SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994 Commission File Number 0-6964
20TH CENTURY INDUSTRIES
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-1935264
----------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) number)
Suite 700, 6301 Owensmouth Avenue, Woodland Hills, California 91367
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 704-3700
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Without Par Value
-------------------------------
(Title of Class)
Series A Preferred Stock, $1,000 Stated Value
---------------------------------------------
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the average bid and asked prices for shares of the
Company's Common Stock on March 9, 1995 as reported by the New York Stock
Exchange, was approximately $454,525,896.
On March 9, 1995, the registrant had outstanding 51,495,636 shares of common
stock, without par value, which is the Company's only class of common stock.
DOCUMENT INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement used in connection with the annual
meeting of shareholders of the registrant, to be held on May 25, 1995, are
incorporated herein by reference into Part III hereof.
<PAGE> 2
20TH CENTURY INDUSTRIES
1994 FORM 10-K ANNUAL REPORT
Table of Contents
Page
PART I
------
Item 1. Business.................................... 3
Item 2. Properties.................................. 25
Item 3. Legal Proceedings........................... 25
Item 4. Submission of Matters to a Vote of Security
Holders............................... 26
PART II
-------
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters........... 28
Item 6. Selected Financial Data..................... 30
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 32
Item 8. Financial Statements and Supplementary
Data.................................. 49
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial
Disclosure............................ 80
PART III
--------
Item 10. Directors and Executive Officers of the
Registrant............................ 80
Item 11. Executive Compensation...................... 80
Item 12. Security Ownership of Certain Beneficial
Owners and Management................. 80
Item 13. Certain Relationships and Related
Transactions.......................... 80
PART IV
-------
Item 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K................... 81
Signatures.................................. 90
<PAGE> 3
PART I
------
ITEM 1. BUSINESS
GENERAL
20th Century Industries is an insurance holding company incorporated in
California. Predecessor companies were originally founded in 1956 by Mr.
Louis W. Foster who retired as Chief Executive Officer and Chairman of the
Board in 1994. Executive offices are located at 6301 Owensmouth Avenue,
Woodland Hills, California 91367. The telephone number of the Corporate
Office is (818) 704-3700. The term "Company", unless the context requires
otherwise, refers to 20th Century Industries and its wholly-owned
subsidiaries, 20th Century Insurance Company and 21st Century Casualty
Company, both of which are property and casualty insurance companies licensed
in California.
The Company directly markets and underwrites private passenger
automobile liability and physical damage and personal excess liability
insurance through 20th Century Insurance Company and similarly markets private
passenger automobile liability and physical damage insurance through 21st
Century Casualty Company. Prior to an order by the California Department of
Insurance in June 1994 (see below), the Company marketed and underwrote
homeowners insurance through 20th Century Insurance Company and condominium
insurance through 21st Century Casualty Company.
The Company believes it has been able to grow profitably by (1) adhering
to its strategy of marketing to responsible prospects with relatively
uncomplicated insurance needs, (2) selling directly to the customer, (3)
centralizing and streamlining its marketing, customer service and policy
change processing, and (4) providing a rate structure that the Company
believes is among the lowest in the market it serves.
The Company limits its underwriting of private passenger automobile
insurance to those drivers defined by California statute as "Good Drivers."
The Company's automobile program has consistently and profitably (excluding
the Proposition 103 rollback and the earthquake impact in 1994) grown to
1,132,605 vehicles in force as of December 31, 1994. For a further discussion
regarding the impact of Proposition 103 and the earthquake losses, as well as
subsequent capital financing, refer to Notes 12, 13 and 14, respectively, of
the Notes to Consolidated Financial Statements.
<PAGE> 4
The Company had been issuing homeowners policies through 20th Century
Insurance Company since 1982 and condominium policies through 21st Century
Casualty Company since 1989; however, an earthquake occurred in the San
Fernando Valley area of California on January 17, 1994 resulting in
unprecedented losses to the Company. In order to reduce the Company's
earthquake exposure, it ceased writing new homeowners and condominium
insurance and ceased renewing earthquake coverage endorsements in accordance
with an order by the California Department of Insurance in June 1994. The
Company continues to renew existing homeowner and condominium policies for two
more annual renewal periods, excluding earthquake coverage. All earthquake
coverage will be terminated by July 23, 1995 and all homeowners and
condominium coverages will be terminated by July 23, 1997.
In 1988, the Company expanded its product line to include the Personal
Excess Liability Policy (PELP) to complement its existing automobile and
homeowners programs. Policies in force totaled 11,072 at December 31, 1994.
The same direct selling and centralized processing strategies apply to PELP.
LIMITS OF INSURANCE COVERAGE
The Company offers private passenger automobile bodily injury liability,
property damage liability, medical payments, uninsured motorist,
comprehensive, collision and towing coverages. Policies are written for a
six-month term. Various limits of liability are offered with maximum limits
of $500,000 per person and $500,000 per accident. The most frequent bodily
injury liability limits are $100,000 per person and $300,000 per accident.
The 20th Century Insurance Company homeowners program utilized a
replacement cost insurance policy which covered the dwelling and its contents.
Program rules provided for a minimum dwelling amount of $50,000 and a maximum
dwelling amount of $500,000. Personal liability coverage limits of $100,000,
$200,000 and $300,000 were available.
The 21st Century Casualty Company condominium program utilized a
replacement cost policy which covered the condominium unit owner's contents up
to the policy limits. Contents coverage limits were offered between a minimum
<PAGE> 5
of $25,000 and a maximum of $250,000. Limits for personal liability coverage
of $100,000, $200,000 and $300,000 were also available.
The Personal Excess Liability Policy (PELP) is written in 20th Century
Insurance Company and provides liability coverage with a limit of $1,000,000
in excess of the underlying automobile and homeowners liability coverage.
Minimum underlying automobile limits of $100,000 per person and $300,000 per
accident are required while homeowners must have $100,000 personal liability
coverage. The underlying automobile coverage must be written by the Company.
MARKETING
The Company markets directly to the customer and writes its policies
without utilizing or engaging outside agents or brokers. The Company uses
direct mail and print and radio advertising to market its policies. The
Company continues to develop a substantial amount of its new business by
referrals from existing policyholders. This was particularly true in 1994 as
all planned newspaper, radio and direct mail advertising was cancelled due to
the January 17th earthquake. During 1994, approximately 86% of new automobile
business and 56% of new homeowners business was obtained from referrals by
current customers. The Company ceased writing new homeowner and condominium
owners policies in June 1994 as a consequence of the serious losses associated
with the Northridge earthquake.
The Company's marketing efforts in recent years have focused on the
Sacramento, San Francisco and San Jose areas in Northern California and the
San Diego area in Southern California. Approximately 25% of new business
production for the Company comes from these areas.
UNDERWRITING
The rate regulatory system in California requires the prior approval of
rates. Within this regulatory framework, the Company establishes its
automobile premium rates based on actuarial analysis of its own historical
premium, loss and expense data. These data are compiled and analyzed to
establish overall rate levels as well as classification differentials. The
Company's rates are established at levels intended to generate underwriting
profits and vary for individual policies based on a number of rating charac-
teristics. These characteristics include driving record, number of years a
driver has been licensed, annual mileage, vehicle usage, value of the
automobile and limits and deductibles selected.
<PAGE> 6
20th Century Insurance Company's automobile risk selection guidelines
are designed to insure careful, responsible individuals as indicated by the
prospect's violation and accident history, and 21st Century Casualty Company's
guidelines are designed for the writing of statutorily defined "Good Drivers."
In 1994, approximately 61% of those individuals who inquired about
purchasing automobile insurance were sent applications for 20th Century
Insurance Company following a preliminary screening by the Company's marketing
representatives. Another 28% were determined to be eligible for a 21st
Century Casualty insurance application. These application assignments were
based on prior insurance and driving record. Approximately 84% of the
applications returned to 20th Century Insurance Company and 67% of those
returned to 21st Century Casualty Company were accepted by the Company for
issuance of a policy based on verification of driving record.
The Company reviews many of its automobile policies at the time of
renewal and/or as changes occur during the policy period. The customer may
contact the Company to make changes, such as the addition or deletion of
drivers or vehicles, changes in the classification of drivers or usage of
vehicles, changes in garaging location and changes in coverages or limits.
Some mid-term changes may result in premium adjustments and some may result in
the policy being reunderwritten and eventually not renewed because of a
substantial increase in hazard.
SERVICING OF BUSINESS
The Company has successfully achieved operating savings and maintained
an extremely low expense ratio because of its efficient processing of all
aspects of customer service. The Company will continue to design and
implement effective systems, fully supported by computers, to improve service
and efficiency in the marketing, policy service, underwriting and claims
functions. As in the past, the Company will increase its processing
capabilities to meet growing workload demands. The computer systems provide
the information resources and data processing capabilities which support the
business and technical needs of the Company. In addition to providing ongoing
support, the systems provide the strategic capabilities necessary to manage
the Company's business. The Company's electronic digital voice communications
system facilitated more than 29.9 million originations during 1994. Each
Division Service Office has its own telephone system, which is tied to the
centralized home office system, to service its customers.
<PAGE> 7
CLAIMS
Claims operations include the receipt and analysis of initial loss
reports, assignment of legal counsel and settlement approval. Whenever
possible, physical damage claims are handled through the use of Company drive-
in claims and vehicle inspection centers. The claims management staff
administers the claims settlement process and directs the legal and adjuster
components of that process. Each claim is carefully analyzed to provide for
fair loss payments, to comply with the Company's contractual obligations and
to minimize loss adjustment expense. Liability and material damage claims are
handled by specialists in each area. In order to handle the heavy volume of
claims received as a result of the Northridge Earthquake, the Company engaged
outside adjuster firms.
The Company utilizes its staff of 59 full-time attorneys who handle all
aspects of claims litigation, including trial, from offices in Brea, Ontario,
Long Beach and Woodland Hills. Staff attorneys handle more than 75% of the
Company's lawsuits. Suits which may involve a conflict of interest are
assigned to outside counsel.
Recognizing the need to provide its customers with convenient, local
service, the Company has established 10 Division Service Offices in Los
Angeles, Orange, San Diego and Ventura Counties. Each Division Service Office
is a full service center, staffed with between seventy-five and one-hundred
employees who provide complete claims services from initial investigation to
final conclusion. While most policy changes are processed centrally by
telephone through the Woodland Hills Home Office, each Division Service Office
has at least two customer service representatives to assist "walk-ins."
The Company has thirteen drive-in claims facilities in Los Angeles,
Orange, San Diego and Ventura Counties. Each drive-in facility is staffed
with between two and five employees.
The Specialty Division is comprised of three vehicle inspection centers
located in Los Angeles and in Orange Counties. Each vehicle inspection center
is staffed with between fifteen and twenty employees who handle total losses,
total thefts and vehicles which are not driveable.
The Claims Services Division employs over 100 people who are responsible
for subrogation and medical payments claims for all programs and workers'
compensation claims arising under the homeowners policy.
<PAGE> 8
The Homeowners Division processes all homeowners property claims on a
regional basis and is made up of three units of approximately twenty employees
each. The units are located in Monrovia, Santa Ana and Woodland Hills.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
The Company establishes reserves, or liabilities, for the future payment
of losses and loss adjustment expenses for claims, both reported and
unreported, which were incurred as of an accounting date. Such reserves are
estimates, as of a particular date, of the amount the Company will ultimately
pay for claims incurred as of the accounting date.
"Case basis" reserves are established for bodily injury liability and
uninsured motorist claims which are either expected to exceed $15,000 or older
than two years. Such case reserves are based on the specific circumstances,
merits and relevant contractual policy provisions of the claim. Anticipated
effects of inflation are included in the case reserve.
Case reserves for other bodily injury and uninsured motorists claims and
for all other coverages are established by an average case reserve value.
These average values are based on a monthly review of recent claims payments
for each coverage.
The Company supplements the case loss reserve estimates with loss
reserves estimated using actuarial methodologies. These reserves are designed
to provide for claims incurred by, but not reported to or recorded by, the
Company as of the accounting date (IBNR) and for changes over time in
individual case reserve estimates. The actuarial reserves are estimated using
actuarial techniques and the Company's own historical loss experience and are
reviewed each quarter.
<PAGE> 9
The claims and legal costs estimated to settle incurred claims are
included in reserves for loss adjustment expenses. These reserves are
determined using actuarial techniques and the Company's own historical
experience.
Anticipated effects of inflation are implicitly considered in the
actuarial estimates of liabilities for loss and loss adjustment expenses.
Amounts reported are estimates of the ultimate net costs of settlement
which are necessarily subject to the impact of future changes in economic and
social conditions. Management believes that, given the inherent variability
in any such estimates, the aggregate reserves are within a reasonable and
acceptable range of adequacy. The methods of making such estimates and for
establishing the resulting reserves are continually reviewed and updated and
any adjustments resulting therefrom are reflected in earnings currently.
The Company does not discount to present value loss and loss adjustment
expense reserves expected to be paid in future periods.
<PAGE> 10
The following table provides a reconciliation of beginning and ending
reserves for losses and loss adjustment expenses, net of reinsurance
recoverable, for the indicated periods to the gross amounts reported in the
Company's consolidated financial statements.
<TABLE>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Reserves for losses and loss adjustment
expenses, net of reinsurance recover-
ables on unpaid losses, at beginning
of year $ 574,619 $554,034 $547,098
Incurred losses and loss adjustment
expenses, net of reinsurance:
Provision for insured events of
the current year, non-earthquake
related, net of reinsurance 1,028,983 930,437 838,263
Provision for insured events of the
current year, earthquake related,
net of reinsurance 868,407 - -
Decrease in provision for
insured events of prior years,
net of reinsurance (84,453) (62,986) (73,889)
---------- -------- ---------
Total incurred losses and loss
adjustment expenses, net of
reinsurance 1,812,937 867,451 764,374
---------- -------- ---------
Payments, net of reinsurance:
Losses and loss adjustment expenses
attributable to insured events of
the current year, non-earthquake re-
lated, net of reinsurance 578,598 519,232 437,174
Losses and loss adjustment expenses
attributable to insured events of
the current year, earthquake related,
net of reinsurance 708,981 - -
Losses and loss adjustment expenses
attributable to insured events of
prior years, net of reinsurance 344,876 327,634 320,264
---------- -------- --------
Total payments, net of reinsurance 1,632,455 846,866 757,438
---------- -------- --------
Reserves for losses and loss adjustment
expenses, net of reinsurance recover-
ables on unpaid losses, at year end 755,101 574,619 554,034
Reinsurance recoverables on unpaid
losses, at year end 1,142 2,871 507
---------- -------- --------
Reserves for losses and loss adjust-
ment expenses, gross of reinsurance
recoverables on unpaid losses, at
year end $ 756,243 $577,490 $554,541
========== ======== ========
</TABLE>
<PAGE> 11
The following table reconciles the reserves reported in the Company's
consolidated financial statements prepared in accordance with generally
accepted accounting principles (GAAP) and those reported in the statements
filed with the California Department of Insurance in accordance with statutory
accounting principles (SAP). In 1994, the Company began to record estimated
recoveries for salvage and subrogation on a SAP basis. Prior to 1994, such
anticipated recoveries were recorded only on a GAAP basis.
DECEMBER 31,
-----------------------------------
1994 1993 1992
---- ---- ----
(AMOUNTS IN THOUSANDS)
Reserves reported on a
SAP basis $755,101 $620,939 $596,444
Adjustments:
Reinsurance recoverables on unpaid
losses and LAE 1,142 2,871 507
Estimated recovery for salvage
and subrogation - (46,320) (42,410)
-------- -------- --------
Reserves reported on a GAAP basis $756,243 $577,490 $554,541
======== ======== ========
The following table represents the development of GAAP balance sheet
reserves, net of reinsurance, for the years 1984 through 1994. The top line
of the table shows the reserves at the balance sheet date, net of reinsurance
recoverables on unpaid losses and loss adjustment expenses, for each of the
years indicated. Such net amounts represent estimated losses and loss
adjustment expenses unpaid as of the particular balance sheet date for claims
arising prior to the balance sheet date whether or not reported. The upper
portion of the table indicates the cumulative amounts paid as of successive
years with respect to that reserve liability. The lower portion of the table
indicates the re-estimated amount of the previously recorded reserves based on
experience as of the end of each succeeding year, including cumulative
payments made since the end of the respective year. The estimate changes as
more information becomes known about the frequency and severity of claims for
individual years. A redundancy (deficiency) exists when the original reserve
estimate is greater (less) than the re-estimated reserves at December 31,
1994.
Each amount in the following table includes the effects of all changes
in amounts for prior periods. The table does not present accident year or
policy year development data. Conditions and trends that have affected the
development of liabilities in the past may not necessarily occur in the
future. Therefore, it may not be appropriate to extrapolate future
deficiencies or redundancies based on the table.
<PAGE> 12
<TABLE>
AS OF DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------------------
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for
losses and loss
adjustment exp.$105,178 $144,972 $206,266 $297,853 $391,748 $472,010 $525,220 $547,098 $554,034 $574,619 $755,101
Paid (cumulative)
as of:
One year later 76,665 102,660 138,944 180,516 197,555 242,757 300,707 320,264 327,634 344,876
Two years later 105,218 139,652 187,448 238,947 271,163 328,606 391,970 401,019 403,434
Three years later 118,982 158,555 211,477 272,955 310,757 366,369 420,853 426,412
Four years later 126,037 168,627 226,550 289,901 326,495 377,980 429,791
Five years later 130,206 174,716 233,287 296,310 330,014 381,507
Six years later 132,306 176,744 235,367 297,764 330,879
Seven years later 132,656 176,947 235,510 298,098
Eight years later 132,713 176,968 235,515
Nine years later 132,625 176,995
Ten years later 132,618
Reserves re-
estimated as of:
One year later 112,962 156,341 227,848 294,504 357,220 402,706 473,974 473,209 491,048 490,166
Two years later 124,233 171,218 230,412 302,991 342,365 397,847 449,348 461,343 447,880
Three years later 130,349 173,717 237,587 304,925 340,760 389,559 442,508 440,198
Four years later 131,056 178,400 239,096 302,661 333,432 384,948 433,408
Five years later 133,089 178,651 237,528 298,764 332,100 382,331
Six years later 133,070 177,732 236,026 298,603 331,191
Seven years later 133,069 177,104 235,819 298,319
Eight years later 132,755 177,088 235,698
Nine years later 132,671 177,038
Ten years later 132,644
Redundancy
(Deficiency) $(27,466) $(32,066) $(29,432) $ (466) $ 60,557 $89,679 $91,812 $106,900 $106,154 $84,453
</TABLE>
<PAGE> 13
Reconciliations for the indicated periods between (1) the net reserves
for losses and loss adjustment expenses at year end (the original reserve
estimate in the ten-year table on the previous page) and the related gross
reserves for losses and loss adjustment expenses on the balance sheet at
year end and (2) the net re-estimated reserves and the related gross re-
estimated reserves as of the end of the latest re-estimation period are as
follows:
1993 1994
---- ----
(AMOUNTS IN THOUSANDS)
Gross Liability - End of Year $577,490 $756,243
Reinsurance Recoverable 2,871 1,142
Net Liability - End of Year 574,619 755,101
Gross Re-Estimated Liability - Latest $492,671
Re-Estimated Recoverable - Latest 2,505
Net Re-Estimated Liability - Latest 490,166
Gross Cumulative Redundancy (Deficiency) $ 84,819
<PAGE> 14
OPERATING RATIOS
Loss and Expense Ratios
Loss and expense ratios are traditionally used to interpret the under-
writing experience of property and casualty insurance companies. Losses
and loss adjustment expenses are stated as a percentage of premiums earned
as losses may occur over the life of a particular insurance policy.
