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

Industrial Risk Insurers (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 of the State of Connecticut, and as such is charged with the duty ofadministering and enforcing the provisions of Title 38a of the Connecticut General Statutes (C.G.S.).

2. The Company is a domestic insurer authorized to transact the business of insurance in the State of Connecticut.

3. On February 17, 2011, the verified Report of the Company was filed with the Connecticut Insurance Department.

4. In accordance with C.G.S. §38a-14(e) (3), the Company was afforded a period of thirty (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 March 21,2011, the Company notified the Department of certain responses and comments on certain items 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.

www.ct.gov/cid P.O. Box 816 • Hartford, CT 06142-0816

An Equal Opportunity Employer

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 recommendations set forth in the Report, and that the failure of the Company to so comply shall result in sanctions or administrative action as provided by Title 38a of the C.G.S.

Dated at Hartford, Connecticut this 30th day of March, 2011

L6~ Thgmas B. Leonardi Insurance Commissioner

EXHIBIT A

EXAMINATION REPORT

OF

INDUSTRIAL RISK INSURERS

AS OF

DECEMBER 31, 2009

BY THE

CONNECTICUT INSURANCE DEPARTMENT

TABLE OF CONTENTS

Page

Salutation 1

Scope of Examination 1

History 2

Subsequent Event 4

Organizational Chart 4

Management and Control 5

Related Parties 7

Insurance Coverages 7

Territory and Plan of Operation 8

Reinsurance 8

Infonnation Technology and Controls 9

Accounts and Records 10

Financial Statements 11

Recommendations 11

Conclusion 11

Signature 12

February 17,2011

The Honorable Thomas B. Leonardi Insurance Commissioner State of Connecticut Insurance Department 153 Market Street, 6th Floor Hartford, Connecticut 06103

Dear Commissioner Leonardi:

In compliance with your instructions and pursuant to the requirements of Section 38a-677 of the Connecticut General Statutes (CGS), the undersigned has made an examination ofthe financial condition and affairs of

INDUSTRIAL RISK INSURERS

(hereinafter referred to as the Association or IRI), a voluntary, unincorporated association of insurers, organized under the laws of the State of Connecticut, with its horne office located at 2 Waterside Crossing, Suite 200, Windsor, Connecticut 06095. The report on such examination is submitted herewith.

SCOPE OF EXAMINATION

The previous examination of the Association was conducted as of December 31, 2004. The current examination which covers the subsequent five-year period was conducted at the horne office of the Association.

As part of the examination planning procedures, the Financial Regulation Division of the Connecticut Insurance Department (the Division) reviewed the following materials submitted by the Association:

• Board of Director (Board) minutes from 2005 through the latest 2010 meeting. • Statutory Audit reports from 2005 through 2009, completed by the Company's independent

certified public accountants, PricewaterhouseCoopers, LLP (PwC). • Statements of Actuarial Opinion from 2005 through 2009. • Reports of the Internal Audit Department from 2005 through 2009.

A comprehensive review was made ofthe financial analysis files and documents submitted to the Financial Analysis Unit of the Division. There were no Examination Jumpstart or Solvency Tracking System reports from the National Association ofInsurance Commissioners (NAIC) database since IRI is an association and does not submit an electronic filing to the NAIC.

Work papers prepared by PwC in connection with its annual statutory audit were reviewed and relied upon to the extent deemed appropriate.

The Division retained the services of Deloitte Consulting, LLP (Deloitte Consulting) to perform an actuarial review.

INDUSTRIAL RISK INSURERS

The examination was conducted on a full scope, comprehensive basis in accordance with the procedures outlined in the NAIC Financial Examiners Handbook (the Handbook).

The Handbook requires that we plan and perform the examination to evaluate the financial condition and identify prospective risks ofthe Association by obtaining information about the Association, including corporate governance, identifying inherent risks within the Association, 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 ofthe Association were considered in accordance with the risk-focused examination process.

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.

HISTORY

IRI is a voluntary unincorporated joint underwriting association formed under the laws of the state of Connecticut, offering property insurance in the highly protected risk market, predominately in all states and territories of the United States of America.

