change in Deferred Tax Federal income tax (benefit) expense $ 0 $ 0 Federal and foreign income taxes incurred $ 0 $ 0 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows: June 30, December 31, Change Deferred tax assets Unpaid losses and LAE $ 25,550 $ 27,534 $ (871) Depreciable assets (114,175) (111,825) (6,227) Unearned premiums 123, ,543 (12,417) Net operating loss carryover 637, ,719 51, , ,971 31,875 Nonadmitted deferred tax asset 672, ,971 31,875 Net admitted deferred tax assets $ 0 $ 0 $ 0 D. Reconciliation of Federal Income Tax Rate to Actual Effective Rate The Company has not recorded a current tax provision because Company management is unsure what will be recovered in a 2018 consolidated tax filing with the parent Company. E. Operating Loss and Tax Credit Carryforwards 1. At June 30, 2018, the Company has $ 3,035,609 of net operating loss carryforwards. 2. At June 30, 2018, the Company has $-0- of federal income taxes available for recoupment in the event of future net losses. 3. The Company did not have any protective tax deposits under Section 6603 of the Internal Revenue Code. F. Consolidated Federal Income Tax Return 1. The Company files a consolidated federal tax return with its parent company, Motts Acquisition, Inc., and Motts Holdings, Inc. (the parent company and 100% owner of Motts Acquisition, Inc.). Also included in the consolidated return is Mott s Supermarkets, Inc., another 100% owned subsidiary of Motts Holdings, Inc. 2. The method of tax allocation among companies is subject to a written agreement, approved by the Board of Directors, whereby allocation is made primarily on a separate return basis with current credit for any operating losses or other items utilized in the consolidated return. G. Federal and Foreign Tax Loss Contigencies Not applicable Q /14/ :56:16 AM

10 NOTES TO FINANCIAL STATEMENTS Note 10 Information Concerning Parent, Subsidiaries, Affiliates and Other Related Parties B. Details of Transactions Greater than 1/2% of Admitted Assets Motts Holdings, Inc. contributed $-0- and $750,000 to the Company in the form of a surplus notes in 2018 and 2017, respectively. Total outstanding surplus notes to Motts Holdings, Inc. were $2,385,000 at June 30, Note 11 Debt Note 12 Retirement Plans, Deferred Compensation, Postemployment Benefits and Compensated Absences and Other Postretirement Benefit Plans Note 13 Capital and Surplus, Dividend Restrictions and Quasi-Reorganizations K. Surplus Notes No surplus notes were contributed during the six months ended June 30, Whereas during 2017, 2016 and 2015, the Company's parent contributed $750,000, $1,385,000 and $250,000 respectively, to the Company in the form of surplus notes. The notes bear interest at the rate of 5% per annum, payable quarterly. The notes mature on the dates listed below, or sooner if certain conditions are met. No principal or interest payments may be made on the surplus notes without the prior approval of the Maryland Insurance Administration. No interest has been accured on these notes in the accompanying 2018 financial statements. Following is a list of the outstanding surplus notes at June 30, 2018: Date Maturity Interest Face Issued Date Rate Value June 26, 2015 December 31, % $ 250,000 January 27, 2016 June 30, % 250,000 June 6, 2016 December 31, % 250,000 July 15, 2016 January 31, % 250,000 November 2, 2016 April 30, % 250,000 November 29, 2016 May 31, % 50,000 December 27, 2016 June 30, % 100,000 February 17, 2017 June 30, % 100,000 February 24, 2017 June 30, % 135,000 April 7, 2017 August 31, % 100,000 April 26, 2017 September 30, % 150,000 May 31, 2017 October 31, % 150,000 July 28, 2017 December 31, % 50,000 September 6, 2017 January 31, % 100,000 September 28, 2017 February, % 50,000 October 27, 2017 March 31, % 85,000 November 28, 2017 April 30, % 65,000 $2,385,000 The surplus notes listed above were issued by the Parent under Section of the Insurance Article of the Annotated Code of Maryland [the "Maryland Surplus Note Statute"] as an advance to the stock insurer to enable it to comply with the surplus requirement. The surplus notes have the following repayment conditions and restrictions: (e.g. Each payment of interest on and principal of the surplus notes may be made only with the prior approval of the Commissioner of Insurance of the State of Maryland and only to the extent the Company has sufficient surplus earnings to make such payment). The surplus notes do not have any subordination terms. The liquidation preference to the insurer's common shareholders are as follows: (e.g. In the event that the Parent is subject to such a proceeding, holders of Indebtedness, Policy Claims and Prior Claims would be afforded a greater priority under the liquidation Act and the terms of the Notes and, accordingly, would have the right to be paid in full before any payments of interest or principal are made to Note Holders). The parent holds 100% of the surplus notes listed in the above table. Note 14 Liabilities, Contingencies and Assessments Note 15 Leases Note 16 Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk Q /14/ :56:16 AM