Underwriting expenses are stated as a percentage of premiums written for
statutory accounting purposes and as a percentage of earned premiums for
GAAP purposes. Underwriting profit margins are a reflection of the extent
to which the combined loss and expense ratios are less than 100%. The loss
ratios, expense ratios (excluding interest), and combined ratios for the
Company's subsidiaries, each on a SAP and GAAP basis, are shown in the
following tables.
YEARS ENDED DECEMBER 31,
--------------------------------------------
Companywide - SAP 1994 1993 1992 1991 1990
----------------- ---- ---- ---- ---- ----
Loss Ratio 173.0% 88.0% 85.9% 88.2% 86.4%
Expense Ratio 9.9 10.5 10.0 9.7 10.0
----- ---- ---- ---- ----
Combined Ratio 182.9% 98.5% 95.9% 97.9% 96.4%
===== ==== ==== ==== ====
YEARS ENDED DECEMBER 31,
-------------------------------------------
Companywide - GAAP 1994 1993 1992 1991 1990
------------------ ---- ---- ---- ---- ----
Loss Ratio 177.6% 87.7% 85.3% 86.3% 85.8%
Expense Ratio 10.1 10.7 10.0 9.9 10.1
----- ---- ---- ---- ----
Combined Ratio 187.7% 98.4% 95.3% 96.2% 95.9%
===== ==== ==== ==== ====
The Northridge Earthquake contributed 85.1% on both a GAAP and SAP
basis to the 1994 loss ratios.
<PAGE> 15
Premiums to Surplus Ratio
The following tables show, for the periods indicated, the Company's
statutory and GAAP ratios of net premiums written to policyholders'
surplus. Since each property and casualty insurance company has different
capital needs, an "appropriate" ratio of net premiums written to
policyholders' surplus for one company may not be the same as for another
company. While there is no statutory requirement applicable to the Company
which establishes a permissible net premium to surplus ratio, guidelines
established by the National Association of Insurance Commissioners provide
that such ratio should generally be no greater than 3 to 1 on a statutory
basis.
The Company's net premiums written to policyholders' surplus ratio was
adversely affected by the Northridge Earthquake. The California Department
of Insurance (DOI) has approved the current ratio and is working with the
Company to improve its surplus levels. The DOI ordered the Company to
cease writing new homeowners and condominium business and cease renewing
earthquake coverage endorsements. For further discussion, see Management's
Discussion and Analysis - Financial Condition.
<TABLE>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
SAP 1994 1993 1992 1991 1990
--- ---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS, EXCEPT RATIO)
<S> <C> <C> <C> <C> <C>
Net premiums written $1,032,737 $1,021,902 $918,443 $833,194 $740,249
Policyholders' surplus $ 207,018 $ 582,176 $500,619 $406,655 $337,367
Ratio 4.9:1 1.8:1 1.8:1 2.0:1 2.2:1
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
GAAP 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS, EXCEPT RATIO)
Net premiums written $1,032,737 $1,021,902 $918,443 $833,194 $740,249
Policyholders' surplus $ 442,871 $ 694,555 $597,203 $491,064 $407,921
Ratio 2.3:1 1.5:1 1.5:1 1.7:1 1.8:1
</TABLE>
<PAGE> 16
INVESTMENTS AND INVESTMENT RESULTS
The Company's investment guidelines are reviewed by the Investment
Committee which is comprised of five directors.
The guidelines emphasize buying high-quality fixed income investments.
Because of the net operating loss (NOL) carryforwards which resulted from
the 1994 Northridge Earthquake, the Company sold all of its appreciated
tax-exempt bonds and used the proceeds to pay losses and re-invested the
remainder in taxable government and corporate bonds and commercial paper.
Until the NOL is substantially utilized, the Company's investable cash will
go into taxable securities. While the Company's policy is generally to
hold these investments until maturity, its ongoing monitoring and
evaluation of investment holdings and market conditions may, from time to
time, result in selected sales of investments prior to maturity. The
Company has designated all of its portfolio as "available-for-sale". See
Note 1 of the Notes to Consolidated Financial Statements, "Investments."
<PAGE> 17
The following table summarizes investment results for the periods and as
of the dates shown:
<TABLE>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average invested assets
(at amortized cost)
(includes cash and
cash equivalents) $1,190,751 (1) $1,384,926 $1,273,168 $1,161,816 $1,017,004
Net investment income:
Before income taxes 84,761 97,574 94,255 90,043 81,056
After income taxes 68,629 87,915 85,442 79,706 71,386
Average annual return
on investments:
Before income taxes 6.7%(1) 7.1% 7.4% 7.8% 8.0%
After income taxes 5.4%(1) 6.3% 6.7% 6.9% 7.0%
Net realized investment
gains after income taxes 40,010 10,874 7,589 6,030 2,356
Net increase (decrease)
in unrealized gains
on fixed maturity
investments after
income taxes (134,660) 39,863 12,832 24,838 (4,545)
</TABLE>
(1) The investment portfolio decreased substantially as a result of the sale
of investments to generate realized capital gains to offset the severe
losses caused by the Northridge Earthquake. The lower return on invest-
ments is a result of selling older securities with higher yields and re-
investing in taxable securities with lower current yields. In addition,
available cash was invested in commercial paper which yielded a lower
interest rate than that earned on the bond portfolio.
<PAGE> 18
The following table sets forth the composition of the investments
and cash and cash equivalents of the Company at the dates indicated.
<TABLE>
DECEMBER 31,
----------------------------------------------------------------------
1994 1993 1992
----------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
Type of Security COST VALUE COST VALUE COST VALUE
---------------- ---------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury Secur-
ities and obliga-
tions of U.S. Govern-
ment corporations
and agencies $ 240,690 $ 232,678 $ 6,258 $ 6,777 $ 8,350 $ 8,956
Obligations of
states and politi-
cal sub-divisions 292,723 261,614 1,273,231 1,399,173 1,151,668 1,225,333
Public utilities 147,241 139,173 11,060 11,935 20,158 20,620
Corporate secur-
ities 322,177 307,941 131,467 149,876 126,316 136,001
---------- ---------- ---------- ---------- --------- ---------
Total Fixed Maturities 1,002,831 941,406 1,422,016 1,567,761 1,306,492 1,390,910
Common Stock 539 768 - - - -
Nonredeemable
Preferred Stock - - 539 539 539 539
---------- ---------- ---------- ---------- ---------- ---------
Total Investments 1,003,370 942,174 1,422,555 1,568,300 1,307,031 1,391,449
---------- ---------- ---------- ---------- ---------- ----------
Cash and Cash
Equivalents 249,834 249,834 17,894 17,894 14,978 14,978
---------- ---------- ---------- ---------- ---------- ----------
Total Investments
and Cash and Cash
Equivalents $1,253,204 $1,192,008 $1,440,449 $1,586,194 $1,322,009 $1,406,427
========== ========== ========== ========== ========== ==========
</TABLE>
In 1994, the Company implemented Statement of Financial Accounting
Standards No.115,"Accounting for Certain Investments in Debt and Equity Secur-
ities". For a further discussion of this new standard, refer to Note 1 of the
Notes to Consolidated Financial Statements, "Investments".
<PAGE> 19
COMPETITION
The property and casualty insurance market is highly competitive and is
comprised of a large number of well capitalized companies, many of which
operate in a number of states and offer a wide variety of lines of business.
Several of these competitors are larger and have greater financial resources
than the Company. Based on published statistics, the Company is the fifth
largest writer of private passenger automobile insurance in California.
While the Company competes with all private passenger automobile
insurers in the state, the Company is in more direct competition with other
major writers which concentrate on the larger good driver market than with
those which specialize in "non-standard", "high-risk" or other niche market
segments.
The Company's marketing and underwriting strategy is to appeal to
careful and responsible drivers who are willing to deal direct with the
Company in order to save a significant amount of money on their insurance
premium. As a result, the Company is able to maintain policy renewal rates
well above the industry average.
By selling its products directly to the insured, the Company has
eliminated agents and brokers commissions. The Company provides the same
services as agents, but at a reduced cost. The Company also relies heavily on
its centralization of operations and its computerized information services
system to efficiently service its policyholders and claimants.
Consequently, the Company consistently operates with one of the lowest
underwriting and loss adjustment expense ratios in the industry and is able to
maintain its rates among the lowest in the market it serves.
REINSURANCE
The Company purchases reinsurance to reduce its loss in the event of a
catastrophe or from infrequent, large individual claims. A reinsurance trans-
action occurs when the Company transfers (cedes) a portion of its exposure
from direct business written to a reinsurer which assumes that exposure for a
premium. The reinsurance cession does not legally discharge the Company from
its liability for a covered primary loss, but provides for reimbursement from
the reinsurer to the Company for the ceded portion.
<PAGE> 20
The Company reviews the financial condition of its reinsurers with its
reinsurance intermediary at annual treaty renewal. Participants with
financial difficulties, if any, can be removed at that time. The Company is
presently not aware of any of its reinsurers experiencing financial
difficulties.
Following the January 17, 1994 Northridge Earthquake, the Company's
reinsurance coverage of 75% of $100 million in excess of $10 million was
reinstated at a cost of $13 million and additional reinsurance of 75% of the
next $100 million was purchased effective April 1, 1994, for approximately
$3 million. These treaties expired on June 30, 1994.
This reinsurance program was renewed for the period from July 1, 1994
through June 30, 1995, with amended terms, for a total annual premium of
approximately $28 million. Coverage under these treaties is provided by a
number of domestic, foreign and London market companies in layers as follows:
Catastrophe Company Reinsurance
Loss Layer Retention Amount
----------------- ----------- -----------
first $ 10,000,000 $10,000,000 $ 0
next $ 90,000,000 $ 7,200,000 $ 82,800,000
next $100,000,000 $ 5,000,000 $ 95,000,000
In order to provide reinsurance coverage for the declining earthquake
exposure, the Company also purchased from National Indemnity Company
additional reinsurance in excess of the underlying $200 million. An
additional layer beginning at $400 million effective June 16, 1994 and
decreasing by $50 million each month through February 15, 1995 was purchased
for a total premium of approximately $21.8 million.
An extension of the additional coverage from National Indemnity Company
was purchased effective January 23, 1995 for a total premium of approximately
$7.8 million. This coverage begins at a limit of $200 million and decreases
in increments ranging from $25 million to $35 million on the 1st and the 16th
of each month beginning March 1, 1995 through May 1, 1995. The treaty expires
May 15, 1995.
The Company also has an excess of loss reinsurance treaty on its
homeowners line with General Reinsurance Corporation. The reinsurer's limit
<PAGE> 21
is $650,000 in excess of the Company's retention of $300,000 per risk, subject
to a maximum reinsurer's limit of $1,300,000 per occurrence.
The Company has a quota share reinsurance treaty for the Personal Excess
Liability Program. Underwriters Reinsurance Company is the lead reinsurer for
this treaty. The Company retains 40% and cedes 60% of each risk under this
treaty.
REGULATION
The Company and its subsidiaries are subject to regulation and
supervision by the California Department of Insurance ("DOI") which has broad
regulatory, supervisory and administrative powers, related primarily to:
1. licensing of insurance companies and agents,
2. prior approval of rates, rules, and forms,
3. standards of solvency,
4. nature of, and limitations on, insurance company investments,
5. periodic examination of the affairs of insurers,
6. annual and other periodic reports of the financial condition and
results of operations of insurers,
7. the establishment of accounting rules regarding loss and loss
adjustment expense and other reserves, and
8. the issuance of securities by insurers.
Regulation by the DOI is designed principally for the benefit of
policyholders. The DOI conducts periodic examinations of the Company's
insurance subsidiaries.
In January 1995, the Company and the DOI reached a settlement concerning
the Company's Proposition 103 rollback liability, wherein $78 million was
allocated for customer refunds consistent with rollback obligations establish-
ed through a DOI administrative hearing during 1992. A more detailed discus-
sion of Proposition 103 can be found in Note 12 of the Notes to Consolidated
Financial Statements.
The operations of the Company are influenced by the laws of the State of
California and changes in those laws can affect the revenues and expenses of
the Company. The Company is a member of industry organizations which may
<PAGE> 22
advocate legislative and initiative proposals and which provide financial
support to officeholders and candidates for California statewide public
offices. The Company also makes financial contributions to those
officeholders and candidates who, in the opinion of management, have a
favorable understanding of the needs of the property and casualty insurance
industry. In 1994, these contributions were approximately $81,000. The
Company believes that such contributions are important to the future of the
property and casualty insurance industry in California and intends to continue
to make such contributions as it determines to be appropriate.
PROPOSED LEGISLATION
Property/casualty insurers are continuing to promote federal legislation
which would provide economic protection, and help save lives, in the event of
natural disasters such as earthquakes.
In September 1994, a revised version of H.R. 2873, the Natural Disaster
-------
Protection Act, was reported out of the House Public Works Committee. While
it did not reach the House floor in 1994, this revised version will likely
serve as the basis for discussion when the 104th Congress convenes in 1995.
Rather than the primary insurance fund posed by the original bill, the
new version, called the Natural Disaster Protection Partnership Act,
establishes a private Natural Disaster Protection Corporation funded by
insurers, reinsurers and state insurance pools to provide catastrophic
coverage for residential property losses. Fund shortages could be covered by
federal loans.
In return for protection by this reinsurance, all participating insurers
must provide earthquake and volcanic eruption coverage along with their
standard homeowner policies. The new bill retrains required state disaster
mitigation plans, but would not cover commercial losses, including apartments
and businesses.
Legislation has been introduced (SB 49) within the California state
legislature to make certain changes to the Financial Responsibility law and
impose arbitration requirements for specific third-party bodily injury claims.
A bill has been introduced to reinstate third-party bad faith (AB 1083). Two
bills are pending that contain proposals for a no-fault system for the
compensation of automobile injury claims (AB 607 and SB 1229).
<PAGE> 23
At this time, it is uncertain what may be the likelihood of passage of
any of these state legislative proposals or their potential for future
amendments or agreement or veto by the state's governor.
HOLDING COMPANY ACT
The Company's subsidiaries are subject to regulation by the California
Department of Insurance pursuant to the provisions of the California Insurance
Holding Company System Regulatory Act (the "Holding Company Act"). The DOI
may examine the affairs of the subsidiaries at any time. Certain transactions
defined to be of an "extraordinary" type may not be effected without the prior
approval of the California Department of Insurance. Such transactions
include, but are not limited to, sales, purchases, exchanges, loans and
extensions of credit, and investments made within the immediately preceding 12
months involving in the net aggregate, more than the lesser of 5% of the
Company's admitted assets or surplus as to policyholders, as of the preceding
December 31. An extraordinary transaction also includes a dividend which,
together with other dividends or distributions made within the preceding
twelve months, exceeds the greater of 10% of the insurance company's
policyholders' surplus as of the preceding December 31 or the insurance
company's net income for the preceding calendar year. The California code
further provides that property and casualty insurers may pay dividends only
from earned surplus. The Holding Company Act generally restricts the ability
of any one person to acquire more than 10% of the Company's voting securities
without prior regulatory approval.
ASSIGNED RISKS
Automobile liability insurers in California are required to participate
in the California Automobile Assigned Risk Plan (CAARP). Each company is
required to write liability insurance coverages for drivers applying to CAARP
for placement as "assigned risks" because their driving records or other
relevant characteristics make them difficult to insure in the voluntary
market. The number of assignments for each insurer is based on the total
applications received by the plan and the insurer's market share.
The number of applicants to CAARP and number of assigned risk policies
in force for the Company declined between 1992 and 1993 and then climbed again
in 1994 as follows:
<PAGE> 24
APPLICATIONS TO CAARP POLICIES IN FORCE
YEAR DURING YEAR AT DECEMBER 31
---- --------------------- -----------------
1992 131,426 6,403
1993 125,670 6,427
1994 136,572 7,285
During 1990, rates for CAARP were extremely competitive with those in
the voluntary market. In February 1989, CAARP filed for an increase of
112.3%. The Insurance Commissioner granted an interim rate increase of 85%
effective October 1, 1990. CAARP appealed the Commissioner's decision to the
Superior Court, which ruled in favor of the full 112.3%. In 1994, the
Commissioner and CAARP reached an agreement which allowed the interim rate
increase of 85% to become permanent while CAARP agreed to withdraw its lawsuit
and submit a revised rate filing. In September 1994, CAARP proposed a rate
increase of 12.8% which the Commissioner cut by more than half to 5.2%.
The 85% rate increase and a requirement implemented by the Superior
Court that an applicant be certified as eligible for assignment contributed to
the decline in the number of applicants to CAARP between 1992 and 1993. The
increased rate level, while not making the remaining assigned risk business
profitable, did at least cause it to be less unprofitable. The future effect
of the assigned risk plan on the Company cannot be predicted because it
depends on the ability of CAARP to achieve and maintain an adequate rate
level.
EMPLOYEES
The Company had approximately 2300 full and part-time employees at
December 31, 1994. The Company provides medical, pension and 401K savings
plan benefits to its employees according to the provisions of each plan. The
Company believes that its relationship with its employees is excellent, and
employee turnover generally is very low.
<PAGE> 25
ITEM 2. PROPERTIES
The Company leases its Home Office building in Woodland Hills,
California, which contains approximately 234,000 square feet of leasable
office space. The lease was amended in October 1994 which expanded the lease
term until November 1999. The lease may be renewed for two consecutive five-
year periods.
The Company also leases office space in nineteen other locations
throughout Southern California. The Company anticipates no difficulty in
extending these leases or obtaining comparable office facilities in comparable
locations.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company has been named as a defendant in lawsuits
incident to its business. Currently included in this class of litigation are
almost 50 actions that arise out of Northridge earthquake claims. It is
believed that a majority of these claims were filed to protect statutes of
limitations. Some of the actions request exemplary or punitive damages. These
actions are vigorously defended unless a reasonable settlement appears
appropriate. While any litigation has an element of uncertainty, the Company
does not believe that the ultimate outcome of these pending actions will have
a material adverse effect on its consolidated financial condition or results
of its operations.
On January 27, 1995, the California Department of Insurance issued an
order which among other things, addressed the issue of the Company's rebate
liability associated with Proposition 103. The order, based upon a stipulated
agreement with the Company, required refunds to policyholders, while providing
immediate cpital additions to improve the Company's financial strength, and
financial resources for possible increases in earthquake claims. On March 28,
1995, suit was filed by a consumer group, challenging the settlement and the
resultant order issued by the Insurance Commissioner. The Company is advised
by counsel, and believes that any challenge to the settlement will be unsuc-
cessful. A more detailed discussion of the settlement can be found in Note 12
of the Notes to Consolidated Financial Statements.
<PAGE> 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As a result of the dramatic decline in financial strength of the Company
due to the gross losses caused by the Northridge Earthquake, a special meeting
of the shareholders was held on December 15, 1994 to vote on the following
matters:
1. INVESTMENT AGREEMENT PROPOSAL - An investment and Strategic Alliance
Agreement dated as of October 17, 1994 between the Company and American
International Group, Inc., a Delaware corporation ("AIG"), including, among
other things, (a) the sale to AIG, or to certain wholly owned subsidiaries
that AIG may designate, for an aggregate purchase price of $216 million, of
(i) 200,000 shares of the Company's Series A Convertible Preferred Stock,
stated value $1,000 per share which are convertible into shares of common
stock without par value, at a conversion price of $11.33 per share (subject to
customary antidilution provisions), and (ii) 16 million Series A Warrants to
purchase an aggregate of 16 million shares of Common Stock at an exercise
price of $13.50 per share; (b) the issuance of shares of Common Stock upon
conversion of shares of Series A Preferred Stock and upon exercise of the
Series A Warrants in accordance with their terms; and (c) the issuance of
additional shares of Series A Preferred Stock at the election of the Company
in the event gross losses and allocated loss adjustment expenses associated
with the January 17, 1994 Northridge, California Earthquake exceed $850
million.
