SURPLUS AND DIVIDENDS

New Jersey law limits the amount of dividends which can be paid by domestic insurance companies to their stockholders. As prescribed in N.J.S.A. 17:27A-4, all dividends are required to be reported within five days of declaration and 30 days prior to payment. During the notice period, the Commissioner of Banking and Insurance may disallow all or part of the proposed dividend if it is determined that the insurer’s surplus is not reasonable in relation to the insurer’s outstanding liabilities and adequate to its financial needs, or if the Commissioner of Banking and Insurance determines that the insurer is otherwise in hazardous financial condition. Furthermore, dividends may not exceed the greater of 10 percent of such insurer’s surplus as of December 31 preceding or the net income, excluding realized capital gains, for the preceding calendar year, without the prior approval of the Commissioner of Banking and Insurance.

Based on the 2001 statutory financial statements of Princeton, the maximum dividend that may be paid to its shareholder in 2002 without prior approval of the Commissioner of Banking and Insurance is $14,374,335. As described above, all dividends are subject to regulatory approval and could be disallowed by the Commissioner.

Unassigned surplus at December 31, 2001 has been reduced by the following items (in thousands):

Net unrealized gains and losses

$ 10,357

Non-admitted asset values

$ 20,635

Provision for reinsurance

$ 2,455

The NAIC adopted a model law, which established certain minimum risk-based capital (RBC) requirements for property and casualty companies. The RBC calculation serves as a benchmark for the regulation of insurance companies by state insurance regulators. The calculation specifies various formulas and weighting factors that are applied to financial balances or various levels of activity based on perceived degree of risk and are set forth in the RBC requirements. The capital of Princeton exceeds the defined company and regulatory action levels calculated using the RBC requirements. However, continued adverse development could further reduce Princeton’s surplus, thus decreasing its risk-based capital ratios, possibly to a level that would require action as prescribed by law. Subsequent to December 31, 2001, Princeton received a $40 million capital contribution in the form of a surplus note from MLMIC. This capital contribution is anticipated to maintain Princeton’s RBC above the required action level.

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