11 NOTES TO FINANCIAL STATEMENTS Note 17 Sale, Transfer and Servicing of Financial Assets and Extinguishments of Liabilities Note 18 Gain or Loss to the Reporting Entity from Uninsured Plans and the Portion of Partially Insured Plans Note 19 Direct Premium Written/Produced by Managing General Agents/Third Party Administrators Note 20 Fair Value Measurements Note 21 Other Items Note 22 Events Subsequent Note 23 Reinsurance Note 24 Retrospectively Rated Contracts and Contracts Subject to Redetermination Note 25 Change in Incurred Losses and Loss Adjustment Expenses The estimated cost of loss and loss adjustment expenses attributable to insured events of prior years resulted in a deficiency of $356,000 and $117,000 through June 30, 2018 and 2017, respectively. Increases and decreases of this nature occur as a result of claim settlements during the current year, and from changes in the original estimates of the cost of claims as additional information is received. Recent loss development trends are also taken into account in evaluating the overall adequacy of unpaid losses and loss adjustment expenses. Note 26 Intercompany Pooling Arrangements Note 27 Structured Settlements Note 28 Health Care Receivables Note 29 Participating policies Note 30 Premium Deficiency Reserves Note 31 High Deductibles Note 32 Discounting of Liabilities for Unpaid Losses or Unpaid Loss Adjustment Expenses Note 33 Asbestos/Environmental Reserves Note 34 Subscriber Savings Accounts Note 35 Multiple Peril Crop Insurance Note 36 Financial Guaranty Insurance Q /14/ :56:16 AM