2. INCREASED AUTHORIZED CAPITAL PROPOSAL - An amendment to the Company's
Articles of Incorporation increasing the number of authorized shares of Common
Stock from 80 million shares to 110 million shares.
<PAGE> 27
3. TRANSFER RESTRICTIONS PROPOSAL - An amendment to the Company's Articles
of Incorporation to include certain restrictions, effective for up to 38
months following the consummation of the Transaction, on the transferability
and ownership of shares of stock designed to prevent transactions in stock
that, under certain circumstances, could trigger limitations under the
Internal Revenue Code of 1986 on the Company's ability to utilize net
operating losses (including gross losses and allocated loss adjustment
expenses related to the Northridge Earthquake) to offset taxable income in
future years.
4. INDEMNIFICATION AGREEMENTS PROPOSAL - Ratification of certain
Indemnification Agreements that have been entered into between the Company and
its subsidiaries and their directors and executive officers and the approval
of any such Indemnification Agreements that may be entered into in the future
between the Company and its subsidiaries and their directors, officers,
employees or other agents.
The shareholders approved all four of the above matters.
<PAGE> 28
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
(a) PRICE RANGE OF COMMON STOCK
The stock is currently traded on the New York Stock Exchange under the
trading symbol "TW". The following table sets forth the high and low bid
prices for the common stock for the indicated periods.
High Low
---- ---
1994
Fourth Quarter 12-7/8 9-5/8
Third Quarter 17-3/8 8-3/4
Second Quarter 19-3/8 14-1/4
First Quarter 28-1/8 18-7/8
1993
Fourth Quarter 30-7/8 25-1/8
Third Quarter 32-3/8 28-1/8
Second Quarter 32 27-3/4
First Quarter 34 25-3/4
<PAGE> 29
(b) HOLDERS OF COMMON STOCK
The approximate number of record holders of the Common Stock on December
31, 1994 was 1,328.
(c) DIVIDENDS
The Company paid regular cash dividends on its Common Stock each year
since 1973 through the second quarter of 1994. Dividends were paid at the
rate of $.16 per share for each of the first two quarters of 1994, $.16 per
share per quarter during 1993, and $.13 per share per quarter during 1992.
Due to the adverse impact of the Northridge Earthquake on the financial
strength of the Company, no dividends were paid in the last two quarters of
1994. The Company's ability to pay future dividends will necessarily depend
upon the earnings and financial condition of its Insurance Subsidiaries. 20th
Century Industries paid cash dividends of $16,471,000 in 1994.
As a holding company, the Company is dependent upon dividends from its
subsidiaries to pay dividends to its stockholders. The Company's subsidiaries
are subject to California laws that restrict their ability to distribute
dividends. California law permits a casualty insurance company to pay
dividends, within any 12-month period, without any prior regulatory approval,
in an amount up to the greater of 10% of policyholders' surplus as of the
preceding December 31 or the insurance company's net income for the calendar
year preceding the date the dividend is paid. The California insurance code
further provides that property and casualty insurers may pay dividends only
from earned surplus. Under these rules, 20th Century Insurance Company and
21st Century Casualty Company are unable to pay dividends to the Company
during 1995 without prior approval. See Note 10 of the Notes to Consolidated
Financial Statements.
<PAGE> 30
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for, and as of
the end of, each of the years in the five-year period ended December 31, 1994
are derived from the consolidated financial statements of 20th Century
Industries and its subsidiaries. The consolidated financial statements as of
December 31, 1994 and 1993 and for each of the years in the three-year period
ended December 31, 1994 are included elsewhere in this Form 10-K. All dollar
amounts set forth in the following tables are in thousands, except per share
data. For a further discussion regarding the impact of Proposition 103 and
the Northridge Earthquake on the results of 1994, refer to Notes 12 and 13,
respectively, of the Notes to Consolidated Financial Statements.
<TABLE>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Operations Data:
<S> <C> <C> <C> <C> <C>
Net premiums earned $1,034,003 $ 989,712 $ 896,353 $810,636 $732,695
Net investment income 84,761 97,574 94,255 90,043 81,056
Realized investment gains 61,554 16,729 11,498 9,137 3,569
Other income (loss) (46) (180) (116) (274) 146
---------- ---------- ---------- -------- --------
Total Revenues 1,180,272 1,103,835 1,001,990 909,542 817,466
---------- ---------- ---------- -------- --------
Net losses and loss
adjustment expenses 944,530 867,451 764,374 697,521 613,015
Net earthquake losses and
related expenses 883,816 - - - -
Policy acquisition costs 43,409 48,375 41,996 38,372 36,338
Other operating expenses 57,214 57,545 48,337 42,303 36,520
Proposition 103 expense 29,124 3,474 3,474 6,195 21,023
Interest expense 8,286 44 33 361 654
---------- ---------- ---------- -------- --------
Total Expenses 1,966,379 976,889 858,214 784,752 707,550
---------- ---------- ---------- -------- --------
Income (loss)before
federal income taxes
and cumulative effect
of change in accounting
for income taxes (786,107) 126,946 143,776 124,790 109,916
Federal income taxes
(benefit) (288,087) 18,350 26,309 21,253 11,194
---------- --------- --------- -------- --------
Income (loss) before cumu-
lative effect of change in
accounting for income
taxes (498,020) 108,596 117,467 103,537 98,722
Cumulative effect of change
in accounting for income
taxes - 3,959 - - -
---------- --------- --------- -------- --------
Net Income (Loss) $ (498,020) $ 112,555 $ 117,467 $103,537 $ 98,722
========== ========= ========= ======== ========
<PAGE> 31
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Per Share Data:
PRIMARY -
Before cumulative effect
of change in accounting
for income taxes $ (9.69) $ 2.11 $ 2.29 $ 2.02 $ 1.92
Cumulative effect of
change in accounting
for income taxes - .08 - - -
---------- -------- -------- -------- --------
Net Income (loss) $ (9.69) $ 2.19 $ 2.29 $ 2.02 $ 1.92
========== ========= ========= ======== ========
FULLY DILUTED -
Before cumulative effect
of change in accounting
for income taxes $ (9.69)
Cumulative effect of
change in accounting
for income taxes -
----------
Net Income (loss) $ (9.69)
==========
Dividends paid per share $ .32 $ .64 $ .52 $ .42 $ .32
========== ========= ========= ======== ========
DECEMBER 31,
-----------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Balance Sheet Data:
Total investments $ 942,174 $1,422,555 $1,307,031 $1,200,067 $1,074,177
Total assets 1,702,810 1,644,670 1,498,330 1,372,628 1,238,060
Unpaid losses and loss
adjustment expenses 756,243 577,490 554,541 548,377 526,258
Unearned premiums 298,519 299,941 267,556 245,290 219,801
Long-term debt 160,000 - - - 3,333
Claims checks payable 70,725 41,535 39,329 36,884 32,192
Stockholders' equity 317,944 655,209 575,674 484,578 402,365
Book value per common share $ 2.29 $ 12.74 $ 11.19 $ 9.43 $ 7.83
</TABLE>
<PAGE> 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INDUSTRY OVERVIEW AND COMPANY STRATEGY
The property and casualty insurance business has a history of
fluctuating results, and underwriting profitability has tended to vary in
cycles. Insurer profitability is influenced by many factors, including
price competition, claim frequency and severity, crime rates, natural
disasters, economic conditions, interest rates, state regulations and laws and
changes in the legal system and court decisions. One of the challenging and
unique features of the property and casualty insurance business is that its
products must be priced before costs are fully known because premiums are
charged before claims are incurred.
Insurance industry price levels tend to change with underwriting
results. As companies experience underwriting losses, prices tend to increase
and competition decreases. As underwriting results improve, prices tend to
decrease and competition increases.
The Company engages in private passenger automobile, homeowners,
condominium, earthquake and personal excess liability insurance primarily in
Southern California. The Northridge Earthquake on January 17, 1994 resulted
in unprecedented losses for the Company. In order to reduce future earthquake
exposure, the Company ceased writing new homeowner and condominium insurance
in accordance with an order received from the California Department of
Insurance in June 1994. However, the Company continues to renew existing
homeowner and condominium policies for two more annual renewal periods,
excluding earthquake coverage. All earthquake coverages will be terminated by
July 23, 1995, and all homeowners and condominium coverage will be terminated
by July 23, 1997.
Policies in force for the Company's two major programs were as follows:
DECEMBER 31,
------------------------------------------
1994 1993 1992
---- ---- ----
Policies in Force
Automobile 1,132,605 1,130,446 1,018,656
Homeowners and Other 217,239 244,786 228,709
-------------- ----------- -----------
Total 1,349,844 1,375,232 1,247,365
============== =========== ===========
Underwriting results for the business written by the Company, excluding
earthquake, are sensitive to weather-related claims and may vary substantially
<PAGE> 33
from one period to another depending on weather during the periods. Results
for the first and fourth quarters of the year are particularly vulnerable to
weather patterns. Quarterly loss and loss adjustment expense ratios for the
most recent three years are as follows:
YEAR 1Q 2Q 3Q 4Q
---- ----- ----- ----- -----
1992 88.0 81.6 82.9 88.5
1993 90.3 83.9 86.5 89.9
1994 312.1 116.9 143.1 142.4
While the quarterly loss and loss adjustment expense ratios generally
exhibit the pattern expected to be caused by weather influences, they also
show the variability caused by the fortuitous events which are the basic
subject of the insurance process. More specifically, the effect of the
Southern California fires in October 1993 and the Northridge Earthquake in
January 1994 can be seen in the ratios for the fourth quarter of 1993 and all
of 1994, respectively. The Northridge Earthquake contributed 215.0%, 28.7%,
51.3%, and 49.2% to the loss ratios for each of the four quarters in 1994,
respectively. Excluding the Northridge Earthquake, the loss ratios follow the
expected pattern caused by weather influences in the first and fourth
quarters. Refer to Management's Discussion and Analysis - Financial Condition
for a further discussion of the earthquake impact.
Property insurance results are subject to the variability introduced by
the chance occurrences of natural or man-made disasters such as earthquakes,
fires, windstorms, floods and riots. The Company minimizes its exposure to
riot-related damage by not writing commercial risks, and its exposure to
conflagration is reduced because it does not accept business in close
proximity to designated brush hazard areas. The Company reported claims
totaling approximately $4.3 million, after reinsurance, as a result of the
Southern California fires in the fourth quarter of 1993; however, it was
assessed an additional $2.6 million as its share of California Fair Plan
losses. Hurricanes and similar wind-related catastrophes are not generally
considered to be a significant exposure in California. The Company does not
have a significant exposure to floods as flood damage is not covered under the
homeowners policy.
Because the Company does not write property or liability insurance for
commercial risks, its exposure to losses caused by exposure to radon or caused
by environmental pollution is insignificant. The Company has received no such
claims under the homeowners policy and believes the probability of a
success-
<PAGE> 34
ful claim of this nature to be remote. Removal of asbestos materials
necessitated by earthquake claims has been included in the estimated loss
values for these claims.
The Company had been writing earthquake insurance since 1982. Since
that time, the Company has always believed that its major catastrophe exposure
was to a loss caused by an earthquake. The Company reduced its net exposure
from such an event with the purchase of reinsurance in amounts based on global
reinsurance market conditions and the Company's estimates of its exposure.
The exposure from such a loss was consistently reviewed each calendar quarter.
Prior to the Northridge Earthquake, the Company had purchased property
catastrophe reinsurance for a catastrophe up to $110 million.
Following the January 17, 1994 Northridge Earthquake, the Company's
reinsurance coverage of 75% of $100 million in excess of $10 million was
reinstated at a cost of $13 million and additional reinsurance of 75% of the
next $100 million was purchased effective April 1, 1994, for approximately
$3 million. These treaties expired on June 30, 1994.
This reinsurance program was renewed for the period from July 1, 1994
through June 30, 1995, with amended terms, for a total annual premium of
approximately $28 million. Coverage under these treaties is provided by a
number of domestic, foreign and London market companies in layers as follows:
Catastrophe Company Reinsurance
Loss Layer Retention Amount
----------------- ----------- -----------
first $ 10,000,000 $10,000,000 $ 0
next $ 90,000,000 $ 7,200,000 $ 82,800,000
next $100,000,000 $ 5,000,000 $ 95,000,000
In order to provide reinsurance coverage for the declining earthquake
exposure, the Company also purchased from National Indemnity Company
additional reinsurance in excess of the underlying $200 million. An
additional layer beginning at $400 million effective June 16, 1994 and
decreasing by $50 million each month through February 15, 1995 was purchased
for a total premium of approximately $21.8 million.
An extension of the additional coverage from National Indemnity Company
was purchased effective January 23, 1995 for a total premium of approximately
$7.8 million. This coverage begins at a limit of $200 million and decreases
in increments ranging from $25 million to $35 million on the 1st and the 16th
<PAGE> 35
of each month beginning March 1, 1995 through May 1, 1995. The treaty expires
May 15, 1995.
Financial Condition
Impact of the Northridge Earthquake
-----------------------------------
The Northridge, California Earthquake, which occurred on January 17,
1994 ("Northridge Earthquake"), has significantly affected the financial
condition of the Company and its operating results for the entire year of
1994. The Northridge Earthquake occurred in an area in which the Company's
homeowners and earthquake business was concentrated and the forces of the
earthquake were much greater and caused significantly more damage than usually
associated with an event of this Richter magnitude.
The resulting losses from the earthquake continue to place pressure on
the Company and its financial condition. The Company experienced a reduction
in its historical pattern of growth, ceased all advertising and marketing for
new policies, and suspended its quarterly dividend for the third and fourth
quarters of fiscal 1994. As of December 31, 1994, total estimated gross
losses and allocated loss adjustment expenses from the Northridge Earthquake
reached $940 million.
On June 9, 1994, the Company announced an order by the California
Department of Insurance ("DOI") designed to reduce the Company's earthquake
exposure. The DOI ordered the Company's insurance subsidiaries, 20th Century
Insurance Company and 21st Century Casualty Company (the "Insurance
Subsidiaries") to discontinue writing new homeowners, condominium owners and
earthquake insurance and to discontinue renewal of existing earthquake
insurance. The DOI also approved a 17% rate increase for the homeowners
program. The Insurance Subsidiaries agreed to offer renewal without
earthquake coverage to existing homeowners and condominium owners
policyholders for two more annual renewal periods. The Company also agreed to
increase the combined statutory surplus of the Insurance Subsidiaries to at
least $250 million by June 30, 1994.
On June 30, 1994, the Company obtained a $175 million bank line (the
"Bank Credit Agreement") through The First National Bank of Chicago and Union
Bank (the "Lenders") of which $160 million has been borrowed and is
outstanding at December 31, 1994. Loan proceeds of $120 million were used to
increase
<PAGE> 36
the statutory surplus of the Insurance Subsidiaries to minimum levels
mandated by the DOI. The five-and-one-half year reducing-revolver loan
features interest-only payments for the first 18 months. Beginning January 1,
1996, the aggregate commitment will be automatically reduced $35 million and
$8.75 million thereafter on the first day of each quarter through the
facility's maturity date of January 1, 2000. Principal repayments are
required when total outstanding advances exceed the aggregate commitment.
Under the terms of the Bank Credit Agreement, all of the outstanding shares of
capital stock of the Insurance Subsidiaries have been pledged as collateral.
In order to provide reinsurance coverage for the declining earthquake
exposure, the Company also purchased from National Indemnity Company
additional reinsurance in excess of the underlying $200 million. An
additional layer beginning at $400 million effective June 16, 1994 and
decreasing by $50 million each month through February 15, 1995 was purchased
for a total premium of approximately $21.8 million.
On September 8, 1994, the Company revised upward its estimated gross
losses and allocated loss adjustment expenses from the Northridge Earthquake
expected to be sustained by the Insurance Subsidiaries to approximately $815
million. The Company became in violation of the net worth maintenance and
other financial covenants under the Bank Credit Agreement. The statutory
surplus of the Insurance Subsidiaries was reduced from approximately $252
million on June 30, 1994 to approximately $71 million on September 30, 1994,
the ratio of the Insurance Subsidiaries' total net written premiums to
statutory surplus increased to 14:1 and the Company's stockholders' equity
declined to approximately $163 million. These adverse developments put a
severe financial strain on the Company.
On September 8, 1994, the Company notified the Lenders that the Company
was in default under the Bank Credit Agreement and, on September 12, 1994, the
Lenders imposed the default rate of interest on outstanding loans and notified
the Company that no additional loans would be available while any default was
continuing. The Lenders also requested prompt information concerning the
steps the Company was taking to restore the capital of its Insurance
Subsidiaries and to cure the default. On September 20, 1994, the Lenders
requested that the Company deposit $25 million in a cash collateral account
with one of the agent banks to secure its obligations under the Bank Credit
Agreement. The Lenders also presented the Company with a series of capital
investment alternatives and required the Company to select and take action to
raise the required capital.
<PAGE> 37
The DOI, after discussions with the Company's management, requested that
the Company expeditiously implement a plan that would provide a more
appropriate level of surplus at the Insurance Subsidiaries. At the same time,
an agreement was reached among the DOI, two consumer intervenors and the
Company regarding the Company's proposed automobile insurance rate increase
that had been filed for approval in December, 1993. On September 14, 1994,
the Commissioner approved a 6% rate increase, which was estimated to generate
an additional $56 million a year in revenues. The agreement provided that the
6% rate increase would decrease to 3% when the Insurance Subsidiaries' total
net written premium to statutory surplus ratio had reached 3:1. See the
discussion regarding the impact of the Proposition 103 rollback below.
On October 17, 1994, the Company entered into an Investment and
Strategic Alliance Agreement (the "Investment Agreement") with American
International Group, Inc. ("AIG"), to provide $216 million of equity capital.
The agreement provided for, among other things (a) the sale to AIG, or to
certain wholly-owned subsidiaries that AIG may designate, for an aggregate
purchase price of $216 million, of (i) 200,000 shares of Series A Convertible
Preferred Stock stated value $1,000 per share (the "Series A Preferred
Stock"), which are convertible into shares of Common Stock at a conversion
price of $11.33 per share (subject to customary antidilution provisions), and
(ii) 16 million Series A Warrants to purchase an aggregate of 16 million
shares of Common Stock at an exercise price of $13.50 per share (subject to
adjustment as described in the Investment Agreement); (b) the issuance of
shares of Common Stock upon conversion of shares of Series A Preferred Stock
and upon exercise of the Series A Warrants in accordance with their terms; and
(c) the issuance of additional shares of Series A Preferred Stock on the terms
described in the Investment Agreement at the election of the Company in the
event gross losses and allocated loss adjustment expenses associated with the
Northridge Earthquake exceed $850 million (the "Transaction").
The Company also negotiated with the Lenders the terms of an amendment
and waiver to the Bank Credit Agreement (the "Amendment and Waiver") in order
to facilitate the proposed transaction with AIG. The Amendment and Waiver,
which was executed and delivered by the Company and the Lenders on October 17,
1994, conditionally waived the Lenders' rights to pursue remedies based on
existing defaults pending consummation of the Transaction, and made certain
amendments to the Bank Credit Agreement, effective upon the closing of the
Transaction.
