STATE OF CONNECTICUT

Transcription

1 STATE OF CONNECTICUT INSURANCE DEPARTMENT ORDER ADOPTING REPORT OF EXAMINATION I, Thomas B. Leonardi, Insurance Commissioner of the State of Connecticut, having fully considered and reviewed the Examination Report (the "Report") of AXIS Specialty Insurance Company ("the Company") as of December 31, 2009, do hereby adopt the findings and recommendations contained therein based on the following findings and conclusions, TO WIT: 1. I, Thomas B. Leonardi, Insurance Commissioner ofthe State of Connecticut, and as such is charged with the duty of administering and enforcing the provisions of Title 38a of the Connecticut General Statutes. 2. The Company is a domestic insurer authorized to transact the business of insurance in the State of Connecticut. 3. On April 6,2011, the verified Examination Report of the Company was filed with the Connecticut Insurance Department. 4. In accordance with Conn. Gen. Statutes 38a-14(e) (3), the Company was afforded a period ofthirty (30) days within which to submit to the Connecticut Insurance Department a written submission or rebuttal with respect to any matters contained in the Report. 5. On May 4, 2011, the Company notified the Department of certain responses and comments relating to matters contained in the Report. 6. Following review of the Report, it was deemed necessary and appropriate to modify the Report. A copy of the Report is attached hereto and incorporated herein as Exhibit A. P.O. Box 816 Hartford, CT An Equal Opportunity Employer

2 NOW, THEREFORE, it is ordered as follows: 1. That the Report of the Company hereby is adopted as filed with the Insurance Department. 2. That the Company shall comply with all of the recommendation set forth in the Report, and that the failure ofthe Company to so comply shall result in sanctions or administrative action as provided by Title 38a ofthe Connecticut General Statutes. Dated at Hartford, Connecticut this 12th day of May, 2011 J~dti Thomas B. Leonardi Insurance Commissioner

3 EXHIBIT A ASSOCIATION EXAMINATION REPORT OF THE AXIS SPECIALTY INSURANCE COMPANY AS OF DECEMBER 31, 2009 BY THE CONNECTICUT INSURANCE DEPARTMENT

4 TABLE OF CONTENTS Salutation Scope of Examination History Organizational Chart Management and Control Related Parties Insurance Coverages Territory and Plan of Operation Reinsurance Information Technology and Controls Accounts and Records Financial Statements Assets Liabilities, Capital and Surplus Statement of Income Losses and Loss Adjustment Expenses Aggregate Write-Ins for Special Surplus Funds Common Capital Stock Gross Paid In and Contributed Surplus Unassigned Funds (Surplus) Recommendation Subsequent Events Conclusion Signature

5 April 6, 2011 The Honorable Joseph Torti, III Financial Condition (E) Committee Deputy Director and Superintendent of Insurance Rhode Island Department of Business Regulation Division of Insurance 1511 Pontiac Avenue, Building 69-2 Cranston, Rhode Island The Honorable Mila Kofman Secretary, Northeastern Zone Superintendent of Insurance Bureau of Insurance 34 State House Station Augusta, Maine The Honorable Thomas B. Leonardi Commissioner of Insurance State of Connecticut Insurance Department P.O. Box 816 Hartford, Connecticut Dear Superintendents/Commissioner: In compliance with your instructions and pursuant to the requirements of Section 38a-14 of the General Statutes of the State of Connecticut (CGS), the undersigned has made a Financial Examination of the condition and affairs of: AXIS SPECIALTY INSURANCE COMPANY (hereafter referred to as the Company or AXIS) a corporation with capital stock, incorporated under the laws of the State of Connecticut and having its statutory home office located at One State Street, Hartford, Connecticut and its main administrative office located at Great Oaks Way, Alpharetta, Georgia. The report of such examination is submitted herewith. SCOPE OF EXAMINATION The previous examination of the Company was conducted as of December 31, The current examination which covers the subsequent four-year period, was conducted at the statutory home office of the Company. As part of the examination planning procedures, the Financial Regulation Division ofthe Connecticut Insurance Department (the Division) reviewed the following materials submitted by the Company: Board of Director (Board) minutes from 2006 through the latest 2010 meeting;