12 NOTES TO FINANCIAL STATEMENTS Q /14/ :56:16 AM

13 GENERAL INTERROGATORIES PART 1 - COMMON INTERROGATORIES GENERAL 1.1 Did the reporting entity experience any material transactions requiring the filing of Disclosure of Material Transactions with the State of Domicile, as required by the Model Act? Yes [ ] No [ X ] 1.2 If yes, has the report been filed with the domiciliary state? Yes [ ] No [ ] 2.1 Has any change been made during the year of this statement in the charter, by-laws, articles of incorporation, or deed of settlement of the reporting entity? Yes [ ] No [ X ] 2.2 If yes, date of change: 3.1 Is the reporting entity a member of an Insurance Holding Company System consisting of two or more affiliated persons, one or more of which is an insurer? Yes [ ] No [ X ] If yes, complete Schedule Y, Parts 1 and 1A. 3.2 Have there been any substantial changes in the organizational chart since the prior quarter end? Yes [ ] No [ X ] 3.3 If the response to 3.2 is yes, provide a brief description of those changes. 3.4 Is the reporting entity publicly traded or a member of a publicly traded group? Yes [ ] No [ X ] 3.5 If the response to 3.4 is yes, provide the CIK (Central Index Key) code issued by the SEC for the entity/group. 4.1 Has the reporting entity been a party to a merger or consolidation during the period covered by this statement? Yes [ ] No [ X ] 4.2 If yes, provide name of entity, NAIC Company Code, and state of domicile (use two letter state abbreviation) for any entity that has ceased to exist as a result of the merger or consolidation Name of Entity NAIC Company Code State of Domicile 5. If the reporting entity is subject to a management agreement, including third-party administrator(s), managing general agent(s), attorney-in-fact, or similar agreement, have there been any significant changes regarding the terms of the agreement or principals involved? If yes, attach an explanation. Yes [ ] No [ ] N/A [X ] 6.1 State as of what date the latest financial examination of the reporting entity was made or is being made. 12/31/ State the as of date that the latest financial examination report became available from either the state of domicile or the reporting entity. This date should be the date of the examined balance sheet and not the date the report was completed or released. 12/31/ State as of what date the latest financial examination report became available to other states or the public from either the state of domicile or the reporting entity. This is the release date or completion date of the examination report and not the date of the examination (balance sheet date). 06/01/ By what department or departments? Maryland Insurance Administration 6.5 Have all financial statement adjustments within the latest financial examination report been accounted for in a subsequent financial statement filed with Departments? Yes [ X ] No [ ] N/A [ ] 6.6 Have all of the recommendations within the latest financial examination report been complied with? Yes [ X ] No [ ] N/A [ ] 7.1 Has this reporting entity had any Certificates of Authority, licenses or registrations (including corporate registration, if applicable) suspended or revoked by any governmental entity during the reporting period? Yes [ X ] No [ ] 7.2 If yes, give full information: On 4/20/18 the DC Insurance Commissioner suspended the Company's authority to write new business in the District of Columbia. 8.1 Is the company a subsidiary of a bank holding company regulated with the Federal Reserve Board? Yes [ ] No [ X ] 8.2 If response to 8.1 is yes, please identify the name of the bank holding company. 8.3 Is the company affiliated with one or more banks, thrifts or securities firms? Yes [ ] No [ X ] 8.4 If the response to 8.3 is yes, please provide below the names and location (city and state of the main office) of any affiliates regulated by a federal regulatory services agency [i.e. the Federal Reserve Board (FRB), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Securities Exchange Commission (SEC)] and identify the affiliate s primary federal regulator] Affiliate Name Location (City, State) FRB OCC FDIC SEC 9.1 Are the senior officers (principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions) of the reporting entity subject to a code of ethics, which includes the following standards? Yes [ X ] No [ ] (a) (b) (c) (d) (e) Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; Full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by the reporting entity; Compliance with applicable governmental laws, rules and regulations; The prompt internal reporting of violations to an appropriate person or persons identified in the code; and Accountability for adherence to the code If the response to 9.1 is No, please explain: 9.2 Has the code of ethics for senior managers been amended? Yes [ ] No [ X ] 9.21 If the response to 9.2 is Yes, provide information related to amendment(s). 9.3 Have any provisions of the code of ethics been waived for any of the specified officers? Yes [ ] No [ X ] 9.31 If the response to 9.3 is Yes, provide the nature of any waiver(s). Q07 08/14/ :56:17 AM