<PAGE> 38
At a special shareholder meeting held on December 15, 1994, (the
"Closing Date"), the Investment Agreement was approved. Subsequently, Holders
of the Series A Preferred Stock, voting separately as a class, elected two of
the Company's eleven directors. Holders of Common Stock were not entitled to
vote in the election of such two directors. Since the Company's gross losses
and allocated loss adjustment expenses related to the Northridge Earthquake
have exceeded $850 million, AIG shall, if requested by the Company, contribute
up to an additional $70 million to the Company in exchange for shares of
Series A Preferred Stock having an aggregate liquidation value equal to the
contributed amount plus an additional liquidation amount based on a formula
designed to compensate AIG for its proportional share of the Company's after-
tax loss resulting from the gross losses and allocated loss adjustment
expenses relating to the Northridge Earthquake in excess of $850 million. The
Company may determine not to obtain some or all of the additional capital from
AIG in light of certain rules under the Internal Revenue Code governing the
Company's ability to utilize its net operating losses to offset taxable income
in future years. The Series A Preferred Stock will be entitled to a per annum
cumulative dividend equal to 9% payable quarterly. At the option of the
Company, during the next three years, dividends may be paid in cash or in kind
(whereby, a holder receives, in lieu of cash, shares of Series A Preferred
Stock having a liquidation value equal to the dividends declared).
The Series A Warrants are, by their terms exercisable at any time fol-
lowing the first anniversary of the consummation of the Transaction. However,
both the exercise and sale of Series A Warrants are subject to transfer re-
strictions in the Company's Articles of Incorporation, which limit exercise or
sale of the warrants until February 1998. The exercise price of $13.50 per
share and the number of shares of Common Stock obtainable per Series A
Warrants are subject to adjustment pursuant to customary antidilution
provisions. The exercise date may be accelerated in the event the Company's
Board of Directors approves such an acceleration, and shall automatically be
accelerated to any earlier date that AIG is entitled to acquire additional
securities of the Company pursuant to the standstill provisions of the Invest-
ment Agreement. These Warrants will expire on the thirteenth anniversary of
the Closing Date.
<PAGE> 39
In addition, in the event the Company's total gross
losses and allocated loss adjustment expenses with respect to the Northridge
Earthquake exceed $945 million, the exercise price shall be reduced by $0.08
per share for each million dollars of gross losses and allocated loss
adjustment expenses in excess of $945 million (provided that the exercise
price shall never be reduced to less than $1.00 per share as a result of
Northridge Earthquake losses); provided, however, that no adjustment to the
Exercise Price shall be made with respect to increases in gross losses and
allocated loss adjustment expenses reflected in financial statements following
the 1995 year-end audited financial statements of the Company.
In connection with the Investment Agreement, subsidiaries of AIG and
each of the Insurance Subsidiaries have entered into a five-year quota share
reinsurance agreement for 10% of each of the subsidiaries' policies incepting
on and after January 1, 1995. At AIG's option, the agreements may be renewed
annually for four years following the initial term, with an annual reduction
of 2% in the quota share percentage ceded to AIG's subsidiaries.
The Investment Agreement also provides that the Company and AIG use
their respective best efforts to negotiate and mutually agree upon a joint
venture agreement whereby the Company and AIG will form a new subsidiary or
subsidiaries to engage in the Company's automobile insurance business in
states outside California.
Impact of Proposition 103 Rollback
----------------------------------
On August 18, 1994, the California Supreme Court issued a decision (the
"Proposition 103 Ruling") reversing a lower court ruling that had upheld the
Company's challenge to the constitutionality of certain regulations and an
administrative order issued by the Commissioner pursuant to California
Proposition 103. The effect of the Proposition 103 Ruling was to reinstate
the Commissioner's order directing that the Company issue refunds totaling
approximately $78.3 million, plus interest at 10% per annum from May 8, 1989,
to policyholders who purchased insurance from the Insurance Subsidiaries
between November 8, 1988 and November 8, 1989.
On September 2, 1994, the Company filed a petition for rehearing with
the California Supreme Court which was denied. The Company filed a petition
for a writ of certiorari with the United States Supreme Court.
<PAGE> 40
Barring action by the U.S. Supreme Court to reverse the Proposition 103
Ruling, the Commissioner's refund order obligated the Company to pay
approximately $122 million, which included accrued interest through December
31, 1994. Prior to the Supreme Court ruling, the Company had $51 million
accrued, and recorded an additional $71 million in September of 1994.
On January 27, 1995, the Company announced a settlement of rebate
liabilities associated with Proposition 103. As a result, the Company
allocated $78 million for customer refunds, consistent with the Company's
liability established through a DOI administrative hearing during 1992.
Interest on the liability established through the original refund order will
not be assessed.
Initially, the Company will refund $46 million to customers specified in
the agreement as soon as practicable, representing an average payment per
household of $80.00, approximately 7.5 percent of premiums paid between
November 8, 1988 and November 7, 1989. The remaining $32 million will be set
aside for additional customer refunds conditioned on the ultimate level of
claim costs associated with the 1994 Northridge Earthquake.
Prior to this settlement, the Company had accrued approximately $122
million with respect to its possible Proposition 103 liability. Therefore, as
of December, 1994, the Company reduced its accrual $44 million.
As part of the settlement, the Company withdrew its request for a
hearing with the United States Supreme Court to appeal the California Supreme
Court decision in the Proposition 103 test case "20th Century vs. Garamendi"
and agreed to abide by the terms of Commissioner Quackenbush's order. Upon
announcement of the settlement, a consumer group objected to the settlement
terms, and threatened legal action. The Company is advised by counsel, and
believes that any challenge to the settlement will be unsuccessful.
Another condition of this agreement required the Company to obtain new
capital of $50 million and contribute the funds to the surplus of the
Insurance Subsidiaries. Of the $50 million, $30 million must be obtained
by March 31, 1995. Available to the Company were an additional $15 million
under the existing bank credit facility and up to $70 million in "Earthquake
Preferred" stock which could be issued to AIG.
<PAGE> 41
In the latter part of March, 1995, the Company issued an additional $20
million in Preferred Stock to AIG and borrowed an additional $10 million
against its existing bank credit facility.
RESULTS OF OPERATIONS
Underwriting Results
Premiums earned and underwriting results for the Company's two major
programs were as follows:
DECEMBER 31,
------------------------------------------
1994 1993 1992
---- ---- ----
Premiums Earned
Automobile $ 981,893,000 $908,522,000 $823,680,000
Homeowners and Other 52,110,000 81,190,000 72,673,000
-------------- ------------ ------------
Total $1,034,003,000 $989,712,000 $896,353,000
============== ============ ============
Underwriting Profit (Loss)
Automobile $ (45,854,000) $ 25,064,000 $ 36,890,000
Homeowners and Other (877,487,000) (11,598,000) 1,714,000
-------------- ------------ ------------
Total $ (923,341,000) $ 13,466,000 $ 38,604,000
============== ============ ============
Impact of the Northridge Earthquake
-----------------------------------
The Northridge Earthquake has resulted in substantial losses. Since the
event occurred, the Company and other members of the property and casualty
insurance industry have revised their estimates of claim costs and related
expenses several times. Because of the unusual nature of the ground motion
during the earthquake, the earthquake produced significant damage to
structures beyond normal expectations. Delayed discovery of the severity of
damages has caused claims to be reevaluated as the additional damage becomes
known and has made the estimation process extremely difficult. The Company
estimates total gross losses and allocated loss adjustment expenses for this
catastrophe to be $940 million at December 31, 1994. Unallocated loss
adjustment, FAIR Plan assessments and other earthquake related expenses are
estimated to be an additional $20 million. By mid-July, the Company had
received all of the $76.3 million in catastrophe and per-risk reinsurance
recoverables due to this event. As of December 31, 1994, the Company has
received 35,327 homeowners and condominium claims and 10,139 automobile
claims. Because of the difficulties of estimation noted above, it is possible
that the Company's Northridge Earthquake loss estimates will increase. Should
<PAGE> 42
the earthquake losses exceed current estimates, $32 million in reserves
related to the Proposition 103 settlement will be available to offset the
additional earthquake losses. However, should the earthquake losses exceed
$974 million, future financial periods will be impacted and additional capital
may be required. The capital transaction with AIG includes provision for the
Company to receive up to an additional $70 million of capital from AIG to
cover excess losses. The Company, however, may determine not to obtain some
or all of the additional capital from AIG in light of certain rules under the
Internal Revenue Code governing the Company's ability to utilize its net
operating losses to offset taxable income in future years, or the Company
could elect to obtain some or all of the additional capital from AIG
notwithstanding the fact that the issuance of securities in exchange for such
capital could result in a limitation on the Company's ability to utilize its
net operating losses.
On a pre-tax basis, net incurred claims and expenses, including
reinsurance reinstatement costs, total $883.8 million. The net after-tax
charge against year-to-date earnings for all costs for this event is $574.5
million, or $11.18 per share.
As of December 31, 1994, the Company had paid approximately $785 million
in gross losses and allocated loss adjustment expenses related to the
Northridge Earthquake. Funds to make payments came from normal operating cash
flows of $226 million, reinsurance proceeds of $76.3 million, and the sale or
maturity of approximately $483 million in investments. The funds needed to
pay remaining earthquake related losses and expenses will come from normal
positive operating cash flows, from loan proceeds and from the proceeds of the
capital transaction with AIG.
Operations Excluding the Effects of the Northridge Earthquake and Proposition
------------------------------------------------------------------------------
103 Rollback
------------
Automobile
Automobile insurance continues to be the major line of business written
by the Company and has been consistently profitable. Excluding earthquake
related claims and expenses, the earthquake reinsurance reinstatement premium
and the Proposition 103 rollback, the Company would have realized an
automobile underwriting profit of $10,127,000. Because of the cessation of
advertising, total automobile policies in force for 1994 remained level with
<PAGE> 43
1993, compared to an 11.0% increase in 1993 over 1992. Earned premiums grew
8.1% in 1994 compared to 10.4% in 1993. Automobile underwriting profits have
declined over the last three years due to the increase in losses from Assigned
Risk business and no rate increases during this period of time.
The automobile insurance business written by the Company is comprised of
"Good Drivers", as defined by California statute. While this business would
have been acceptable to the Company before Proposition 103, those who had no
prior insurance would have been written at a higher rate level than those who
had been insured prior to being written by the Company. The underwriting
losses produced by this segment of the market suggests that the former
differential was appropriate. These drivers have produced automobile
underwriting losses of $31,134,000 in 1994, compared to $16,877,000 in 1993
and $9,719,000 in 1992.
Overall automobile underwriting results are also affected by assigned
risk policies in force. Such policies remained level between 1992 and 1993
and then increased in 1994. Underwriting losses for assigned risk business
were $3,800,000 in 1994, compared to $3,031,000 in 1993 and $1,862,000 in
1992.
The Company was granted an overall increase in automobile rates of 6%,
which took effect on October 7, 1994. Prior to this increase, the Company had
not revised its automobile rates since 1988.
Homeowners and Other Programs
As mentioned previously, the Company no longer writes new homeowners or
condominium policies or earthquake coverage endorsements as ordered by the
DOI. The Company continues to write new Personal Excess Liability Policies.
Additionally, the Company will continue to renew existing homeowner and
condominium policies without earthquake through July, 1997. Due to the
Company's intent to exit the homeowners' market, policies in force for
homeowners and the other programs combined decreased 11.3% in 1994 compared to
an increase of 7.0% in 1993.
Underwriting results for these programs are subject to variability
caused by weather-related claims and by infrequent disasters. Excluding
earthquake related claims and expenses, the earthquake reinsurance
reinstatement and the Proposition 103 rollback, the underwriting profit (loss)
for
<PAGE> 44
these lines was $(21,514,000) in 1994, $(11,598,000) in 1993 and $1,714,000
in 1992. Results in 1994 include approximately $35,000,000 of catastrophe
reinsurance premiums related to the additional reinsurance coverage. Results
in 1993 were influenced by $4.6 million in claims due to rainy weather in the
first quarter of the year; and by claims of approximately $4.3 million, after
reinsurance, plus a $2.6 million assessment for the Company's share of
California Fair Plan losses, due to the Southern California fires in the
fourth quarter of the year. Results in 1992 included rainy weather in the
first and fourth quarters of the year.
The Company also received a homeowner rate increase averaging 17%
effective August 1, 1994. The proposed increase reflects the rising costs of
claim payments in this product line and a modest provision for weather and for
catastrophes.
Policy Acquisition and General Operating Expenses
The Company's policy acquisition and general operating expense ratio
continues to be one of the lowest in the industry. The ratio of underwriting
expenses (excluding interest) to earned premiums was 10.1% in 1994, 10.7% in
1993 and 10.0% in 1992. The Company's efficiency, as reflected in its expense
advantage over its competitors, enables the Company to maintain its price
leadership and provide for future growth and profitability.
Investment Income
Net pre-tax investment income was $84,761,000 in 1994, $97,574,000 in
1993 and $94,255,000 in 1992 which produced an increase (decrease) over the
prior year of (13.1%) and 3.5% for 1994 and 1993, respectively. Average
invested assets decreased 14.0% in 1994 from 1993 and increased 8.8% in 1993
over 1992. Average annual pre-tax yield on invested assets has declined from
7.4% in 1992 to 7.1% in 1993 to 6.7% in 1994 because of lower interest rates
available on bonds purchased in 1992 and 1993 and because bonds that had been
purchased previously with rates that were higher than currently available were
sold in 1994 to generate cash for paying earthquake claims. In addition, in
1994, available cash was invested in commercial paper which yielded a lower
interest rate then that earned on the bond portfolio.
Realized capital gains on the sales of investments has increased from
$11,498,000 in 1992, to $16,729,000 in 1993 and to $61,554,000 in 1994.
<PAGE> 45
As of December 31, 1994, the Company had a net unrealized loss on bonds
of $61,425,000 compared to a net unrealized gain in 1993 and 1992 of
$145,746,000 and $84,418,000, respectively. The primary reason for the shift
from an unrealized gain to an unrealized loss is that interest rates rose
sharply since late 1993 causing a reduction in fair value of the bond
portfolio, and the Company had recognized significant gains on the portion of
the bond portfolio sold in 1994.
The Company's investment guidelines currently emphasize buying high-
quality, fixed income, taxable securities because of the Company's substantial
net operating loss carryforward. While the Company's policy is generally to
hold these investments until maturity, its ongoing monitoring and evaluation
of investment holdings and market conditions may, from time to time, result
in selected sales of investments prior to maturity. The Company has designated
its portfolio as "available-for-sale," and it is carried at fair value as of
December 31, 1994 in accordance with the standards set forth in Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company implemented this new standard January
1, 1994. For a more complete description of this new standard, see Note 1 of
the Notes to Consolidated Financial Statements, "Investments".
Income Taxes
In 1993, the Company adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes", which requires the recognition of
deferred tax liabilities and tax assets for the expected future tax
consequences of temporary differences between the carrying amount and the tax
bases of assets and liabilities. For further discussion, refer to Note 4 of
the Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has experienced positive cash flow from
operating activities. Due to the severe earthquake losses, the Company did
not generate a positive cash flow from operating activities in 1994. The
Company paid for these losses with cash from operations, investment sales,
loan proceeds and equity financing. Funds needed to pay for remaining
earthquake related losses and expenses will come from normal positive
operating cash flows and from available cash on deposit. As of December 31,
1994, the Com-
<PAGE> 46
pany had total cash of $249,834,000 and total investments of $942,174,000. Of
the Company's total investments, $229,216,000 at fair value was invested in
tax-exempt state and municipal bonds and the balance was invested in taxable
government, corporate and municipal securities.
Statutory regulations require the majority of the Company's investments
to be made in high-grade securities to provide ample protection for
policyholders. The Company primarily invests in long-term fixed maturity
investments such as bonds.
Loss and loss expense payments are the most significant cash flow
requirements of the Company. The Company continually monitors the loss
payments to provide projections of future cash requirements. The Company
generally generates enough cash flow to allow for monthly investments in the
Cash Management Fund which is the source for purchasing long-term investments
such as bonds. In order to help pay for the earthquake losses in 1994, the
Company capitalized on the substantial unrealized gain in its bond portfolio
by selling off bonds with higher market values. This resulted in capital
gains of $61,554,000.
In order to realize capital gains to increase statutory surplus, to
provide cash for earthquake claims payments and to maximize investment income,
the Company has restructured its investment portfolio to increase the
proportion of investment-grade taxable instruments. Accordingly, the entire
portfolio is shown as available-for-sale. As of December 31, 1994, the
portfolio contained 76% taxable instruments compared to 13% a year earlier.
All of the Company's investments are of high-quality and very liquid.
In prior years, the Company's most significant capital requirement
resulted from its need to maintain an acceptable ratio of net premiums written
to policyholders' surplus. In 1994, the losses from the Northridge Earthquake
were so severe that the Company obtained a $160 million bank loan for its
subsidiaries and equity financing from American International Group, Inc.
(AIG). See Notes 7 and 14 of the Notes to Consolidated Financial Statements.
At December 31, 1994, the Company has $200 million of preferred stock
outstanding, bearing interest at 9% per year payable quarterly. This results
in a dividend of $18 million a year, or $4,500,000 per quarter. The Company
also has a revolving credit line obligation of $160 million, with interest
obligations varying according to market conditions. First quarter 1995
interest payments are estimated to be $3,900,000.
<PAGE> 47
In March 1995, the Company issued an additional $20 million of preferred
stock and borrowed another $10 million against the existing bank credit
facility in order to increase the surplus of its Insurance Subsidiaries
pursuant to an order by the California Department of Insurance. Dividends
required in June 1995 and subsequent quarters will be $4,950,000. Interest
for the credit facility will be approximately $3,700,000 for the second
quarter of 1995.
Funds required by 20th Century Industries to pay dividends are provided
by the Insurance Subsidiaries. The ability of the Insurance Subsidiaries to
pay dividends to the holding company is regulated by state law. Because of
statutory regulations which require dividends to be paid from earned surplus,
no dividends may be paid by the subsidiaries in 1995 without prior approval.
The order from the DOI in January, 1995 specifically provides that the
Insurance Subsidiaries may pay dividends to service existing debt and
preferred stock obligations, and to service the additional contributions. The
DOI and the Company have been in constant communication, and currently the DOI
is permitting the Company to operate at a net premiums written to surplus
ratio in excess of 3:1. The Company has requested approval from the DOI for
an extraordinary dividend to pay the required dividends and interest, and
anticipates a favorable response.
Stockholders' equity decreased $337.3 million between 1993 and 1994 from
$655.2 million to $317.9 million, respectively, while book value per common
share decreased $10.45 from $12.74 to $2.29 for the same time period.
For years prior to 1994, the Company's cash outlays for income taxes
generally exceeded income tax expense recorded in accordance with generally
accepted accounting principles. This resulted primarily because of the
reduction of the unearned premium deduction and the discounting of unpaid loss
reserve mandated by the Tax Reform Act of 1986.
In 1994, the losses caused by the Northridge Earthquake resulted in a
net operating loss of approximately $788.5 million and $759.5 million for
regular tax and alternative minimum tax, respectively. Of these amounts,
$238.0 million and $350.0 million for regular tax and alternative minimum tax,
respectively, were carried back to the previous three years offsetting most of
the taxable income for those years and resulting in a tax refund of $74.1
million. The balance of the 1994 net operating loss ($550.0 million and
$408.0 million for regular tax and alternative minimum tax, respectively) will
offset taxable income for future years. For the next two to three years, the
Company
<PAGE> 48
expects to have very small cash outlays for income taxes, specifically
alternative minimum tax. Until the net operating losses are fully utilized,
the Company expects that cash outlays for income taxes will be less than
income tax expense recorded in accordance with generally accepted accounting
principles. The net operating loss carryforwards will expire in the year
2009.