Effective January 1, 1998, the former member companies (Ceding Members) sold their member

interest of IRI to Employers Reinsurance Corporation (ERC) and Hartford Steam Boiler Inspection

and Insurance Company (HSB), aggregating ownership interests of99.5% and 0.5% respectively, for a purchase price of $235,000,000. Pursuant to this transaction, ERC and HSB entered into a

reinsurance agreement with the Ceding Members to reinsure claims related to IRI policies in force on January 1, 1998, arising from insured events occurring on or after January 1, 1998, in consideration for the Ceding Members net unearned premium reserve on January 1, 1998. Existing liabilities under policies that expired prior to or were in-force on January 1, 1998, remain

liabilities of the Ceding Members.

Effective December 31, 2000, HSB exited its participation in the Association and its ownership interest was assumed by Westport Insurance Corporation (WIC). Effective January 1, 2001, WIC, a wholly-owned subsidiary of ERC, assigned its rights, duties, and obligations arising out of its

membership in IRI to ERC.

On June 9,2006, Swiss Reinsurance Company (Swiss Re Zurich) and Swiss Re Funding (US)

LLC (SRF) purchased from General Electric Capital Corporation (GECC) and General Electric

Capital Services, Inc. all of the outstanding stock ofGE Insurance Solutions (GElS), the parent

company ofERC. Swiss Re Zurich transferred 61 % of the common stock of GElS to Swiss Re America Holding Corporation (SRAHC), with SRF holding the remaining 39% (SRF subsequently

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INDUSTRIAL RISK INSURERS

merged with SRAHC, with SRAHC as the survivor).

As of December 31, 2006, the member companies of the Association were comprised of ERC (99.5%) and WIC (0.5%). On January 1,2008, ERC was merged with WIC, with ERC being the surviving company. Upon execution of the merger, ERC changed its name to WIC.

In addition, on January 1, 2008, pursuant to the aforementioned merger, Swiss Re America

Corporation (SRAC) joined the Association. Due to the merger ofERC with and into WIC, WIC will continue to assume its 0.5% in the Association and SRAC will assume the 99.5% membership previously held by ERC.

Association membership prior to 1998 is commonly referred to as "Old Syndicate" while Association membership from 1998 and subsequent is referred to as "New Syndicate".

The business of the Association, for the purpose of distribution among its Members, shall be

divided on the basis of 1,000 equal shares. Each member company, upon becoming a member, is

required to pay an admission fee equal to $250 for each member share assumed.

As of December 31, 2009, and 2008, the member companies of the Association were comprised of SRAC (99.5%) and WIC (0.5%), respectively.

Article II of the Association's Constitution identifies the purposes and powers of the Association.

The Association shall be a voluntary, unincorporated association. In conformity with law and on

behalf of its members and to the extent authorized by its Constitution and the Underwriting Rules of Practice, the Association:

1. Shall constitute an underwriting facility through which its members may provide, on a

several and joint basis, such insurance as may be authorized there under;

2. Shall constitute an underwriting facility through which its members may cede or accept remsurance;

3. Shall receive all premiums, less any commissions, due to its members and remit to the members in due course all net income after provision for losses and necessary expenses;

4. Shall issue in the name of its members such policies or other evidence of insurance or

reinsurance as may be deemed proper and control, directly or through appointment of

applicable managers, the investigation, adjustment, litigation, establishment of reserves, and

settlement and payment of claims and expenses arising there under;

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INDUSTRIAL RISK INSURERS

5. Shall have the authority to act as a joint underwriting or joint reinsurance association, advisory

organization, pool or similar organization as may be advisable or required pursuant to the

provision of the insurance laws in jurisdictions where the Association operates;

6. May join, advise, assist, associate with, cooperate with, and contract with such organizations,

associations and others as may be necessary or desirable for the accomplishment of the

purposes therein set forth pursuant to the provisions of the insurance laws applicable to the

Association's operations;

7. May do anything otherwise necessary or desirable for the accomplishment of the purposes

therein set forth.