6 AXIS SPECIALTY INSURANCE CaMPANY Statutory Audit reports from 2006 through 2009, completed by the Company's independent certified public accountants, Deloitte and Touche, LLP (D&T); Management's Discussion and Analysis from 2006 through 2009; Statements of Actuarial Opinion from 2006 through 2009; Annual Statements filed with the Division from 2006 through 2009; Documentation supporting Section 404 of the Sarbanes-Oxley Act (SOX) of 2002; Reports of the Company's Internal Audit Department from 2006 through A comprehensive review was made of the financial analysis files and documents submitted to the Financial Analysis Unit of the Division, reports from the National Association of Insurance Commissioners (NAIC) database, as well as the independent audit reports which indicated no material concerns with respect to financial condition or regulatory compliance issues. Work papers prepared by D&T in connection with its annual statutory audit were reviewed and relied upon to the extent deemed appropriate. Comments in this report are generally limited to exceptions noted or to items considered to be of a material nature. Failure of items in this report to add to totals or for totals to agree with captioned amounts is due to rounding. The Division retained the services of Milliman, USA (Milliman) to perfonn an actuarial review of AXIS. The examination was conducted on a full scope, comprehensive basis in accordance with the procedures outlined in the NAIC Financial Condition Examiners Handbook (the Handbook). The Handbook requires that we plan and perfonn the examination to evaluate the financial condition and identify prospective risks of the Company by obtaining infonnation about the Company including corporate governance, identifying inherent risks within the Company, and evaluating system controls and procedures used to mitigate those risks. An examination also includes assessing the principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation, management compliance with Statutory Accounting Principles, and Annual Statement Instructions. All accounts and activities of the Company were considered in accordance with the riskfocused examination process. HISTORY The Company, a wholly-owned subsidiary of AXIS Insurance Company (AXISIC), an Illinois domiciled insurance company, is an indirect wholly-owned subsidiary of AXIS Specialty U.S. Holdings, Inc. (AXIS Specialty US), a Delaware domiciled holding company. AXIS Specialty US is a wholly-owned subsidiary of AXIS Specialty Global 2

7 AXIS SPECIALTY INSURANCE CaMPANY Holdings Limited (AXIS Specialty Limited), a holding company organized under the laws of Ireland. AXIS Capital Holdings Limited (AXIS Capital), a Bermuda holding company is the Company's ultimate parent. The Company was incorporated as Orion Excess Insurance Company on January 12, 1983, and commenced business on January 11, The original subscriber of the Company's stock was Security Insurance Company of Hartford (SICH). On March 30, 1990, the Company's name was changed to Connecticut Specialty Insurance Company. On May 31, 1995, Orion Capital Corporation (OCC) purchased all the outstanding shares ofthe Company from SICH. OCC was acquired by the Royal and SunAlliance Group (RSA) on November 19, An assumption reinsurance agreement, effective December 31, 2001, between the Company and Royal Surplus Lines Insurance Company (RSLIC) was approved by the Division on February 7,2002. Pursuant to this agreement RSLIC assumed 100% of the Company's insurance liabilities. On October 1, 2002, AXIS Specialty US purchased the Company. The ownership of the Company was moved to AXIS Reinsurance Company (AXIS Re) on December 31, The Company's name was changed to AXIS Specialty Insurance Company effective January 24, As part of a restructuring strategy to realign its business, the Company was sold back to AXIS Specialty US on December 1, On November 1,2007, AXIS Specialty US contributed all ofthe outstanding shares ofthe Company to AXISIC. AXIS Capital was formed in late 2001, following the events of September 11,2001. AXIS Capital held its initial public offering on July 1,