RISK-BASED CAPITAL
The National Association of Insurance Commissioners (NAIC) requires
property and casualty insurance companies to calculate and report information
under a Risk-Based Capital (RBC) formula effective with the filing of their
1994 annual statements due March 1, 1995. The RBC requirements are intended
to assist regulators in identifying inadequately capitalized companies. The
RBC calculation is based on the type and mix of risks inherent in the
Company's business and includes components for underwriting, asset, interest
rate and other risks. The Company implemented the RBC formula for year-end
1994 and has exceeded the minimum RBC requirements. Therefore, no corrective
action is required.
HOME OFFICE LEASE
The Company leases its Home Office building in Woodland Hills,
California, which contains approximately 234,000 square feet of leasable
office space. The lease was amended in October 1994 which extended the lease
term until November 1999. The lease on this building may be renewed for two
consecutive five-year periods.
<PAGE> 49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Board of Directors
20th Century Industries
We have audited the accompanying consolidated balance sheets of 20th
Century Industries and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1994. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As more fully discussed in Notes 7, 12, 13 and 14, the Company's
financial position has been adversely impacted by an earthquake in the
Southern California area and other events occurring in 1994.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of 20th Century Industries and subsidiaries at December 31, 1994 and 1993, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As described in Note 1, 20th Century Industries and subsidiaries adopted
in 1994 the provisions of Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". As
described in Note 4, 20th Century Industries and subsidiaries adopted in 1993
the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes".
ERNST & YOUNG LLP
Los Angeles, California
February 17, 1995
<PAGE> 50
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
------------------------------
1994 1993
---- ----
(Amounts in thousands)
Investments:
Fixed maturities, held-to-maturity
at amortized cost (fair value,
1993 $1,289,895) $ - $1,177,565
Fixed maturities - available-for-
sale, at fair value, 1994 and lower
of aggregate amortized cost or aggregate
fair value, 1993 (amortized cost, 1994
$1,002,831; aggregate fair value, 1993
$277,866) 941,406 244,451
Equity securities, at fair value
(cost, 1994 $539;
1993 $539) 768 539
---------- ----------
Total investments - Note 2 942,174 1,422,555
Cash and cash equivalents 249,834 17,894
Accrued investment income 19,631 28,247
Premiums receivable 90,236 87,241
Income taxes receivable 74,064 1,396
Deferred income taxes - Note 4 276,570 40,905
Deferred policy acquisition
costs - Note 3 14,776 15,712
Furniture, equipment and leasehold
improvements; at cost less accumulated
depreciation, 1994 $42,171; 1993 $35,414 13,307 17,409
Other assets 22,218 13,311
---------- ----------
$1,702,810 $1,644,670
========== ==========
The accompanying notes are an integral part of this statement.
<PAGE> 51
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
-----------------------------
1994 1993
---- ----
(Amounts in thousands, except share data)
Unpaid losses and loss adjustment
expenses - Note 6 $ 756,243 $ 577,490
Unearned premiums 298,519 299,941
Bank loan payable - Note 7 160,000 -
Claims checks payable 70,725 41,535
Proposition 103 payable - Note 12 78,307 49,185
Other liabilities - Note 5 21,072 21,310
---------- ----------
Total liabilities 1,384,866 989,461
---------- ----------
Commitments - Note 9 and
Contingencies - Note 11
Stockholders' equity - Note 10
Capital Stock
Preferred stock, par value $1.00
per share; authorized 500,000
shares, none issued
Series A convertible preferred stock,
stated value $1,000 per share, authorized
376,126 shares, outstanding 200,000
in 1994 200,000 -
Common stock without par value;
authorized 110,000,000 shares,
outstanding 51,472,471 in 1994
and 51,447,471 in 1993 69,340 68,848
Common stock warrants 16,000 -
Unrealized investment losses, net - Note 2 (39,777) -
Retained earnings 72,381 586,361
---------- ----------
Total stockholders' equity 317,944 655,209
---------- ----------
$1,702,810 $1,644,670
========== ==========
The accompanying notes are an integral part of this statement.
<PAGE> 52
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------------
1994 1993 1992
---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C>
REVENUES:
Net premiums earned - Note 8 $ 1,034,003 $ 989,712 $ 896,353
Net investment income - Note 2 84,761 97,574 94,255
Realized investment gains 61,554 16,729 11,498
Other (46) (180) (116)
----------- ---------- ----------
1,180,272 1,103,835 1,001,990
----------- ---------- ----------
LOSSES AND EXPENSES:
Net losses and loss adjustment
expenses - Note 6 944,530 867,451 764,374
Net earthquake losses and related
expenses - Note 6 883,816 - -
Policy acquisition costs 43,409 48,375 41,996
Other operating expenses 57,214 57,545 48,337
Proposition 103 expense - Note 12 29,124 3,474 3,474
Interest expense 8,286 44 33
----------- ---------- ----------
1,966,379 976,889 858,214
----------- ---------- ----------
Income (loss) before federal income
taxes and cumulative effect
of change in accounting for
income taxes (786,107) 126,946 143,776
Federal income taxes (benefit) -
Note 4 (288,087) 18,350 26,309
----------- ---------- ----------
Income (loss)before cumulative effect
of change in accounting for income
taxes (498,020) 108,596 117,467
Cumulative effect of change in
accounting for income taxes - 3,959 -
----------- ---------- ----------
NET INCOME (LOSS) $ (498,020) $ 112,555 $ 117,467
=========== ========== ==========
EARNINGS (LOSS) PER COMMON
SHARE - NOTE 1
PRIMARY -
Before cumulative effect of
change in accounting for
income taxes $ (9.69) $ 2.11 $ 2.29
Cumulative effect of change in
accounting for income taxes - .08 -
----------- ---------- ----------
NET INCOME (LOSS) $ (9.69) $ 2.19 $ 2.29
=========== ========== ==========
FULLY DILUTED -
Before cumulative effect of
change in accounting for
income taxes $ (9.69)
Cumulative effect of change
in accounting for income taxes -
-----------
NET INCOME (LOSS) $ (9.69)
===========
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE> 53
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1992, 1993 and 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK UNREALIZED
$1 PAR VALUE WITHOUT COMMON INVESTMENT
PER SHARE PAR VALUE STOCK GAINS RETAINED
AMOUNT AMOUNT WARRANTS (LOSSES) EARNINGS
-------- --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1992 $ - $ 68,060 $ - $ - $416,517
Net income for the year 117,467
Effects of common stock issued
under restricted shares plan 371
Cash dividends paid ($.52 per
share) (26,741)
------ -------- ------- ------- ---------
Balance at December 31, 1992 - 68,431 - - 507,243
Net income for the year 112,555
Effects of common stock issued
under restricted shares plan 417
Unrealized pension loss (511)
Cash dividends paid ($.64 per
share) (32,926)
------ -------- ------- -------- ---------
Balance at December 31, 1993 - 68,848 - - 586,361
Net loss for the year (498,020)
Effects of common stock issued
under restricted shares plan 492
Effect of implementing change in
accounting for investments at
January 1, 1994 - Note 2 36,757
Net decrease in unrealized gains
on portfolio classified as avail-
able-for-sale from January 1, 1994
to December 31, 1994 - Note 2 (76,683)
Unrealized gain on marketable
equity securities, net of
deferred taxes of $80 149
Issuance of Series A
Preferred Stock - Note 10 200,000
Issuance of Series A Common
Stock Warrants - Note 10 16,000
Unrealized pension gain 511
Cash dividends paid
($.32 per share) (16,471)
-------- ------- ------- -------- --------
Balance at December 31, 1994 $200,000 $69,340 $16,000 $(39,777) $ 72,381
======== ======= ======= ======== ========
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE> 54
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1993 1992
---- ---- ----
(Amounts in thousands)
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Income (loss) $(498,020) $ 112,555 $ 117,467
Adjustments to reconcile net income
to net cash provided (used) by operating
activities:
Provision for depreciation
and amortization 7,195 7,203 6,127
Provision for deferred income taxes (214,522) (6,518) (4,682)
Realized gains on sale of invest-
ments, fixed assets, etc. (61,470) (16,515) (11,343)
Effects of common stock issued
under restricted shares plan 492 417 371
Increase in premiums receivable (2,995) (9,614) (7,091)
(Increase) decrease in accrued
investment income 8,616 (147) (1,854)
(Increase) decrease in deferred
policy acquisition costs 936 (2,367) (1,723)
Increase in unpaid losses and loss
adjustment expenses 178,753 22,950 6,164
Increase (decrease) in unearned premiums (1,422) 32,385 22,266
Increase in claims checks payable 29,190 2,206 2,445
Increase in Proposition 103 payable 29,122 3,474 3,474
Change in other assets, other
liabilities and accrued income
taxes (81,026) (6,376) 1,539
--------- --------- ---------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (605,151) 139,653 133,160
</TABLE>
<PAGE> 55
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1994 1993 1992
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Investments purchased - held-
to-maturity - (308,543) (452,096)
Investments purchased-available-
for-sale (821,822) - -
Investments called or matured - held-
to-maturity - 19,760 47,820
Investments called or matured - avail-
able-for-sale 27,531 14,323 -
Investments sold - held-to-maturity - 58,116 308,703
Investments sold - available-for-sale 1,275,091 117,503 -
Net purchases of furniture, equip-
ment and leasehold improvements (3,238) (4,895) (8,320)
---------- ---------- ----------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 477,562 (103,736) (103,893)
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 200,000 - -
Proceeds from issuance of common stock
warrants 16,000 - -
Payments on installment contract - (75) (414)
Proceeds from bank loan 160,000 - -
Dividends paid (16,471) (32,926) (26,741)
---------- ---------- ----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 359,529 (33,001) (27,155)
---------- ---------- ----------
Net increase in cash 231,940 2,916 2,112
Cash, beginning of year 17,894 14,978 12,866
---------- ---------- ----------
Cash, end of year $ 249,834 $ 17,894 $ 14,978
========== ========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE> 56
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
Basis of Consolidation and Presentation
The accompanying financial statements include the accounts of 20th
Century Industries and its wholly-owned subsidiaries, 20th Century Insurance
Company and 21st Century Casualty Company. All material intercompany accounts
and transactions have been eliminated. The consolidated financial statements
have been prepared in conformity with generally accepted accounting principles
which differ in some respects from those followed in reports to insurance
regulatory authorities.
Investments
Prior to the adoption in 1994 of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", the Company adhered to less stringent requirements and
management believed that it had the ability to hold its investments to
maturity and intended to do so. However, the Company also recognized that it
could be appropriate to sell a security prior to maturity in response to
unforeseen changes in circumstances. Recognizing the need for the ability to
respond to changes in tax position and in market conditions, the Company had
designated a portion of its investment portfolio as "available-for-sale".
These fixed income securities were valued in the aggregate at the lower of
amortized cost or fair value. The remainder of the Company's portfolio was
designated as "held-for-investment" and valued at amortized cost.
The Company adopted SFAS 115 at January 1, 1994. SFAS 115 requires that
fixed maturity securities are to be classified as either held-to-maturity,
available-for-sale, or trading. Held-to-maturity debt securities are to be
reported at amortized cost; trading securities are to be reported at fair
value, with unrealized gains or losses included in earnings; and available-
for-sale securities are to be reported at fair value, with unrealized gains or
losses excluded from earnings and reported in a separate component of
shareholders' equity.
<PAGE> 57
Because these rules are more stringent than in prior years, the Company
during 1994 has reclassified its portfolio into the available-for-sale
category. (See Note 2).
Fair values for fixed maturity and equity securities are based on quoted
market prices. Unrealized investment gains and losses on available-for-sale
securities are credited or charged directly to stockholders' equity, net of
any tax effect. When investment securities are sold, the cost used to
determine any realized gain or loss is based on specific identification.
Cash and Cash Equivalents
Cash and cash equivalents include cash and short-term investments in
demand deposits.
Reinsurance
In the normal course of business, the Company seeks to reduce the loss
that may arise from catastrophes or other events that cause unfavorable
underwriting results by reinsuring certain levels of risk in various areas of
exposure with other insurance enterprises or reinsurers. Reinsurance premiums
and reserves on reinsured business are accounted for on a basis consistent
with those used in accounting for the original policies issued and the terms
of the reinsurance contracts. Amounts applicable to ceded unearned premiums
and ceded claim liabilities are reported as assets in the accompanying balance
sheets.
Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are recorded at cost. The
provision for depreciation is computed on the straight-line method over the
estimated useful lives of the related assets which generally range from 5 to
7 years. Leasehold improvements are capitalized and amortized over the
shorter of the life of the asset or the lease term. Maintenance and repair
costs are charged to operations when incurred. Depreciation and amortization
expense was $7,256,000, $7,158,000 and $6,020,000 for 1994, 1993 and 1992,
respectively.
<PAGE> 58
Income Recognition
Premiums written are recorded as earned proportionately over the term of
the policy.
Losses and Loss Adjustment Expenses
The estimated liabilities for losses and loss adjustment expenses include
the accumulation of estimates of losses for claims reported prior to the
balance sheet dates, estimates (based upon actuarial analysis of historical
data) of losses for claims incurred but not reported and estimates of expenses
for investigating and adjusting all incurred and unadjusted claims. Amounts
reported are estimates of the ultimate net costs of settlement which are
necessarily subject to the impact of future changes in economic and social
conditions. Management believes that, given the inherent variability in any
such estimates, the aggregate reserves are within a reasonable and acceptable
range of adequacy. The methods of making such estimates and for establishing
the resulting reserves are continually reviewed and updated and any
adjustments resulting therefrom are reflected in earnings currently.
Policy Acquisition Costs
Policy acquisition costs, principally direct and indirect costs directly
related to production of business, are deferred and amortized against the
premiums earned.
Income Taxes
Income taxes for 1993 and 1994 have been provided using the liability
method in accordance with SFAS No. 109, "Accounting for Income Taxes". Under
that method, deferred tax assets and liabilities are determined based on the
differences between their financial reporting and their tax bases and are
measured using the enacted tax rates. Income taxes for 1992 have been
provided for using the deferred method.
Earnings (Loss) Per Common Share
Earnings (loss) per common share are computed using the weighted average
number of common shares outstanding during the respective periods. The
weighted average number of shares was 51,387,120 for the year ended
December 31, 1994, 51,411,968 for 1993 and 51,394,806 for 1992. Primary
earnings per share amounts
<PAGE> 59
for 1993 and 1992 reflect a simple capital
structure in which there were no securities in existence allowing common stock
to be acquired as a result of exercising the conversion rights of such
securities. The 1994 primary and fully diluted loss per share amounts reflect
a complex capital structure in which securities exist that allow for the
acquisition of additional common stock through the exercise of conversion
rights in these securities. However, as there is a net loss for the year,
primary and fully diluted loss per share amounts for 1994 are the same, as
including the convertible securities in the computation of the loss per share
would be antidilutive.
Fair Values of Financial Instruments
The carrying amounts of financial instruments other than investment
securities, approximate their fair values. For investment securities, fair
values are based on quoted market prices. The carrying amounts and fair
values for all investment securities are disclosed in Note 2.
Reclassifications
The accompanying 1992 and 1993 financial statements have been
reclassified to conform with the 1994 presentation.
NOTE 2. INVESTMENT INCOME
As of January 1, 1994, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities" for
investments held as of or acquired after that date. In accordance with SFAS
No. 115, prior-period financial statements have not been restated to reflect
the change in accounting principle.
In accordance with the criteria contained in SFAS No. 115, certain fixed
maturities previously classified as held-to-maturity (with an amortized cost
of $166,786,000 and fair value of $189,921,000) were transferred to the
available-for-sale category; in addition, the carrying value of the existing
available-for-sale portfolio was adjusted to fair value as of January 1, 1994.
The effect of adopting SFAS 115 on January 1, 1994 increased fixed maturity
investments available-for-sale by $56,549,000, decreased deferred taxes by
$19,792,000, and increased stockholders' equity by $36,757,000. In the three-
month period ended March 31, 1994, those net unrealized holding gains
decreased by $15,551,000 (net of deferred income taxes of $8,374,000).
Effective March 31, 1994, the Company, in response to the unprecedented losses
resulting from the Northridge Earthquake
<PAGE> 60
( see Note 13 ), reclassified the
balance of its investment portfolio as available-for-sale, increasing
stockholders' equity by $19,719,000 (net of deferred income taxes of
$10,618,000). In the nine-month period ended December 31, 1994, net
unrealized holding gains on the Company's bond portfolio decreased from
$40,925,000 (net of deferred income taxes of $22,036,000) at March 31, 1994 to
a net unrealized loss of $39,926,000 (net of deferred income taxes of
$21,499,000) at December 31, 1994 or a decrease of $80,851,000 (net of
deferred income taxes of $43,535,000). The aggregate of the changes in
unrealized gains (losses) for 1994 as discussed above totals $76,683,000,
which is reflected in the Consolidated Statement of Stockholders' Equity.
<PAGE> 61
A summary of net investment income is as follows:
<TABLE>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1994 1993 1992
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Interest and dividends on fixed
maturities $ 82,125 $ 97,771 $ 93,626
Dividends on equity securities 11 40 40
Interest on short-term cash
investments (demand deposits) 3,210 522 791
Other 117 11 99
-------- -------- --------
Total investment income 85,463 98,344 94,556
Investment expense 702 770 301
-------- -------- --------
Net investment income $ 84,761 $ 97,574 $ 94,255
======== ======== ========
A summary of realized investment gains and losses before income taxes and
proceeds from the sale of bonds is as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1994 1993 1992
---- ---- ----
(Amounts in thousands)
Fixed maturities available-for-sale:
Gross realized gains $ 65,300 $ 11,528 $ -
Gross realized losses (3,746) (99) -
Fixed maturities held-to-maturity:
Gross realized gains - 5,300 12,554
Gross realized losses - - (1,056)
---------- -------- --------
Net realized investment gains $ 61,554 $ 16,729 $ 11,498
========== ======== ========
Proceeds from sale of bonds
(calls and maturities excluded) $1,275,091 $175,619 $308,703
========== ======== ========
</TABLE>
<PAGE> 62
<TABLE>
The amortized cost, gross unrealized gains and losses, and fair
values of fixed maturities as of December 31, 1994 and 1993, respectively, are as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
1994 Cost Gains Losses Value
---- --------- ---------- ----------- -----------
Available-for-sale: (Amounts in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obli-
gations of U.S. government cor-
porations and agencies $ 240,690 $ 65 $ 8,077 $ 232,678
Obligations of states and political
subdivisions 292,723 355 31,464 261,614
Public utilities 147,241 11 8,079 139,173
Corporate securities 322,177 1,594 15,830 307,941
----------- -------- ------- -----------
Total available-for-sale $ 1,002,831 $ 2,025 $63,450 $ 941,406
=========== ======== ======= ===========
1993
----
Held-to maturity:
U.S. Treasury securities and obli-
gations of U.S. government corp-
orations and agencies $ 6,258 $ 519 $ - $ 6,777
Obligations of states and political
subdivisions 1,028,780 93,118 590 1,121,307
Public utilities 11,060 875 - 11,935
Corporate securities 131,467 18,408 - 149,876
----------- -------- ------ -----------
Total held-to-maturity $ 1,177,565 $112,920 $ 590 $ 1,289,895
=========== ======== ====== ===========
Available-for-sale:
Obligations of states and political
subdivisions $ 244,451 $ 33,420 $ 5 $ 277,866
----------- -------- ------ -----------
Total available-for-sale $ 244,451 $ 33,420 $ 5 $ 277,866
=========== ======== ====== ===========
</TABLE>
<PAGE> 63
The maturity distribution of the Company's fixed maturity investments at
December 31, 1994 was as follows: (Amounts in thousands)
Available-for-Sale
---------------------------
Amortized Fair
Fixed maturities due: Cost Value
--------------------- ---------- --------
1995 $ 11,056 $ 10,927
1996 - 1999 223,727 216,932
2000 - 2004 241,483 232,175
2005 - 2014 288,982 268,718
2015 and after 237,583 212,654
---------- --------
Total $1,002,831 $941,406
========== ========
Expected maturities of the Company's investment portfolios differ from
contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
NOTE 3. POLICY ACQUISITION COSTS
YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1993 1992
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Deferred policy acquisition costs
amortized in the year $ 15,712 $ 13,345 $ 11,622
Policy acquisition costs incurred
during the year 42,473 50,742 43,719
--------- -------- --------
Total policy acquisition costs 58,185 64,087 55,341
Deferred policy acquisition costs
at end of the year 14,776 15,712 13,345
-------- -------- --------
Policy acquisition costs for
current year $ 43,409 $ 48,375 $ 41,996
======== ======== ========
</TABLE>
<PAGE> 64
NOTE 4. FEDERAL INCOME TAXES
In 1993, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes". The adoption of SFAS 109
changes the Company's method of accounting for income taxes from the deferred
method to the liability method. The liability method requires the recognition
of deferred tax liabilities and tax assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities. The adjustments to the January 1, 1993
balance sheet to adopt SFAS 109 totaled $3,959,000, which is reflected in the
1993 statement of income as the effect of a change in accounting principle.