SUBSEQUENT EVENT

Management of the Association determined that it would be in its best interest to terminate the Association. The Association requested that the Department approve the dissolution of the IRI Joint Underwriting Association effective as of January 1,2011. The Department had no objection to the dissolution of IRI and has subsequently approved this transaction.

ORGANIZATIONAL CHART

The following is an organizational chart for the Association and its major affiliates:

Swiss Re America Holding Corporation

(DE)

Swiss Re Solutions Holding Corporation

(DE)

I Core

Reinsurance Company Limited

(BM)

I Westport Insurance

Corporation (MO) -

0.5% Member IRI

Industrial Risk

Insurers (CT)

I Swiss Reinsurance

America Corporation

(NY) 99.5% Member IRI

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INDUSTRIAL RISK INSURERS

MANAGEMENT AND CONTROL

The Constitution provides for a Board to govern the Association with full authority on behalf of the members with respect to all affairs and business of IRI. It may appoint standing or special committees of the Association and delegate its duties to such committees.

Article V of the Constitution, titled the Board, states:

1. The Board shall consist of not more than fifteen (15) nor less than five (5) directors, each of whom shall have one (1) vote;

2. Members of the Board shall be elected at the annual meeting of the Association and shall serve a term of one (l) year and until their successors are elected;

3. The Board shall fill vacancies in its membership that may occur between annual meetings;

4. The chairman of the Board shall preside at the meetings of the Association and the Board;

5. The chairman of the Board, at least thirty (30) days prior to the annual meeting, shall request nominations from each member and shall notify the members of the nominees within one (l) week prior to the annual meeting;

6. The Board shall direct the execution and issuance of all policies or certificates of insurance and contracts of reinsurance in the name of and on behalf of the members by such persons as it may designate. The Board shall direct the remission of all net income in due course to the members after the deduction of losses and expenses. It shall have plenary powers and authority to adopt, alter or amend the Underwriting Rules of Practice of the Association or such other regulations, rules and actions as may be necessary to carry out the purposes and functions of the Association as set forth in the Constitution;

7. The Board may delegate its duties to such other entities or natural persons as it may in its sole discretion appoint;

8. The Board is authorized to procure adequate fidelity bonds covering all officers and employees in such amounts as it may determine;

9. The Board shall designate the persons who may sign checks against the funds of the Association and the conditions under which they may be signed.

Article VI of the Constitution, titled Officers and their Duties, states:

1. The officers of the Association shall be a president, one or more vice presidents, a secretary, a treasurer and such other officers as may be desirable. All officers shall be appointed by and serve at the pleasure of the Board;

2. The president shall be a member, ex officio, of the Board and all standing committees except an audit committee, if any, and have full authority over all offices, departments, and personnel. He shall have sole charge and management of the day to day affairs of the Association, subject

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INDUSTRIAL RISK INSURERS

to the direction and control of the Board, and shall have such other powers and duties as may be delegated by the Constitution or by the Board;

3. The secretary shall keep a record of the proceedings of all meetings of the Association and shall perform such other duties as are usual to the position of secretary;

4. The treasurer shall examine the audit reports prescribed by Article IX and shall report thereon to the Board and to the members at the annual meeting.

Directors

The following Directors served on the Board as of December 31,2009:

Director

Craig Esses Brian Evans Anthony Hill

Steven Kelner James Miller Randy Nordquist

Robert Petrilli

Robert Solitro William Steilen

Craig Zahnd

Officers

Title and Principal Business Affiliation

Senior Vice President -Tax, Swiss Reinsurance America Corporation Senior Vice President, Westport Insurance Corporation Managing Director, Swiss Reinsurance America Corporation and

Westport Insurance Corporation Managing Director, Swiss Reinsurance America Corporation Managing Director and Chief Operating Officer, Industrial Risk Insurers Managing Director, Swiss Reinsurance America Corporation and Westport