8 ORGANIZATIONAL CHART The following is an organizational chart of the Company and its major affiliates: AXIS Capital Holdings Limited (Bermuda) I I AXIS Specialty UK Holdings Limited (UK) AXIS Specialty Global Holdings Limited (Ireland) AXIS Specialty U.S. Holdings, Inc. (DE) I I AXIS Insurance Company (Illinois) AXIS Reinsurance Company (New York) AXIS Specialty U.S Services, Inc. (DE) AXIS Specialty Finance LLC (DE) AXIS Group Services, Inc. (DE) AXIS Reinsurance Company (Canadian Branch) AXIS Surplus Insurance Company (Illinois) I AXIS Specialty Insurance Company (CT) 4

9 MANAGEMENT AND CONTROL The amended and restated bylaws provide that there shall be an annual meeting of shareholders for the election of directors and for the transaction of such other business that may come before such meeting. Special meetings of the shareholders may be called by the Board, the chairman of the board (Chairman), or president and must be called by the corporate secretary or upon written request of the holders of at least twenty-five percent of all the outstanding shares of the Company entitled to vote at the meeting. At any meeting of the shareholders, the holders of a majority of the issued and outstanding shares of stock and the holders of a majority of shares of each class of stock, then entitled to vote represented in person or by proxy shall constitute a quorum for all purposes. The number of directors shall consist of five to fifteen members as determined by the shareholders at each annual meeting, by vote ofthe shareholders at any special meeting, or by vote of the whole Board at any regular or special meeting. The Board shall meet each year as soon as practicable following the annual election of directors for the purpose of organization, election of officers, and other business as the Board considers relevant. Regular meetings of the Board shall be held as determined by the Board. Special meetings shall be held at the call of the Chairman, the president, corporate secretary or any two directors. One-third of the directors then in office shall constitute a quorum for the transaction of business. The elected officers shall be the president, one or more vice presidents, a corporate secretary, and a treasurer. There may also be one or more assistant secretaries and assistant treasurers as the Board may deem advisable. All officers shall be elected annually. The Board may, by a vote of a majority of the directors, designate one or more committees in addition to the Executive Committee, each consisting of three or more directors, for such purposes as the Board may determine. 5

10 Members of the Board serving the Company at December 31,2009, were as follows: Director Christopher N. DiSipio Michael E. Morrill Cheryl L. Price John M. Intondi John A. Kuhn Carlton W. Maner Andrew M. Weissert Gregory W. Springer Title and Principal Business Affiliation Chairman of the Board, President, CEO, AXIS Specialty Insurance Company CEO and President, AXIS Reinsurance Company Senior Vice President and Treasurer, AXIS SpecialtyU.S. Holdings, Inc. Senior Vice President - U.S. Claims, AXIS Specialty Insurance Company Senior Vice President - Professional Lines, AXIS Specialty Insurance Company Division President - Excess & Surplus Lines, AXIS Specialty Insurance Company Senior Vice President, General Counsel, Secretary, AXIS Specialty Insurance Company Senior Vice President - Specialty Products, AXIS Specialty Insurance Company Outside directors exist only at the AXIS Capital level. The executive officers serving the Company at December 31,2009, were as follows: Name Christopher N. DiSipio Andrew M. Weissert Cheryl L. Price Title Chairman ofthe Board, President and CEO Senior Vice President, General Counsel and Secretary Senior Vice President and Treasurer RELATED PARTIES The Company has the following intercompany agreements in place: Tax Allocation Agreement The Company is party to a Tax Allocation Agreement with AXIS Specialty US. AXIS Specialty US files a consolidated federal income tax return for three other AXIS affiliates. The consolidated tax liability is allocated among affiliates in the ratio that each affiliate's separate return tax liability bears to the sum of the separate tax return liabilities of all affiliates that are members ofthe consolidated group. Premium Transfer Agreement The Company is party to a Premium Transfer Agreement between AXIS Surplus Insurance Company (AXIS Surplus), AXIS Re and AXISIC. AXIS Surplus maintains a 6