<TABLE>
Federal income tax expense consists of:
YEARS ENDED DECEMBER 31,
------------------------------------------------
1994 1993 1992
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Current tax expense (benefit) $ (73,565) $ 24,868 $ 30,991
Deferred tax expense (benefit) (214,522) (6,518) (4,682)
--------- -------- --------
$(288,087) $ 18,350 $ 26,309
========= ======== ========
</TABLE>
The Company's net deferred income tax asset is composed of:
YEARS ENDED DECEMBER 31,
-----------------------------
1994 1993
---- ----
(Amounts in thousands)
Deferred Tax Assets:
Net operating loss carryforward $192,334 $ -
Unearned premiums 20,810 20,898
Loss reserves 21,886 19,621
Alternative minimum tax credit 8,084 -
Proposition 103 14,138 3,337
Unrealized investment losses 21,419 -
Non-qualified retirement plans 2,761 2,578
Other 1,373 1,088
-------- --------
282,805 47,522
-------- --------
Deferred Tax Liabilities:
Deferred policy acquisition costs 5,173 5,499
Salvage and subrogation 1,062 1,118
-------- --------
6,235 6,617
-------- --------
Net Deferred Tax Asset $276,570 $ 40,905
======== ========
<PAGE> 65
Under normal operations, the Company's principal deferred tax assets
arise due to the discounting of loss reserves for tax purposes which delays a
portion of the loss deduction and the acceleration of 20% of the unearned
premium reserve into taxable income before it is earned. As a result of the
losses arising from the Northridge Earthquake, the Company, as of December 31,
1994, after available carryback, has a net operating loss carryforward of
approximately $550,000,000 for regular tax purposes and $408,000,000 for
alternative minimum tax purposes expiring in the year 2009 and an alternative
minimum tax credit carryforward of $8,084,000.
The Company is required to establish a "valuation allowance" for any
portion of the deferred tax asset that management believes will not be
realized. In order to utilize the deferred tax assets, the Company must have
the ability to generate sufficient future taxable income to realize the tax
benefits. The Company has available the following tax-planning strategies to
generate additional taxable income in the future above historical levels:
1) The Company as of December 31, 1994 has approximately 76% of its
$1 billion investment portfolio invested in taxable securities
compared to 13% at December 31, 1993. By converting its investment
portfolio from tax-exempt securities (and investing new cash flow)
into taxable securities, the Company has significantly increased
its future taxable income.
2) The Company could reinsure outstanding loss reserves and thus
eliminate the temporary difference related to the discounting
of loss reserves for tax purposes.
The Company has a strong record of profitable operations. Except for
the losses arising from the Northridge Earthquake, the Company has been
profitable for each of the past 10 years. Over the last five years, the
Company's combined ratio on a GAAP basis has been approximately 97% and
investment earnings have averaged approximately $95 million a year over the
same five year period. Historically, the Company has generated almost all of
its profits from its automobile line of business. In accordance with the
order by the California Department of Insurance, the Company is withdrawing
from the homeowners and earthquake lines of business. The Company cannot
renew any homeowner policies which include earthquake coverage with effective
dates on or after July 23, 1994 and thus will be completely out of the
earthquake line of business by July 23,
<PAGE> 66
1995 and out of the homeowners line of business by July 23, 1997. This will
substantially reduce the Company's exposure to future earthquake catastrophes.
The Company's estimates of future taxable income are based on its
historical profitable operations and the equity financing received from
American International Group ("AIG") to replace diminished statutory capital
(See Note 14). The Company believes the AIG transaction will provide
sufficient statutory capital to allow the Company, in combination with its
significantly reduced exposure to catastrophic losses, to return to its
historical levels of profitability. The Company believes that the capital
transaction with AIG does not create any limitations on the ability of the
Company to utilize the net operating loss carryforward. The Company believes
that because of its historically strong earnings performance and the tax
planning strategies available, it is more likely than not that the Company
will realize the benefit of the deferred tax assets, and therefore, no
valuation allowance has been established.
Income taxes do not bear the expected relationship to income because of
differences in the recognition of revenue and expense for tax and financial
reporting purposes. The tax effects of such differences are:
<TABLE>
YEARS ENDED DECEMBER 31,
------------------------------------------
1994 1993 1992
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Federal income tax (benefit)
at statutory rate $(275,138) $ 44,431 $ 48,884
(Decrease) increase due to:
Tax-exempt income, net (13,535) (24,492) (22,960)
Alternative minimum tax - - (454)
Salvage and subrogation - - (88)
Adjustment of deferred tax for
1% increase in tax rate 1,696 (1,074) -
Other (1,110) (515) 927
--------- -------- --------
Federal taxes on income $(288,087) $ 18,350 $ 26,309
========= ======== ========
The statutory tax rate was 35% for 1994 and 1993 and 34% for 1992.
Cash paid for income taxes was $-0-, $26,026,000, and $32,303,000 for
the years ended December 31, 1994, 1993 and 1992, respectively.
</TABLE>
<PAGE> 67
NOTE 5. EMPLOYEE BENEFITS
Pension Plan and Supplemental Executive Retirement Plan
In 1988, the Company adopted a non-contributory defined benefit pension
plan (Pension Plan) which covers essentially all employees who have completed
at least one year of service. The benefits are based on employees'
compensation during all years of service. The Company's funding policy is to
make annual contributions as required by applicable regulations. The Pension
Plan's assets consist of high-grade fixed income securities and cash
equivalents.
Effective January 1, 1988, the Company adopted an unfunded Supplemental
Executive Retirement Plan (Supplemental Plan) which covers certain key
employees, designated by the Board of Directors. The Supplemental Plan
benefits are based on years of service and compensation during the last three
years of employment, and are reduced by the benefit payable from the Pension
Plan.
The net periodic pension cost for these plans reflected in the 1994,
1993 and 1992 Consolidated Statements of Operations is $3,722,000, $2,998,000
and $2,398,000, respectively. Accrued pension costs reflected in the
Consolidated Balance Sheets at December 31, 1994 and 1993 are $4,713,000 and
$6,811,000, respectively.
Savings and Security Plan
The Company has a qualified contributory savings and security plan for
eligible employees which incorporates Section 401(k) of the Internal Revenue
Code to permit certain pre-tax contributions by participants. Under the plan
(which is voluntary as to an employee's participation), the Company matches
75% of all employee contributions up to a limit of 6% of each participating
employee's compensation. Contributions charged against operations were
$2,210,000, $1,943,000 and $1,516,000 in 1994, 1993 and 1992, respectively.
<PAGE> 68
NOTE 6. LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
1994 1993
---- ----
(AMOUNTS IN THOUSANDS)
Reserves for losses and loss adjustment
expenses, net of reinsurance recover-
ables on unpaid losses, at beginning
of year $ 574,619 $554,034
Incurred losses and loss adjustment
expenses, net of reinsurance:
Provision for insured events of the
current year, non-earthquake related,
net of reinsurance 1,028,983 930,437
Provision for insured events of the
current year, earthquake related,
net of reinsurance 868,407 -
Decrease in provision for
insured events of prior years,
net of reinsurance (84,453) (62,986)
---------- --------
Total incurred losses and loss
adjustment expenses, net of
reinsurance 1,812,937 867,451
---------- --------
Payments, net of reinsurance:
Losses and loss adjustment expenses
attributable to insured events of
the current year, earthquake related,
net of reinsurance 708,981 -
Losses and loss adjustment expenses
attributable to insured events of
the current year, non-earthquake re-
lated, net of reinsurance 578,598 519,232
Losses and loss adjustment expenses
attributable to insured events of
prior years, net of reinsurance 344,876 327,634
---------- --------
Total payments, net of reinsurance 1,632,455 846,866
---------- --------
Reserves for losses and loss adjustment
expenses, net of reinsurance recover-
ables on unpaid losses, at year end 755,101 574,619
Reinsurance recoverables on unpaid
losses, at year end 1,142 2,871
---------- --------
Reserves for losses and loss adjust-
ment expenses, gross of reinsurance
recoverables on unpaid losses, at
year end $ 756,243 $577,490
========== ========
As a result of changes in estimates of insured events in prior years, the
provision of losses and loss adjustment expenses (net of reinsurance
recoveries of $400,000 and $(366,000) in 1993 and 1994, respectively)
decreased by $62,986,000 and $84,453,000 in 1993 and 1994, respectively, due
to a combination of improvements in the claims handling process, unanticipated
decreases in frequency and random fluctuations in severity.
<PAGE> 69
NOTE 7. DEBT
Effective June 30, 1994, the Company secured a five and one-half year
reducing-revolver credit facility (the Facility), with an aggregate commitment
of $175 million through The First National Bank of Chicago and Union Bank (the
Agents).
As of December 31, 1994, the Company's outstanding advances against the
Facility totalled $160 million for which loan origination fees to the Agents
of $7.2 million were incurred. Loan fees are being amortized over the five-
and-one-half year life of the Facility. Interest is charged at a variable
rate based, at the option of the Company, on either (1) the higher of (a) the
prime rate or (b) the sum of the Federal Funds Effective Rate plus 0.5%, plus
a margin of 2.0%, or (2) the Eurodollar rate plus a margin of 3.25%. Margins
will be reduced in relation to certain financial and operational levels of the
Company. Interest is payable at the end of each interest period. The stock
of the Company's Insurance Subsidiaries is pledged as collateral under the
loan agreement. At December 31, 1994, the annual interest rate for the
specified interest period was approximately 9.25%. Interest paid as of
December 31, 1994 was $7,277,000.
Beginning January 1, 1996, the aggregate commitment will be
automatically reduced $35 million, and $8.75 million thereafter on the first
day of each quarter through the Facility's maturity date of January 1, 2000.
Principal repayments are required when total outstanding advances exceed the
aggregate commitment. The Company may prepay principal amounts of the
advances, as well as voluntarily cause the aggregate commitment to be reduced
at any time during the term of the Facility.
With the increase in Northridge Earthquake losses and resulting decline
in equity, the Company was in default of certain financial covenants of the
Facility. The Company deposited $25 million in a cash collateral account with
one of the agent banks to secure its obligations under the Bank Credit
Agreement. The Company and the Agents and Lenders agreed to amendments to the
loan agreement to waive the events of default in order to facilitate the
capital transaction with American International Group (AIG). (See Note 14).
Upon the closing of the capital transaction, the default condition was cured.
NOTE 8. REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. The Company periodically reviews the financial condition of its
<PAGE> 70
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. It is the Company's policy to hold collateral under related
reinsurance agreements in the form of letters of credit for unpaid losses for
all reinsurers not licensed to do business in the Company's state of
domicile. At December 31, 1994, there were no insurance agreements in force
with any such unauthorized reinsurers.
<TABLE>
The effect of reinsurance on premiums written and earned is as follows
(amounts in thousands):
1994 1993 1992
----------------------- ---------------------- ------------------
Written Earned Written Earned Written Earned
---------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Direct $1,091,663 $1,093,086 $1,033,895 $1,001,510 $926,708 $904,442
Ceded (58,926) (59,083) (11,993) (11,798) (8,265) (8,089)
--------- ---------- ---------- ---------- -------- --------
Net premiums $1,032,737 $1,034,003 $1,021,902 $ 989,712 $918,443 $896,353
========== ========== ========== ========== ======== ========
</TABLE>
Loss and loss adjustment expenses have been reduced by reinsurance ceded
totaling $76,815,000, $3,700,000, and $1,333,000 for 1994, 1993 and 1992,
respectively.
At December 31, 1994 and 1993, reinsurance receivable/recoverable was
$2,737,000 and $3,318,000, respectively, and ceded unearned premium was
$1,237,000 and $1,393,000, respectively.
The Company has a homeowners excess of loss reinsurance treaty with
General Reinsurance Corporation. In this excess treaty, the reinsurer's limit
is $650,000 in excess of the Company's retention of $300,000 per risk, subject
to a maximum reinsurer's limit of $1,300,000 per occurrence.
Following the January 17, 1994 Northridge Earthquake, the Company's
reinsurance coverage of 75% of $100 million in excess of $10 million was
reinstated at a cost of $13 million and additional reinsurance of 75% of the
next $100 million was purchased effective April 1, 1994, for approximately
$3 million. These treaties expired on June 30, 1994.
This reinsurance program was renewed for the period from July 1, 1994
through June 30, 1995, with amended terms, for a total annual premium of
approxi-
<PAGE> 71
mately $28 million. Coverage under these treaties is provided by a
number of domestic, foreign and London market companies in layers as follows:
Catastrophe Company Reinsurance
Loss Layer Retention Amount
----------------- ----------- -----------
first $ 10,000,000 $10,000,000 $ 0
next $ 90,000,000 $ 7,200,000 $ 82,800,000
next $100,000,000 $ 5,000,000 $ 95,000,000
In order to provide reinsurance coverage for the declining earthquake
exposure, the Company also purchased from National Indemnity Company
additional reinsurance in excess of the underlying $200 million. An
additional layer beginning at $400 million effective June 16, 1994 and
decreasing by $50 million each month through February 15, 1995 was purchased
for a total premium of approximately $21.8 million.
An extension of the additional coverage from National Indemnity Company
was purchased effective January 23, 1995 for a total premium of approximately
$7.8 million. This coverage begins at a limit of $200 million and decreases
in increments ranging from $25 million to $35 million on the 1st and the 16th
of each month beginning March 1, 1995 through May 1, 1995. The treaty expires
May 15, 1995.
The Company has a quota share treaty for its Personal Excess Liability
Policy business with Underwriters Reinsurance Company and others. Effective
January 1, 1993, the Company cedes 60% of its business; prior to 1993, 90% was
ceded under this treaty.
NOTE 9. LEASE COMMITMENTS
The Company leases office space in a building in Woodland Hills,
California. The lease was amended in October 1994, extending the lease term
until November 1999. The lease may be renewed for two consecutive 5 year
periods.
The Company also leases office space in several other locations
throughout Southern California, primarily for claims servicing.
<PAGE> 72
Minimum rental commitments under the above lease obligations are as
follows:
1995 $10,701,000
1996 10,684,000
1997 10,246,000
1998 8,824,000
1999 7,881,000
Thereafter 3,642,000
Rental expense charges to operations for the years ended December 31,
1994, 1993 and 1992 were $11,694,000, $11,259,000, and $10,572,000,
respectively.
NOTE 10. STOCKHOLDERS' EQUITY
Capital Stock:
On December 16, 1994, the Company received $216 million of equity
capital from American International Group, Inc. ("AIG") and in exchange,
issued (i) 200,000 shares of Series A 9% Convertible Preferred Stock, par
value $1.00 per share, at a price and liquidation value of $1,000 per share
and convertible into common shares at a conversion price of $11.33 per share,
and (ii) 16,000,000 Series A Warrants to purchase an aggregate 16,000,000
shares of the Company's Common Stock at $13.50 per share. The Company
received aggregate consideration of $200,000,000 for the shares of the
Preferred Stock and $16,000,000 for the Warrants. The Series A Preferred
Stock ranks senior to the Common Stock in respect to dividend and liquidation
rights. The Common Stock Warrants are generally exercisable from February
1998 to February 2007. See Note 14 of the Notes to Consolidated Financial
Statements for further discussion regarding the agreement between the Company
and AIG.
Retained Earnings:
The insurance subsidiaries have restrictions affecting the amount of
stockholder dividends which may be paid within any one year without the
approval of the California Department of Insurance. The California Insurance
Code provides that amounts may be paid as dividends from earned surplus on an
annual noncumulative basis of the greater of (1) net income for the preceding
year, or (2) 10 percent of statutory surplus as regards policyholders as of
the preceding December 31, without prior approval by the California Department
of Insurance. As both Insurance Subsidiaries had negative earned surplus at
December 31, 1994, no dividends may be paid to the Company during 1995 without
prior approval.
<PAGE> 73
Stockholder's equity of the Insurance Subsidiaries on a statutory
accounting basis at December 31, 1994 and 1993 was $207,018,000 and
$582,176,000, respectively. Statutory net income (loss) for the Insurance
Subsidiaries was $(657,331,000), $96,218,000 and $105,959,000 for the years
ended December 31, 1994, 1993, and 1992, respectively.
Restricted Shares Plan:
The plan provides for grants of common shares not to exceed 921,920
shares to be made to key employees as determined by the Key Employee Incentive
Committee of the Board of Directors. At December 31, 1994, 334,409 common
shares remain available for future grants. Upon issuance of grants of common
shares under the plan, unearned compensation equivalent to the market value on
the date of grant is charged to common stock and subsequently amortized in
equal monthly installments over the 5-year period of the grant. Amortization
of unearned compensation was $431,000, $320,000 and $255,000 in 1994, 1993 and
1992, respectively. At December 31, 1994 and 1993, unearned compensation, net
of amortization, was $1,153,000 and $915,000, respectively. The common shares
are restricted for 5 years retroactive to the first day of the year of grant.
Restrictions are removed on 20% of the shares of each employee on January 1 of
each of the 5 years following the year of grant. A summary of grants
outstanding under the plan from 1992 through 1994 is as follows:
COMMON MARKET PRICE PER
SHARES SHARE ON DATE OF GRANT
------ ----------------------
Outstanding, December 31, 1991 46,488
Granted in 1992 33,940 $20.63
Vested in 1992 25,478
Cancelled or forfeited -
-------
Outstanding, December 31, 1992 54,950
Granted in 1993 21,225 $28.13
Vested in 1993 19,460
Cancelled or forfeited -
-------
Outstanding, December 31, 1993 56,715
Granted in 1994 25,000 $27.38
Vested in 1994 18,543
Cancelled or forfeited -
-------
Outstanding, December 31, 1994 63,172
=======
<PAGE> 74
NOTE 11. LITIGATION
Lawsuits arising from claims under insurance contracts are provided for
through loss and loss adjustment expense reserves established on an ongoing
basis. From time to time, the Company has been named as a defendant in
lawsuits incident to its business. Some of these actions assert claims for
exemplary or punitive damages which are not insurable under California
judicial decisions. The Company vigorously defends these actions unless a
reasonable settlement appears appropriate. While any litigation has an
element of uncertainty, the Company is confident that the ultimate outcome of
pending actions will not have a material adverse effect on its consolidated
financial condition or results of operations.
