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State-Imposed Requirements
Since its incorporation in 1981, petitioner has been
regulated by the Minnesota Department of Commerce (the
department). Petitioner's affairs, practices, and financial
condition are periodically subject to examination by the
department’s insurance division.
Each year, petitioner is required to file with both the
department and the National Association of Insurance
Commissioners (NAIC) a copy of its NAIC annual statement, and to
deliver a statement of actuarial opinion regarding the adequacy
of its reserve levels. At all times relevant to this case,
petitioner complied with these requirements.
Throughout its existence, petitioner was required under
Minnesota State law to maintain a minimum surplus of $1 million.1
Petitioner’s Early Financial Problems and Remedial Actions
Between 1982 and 1985, petitioner’s reported surplus
deteriorated from $1,433,544 to $1,011,148. Petitioner’s audited
financial statements for 1985, issued by Ernst & Whinney on
May 10, 1986, restated petitioner’s December 31, 1985, surplus as
$7,995 and noted that petitioner did not meet the surplus level
required by Minnesota statutes.
1 Petitioner's surplus is the excess of its assets over its
liabilities, which include the amounts estimated to be necessary
to satisfy its obligations for unpaid losses and allocated loss
expenses. As a liability item on petitioner's balance sheet, its
loss reserves directly reduce petitioner's surplus.
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