Insurance Corporation Chairman and President, Industrial Risk Insurers and Chairman, President

and Chief Executive Officer, Westport Insurance Corporation Managing Director, Swiss Reinsurance America Corporation Managing Director and Chief Financial Officer, Swiss Reinsurance

America Corporation and Westport Insurance Corporation Managing Director, Swiss Reinsurance America Corporation and Westport

Insurance Corporation

The following individuals served as officers of the Association as of December 31,2009:

Name

Robert Petrilli James Miller Daniel Gibson Charles Lubochinski

Elissa Kenny Joyce Allen Brian Fahey George Klotzbaugh Gregory O'Neil Erika Ozer Josephine Sanditz Michele Woodman

Title

Chairman and President Managing Director and Chief Operating Officer Senior Vice President, Chief Financial Officer and Treasurer Senior Vice President Tax

Senior Vice President and Secretary Senior Vice President Senior Vice President Senior Vice President and Assistant Secretary Senior Vice President Senior Vice President Assistant Secretary Assistant Secretary

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INDUSTRIAL RISK INSURERS

The Association's Constitution states that an annual meeting shall be held within the first six months of the year. However, an annual meeting was not held within the first six months of2007. It is recommended that the Association follow its Constitution and hold its annual meeting within the first six months of the year.

RELATED PARTIES

The Association has the following intercompany agreements in place:

Administrative Services

The Association has had an administrative service agreement (Service Agreement) with ERC since January 1, 1998. The Service Agreement was amended on January 1,2008, to change the company name from ERC to WIC. The Service Agreement states that WIC agrees to provide equipment, data processing and computer services, accounting, financial, actuarial, payroll, sales, underwriting, claims and related services. In return, IRI agrees to reimburse WIC for all reasonable and necessary expenses devoted to providing these services.

Swiss Re Money Market Fund

The Association became a participant in the Swiss Re Money Market Fund (the Fund) by signing a Declaration of Endorsement and Adoption of the Swiss Re Money Market Fund Agreement on August 14, 2006. The Fund is managed by Swiss Re Financial Services Corporation and provides participants with a high quality and highly liquid alternative to investing individually in short term securities.

INSURANCE COVERAGES

IRI's ultimate parent, SRAHC maintains fidelity bond coverage through the Vigilant Insurance Company. The financial institution fidelity bond coverage protects SRAHC and its subsidiaries for a single loss liability limit of $25,000,000, and an aggregate amount of $50,000,000, with a single loss deductible amount of $1 ,000,000, against losses resulting from dishonest or fraudulent acts of its directors, officers, and employees. These limits exceed the suggested minimum limits of insurance pursuant to the Handbook.

In addition to the fidelity coverage, SRAHC maintains the following coverages:

Company Coverage

American Guarantee & Liability Company All Risk Property Federal Insurance Company Fiduciary Liability, Travel Accident, Umbrella

Insurance, and Workers' Compensation National Union Kidnap and Ransom Pacific Indemnity Insurance Company Commercial Business Auto Travelers Insurance Company Financial Institutions Bond - Excess Zurich American Insurance Company General Liability

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INDUSTRIAL RISK INSURERS

TERRITORY AND PLAN OF OPERATION

The Association transacts business for its member companies in all fifty states, the District of Columbia, Puerto Rico, and certain foreign countries. The Association primarily writes monoline commercial property insurance for large risks with multiple locations. The Association writes business using syndicate policies with WIC assuming one hundred percent of the risk. The Association does not employ agents nor does it directly solicit business. Most business written is received from agents of member companies or from brokers.

REINSURANCE

The Association entered into reinsurance agreements, both facultative and treaty, to control its exposure to losses. Reinsurance recoverable from unlicensed reinsurers was collateralized by deposits and letters of credit. The Association also assumed risks from various insurance companies and associations.

At December 31, 2009, IRI had no in-force ceded reinsurance agreements with the exception of an arrangement with Century Property and Casualty Insurance Company (Century). From October I, 2007, through present, IRI has primarily acted as a fronting carrier on a large property program which is ceded to Century.