NOTE 12. PROPOSITION 103
On January 27, 1995, the Company announced a settlement of rebate
liabilities associated with Proposition 103, which was passed by California
voters on November 8, 1988. The agreement applies to both Insurance
Subsidiaries, 20th Century Insurance Company and 21st Century Casualty
Company, and applies to those customers insured between November 8, 1988 and
November 7, 1989. At December 31, 1994, $78 million is recorded as a
liability.
Initially, the Company will refund $46 million to customers specified in
the agreement as soon as practicable, representing an average payment per
household of $80.00, approximately 7.5 percent of premiums paid between
November 8, 1988 and November 7, 1989. The remaining $32 million will be set
aside for additional customer refunds conditioned on the ultimate level of
claim costs associated with the 1994 Northridge Earthquake.
This settlement required the Company to withdraw its request for a
hearing with the United States Supreme Court to appeal the California Supreme
Court decision in the Proposition 103 test case "20th Century vs. Garamendi"
and abide by the terms of Commissioner Quackenbush's order. Upon announcement
of the settlement, a consumer group objected to the settlement terms, and
threatened legal action. The Company is advised by counsel, and believes that
any challenge to the settlement will be unsuccessful.
Another condition of this agreement required the Company to obtain new
capital of $50 million and contribute the funds to the surplus of the
Insurance Subsidiaries, consisting of $30 million by March 31, 1995 and
$20 million by Decem-
<PAGE> 75
ber 31, 1995. Available to the Company were are an additional $15 million un-
der the existing bank credit facility and up to $70 million in preferred stock
which could be issued to AIG. See Note 17 for further discussion.
NOTE 13. NORTHRIDGE EARTHQUAKE
The Northridge, California Earthquake, which occurred on January 17,
1994, significantly affected the operating results and the financial position
of the Company for 1994. The earthquake occurred in an area in which the
Company's homeowners and earthquake coverages were concentrated. Since the
event occurred, the Company and other members of the property and casualty
insurance industry have revised their estimates of claim costs and related
expenses several times. Because of the unusual nature of the ground motion
during the earthquake, the earthquake produced significant damage to
structures beyond normal expectations. Delayed discovery of the severity of
damages has caused claims to be reevaluated as the additional damage becomes
known and has made the estimation process extremely difficult. The Company
currently estimates total gross losses and allocated loss adjustment expenses
for this catastrophe to be $940 million. Unallocated loss adjustment expense,
FAIR plan assessments and other earthquake related expenses are estimated to
be an additional $20 million. The charge for the year against pre-tax
earnings, after reduction for $76.3 million of reinsurance, was $883.8
million.
Should the earthquake losses increase above $974 million, future
financial periods will be impacted and additional capital may be required.
NOTE 14. CAPITAL TRANSACTION
As a result of the earthquake losses discussed in Note 13, the Company
found it necessary to obtain additional capital to increase the combined
statutory surplus of the Insurance Subsidiaries.
On December 15, 1994, at a special shareholders meeting, a definitive
agreement entered into between the Company and American International Group,
Inc. ("AIG"), to provide $216 million of equity capital was approved. The
agreement provides for an investment and strategic alliance agreement which
provides for the issuance of, (i) 200,000 shares of the Company's Series A 9%
Convertible Preferred Stock (the "Preferred Stock"), par value $1.00 per
share, at a price and liquidation value of $1,000 per share convertible into
common shares at a conversion price of $11.33 per share, and (ii) 16,000,000
Series A Warrants (the "Warrants") to purchase an aggregate 16,000,000 shares
of the Company's Common Stock at $13.50 per share.
<PAGE> 76
The Company received aggregate consideration of $200,000,000 for the shares of
the Preferred Stock and $16,000,000 for the Warrants (collectively, the
"Investment Agreement").
The Investment Agreement also provides for a 10% quota share reinsurance
agreement applicable to the Company's entire book of business, thereby
improving the Company's ability to sustain growth.
In addition to AIG's capital investment and quota share agreement, the
Company and AIG are negotiating a strategic business alliance agreement for
joint ventures for the sale of automobile insurance outside California. This
alliance will enable the Company to expand its business into other geographic
areas.
Upon approval by the shareholders, AIG, as holders of the Preferred
Stock, voting separately as a class, elected two of the Company's eleven
directors. Holders of Common Stock were not entitled to vote in the election
of such two directors.
An amendment to the Company's Articles of Incorporation to increase the
number of authorized shares of Common Stock without par value from 80,000,000
to 110,000,000 shares was also approved by shareholders. This proposed
amendment was necessary in order to permit the full exercise of conversion
privileges under the Investment Agreement.
<PAGE> 77
NOTE 15. UNAUDITED QUARTERLY RESULTS
The summarized unaudited quarterly results of operations were as follows:
<TABLE>
QUARTER ENDED
-----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(Amounts in thousands, except per share data)
1994
----
<S> <C> <C> <C> <C>
Revenues $ 290,560 $ 333,481 $ 280,883 $ 275,348
Net income (loss) $(339,993) $ 4,880 $(114,254) $ (48,653)
Earnings (loss) per
common share $ (6.61) $ .09 $ (2.22) $ (.95)
1993
----
Revenues $ 263,101 $ 272,873 $ 281,339 $ 286,522
Net income $ 23,924 $ 34,824 $ 31,018 $ 22,789
Earnings per
common share $ .47 $ .67 $ .61 $ .44
</TABLE>
The fourth quarter 1993 net income was impacted by approximately $4.3
million in net losses and $2.6 million in assessments for the Company's share
of California Fair Plan losses as a result of the Southern California fires.
The net income for all four quarters of 1994 reflect the impact of the
January 17 Northridge Earthquake, which were as follows: first quarter,
$551.3 million; second quarter, $76.5 million; third quarter, $129.8 million;
and fourth quarter, $126.2 million. The second quarter 1994 net income
reflects approximately $50 million in realized capital gains from the sale of
investments. The third quarter 1994 net income reflects additional deferred
revenue of $43.6 million and interest expense of $28 million related to the
Proposition 103 order directing the Company to issue refunds totaling
approximately $78.3 million, plus interest at 10% per annum from May 8, 1989
to September 30, 1994. The fourth quarter 1994 net income reflects the
reversal of all Proposition 103 interest accrued of approximately $44 million
in accordance with a settlement with the California Department of Insurance.
<PAGE> 78
NOTE 16. RESULTS OF OPERATIONS BY LINE OF BUSINESS
The following table presents premium revenue and underwriting profit
(loss) for the Company's auto lines and homeowner and other lines on a GAAP
basis.
1994
----
Homeowner
(Amounts in thousands) Auto Lines and Other Lines
---------- ---------------
Direct premiums written $ 991,268 $ 87,395
========= ==========
Premiums earned $ 981,893 $ 52,110
========= ==========
Underwriting loss $ (45,854) $ (877,487)
========= ==========
1993
----
Homeowner
Auto Lines and Other Lines
---------- ---------------
Direct premiums written $ 932,497 $ 101,398
========= =========
Premiums earned $ 908,522 $ 81,190
========= =========
Underwriting profit (loss) $ 25,064 $ (11,598)
========= =========
1992
----
Homeowner
Auto Lines and Other Lines
---------- ---------------
Direct premiums written $ 841,610 $ 85,098
========= =========
Premiums earned $ 823,680 $ 72,673
========= =========
Underwriting profit $ 36,890 $ 1,714
========= =========
In 1994, both the Auto and Homeowner lines experienced an underwriting
loss due to the high level of claims incurred as a result of the January
17 Northridge Earthquake and the cost of the Proposition 103 rollback order.
In 1993, the Homeowners line experienced an underwriting loss primarily
as a result of first quarter weather-related losses of approximately $4.6
million, and the third quarter Southern California fires with related net
losses incurred of approximately $4.3 million and $2.6 million in assessments
for the Company's share of California Fair Plan losses. The underwriting
loss also included losses of approximately $1.0 million related to the 1991
Oakland, California fire.
In 1992, the Homeowners line experienced an underwriting profit despite
losses incurred of approximately $2.1 million related to the 1991 Oakland,
California fire.
<PAGE> 79
NOTE 17. SUBSEQUENT EVENT (unaudited)
On January 28, 1995, the California Department of Insurance, as part of
the Proposition 103 settlement, ordered the Company to contribute an
additional $50 million to the Insurance Subsidiaries' surplus, including $30
million by March 31, 1995. In March 1995, the Company received $20 million
from the issuance of preferred stock to AIG and $10 million from the existing
bank credit facility and contributed such funds to the Insurance Subsidiaries'
surplus.
<PAGE> 80
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the Company's independent auditors on
any matters of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, or any reportable events.
PART III
--------
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Information in response to Item 10 is incorporated by reference from the
Company's definitive proxy statement used in connection with the Company's
1995 Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to Item 11 is incorporated by reference from the
Company's definitive proxy statement used in connection with the Company's
1995 Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to Item 12 is incorporated by reference from the
Company's definitive proxy statement used in connection with the Company's
1995 Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to Item 13 is incorporated by reference from the
Company's definitive proxy statement used in connection with the Company's
1995 Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
<PAGE> 81
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED WITH THIS REPORT
(1) FINANCIAL STATEMENTS. PAGE
----
The following consolidated financial statements of the Company
are filed as part of this report:
(i) Report of independent accountants;...................... 49
(ii) Consolidated balance sheets-December 31, 1994 and 1993;. 50
(iii) Consolidated statements of operations--Years ended
December 31, 1994, 1993 and 1992;....................... 52
(iv) Consolidated statement of changes in stockholders'equity--
Years ended December 31, 1994, 1993 and 1992;........... 53
(v) Consolidated statements of cash flows--Years ended
December 31, 1994, 1993 and 1992;....................... 54
(vi) Notes to consolidated financial statements.............. 56
(2) SCHEDULES
The following financial statement schedule required to be filed
by Item 8 and by paragraph (d) of Item 14 of Form 10-K is
submitted as a separate section of this report.
Schedule II - Condensed Financial Information of Registrant..... 85
Schedules I, III, IV, and VI have been omitted as all required data
is included in the Notes to Consolidated Financial Statements.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
<PAGE> 82
(3) EXHIBITS REQUIRED.
The following exhibits required by Item 601 of Regulation S-K and
by paragraph (c) of Item 14 of Form 10-K are listed by number
corresponding to the Exhibit Table of Item 601 of Regulation S-K.
3 Articles of Incorporation as amended and By-Laws, amended,
for the fiscal year ended December 31, 1994 of the Company.
4 A Specimen Common Stock Certificate is incorporated herein
by reference from the Registrant's Form 10-K for the fiscal
year ended December 31, 1985, in which it was included as an
exhibit.
10 The contracts listed below as 10(a) and 10(b) are
incorporated herein by reference from the Registrant's Form
10-K for the fiscal year ended December 31, 1985, and 10(c)
through 10(g) are amended or added for the fiscal year ended
December 31, 1987, 10(h) and 10(i) are for the fiscal year
ended December 31, 1988, 10(j) and 10(k) are for the fiscal
year ended December 31, 1989, 10(l) is amended for the
fiscal year ended December 31, 1990, 10(m) is amended for
the fiscal year ended December 31, 1994, 10(n) is amended
for the fiscal year ended December 31, 1995, 10(o) and 10(p)
are incorporated herein by reference from the Registrant's
Form 8-K dated October 5, 1994, 10(q) is for the fiscal year
ended December 31, 1995, 10(r) through 10(t) are
incorporated herein by reference from the Registrant's
Form 10-Q dated November 13, 1994, and 10(u) through 10(w)
are for the fiscal year ended December 31, 1995.
10(a) First Amended Employment Agreement and
Retirement Agreement between the Company and
Louis W. Foster.
10(b) Life Insurance Agreement for key officers.
10(c) 20th Century Industries Restricted Shares Plan,
as amended.
10(d) Restricted Shares Agreement.
10(e) Split Dollar Insurance Agreement between the
Company and Stanley M. Burke, as trustee of the
1983 Foster Insurance Trust.
10(f) Property Reinsurance Agreement No. 7288 between
the Company and General Reinsurance Corporation.
10(g) Note payable with Bank of America.
10(h) 20th Century Industries supplemental executive
retirement plan, as amended.
<PAGE> 83
10(i) Amendment and restatement of 20th Century
Industries pension plan.
10(j) Software system agreement between the Company
and Management Science America, Inc.
10(k) Employment contract for a key officer.
10(l) 20th Century Industries Savings and Security
Plan, as amended.
10(m) Property Catastrophe Reinsurance Agreement No.
P3341-1 and 2 between the Company and Guy
Carpenter and Company, Inc., a reinsurance
intermediary, as amended.
10(n) PELP Reinsurance Contract, as amended.
10(o) Letter of intent between the Company and
American International Group, Inc.
10(p) Stock Option Agreement between the Company and
American International Group, Inc.
10(q) Property Catastrophe Excess of Loss Reinsurance
Agreement between 20th Century Insurance Company
and/or 21st Century Casualty Company and
National Indemnity Company.
10(r) Credit Agreement between the Company, Union Bank
and The First National Bank of Chicago.
10(s) Investment and Strategic Alliance Agreement
between the Company and American International
Group, Inc.
10(t) Amendment and Waiver between the Company, Union
Bank and The First National Bank of Chicago.
10(u) Amendment No. 2 and Waiver between the Company,
Union Bank and The First National Bank of
Chicago.
10(v) Amendment No. 1 to Investment and Strategic
Alliance Agreement between the Company and
American Internal Group, Inc.
10(w) Quota Share Reinsurance Agreement between 20th
Century Insurance Company and New Hampshire
Insurance Company and 21st Century Casualty
Company and New Hampshire Insurance Company.
22 Subsidiaries of Registrant.
29 Information from reports furnished to state
insurance regulatory authorities.
29(a) 20th Century Insurance Company
29(b) 21st Century Casualty Company
These documents are incorporated herein by reference to the
paper document filed by March 31, 1995 pursuant to a contin-
uing hardship exemption granted under Rule 202 of Regulation
S-T
<PAGE> 84
(b) REPORTS ON FORM 8-K.
The Registrant filed two Form 8-K's during the three months ended
December 31, 1994 as follows:
1. October 5, 1994 The Company filed with the Commission
copies of the executed letter of intent,
with exhibits, and the executed Stock
Option Agreement, dated September 26, 1994
by and between the Company and American
International Group, Inc.
2. December 22, 1994 A. The Company expects earthquake
claims to total $900 million, up $85
million from a previous estimate.
The Company will have access to
additional capital through American
International Group, Inc. under the
terms of an investment plan
currently pending Shareholder
approval.
B. The Company appointed John B.
DeNault, formerly Vice Chairman of
the Board, as Chairman of the
Company's Board of Directors,
succeeding company founder, Louis W.
Foster, who is now Chairman of the
Board, Emeritus. In addition, Rex
J. Bates was named Vice Chairman of
the Board.
C. The Company closed the
capitalization and joint venture
plan with American International
Group, Inc. Under the plan, AIG
invested $216 million of equity
capital in the Company in return for
convertible preferred stock and
warrants.
<PAGE> 85
<TABLE>
SCHEDULE II
20TH CENTURY INDUSTRIES (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
ASSETS
DECEMBER 31,
------------------------------
1994 1993
---- ----
(Amounts in thousands, except share data)
<S> <C> <C>
Cash $ 31,283 $ 123
Accrued interest income 499 -
Other current assets 1,701 1,022
Accounts receivable from subsidiaries 4,050 -
Investment in non-consolidated insurance
subsidiaries at equity 442,871 694,555
Equipment, at cost, less accumulated
depreciation - 1994 $1,078; 1993 $807 1,568 1,825
Other assets 17,323 4,616
-------- --------
$499,295 $702,141
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable to subsidiaries $ 3,705 $ 33,159
Accounts payable and accrued expenses 17,646 13,773
Bank loan payable 160,000 -
-------- --------
Total liabilities 181,351 46,932
-------- --------
Stockholders' equity:
Capital Stock
Preferred stock, par value $1.00 per share;
authorized 500,000 shares, none issued
Series A convertible preferred stock,
stated value $1,000 per share, authorized
376,126 shares, outstanding 200,000 in
1994 200,000 -
Common stock, without par value; author-
ized 110,000,000 shares, outstanding
51,472,471 in 1994 and 51,447,471 in
1993 69,340 68,848
Common stock warrants 16,000 -
Retained earnings 32,604 586,361
-------- --------
Total stockholders' equity 317,944 655,209
-------- --------
$499,295 $702,141
======== ========
See note to condensed financial statements.
</TABLE>
<PAGE> 86
<TABLE>
SCHEDULE II
20TH CENTURY INDUSTRIES (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------------
1994 1993 1992
---- ---- ----
(Amounts in thousands, except per share data)
REVENUES
<S> <C> <C> <C>
Interest $ 1,139 $ 2 $ -
Commissions 1 1 2
--------- -------- --------
Total 1,140 3 2
EXPENSES
General and administrative 9,034 645 466
--------- -------- --------
Loss before income tax refund (7,894) (642) (464)
Refund of income taxes (2,763) (225) (51)
--------- -------- --------
Net loss before equity in net
income of insurance subsidiaries (5,131) (417) (413)
Net income (loss) of non-consolidated
insurance subsidiaries (492,889) 112,972 117,880
--------- -------- --------
NET INCOME (LOSS) $(498,020) $112,555 $117,467
========= ======== ========
Earnings (loss) per common share $ (9.69) $ 2.19 $ 2.29
========= ======== ========
See note to condensed financial statements.
</TABLE>
<PAGE> 87
<TABLE>
SCHEDULE II
20TH CENTURY INDUSTRIES (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------
1994 1993 1992
---- ---- ----
(Amounts in thousands)
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Income (loss) $(498,020) $112,555 $ 117,467
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Net (income) loss of non-consolidated
insurance subsidiaries 492,889 (112,972) (117,880)
Reimbursement of depreciation and
amortization by non-consolidated
subsidiaries 550 586 595
Loss on sale of fixed assets 42 138 186
Effects of common stock issued
under restricted shares plan 492 417 371
Dividends received from non-consolidated
insurance subsidiaries 16,471 33,120 26,741
Increase (decrease) in deferred
compensation benefits (502) 3,114 96
Change in other assets, other
liabilities, and accrued
income taxes (42,504) 14,171 14,941
--------- -------- ---------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES $ (30,582) $ 51,129 $ 42,517
See note to condensed financial statements.
</TABLE>
<PAGE> 88
<TABLE>
SCHEDULE II
20TH CENTURY INDUSTRIES (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(Continued)
Years Ended December 31,
--------------------------------------------
1994 1993 1992
---- ---- ----
(Amounts in thousands)
INVESTING ACTIVITIES:
<S> <C> <C> <C>
Capital contributed to 21st Century
Casualty Company $ (40,841) $(17,500) $(15,000)
Capital contributed to 20th Century
Insurance Company (256,612) - -
Purchase of equipment (478) (946) (1,006)
Proceeds from sale of equipment 144 291 264
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (297,787) (18,155) (15,742)
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 200,000 - -
Proceeds from issuance of stock warrants 16,000 - -
Proceeds from bank loan 160,000 - -
Dividends paid (16,471) (32,926) (26,741)
--------- -------- --------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 359,529 (32,926) (26,741)
--------- -------- --------
Net increase in cash 31,160 48 34
Cash, beginning of year 123 75 41
--------- -------- --------
Cash, end of year $ 31,283 $ 123 $ 75
========= ======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest was $7,277,000, $-0- and $-0- for the years ended December
31, 1994, 1993 and 1992, respectively.