11 lockbox for premiums belonging to these companies and provides for the collection and allocation of premiums to each group member. AXIS Surplus receives premium payments from third parties that are intended for group members and then transfers these payments from the lockbox to the correct group members. Expense Allocation Agreement The Company is party to an expense allocation agreement with AXIS Specialty US Services, Inc. (AXIS Services). This agreement provides personnel, office space and office equipment, computer hardware and software, technical support, office fixtures, furniture and other equipment such as telephone and storage on a cost basis. Administrative Services Agreement The Company is party to an administrative services agreement with AXIS Specialty Limited. This agreement provides actuarial services (counseling on reserve requirements), capital allocation modeling and actuarial certification, investment management, general corporate services (assistance and advice concerning raising capital and obtaining financing and providing advice and consultation concerning mergers and acquisitions), and reinsurance security on a cost basis. Credit Party Agreement The Company is party to a credit agreement with AXIS Capital through JP Morgan Chase Bank N.A. The agreement allows AXIS Capital and its affiliates to request letters of credit and/or loans. The agreement is used for mergers, acquisitions, and as a part of its capital structure and business modeling. The agreement also provides general liquidity for the AXIS group as a whole and provides general borrowings on an as needed basis. Representative Agreement The Company is party to a representative agreement with AXIS Specialty Limited. The agreement appoints AXIS UK Services as the fiscal representative to the UK Tax Authority in connection with the filing and paying of insurance premium taxes and fulfilling all business communications with HM Customs and Revenue or other relevant taxing authorities. INSURANCE COVERAGES The Company's parent, AXIS Capital maintains fidelity bond coverage through various insurers. AXIS Capital maintains a financial institution bond insurance policy through St. Paul Fire and Marine Insurance Company and Federal Insurance Company (cosureties). The single loss limit ofliability on the policy is $50,000,000 which exceeds the suggested minimum limits of insurance pursuant to the Handbook. In addition to fidelity bond insurance, AXIS Capital and its subsidiaries maintain insurance policies with various insurance carriers including the following: 7

12 Everest Indemnity Insurance Company Westchester Fire Insurance Company Federal Insurance Company Great Northern Insurance Company Vigilant Insurance Company St. Paul Fire and Marine Insurance Company Excess professional liability Excess professional liability Package policy, umbrella and excess liability and financial institution bond Business auto Workers' compensation and employers' liability Financial institution bond and fiduciary The cost for these policies is allocated to the Company based upon weighted metrics (e.g. capital, premiums) relative to other covered subsidiaries of AXIS Capital. TERRITORY AND PLAN OF OPERATION The Company is licensed in ten states, including the state of Connecticut, to write various property and casualty lines of business. The Company is also an approved surplus lines insurer in 30 other states. The Company is currently running this business off and is in the process of applying for admission and authority for the Accident and Health (A&H) line in all states including the District of Columbia and Puerto Rico. It is the intent of the Company that, upon admission to the various states, it will focus its business and operations on the A&H business and no other lines. The Company provides coverage through a variety of distribution channels in the U.S. and covers primarily U.S. exposures. The product lines are offered through wholesale brokers, retail brokers, managing general agents and underwriters. Products tend to be for non-standard and complex risks. REINSURANCE The Company purchases significant amounts ofreinsurance to reduce the risk of exposure to loss and to preserve its surplus. Treaty reinsurance is purchased on an AXIS Group basis for both excess of loss and quota share (QS) treaty reinsurance. Facultative reinsurance coverage is also purchased at the business unit level where deemed advantageous and necessary. The major reinsurance treaties for the property lines of business are the Property Per Risk with limits up to $100 million and Property Catastrophe with limits up to $675 million. The major reinsurance treaty for the casualty lines ofbusiness is the Excess and Surplus Umbrella and Excess Casualty which is a seventy percent QS with limits up to $25 million each loss, each insured. The QS percentage was reduced to sixty percent effective March 15, Reinsurance with Affiliates Effective November 27,2002, the Company entered into a QS and Stop Loss (SL) reinsurance agreement with AXIS Limited. Under the QS agreement, the Company 8