14 GENERAL INTERROGATORIES PART 1 - COMMON INTERROGATORIES FINANCIAL 10.1 Does the reporting entity report any amounts due from parent, subsidiaries or affiliates on Page 2 of this statement? Yes [ X ] No [ ] 10.2 If yes, indicate any amounts receivable from parent included in the Page 2 amount: $ 4,286 INVESTMENT 11.1 Were any of the stocks, bonds, or other assets of the reporting entity loaned, placed under option agreement, or otherwise made available for use by another person? (Exclude securities under securities lending agreements.) Yes [ ] No [ X ] 11.2 If yes, give full and complete information relating thereto: 12. Amount of real estate and mortgages held in other invested assets in Schedule BA: $ Amount of real estate and mortgages held in short-term investments: $ Does the reporting entity have any investments in parent, subsidiaries and affiliates? Yes [ ] No [ X ] 14.2 If yes, please complete the following: 1 2 Prior Year End Book/Adjusted Carrying Value Current Quarter Book/Adjusted Carrying Value Bonds $ 0 $ Preferred Stock Common Stock Short-Term Investments Mortgage Loans on Real Estate All Other Total Investment in Parent, Subsidiaries and Affiliates (Subtotal Lines to 14.26) $ 0 $ Total Investment in Parent included in Lines to above $ 0 $ Has the reporting entity entered into any hedging transactions reported on Schedule DB? Yes [ ] No [ X ] 15.2 If yes, has a comprehensive description of the hedging program been made available to the domiciliary state? Yes [ ] No [ ] If no, attach a description with this statement. 16. For the reporting entity's security lending program, state the amount of the following as of current statement date: 16.1 Total fair value of reinvested collateral assets reported on Schedule DL, Parts 1 and 2: $ Total book adjusted/carrying value of reinvested collateral assets reported on Schedule DL, Parts 1 and 2: $ Total payable for securities lending reported on the liability page: $ Excluding items in Schedule E-Part 3-Special Deposits, real estate, mortgage loans and investments held physically in the reporting entity's offices, vaults or safety deposit boxes, were all stocks, bonds and other securities, owned throughout the current year held pursuant to a custodial agreement with a qualified bank or trust company in accordance with Section 1, III - General Examination Considerations, F. Outsourcing of Critical Functions, Custodial or Safekeeping Agreements of the NAIC Financial Condition Examiners Handbook? Yes [ X ] No [ ] 17.1 For all agreements that comply with the requirements of the NAIC Financial Condition Examiners Handbook, complete the following: 1 2 Name of Custodian(s) Custodian Address M&T BANK / WILMINGTON TRUST 25 S. CHARLES ST. BALTIMORE, MD WELLS FARGO BANK 1021 E. CAREY ST. RICHMOND, VA For all agreements that do not comply with the requirements of the NAIC Financial Condition Examiners Handbook, provide the name, location and a complete explanation: Name(s) Location(s) Complete Explanation(s) 17.3 Have there been any changes, including name changes, in the custodian(s) identified in 17.1 during the current quarter? Yes [ ] No [ X ] 17.4 If yes, give full and complete information relating thereto: Date of Old Custodian New Custodian Change Reason 17.5 Investment management Identify all investment advisors, investment managers, broker/dealers, including individuals that have the authority to make investment decisions on behalf of the reporting entity. For assets that are managed internally by employees of the reporting entity, note as such [" that have access to the investment accounts", "handle securities"]. 1 2 Name of Firm or Individual Affiliation For those firms/individuals listed in the table for Question 17.5, do any firms/individuals unaffiliated with the reporting entity (i.e., designated with a "U") manage more than 10% of the reporting entity's assets? Yes [ ] No [ X ] For firms/individuals unaffiliated with the reporting entity (i.e., designated with a "U") listed in the table for Question 17.5, does the total assets under management aggregate to more than 50% of the reporting entity's assets? Yes [ ] No [ X ] 17.6 For those firms or individuals listed in the table for 17.5 with an affiliation code of "A" (affiliated) or "U" (unaffiliated), provide the information for the table below Central Registration Depository Number Name of Firm or Individual Legal Entity Identifier (LEI) Registered With Investment Management Agreement (IMA) Filed 18.1 Have all the filing requirements of the Purposes and Procedures Manual of the NAIC Investment Analysis Office been followed? Yes [ X ] No [ ] 18.2 If no, list exceptions: Q /14/ :56:17 AM

15 GENERAL INTERROGATORIES PART 1 - COMMON INTERROGATORIES 19. By self-designating 5*GI securities, the reporting entity is certifying the following elements for each self-designated 5*GI security: a. Documentation necessary to permit a full credit analysis of the security does not exist. b. Issuer or obligor is current on all contracted interest and principal payments. c. The insurer has an actual expectation of ultimate payment of all contracted interest and principal. Has the reporting entity self-designated 5*GI securities? Yes [ ] No [ X ] Q /14/ :56:17 AM