The following outline summarizes IRI's ceded reinsurance program from December 31, 2004 through December 31, 2009.

Quota Share Reinsurance Agreement - terminated December 31,2008 on run-off basis. Reinsurance Company Attachment Limits Contract Retention 2004 Quota Share 59% First dollar Up to $12,500,000 2005 Quota Share 67% First Dollar Up to $15,000,000 2006 Quota Share 48% First Dollar Up to $25,000,000 2007 Quota Share 40% First Dollar Up to $25,000,000 2008 Quota Share 40% First Dollar Up to $25,000,000 Surplus Share Reinsurance Agreement - terminated December 31, 2005 on run-off basis. Reinsurance Contract

Company Retention

Attachment Limits

Surplus Share 5% $15,000,000 $10,000,000 excess $15,000,000

Property Catastrophe Reinsurance Agreement - non-renewed December 31, 2007. (not activated as there were no losses that reached the aggregated threshold) Reinsurance Contract

Company Retention

Attachment Limits

Layer 1 40% $100,000,000 $50,000,000 excess of $100,000,000

Layer 2 40% $150,000,000 $100,000,000 excess of $150,000,000

Layer 3 40% $250,000,000 $150,000,000 excess of $250,000,000

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INDUSTRIAL RISK INSURERS

Property Catastrophe Reinsurance Agreement - non-renewed December 31, 2006. (not activated as there were no losses that reached the aggregated threshold) Reinsurance Contract

Company Retention

Attachment Limits

Layer 1 48% $85,000,000 $65,000,000 excess of $85,000,000

Layer 2 48% $150,000,000 $100,000,000 excess of $150,000,000

Layer 3 48% $250,000,000 $150,000,000 excess of $250,000,000

Property Catastrophe Reinsurance Agreement - non-renewed December 31,2005. Reinsurance Contract

Company Retention

Attachment Limits

Layer 1 33% $50,000,000 $25,000,000 excess of $50,000,000

Layer 2 33% $75,000,000 $50,000,000 excess of $75,000,000

Layer 3 33% $125,000,000 $150,000,000 excess of $125,000,000

In addition to the Association's property catastrophe reinsurance agreement outlined above, ERC provided a corporate catastrophe reinsurance agreement for its affiliates. The corporate catastrophe treaty is outlined below.

Corporate Property Catastrophe Reinsurance Agreement - Non-renewed December 31, 2005.

Reinsurance Company Attachment Limits Contract Retention Layer 1 77% $35,000,000 $45,000,000 excess of

$35,000,000 Layer 2 77% $80,000,000 $45,000,000 excess of

$80,000,000

INFORMATION TECHNOLOGY AND CONTROLS

An evaluation of information technology (IT) controls was conducted to gain familiarity with the existing controls, policies and procedures established by the IT area. The Missouri Insurance Department (MID) conducted a recent examination ofWIC's IT controls which overlapped the examination period for IRI. MID's review was conducted under the same guidelines as those used by the Division. The Handbook's Information Technology Planning Questionnaire (ITPQ) responses were evaluated, a work program was developed, and testing was performed to assess the degree of reliance that could be placed on internal controls with the objective of assisting in the appropriate approach to the examination of the Association's financial records.

After reviewing MID's documentation, the Division decided to place reliance on the work they performed. The Division agreed with the conclusions made by MID relating to the IT controls environment supporting the Association.

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INDUSTRIAL RISK INSURERS

The Association's primary systems were:

• AMS - account management system for commercial industrial risks; • CDS - cash disbursement system from SunGard Insurance Systems (SunGard); • CRAS - accounting engine for commercial reinsurance, ceded business ­

property/casualty (P&C); • TRAC - core legacy contract and claims administration and technical accounting system,

direct/assumed - P&C; commercial; • WINS - supports booking, billing, technical accounting and bureau reporting, direct

business - P&C, commercial;

The selected key systems - CRAS, TRAC, and WINS were examined during the Department's review of the supporting documentation and testing in conjunction with the evaluation of the ITPQ contained in the Handbook.