13 cedes fifty percent of its net underwriting results to AXIS Limited. The SL agreement allows the Company to cede any loss and loss adjustment expenses incurred in excess of eighty percent of earned premium subject to a maximum of one hundred twenty percent of premium. During our review of inter-company transactions it was noted that AXIS Surplus was settling reinsurance transactions on behalf of the Company without a formal agreement. These transactions consist ofmonies wired directly to AXIS Surplus from reinsurers and reinsurance brokers for ceded paid losses recoverables belonging to the Company. Statements of Statutory Accounting Principles (SSAP) No. 96, paragraph 2 of the NAIC Accounting Practices and Procedures Manual (the Manual), states that "transactions between related parties must be in the form of a written agreement, and must provide for timely settlement of amounts owed, with a specified due date". The Company does not have a written agreement with AXIS Surplus for the collection, deposit, and transfer of reinsurance transactions. It is recommended that the Company comply with the requirements ofssap No. 96 of the Manual. INFORMAnON TECHNOLOGY AND CONTROLS An evaluation of information technology (IT) controls was conducted in accordance with NAIC requirements as outlined in the Handbook. The guidance and direction used to perform the review of the Company's IT general controls was derived from Exhibit C Part I - Information Technology Planning Questionnaire (ITPQ) and Exhibit C Part 2 Information Technology Work Program. The Company's responses to the ITPQ were evaluated and certain controls within the IT control environment were tested to assess whether the selected controls were designed effectively and are functioning properly. The review of IT controls placed reliance upon the results of the work performed during the Company's SOX control testing, internal audit, and CPA reviews. This review included an assessment of AXIS controls in place to prevent unauthorized access and use of the following financially significant systems: Underwriting Workstation (UWS); Claims Workstation (CWS); and IRIS, an AS/400 system, the Company's main underwriting policy administration system. The IT risks were outlined in the work programs which focused on the areas of logical and physical security over the IT infrastructure and key application systems. The scope of the information system and control review also included: Confirmation of compliance with AXIS policies, regulatory requirements, and other governing bodies; Determination that AXIS had adequate controls over contingency planning to ensure business continuity; and Determination that AXIS had adequate controls in place to safeguard its computing assets. There were no material findings which affected the Division's overall reliance on the Company's IT controls. 9

14 ACCOUNTS AND RECORDS The Company utilizes the Sun Systems General Ledger (SunGL) system and the UWS and CWS systems for policy administration and claims, respectively. Some managing general agents (MGA) produced business is entered directly into IRIS. The Company maintains an Annual Statement Line ofbusiness (ASLOB) database from which information is extracted for purposes of annual statement reporting. The Company utilizes the services of two different outside firms to manage its invested assets and to maintain its investment financial records. The Company utilized Booke Seminars "The Complete Package" for preparation of its 2009 Annual Statement. General ledger account balances were reconciled and traced to the amounts reported in the annual statement for Further detail analyses were performed on the individual accounts throughout the examination. 10

15 FINANCIAL STATEMENTS The following statements reflect the assets, liabilities, capital and surplus, and statement of income as of December 31, 2009, as reported by the Company and as detennined by the examination: ASSETS Description Bonds Common stocks Cash, cash equivalents and short-term investments Receivables for securities Investment income due or accrued Premiums and considerations: Uncollected premiums and agents' balances in course of collection Reinsurance: Amounts recoverable from reinsurers Current federal and foreign income tax recoverable and interest thereon Net deferred tax asset Furniture and equipment, including health care delivery assets Receivables from parent, subsidiaries and affiliates Aggregate write-ins for other than invested assets Assets $150,477, ,729 14,955,801 9,862 1,452,358 57,914 19,107,441 1,803,475 5,465, ,134 5,954,480 1,583,845 Nonadmitted Assets $47,998 2,828, ,134 1,172,385 Net Admitted Assets $150,477, ,729 14,955,801 9,862 1,452,358 9,916 19,107,441 1,803,475 2,637, ,954, ,460 Totals $20I.37]j00 $4,298,667 $197,079,833 11