16 GENERAL INTERROGATORIES (continued) PART 2 PROPERTY & CASUALTY INTERROGATORIES 1. If the reporting entity is a member of a pooling arrangement, did the agreement or the reporting entity s participation change? Yes [ ] No [ ] N/A [ X ] If yes, attach an explanation. 2. Has the reporting entity reinsured any risk with any other reporting entity and agreed to release such entity from liability, in whole or in part, from any loss that may occur on the risk, or portion thereof, reinsured? Yes [ ] No [ X ] If yes, attach an explanation. 3.1 Have any of the reporting entity s primary reinsurance contracts been canceled? Yes [ ] No [ X ] 3.2 If yes, give full and complete information thereto: 4.1 Are any of the liabilities for unpaid losses and loss adjustment expenses other than certain workers compensation tabular reserves (see Annual Statement Instructions pertaining to disclosure of discounting for definition of tabular reserves, ) discounted at a rate of interest greater than zero? Yes [ ] No [ X ] 4.2 If yes, complete the following schedule: Total Discount Discount Taken During Period Line of Business Maximu m Interest Disc. Rate Unpaid Losses Unpaid LAE IBNR Total Unpaid Losses Unpaid LAE IBNR Total Total XXX XXX Operating Percentages: 5.1 A&H loss percent 0.000% 5.2 A&H cost containment percent 0.000% 5.3 A&H expense percent excluding cost containment expenses 0.000% 6.1 Do you act as a custodian for health savings accounts? Yes [ ] No [ X ] 6.2 If yes, please provide the amount of custodial funds held as of the reporting date. $ Do you act as an administrator for health savings accounts? Yes [ ] No [ X ] 6.4 If yes, please provide the amount of funds administered as of the reporting date. $ 0 7. Is the reporting entity licensed or chartered, registered, qualified, eligible or writing business in at least two states? Yes [ X ] No [ ] 7.1 If no, does the reporting entity assume reinsurance business that covers risks residing in at least one state other than the state of domicile of the reporting entity? Yes [ ] No [ ] Q08 08/14/ :56:17 AM

17 SCHEDULE F - CEDED REINSURANCE Showing All New Reinsurers - Current Year to Date NAIC Company Code ID Number Name of Reinsurer Domiciliary Jurisdiction Type of Reinsurer Certified Reinsurer Rating (1 through 6) Effective Date of Certified Reinsurer Rating Q09 08/14/ :56:17 AM

18 SCHEDULE T - EXHIBIT OF PREMIUMS WRITTEN Current Year to Date - Allocated by States and Territories 1 Direct Premiums Written Direct Losses Paid (Deducting Salvage) Direct Losses Unpaid Active Status Current Year Prior Year Current Year Prior Year Current Year Prior Year States, Etc. (a) to Date to Date to Date to Date to Date to Date 1. Alabama...AL...N Alaska...AK...N Arizona...AZ...N Arkansas...AR...N California...CA...N Colorado...CO...N Connecticut...CT...N Delaware...DE...N District of Columbia...DC...L , , , , , , Florida...FL...N Georgia...GA...N Hawaii...HI...N Idaho...ID...N Illinois...IL...N Indiana...IN...N Iowa...IA...N Kansas...KS...N Kentucky...KY...N Louisiana...LA...N Maine...ME...N Maryland...MD...L ,812, ,035, ,242, ,866, ,909, ,163, Massachusetts...MA...N Michigan...MI...N Minnesota...MN...N Mississippi...MS...N Missouri...MO...N Montana...MT...N Nebraska...NE...N Nevada...NV...N New Hampshire...NH...N New Jersey...NJ...N New Mexico...NM...N New York...NY...N North Carolina...NC...N North Dakota...ND...N Ohio...OH...N Oklahoma...OK...N Oregon...OR...N Pennsylvania...PA...N Rhode Island...RI...N South Carolina...SC...N South Dakota...SD...N Tennessee...TN...N Texas...TX...N Utah...UT...N Vermont...VT...N Virginia...VA...N Washington...WA...N West Virginia...WV...N Wisconsin...WI...N Wyoming...WY...N American Samoa...AS...N Guam...GU...N Puerto Rico...PR...N US Virgin Islands...VI...N Northern Mariana Islands...MP...N Canada...CAN...N Aggregate Other Alien...OT...XXX Totals......XXX ,416, ,764, ,533, ,051, ,428, ,366,000 DETAILS OF WRITE-INS XXX XXX XXX Summary of remaining write-ins for Line 58 from overflow page......xxx Totals (Lines thru Line 58998) (Line 58 above)......xxx (a) Active Status Count L - Licensed or Chartered - Licensed insurance carrier or domiciled RRG... 2 R - Registered - Non-domiciled RRGs... 0 E - Eligible - Reporting entities eligible or approved to write surplus lines in the state Q - Qualified - Qualified or accredited reinsurer... 0 (other than their state of domicile - See DSLI)... 0 N - None of the above - Not allowed to write business in the state D - Domestic Surplus Lines Insurer (DSLI) - Reporting entities authorized to write surplus lines in the state of domicile... 0 Q10 08/14/ :56:17 AM