The evaluation of IT controls focused on the following areas: management and organizational control; logical and physical security; program change controls; system development controls; business continuity; services provider controls (i.e. TPAs); operations; and network and internet control.

There were no material findings which affected the Division's overall reliance on the Association's IT controls.

ACCOUNTS AND RECORDS

IRI is part of the Swiss Re North American property and casualty business unit and uses the same systems as WIC. The staff responsible for assembling the statutory financial statements is located in Overland Park, Kansas. The Accounting, Budget and Cost system from SunGard is the general ledger system used to account for the property casualty business on a Generally Accepted Accounting Principles (GAAP) basis. Manual adjustments are then made to convert the IRI financial statements to a statutory basis.

General ledger account balances were reconciled and traced to the amounts reported in the audited financial statement for 2009. Further detail analyses were performed on the individual accounts throughout the examination.

During the examination it was noted that IRI has historically reported its premiums and losses in a manner that is questionable as to its compliance with the NAIC Accounting Practices and Procedures Manual (Manual). The current interpretation of the Statement of Statutory Accounting Principles (SSAP) No. 63 would lead to financial statements reporting zero net premiums and losses, reflecting cessions to members of the Association.

Pursuant to SSAP No. 63 of the Manual, if a reporting entity is a direct writer of premium business, the premiums should be recorded as directly written and accounted for in the same manner as any other direct business written by the entity. Based on the review ofthe IRI syndicate policies, WIC was documented as assuming one hundred percent ofthe policy risk and as such is reporting the premium properly as direct business on its financial statements.

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INDUSTRIAL RISK INSURERS

SSAP No. 63 further states that an entity that cedes premium to a pool records the premiums and losses on its books in the same manner as any other reinsurance arrangement which is a reduction of both premiums and losses. SSAP No. 63 also notes that a reporting entity that is a member of a pool shall record its participation in the pool as assumed business, as in any other reinsurance arrangement which increases the reported premiums and losses.

Since WIC was acting in the capacity of a "Servicing Carrier" for IRI, the premiums should have been reported on WIC's financial statements as direct, ceded, and assumed by IRI. However, in reviewing the IRI audited income statement, IRI was reporting the premium as direct business and not assumed business.

It is recommended that IRI review and adjust the financial reporting of its premiums and losses to be in compliance with the Manual and SSAP No. 63. As IRI management is dissolving its operations, the financial statements will not be adjusted.

FINANCIAL STATEMENTS

The financial statements as of December 31,2009, are not in compliance with SSAP No. 63 and will not be presented in this report.

RECOMMENDATIONS

PAGE

5 MANAGEMENT AND CONTROL

It is recommended that the Association follow its Constitution and hold its annual meeting within the first six months of the year.

10 ACCOUNTS AND RECORDS

It is recommended that IRI review and adjust the financial reporting of its premiums and losses to be in compliance with the Manual and SSAP No. 63. As IRI management is dissolving its operations, the financial statements will not be adjusted.

CONCLUSION

The results of this examination disclosed that as of December 31,2009, IRI was not in compliance with the Manual regarding the reporting of premiums and losses. IRI was dissolved as of January 1, 2011.

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INDUSTRIAL RISK INSURERS

SIGNATURE

In addition to the undersigned, the following participated in this examination: Kent Krajick, CFE; Joseph Marcantonio, AFE, CISA; Mark Murphy, CFE; and James Jakielo, FSA, MAAA of the Connecticut Insurance Department; and the professional service firm of Deloitte Consulting.

I, Michael Daniels, 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 of December 31, 2009, to the best of my information, knowledge and belief.

Respectfully submitted,

Michael Daniels, CFE Examiner-in-Charge State of Connecticut Insurance Department

State of Connecticut ss j ldIi -tz, 1d County of Hartford

Subscribed; and sworn before me, Na (l U8 th [he rc/-t£ Notary Public, on this / 7 Cf4 day of 'Hi::>. ,201l.

J11l~ /11. ~v-JUJ Notary Pul2,{ic .

My Commission Expires &~0/d-U / S­

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