16 LIABILITIES, CAPITAL AND SURPLUS Total Losses $ 60,546,437 Loss adjustment expenses 10,600,263 Commissions payable, contingent commissions and other similar charges 36,999 Other expenses 69,660 Taxes, licenses and fees 1,735 Unearned premiums 4,210,225 Ceded reinsurance premiums payable (net of ceding commissions) (310,670) Funds held by company under reinsurance treaties 2,161 Remittances and items not allocated 173,620 Provision for reinsurance 25,154 Payable to parent, subsidiaries and affiliates 740,872 Payable for securities 2,406,400 Aggregate write-ins for other liabilities 1,792,576 Total liabilities 80,295,432 Aggregate write-ins for special surplus funds 1,389,828 Common capital stock 4,000,200 Gross paid in and contributed surplus 101,815,160 Unassigned funds (surplus) 9,579,213 Surplus as regards policyholders 116,784,401 Totals $197,079,833 12

17 STATEMENT OF INCOME UNDERWRITING INCOME Premiums earned $9,098,895 Losses incurred Loss expenses incurred Other underwriting expenses incurred 4,195,416 1,219,617 I 3,866,138 Total underwriting deductions 9,281,171 Net underwriting gain (loss) Net investment income earned Net realized capital gains (losses) Net investment gain (loss) INVESTMENT INCOME OTHER INCOME Aggregate write-ins for miscellaneous income Total other income Net income before dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes Dividends to policyholders Net income, after dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes Federal and foreign income taxes incurred Net income CAPITAL AND SURPLUS ACCOUNT Surplus as regards policyholders, December 31 prior year Net income Change in net unrealized capital gains or (losses) Change in net deferred income tax Change in nonadmitted assets Change in provision for reinsurance Cumulative effect of changes in accounting principles Aggregate write-ins for gains and losses in surplus Change in surplus as regards policyholders for the year I (182,276) 7,780,931 (909,678) 6,871, , ,336 7,125,313 7,125,313 1,934,859 5,190, ,740,194 5,190,454 (219,187) (2,836,857) 2,601,877 6, ,085 1,798,960 7,044,206 Surplus as regards policyholders, December 31 current year $116,784,401 13

18 LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) $71,146,700 The following items are included in the captioned account: Losses $60,546,437 LAE 10,600,263 $71,146,700 The Division engaged Milliman to conduct a comprehensive actuarial analysis of the loss and LAE reserves ofthe Company as of December 31,2009. The actuarial analysis was conducted in accordance with accepted loss reserving standards and principles. Milliman based its review on information provided by the Company: The Actuarial Report as of December 31, 2009 (detailed calculations supporting the actuarial data to Schedule P- Part 1 - Summary of the Annual Statement); The 2009 Statements of Actuarial Opinion and Actuarial Opinion Summaries; The 2009 Annual Statement and other information requested and obtained during the course of the review through discussions and meetings with key personnel of the Company which included but is not limited to: The independent consulting actuary, Ernst & Young (E&Y) quarterly analyses for selected classes; Actual vs. expected loss emergence exhibits for selected classes; Paid unallocated loss adjustment expenses (ULAE) by calendar year; Detailed incurred but not reported (IBNR) loss template as of December ; Aggregate stop loss cession calculation for 2009; Historical comparison ofe&y estimated loss ratios and booked loss ratios by accident year and calendar year for the four major classes. Milliman relied on the Division's review of the Company's underlying data concluding that there were no indications of any significant inaccuracies in the data reported in Schedule P of the Annual Statement. The scope of Milliman's actuarial analysis is outlined below: 1. An assessment ofreserve risk, including but not limited to: a. An evaluation of the Company's reconciliation ofthe actuarial data to Schedule P as well as a review of the integrity and the appropriateness of data segmented for actuarial evaluation. b. A detailed review ofthe work papers and documentation supporting the carried liabilities for loss and LAE. c. Meeting with appropriate reserve actuaries and/or other officers ofthe Company to assess the appropriateness ofmethodologies and the quality of assumptions, including but not limited to case reserve adequacy, 14

19 expected loss ratios, claim emergence patterns, and anticipated recoveries. d. Review the primary reserve risks and the controls in place to mitigate those risks and the frequency of reporting actuarial indications to management, by line ofbusiness and in the aggregate. e. Review the Company's claims handling procedures and processes used to estimate Loss and LAE liabilities with concentration on umbrella and/or similar exposure. 2. An assessment ofpricing and underwriting risk, including but not limited to: a. Meeting with appropriate ratemaking actuaries and/or other officers of the Company to assess the appropriateness ofmethodologies and the quality of assumptions, including but not limited to trend, loss development, expenses, catastrophes, large losses, and profit. b. A high level evaluation ofprice monitoring processes and controls. c. The reporting ofpricing and underwriting considerations to management. 3. An assessment ofliquidity risk, including but not limited to: a. A qualitative review of the Company's process for assessment of catastrophe exposure and risk concentration. b. Reporting assessments to management. Reserve Risk The following table summarizes the Company's carried reserve position in comparison with the range of reasonable reserves as estimated by E&Y, as ofdecember 31, 2009, both on a gross and net of all reinsurance basis. The Company books reserves higher than the indicated reserve range. Table 1 Range of Reasonable Reserves As of December 31, 2009 (OOO's omitted) I Gross of Reinsurance Net of Reinsurance Statutory Surplus 116, ,784 Carried Reserve 320,403 71,146 Low 264,100 61,200 Central 283,958 65,852 High 325,100 74,700 I Milliman reviewed the following areas with an emphasis on long-tail casualty lines of business (classes) that comprise ofmajority of the carried reserves as of December 31, 2009: Excess and Surplus Casualty Excess and Surplus Umbrella 15

20 AXIS SPECIALTY INSURANCE CaMPANY Financial Industries Financial Insurance Solutions The Company estimates the IBNR reserves using the Bornhuetter-Ferguson method (BF) which is a commonly excepted actuarial technique. BF relies on the assumption that remaining unreported losses are a function of the total expected losses rather than a function of current reported losses. In addition to using BF, the Company uses the incurred loss development and expected loss ratio methods to provide further information in estimating the ultimate loss ratio by class. Milliman believes that the reserve risk is mitigated by the Company's effective reserving risk mitigation processes and control. In addition, the frequency of and the process of reporting actuarial indications to management is reasonable and appropriate. Overall, Milliman found the Company to be in line with sound industry practices that mitigate reserve risk and noted no serious, pervasive issues involving its reserve review. Pricing and Underwriting Risk Milliman based its review on the Company's rating models, rate review process and controls, price monitoring reports, and a review of the frequency of and process for reporting pricing and underwriting considerations to management. Milliman determined that the Company displays a sufficient level of detail and rigor within its management information reporting processes and that the pricing and underwriting practices were appropriate for the risks assumed. In addition, Milliman found the pricing method and assumptions used by the Company to be reasonable. Liquidity Risk The Company manages liquidity risk within its enterprise risk management processes at the group level. The risk management committee and group risk management function serve a key role in managing overall insurance risk and enhancing risk management. Milliman determined that the Company's liquidity risk mitigation practices to be appropriate for the risks assumed. In addition, Milliman found the processes for assessing catastrophe exposures and risk concentration to meet industry best practice levels. Conclusion Based on the procedures performed by Milliman, no material concerns were noted relating to the appropriateness ofthe reserve risk, pricing and underwriting risk, and liquidity risk. AGGREGATE WRITE-INS FOR SPECIAL SURPLUS FUNDS $1,389,828 On December 31,2009, the Company adopted SSAP No. lor, statutory accounting principles for current and deferred federal and foreign income taxes and current state income taxes. The adoption resulted in an increase to net admitted assets and capital and surplus of $1,389,

21 COMMON CAPITAL STOCK $4,000,200 As of December , there were 100,000 shares of common capital stock authorized, with 13,334 issued and outstanding, having a par value of $300 per share. All the issued shares are owned by AXISIC. GROSS PAID IN AND CONTRIBUTED SURPLUS $101,815,160 In 2008, the Company paid an extraordinary dividend of$20 million of which $7 million was deemed to be return of capital. The following exhibit reflects the balance ofthis account during the four-year period under review: 2009 $101,815, $101,815, $108,815, $108,815,160 UNASSIGNED FUNDS (SURPLUS) $9,579,213 In 2006, the Company paid shareholder dividends of $13 million to its then parent AXIS Re. In 2008, the Company paid shareholders dividends of$33 million, ofwhich $7 million was a return ofcapital to AXISIC. In 2009, the Company adopted SSAP No. lor, statutory accounting principles for current and deferred federal and foreign income taxes and current states taxes which resulted in a positive impact to unassigned surplus. The following exhibit reflects the balance of this account during the four-year period under review: 2009 $9,579, $3,924, $18,253, $14,978,941 PAGE RECOMMENDAnON 8 REINSURANCE It is recommended that the Company comply with the requirements of SSAP No. 96 of the Manual. SUBSEQUENT EVENTS Effective April 20, 2010, the Company changed its investment managers from Evergreen Management Company, LLC to Standish Mellon Asset Company. 17

22 Effective May 14, 2010, the Company entered into a committed secured letter of credit facility with Citibank Europe PLC for the aggregate amount of$750 million under the letter of credit facility. On May 27, 2010, the Company paid an ordinary cash dividend of $9 million to AXISIC. Effective December 10, 2010, the Company and its affiliates entered into a $500 million three year revolving senior credit facility with various banks whereby the borrower may request that the lenders issue letters of credit and make loans to a maximum aggregate of $500 million. AXIS Capital guarantees the obligations ofeach of the borrowers. CONCLUSION The results of this examination disclosed that as of December 31, 2009, the Company had admitted assets of$197,079,833, liabilities of$80,295,432, and capital and surplus of $116,784,401. During the period under examination, admitted assets decreased by $91,971,159, liabilities decreased $77,388,519, and surplus as regards policyholders decreased by $14,582,640. These decreases are indicative of the Company's run-out strategy for its surplus lines business. It was determined that the Company's assets were fairly stated in accordance with guidance outlined in the Manual. Assets were acceptable under Section 38a-1 02 of the CGS. The liabilities established were adequate to cover the Company's obligations to policyholders. 18

23 SIGNATURE In addition to the undersigned, Sharon Altieri, CPA, Gerald Burke, CFE, Alan Sundell, AFE, Daniel Levine, AFE, Lisa Pagliaro, AFE, Joseph Marcantonio, AFE, CISA, Mark Murphy, CFE, and Richard Marcks, FCAS, MAAA, of the Connecticut Insurance Department, and the consulting firm of Milliman participated in this examination. I, Wayne Shepherd, CFE, do solemnly swear that the foregoing report of examination is hereby represented to be a full and true statement of the condition and affairs of the subject insurer as ofdecember 31,2009, to the best ofmy information, knowledge and belief. Respectfully submitted, LJ{tiSl~jIidJ Wayne epherd, CF Examiner-In Charge State of Connecticut Insurance Department State of Connecticut ss County of Hartford Subscribed and sworn before me, PO..:fnccc Ou:.+t (/, Notary Public, on this q '-... day of I0..P(; \,2011. ce eg -Ct: c cc c'-- C ;:!J c.c,lk..c, Notary Public of the Superior Court -- I """"j,-'1.\..-, l' II My Commission Expires ~.:::::, f' P.tt>,-v,- 0: r \..;::>="'" rj) ) 19