See note to condensed financial statements.
</TABLE>
<PAGE> 89
SCHEDULE II
20TH CENTURY INDUSTRIES (PARENT COMPANY)
NOTE TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
20th Century Industries and Subsidiaries.
<PAGE> 90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
(Registrant)
Date: March 28, 1995 By:
-------------- ----------------------------------
William L. Mellick
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated on the 28th of
March, 1995.
SIGNATURE TITLE
--------- -----
Chief Executive Officer
------------------------------ (Principal Executive Officer)
William L. Mellick
Vice President,
Chief Financial Officer and
Chief Actuary (Principal
------------------------------ Financial Officer)
Charles I. Petit
Treasurer and Assistant Secretary
------------------------------ (Principal Accounting Officer)
Margaret Chang
<PAGE> 91
SIGNATURE TITLE
--------- -----
----------------------------- Chairman of the Board
John B. DeNault
------------------------------ Vice Chairman of the Board
Rex J. Bates
------------------------------ Director
Neil H. Ashley
----------------------------- Director
Stanley M. Burke
------------------------------ Director
John B. DeNault III
------------------------------ Director
Louis W. Foster
------------------------------ Director
R. Scott Foster, M.D.
<PAGE> 92
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION OF
20TH CENTURY INDUSTRIES
Neil H. Ashley and John R. Bollington certify that:
1. They are the Chief Executive Officer and Secretary,
respectively, of 20th Century Industries, a California corporation.
2. Article IV of the Articles of Incorporation is hereby
amended to read in full as follows:
IV
This corporation is authorized to issue two classes
of shares to be designated respectively "Preferred Shares" and
"Common Shares"; the total number of shares which this
corporation has authority to issue is 110,500,000 and the
aggregate par value of all shares that are to have a par value
shall be $500,000; the number of Preferred Shares that are to
have a par value shall be 500,000 and the par value of each share
of such class shall be $1 and the number of Common Shares without
par value shall be 110,000,000. The Preferred Shares may be
issued from time to time in one or more series. The board of
directors is hereby authorized to fix or alter the dividend
rights, dividend rate, conversion rights, voting rights, rights
and terms of redemption (including sinking fund provisions), the
redemption price or prices and the liquidation preferences of any
wholly unissued series of Preferred Shares, and the number of
shares constituting any such series and the designation thereof,
or any of them; and to increase or decrease the number of shares
of any series subsequent to the issue of shares of that series,
but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be
so decreased, the shares constituting such decrease shall resume
the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
3. Articles V, VI, VII and VIII of the Articles of
Incorporation are hereby renumbered as Articles VI, VII, VIII and IX,
respectively.
4. A new Article V is hereby added to the Articles of
Incorporation, which shall read in full as follows:
V
A. Prohibited Transfer; Excess Stock. Except
as provided in Section G, until the Restriction Termination Date,
any attempted direct or indirect Transfer of Stock shall be
deemed a "Prohibited Transfer" if (i) such Transfer would
increase the Percentage of Stock Owned by any Person that (or
<PAGE> 93
by any Person whose Stock is or by virtue of such Transfer would
be attributed to any Person that), either after giving effect to
the attribution rules (including the option attribution rules) of
Section 382 or without regard to such attribution rules, Owns, by
virtue of such Transfer would Own, or has at any time since the
period beginning three years prior to the date of such Transfer
Owned, Stock in excess of the Limit, (ii) such Transfer would
increase the Percentage of Stock Owned by any 5% Shareholder
(including but not limited to a Transfer that results in the
creation of a 5% Shareholder), or (iii) such Transfer would cause
an "ownership change" of the corporation within the meaning of
Section 382. Except as otherwise provided in Sections D and F,
the Stock or Option sought to be Transferred in the Prohibited
Transfer shall be deemed "Excess Stock."
B. Transfer of Excess Stock to Trustee.
Except as otherwise provided in Sections D and F, a Prohibited
Transfer shall be void ab initio as to the Purported Transferee
in the Prohibited Transfer and such Purported Transferee shall
not be recognized as the owner of the Excess Stock for any
purpose and shall not be entitled to any rights as a stockholder
of the corporation arising from the ownership of Excess Stock,
including, but not limited to, the right to vote such Excess
Stock or to receive dividends or other distributions in respect
thereof or, in the case of Options, to receive Stock in respect
of their exercise. Any Excess Stock shall automatically be
transferred to the Trustee in trust for the benefit of the
Charitable Beneficiary, effective as of the close of business on
the business day prior to the date of the Prohibited Transfer;
provided, however, that if the transfer to the trust is deemed
ineffective for any reason, such Excess Stock shall nevertheless
be deemed to have been automatically transferred to the person
selected as the Trustee at such time, and such person shall have
rights consistent with those of the Trustee as described in this
section and in Section C below. Any dividend or other
distribution with respect to such Excess Stock paid prior to the
discovery by the corporation that the Excess Stock has been
transferred to the Trustee ("Prohibited Distributions") shall be
deemed to be held by the Purported Transferee as agent for the
Trustee, and shall be paid to the Trustee upon demand, and any
dividend or distribution declared but unpaid shall be paid when
due to the Trustee. Any vote cast by a Purported Transferee with
respect to Excess Stock prior to the discovery by the corporation
that the Excess Stock has been transferred to the Trustee will be
rescinded as void and shall be recast in accordance with the
desires of the Trustee acting for the sole benefit of the
Charitable Beneficiary. The Purported Transferee and any other
Person holding certificates representing Excess Stock shall
immediately surrender such certificates to the Trustee. The
Trustee shall have all the rights of the owner of the Excess
Stock, including the right to vote, to receive dividends or other
distributions, and to receive proceeds from liquidation, which
rights shall be exercised for the sole benefit of the Charitable
Beneficiary.
<PAGE> 94
C. Disposition of Excess Stock. As soon as
practicable following receipt of notice from the corporation that
Excess Stock has been transferred to the Trustee, the Trustee
shall take such actions as it deems necessary to dispose of the
Excess Stock in an arm's-length transaction that would not
constitute a Prohibited Transfer. Upon the disposition of such
Excess Stock, (i) the interest of the Charitable Beneficiary in
the Excess Stock shall terminate, and (ii) the Trustee shall
distribute the net proceeds of the sale as follows: (a) the
Purported Transferee shall receive an amount of the net proceeds
of such sale not to exceed the Purported Transferee's cost
incurred to acquire such Excess Stock, or, if such Excess Stock
was Transferred for less than fair market value, the fair market
value of the Excess Stock on the date of the Prohibited Transfer,
in each case less all costs incurred by the corporation, the
Trustee and the Transfer Agent in enforcing the Restrictions, and
(b) the Charitable Beneficiary shall receive the balance of the
net proceeds from the sale of the Excess Stock, if any, together
with any Prohibited Distributions received from the Purported
Transferee and any other distributions with respect to such
Excess Stock while such Stock was held by the Trustee. In the
event the Purported Transferee has disposed of the Excess Stock
and distributed the proceeds and other amounts otherwise than in
accordance with this section, then (w) such Purported Transferee
shall be deemed to have disposed of such Excess Stock as an agent
for the Trustee, (x) such Purported Transferee shall be deemed to
hold such proceeds and any Prohibited Distributions as an agent
for the Trustee, (y) such Purported Transferee shall be required
to return to the Trustee the proceeds from such sale, together
with any Prohibited Distributions theretofore received by the
Purported Transferee with respect to such Excess Stock, provided
that upon receipt of written permission from the Trustee, the
Purported Transferee will be entitled to retain an amount of such
sale proceeds not to exceed the amount that such Purported
Transferee would have received from the Trustee if the Trustee
had obtained and resold the Excess Stock at any time during the
period beginning on the date of the Prohibited Transfer giving
rise to such Excess Stock and ending on the date of such
disposition by the Purported Transferee, assuming for this
purpose that the Trustee would have sold the Excess Stock for an
amount equal to the lowest-quoted trading price of such Excess
Stock during such period, and (z) the Trustee shall transfer any
remaining proceeds to the Charitable Beneficiary. Neither the
Trustee, the corporation, the Purported Transferee nor any other
party shall claim an income tax deduction with respect to any
transfer to the Charitable Beneficiary and neither the Trustee
nor the corporation shall benefit in any way from the enforcement
of the Restrictions, except insofar as these restrictions protect
the corporation's Income Tax Net Operating Loss Carryover.
Neither the Trustee, the corporation nor the Transfer Agent shall
have any liability to any Person for any loss arising from or
related to a Prohibited Transfer.
D. Transfers by 5% Shareholders. In the event
a Prohibited Transfer is attributable to a Transfer by a 5%
Shareholder, the corporation and
<PAGE> 95
the Transfer Agent shall make all reasonable efforts to locate
the Person or Public Group who acquired the Excess Stock (the
"Public Purchaser"). In the event the corporation is able to
locate the Public Purchaser within ninety (90) days of the
Prohibited Transfer, the corporation shall request that the
Public Purchaser surrender the Excess Stock, together with any
dividends or other distributions theretofore received with
respect to the Excess Stock by the Public Purchaser, to the
Purported Transferor, and, if such Stock is surrendered, the
Purported Transferor shall surrender to the Public Purchaser the
purchase price paid by the Public Purchaser for the Excess Stock,
plus, if the Public Purchaser acquired Ownership of the Excess
Stock without knowledge that such acquisition was a Prohibited
Transfer, an amount equal to all other losses, damages, costs and
expenses incurred by the Public Purchaser to acquire Ownership of
the Excess Stock and to comply with the Restrictions (including
any loss incurred as a result of a decline in value of such
Stock). In the event the Transfer Agent and the corporation are
unable to locate the Public Purchaser within ninety (90) days
following the Prohibited Transfer, or the Public Purchaser
refuses to surrender or has disposed of the Excess Stock prior to
the surrender of the Excess Stock to the Purported Transferor,
such Stock shall no longer be treated as Excess Stock and the
corporation shall (i) purchase from one or more third parties, in
one or more transactions that would, to the extent possible,
reduce the Ownership of Stock by the Person or Public Group whose
Ownership increased as a result of the Prohibited Transfer to an
amount equal to such Ownership immediately prior to the
Prohibited Transfer, shares of Stock equal in type and number to
the Stock Transferred in the Prohibited Transfer (which Stock
shall be treated as Excess Stock), (ii) hold such Stock for and
on behalf of the Purported Transferor, (iii) treat such Stock as
Owned by the Purported Transferor since the date of the
Prohibited Transfer for all purposes, including the right to vote
and to receive dividends and other distributions, and (iv) for
all purposes treat any dividends and other distributions made to
such Person or Public Group as a dividend or other distribution
to the Purported Transferor, a payment by the Purported
Transferor to the corporation to be applied against the Amount
Due (as defined below), and a non-dividend payment to the Persons
or Public Group who received such distributions. To the extent
reasonably possible, any votes cast by such Person or Public
Group from and after the date of the Prohibited Transfer with
respect to Excess Stock shall be rescinded in the same proportion
as the votes actually cast by such Person or Public Group, and
the Purported Transferor shall be entitled to cast those votes
that were rescinded. The corporation shall hold such Excess
Stock, and any dividends or other distributions thereon, on
behalf of the Purported Transferor, as security for payment of
the Amount Due, until the earlier of such time as (y) the
corporation has received, either directly from the Purported
Transferor or indirectly from any dividends or other
distributions theretofore received by the corporation with
respect to such Excess Stock on behalf of the Purported
Transferor (or any amounts deemed paid by the Purported
Transferor as provided in this Section D), or any combination
thereof, an amount equal to the amount incurred by the
corporation to fund the purchase such Excess
<PAGE> 96
Stock, plus all costs incurred by the corporation in enforcing
the Restrictions with respect to such Prohibited Transfer
(including the amount of any non-dividend payment deemed made by
the corporation to the Person or Public Group as provided in this
Section D), plus interest on all such amounts from the dates
incurred by the corporation at the "applicable federal rate"
determined under Section 1274(d) of the Code (collectively, the
"Amount Due") (it being the intent to treat the Amount Due and
any portion thereof as a loan to the Purported Transferor), or
(z) the corporation is able to dispose of such Excess Stock on
behalf of the Purported Transferor in a transaction that would
not be a Prohibited Transfer, in which case the corporation will
sell such Excess Stock and distribute to the Purported Transferor
any proceeds (together with any other cash distributions
theretofore received (or deemed received) with respect to the
Excess Stock) in excess of the Amount Due. The obligation of the
Purported Transferor for the Amount Due shall be payable on
demand by the corporation. In the event the Amount Due exceeds
the proceeds from a sale of Excess Stock and any cash
distributions theretofore received (or deemed received) by the
corporation on behalf of the Purported Transferor with respect to
such Excess Stock, the balance shall be due from the Purported
Transferor on demand.
E. Trans fer Ag ent's Right s and
Responsibilities. The Transfer Agent shall not register any
Transfer of Stock on the corporation's stock transfer records if
it has knowledge that such Transfer is a Prohibited Transfer. The
Transfer Agent shall have the right, prior and as a condition to
registering any Transfer of Stock on the corporation's stock
transfer records, to request any transferee of the Stock to
submit an affidavit, on a form agreed to by the Transfer Agent
and the corporation, stating the number of shares of each class
of Stock Owned by the transferee (and by Persons who would Own
the transferee's Stock) before the proposed Transfer and that
would, if effect were given to the proposed Transfer, be Owned by
the transferee (and by Persons who would Own the prospective
transferee's Stock) after the proposed Transfer. If either (i)
the Transfer Agent does not receive such affidavit, or (ii) such
affidavit evidences that the Transfer was a Prohibited Transfer,
the Transfer Agent shall notify the corporation and shall not
enter the Prohibited Transfer into the corporation's stock
transfer records, and the Trustee, the corporation and the
Transfer Agent shall take such steps as provided in the
Restrictions in order to dispose of the Excess Stock purportedly
Owned by such Purported Transferee. If the Transfer Agent, for
whatever reason, enters a Prohibited Transfer in the
corporation's stock transfer records, such Transfer shall be
nonetheless void and shall have no force and effect, in
accordance with the Restrictions, and the corporation's stock
transfer records shall be revised to so provide.
F. Certain Indirect Prohibited Transfers. In
the event a Transfer would be a Prohibited Transfer as a result
of attribution to the Purported Transferee of the Ownership of
Stock by a Person (an "Other Person") who is not controlling,
controlled by or under common control with the Purported
<PAGE> 97
Transferee, which Ownership is nevertheless attributed to the
Purported Transferee, the Restrictions shall not apply in a
manner that would invalidate any Transfer to such Other Person,
and the Purported Transferee and any Persons controlling,
controlled by or under common control with the Purported
Transferee (collectively, the "Purported Transferee Group") shall
automatically be deemed to have transferred to the Trustee at the
time and in a manner consistent with Section B hereof, sufficient
Stock (which Stock shall (i) consist only of Stock held legally
or beneficially, whether directly or indirectly, by any member of
the Purported Transferee Group, but not Stock held through any
Other Person, other than shares held through a Person acting as
agent or fiduciary for any member of the Purported Transferee
Group, (ii) be deemed transferred to the Trustee, in the inverse
order in which it was acquired by members of the Purported
Transferee Group, and (iii) be treated as Excess Stock) to cause
the Purported Transferee, following such transfer to the Trustee,
not to be in violation of the Restrictions; provided, however,
that to the extent the foregoing provisions of this Section F
would not be effective to prevent a Prohibited Transfer, the
Restrictions shall apply to such other Stock Owned by the
Purported Transferee (including Stock actually owned by Other
Persons), in a manner designed to minimize the amount of Stock
subject to the Restrictions or as otherwise determined by the
Board of Directors to be necessary to prevent a Prohibited
Transfer (which Stock shall be treated as Excess Stock).
G. Exceptions. The term "Prohibited Transfer"
shall not include: (i) the original issuance of Series A
Convertible Preferred Stock pursuant to the Investment Agreement,
(ii) the original issuance of Series A Warrants pursuant to the
Investment Agreement, (iii) the conversion of Series A
Convertible Preferred Stock, (iv) the sale of Series A
Convertible Preferred Stock or Common Shares acquired upon the
conversion thereof if the sale would not be a Prohibited Transfer
but for the transferor's ownership of Stock, in either case in
compliance with the Investment Agreement, (v) any purchase of
Stock permitted by Section 6.1(b) of the Investment Agreement,
(vi) any sale of any securities of the corporation acquired
pursuant to the Investment Agreement after the Restriction
Effective Date if such acquisition was not prohibited pursuant to
the terms of the Investment Agreement, (vii) any Transfer
described in Section 382(l)(3)(B) of the Code (relating to
transfers upon death or divorce and certain gifts) if all Persons
who would Own the Stock Transferred would be treated for purposes
of Section 382 as having Owned such Stock at all times beginning
more than three (3) years prior to the date of the Transfer,
(viii) any sale of Common Stock by a Person who Owns more than
4.75% of the outstanding Common Stock on November 15, 1994 if
such sale would not result in a net increase in the amount of
Stock owned by 5% Shareholders during the three-year period
ending on the date of such sale, provided such sale would not
otherwise be prohibited under the Restrictions but for such
transferor's Ownership of Stock, and (ix) any Transfer with
respect to which the Person who would otherwise be the Purported
Transferee obtains or is granted the prior
<PAGE> 98
written approval of the Board of Directors of the corporation,
which approval shall be granted in its sole and absolute
discretion after considering all facts and circumstances,
including but not limited to future events the occurrence of
which are deemed by the Board of Directors of the corporation to
be reasonably possible.
H. Legend. All certificates or other
instruments evidencing Ownership of Stock shall bear a
conspicuous legend describing the restrictions. The Board of
Directors shall take such actions as it deems necessary to
substitute certificates evidencing ownership of Stock and bearing
such legend for certificates not bearing such legend.
I. Prompt Enforcement; Further Actions. As
soon as practicable and within thirty (30) business days of
learning of a purported Prohibited Transfer, the corporation
through its Secretary or any assistant Secretary shall demand
that the Purported Transferee (or any other member of the
Purported Transferee Group) or Public Purchaser surrender to the
Trustee the certificates representing the Excess Stock or any
resale proceeds therefrom, and any Prohibited Distributions or
other dividends or distributions received thereon, and if such
surrender is not made within twenty (20) business days from the
date of such demand, the corporation shall institute legal
proceedings to compel such surrender and for compensatory damages
on account of any failure to take such actions; provided,
however, that nothing in this Section I shall preclude the
corporation in its discretion from immediately bringing legal
proceedings without a prior demand, and also provided that
failure of the corporation to act within the time periods set out
in this section shall not constitute a waiver of any right of the
corporation to compel any transfer required hereby. Upon a
determination by the Board of Directors that there has been or is
threatened a Prohibited Transfer, the Board of Directors may
authorize such additional action as it deems advisable to give
effect to the Restrictions, including, without limitation,
refusing to give effect on the books of the Company to any such
purported Prohibited Transfer or instituting proceedings to
enjoin any such purported Prohibited Transfer. Nothing contained
in the Restrictions shall limit the authority of the Board of
Directors to take such other action to the extent permitted by
law as it deems necessary or advisable to protect the corporation
and the interests of the holders of its securities in preserving
the Income Tax Net Operating Loss Carryover, including, but not
limited to, refusing to give effect to any Prohibited Transfer or
other action on the books of the corporation or instituting
proceedings to enjoin any Prohibited Transfer or other action;
provided, however, that any Prohibited Transfer shall
nevertheless result in the consequences otherwise described in
the Restrictions.
J. Board Authority to Interpret. The Board of
Directors shall have the authority to interpret the provisions of
the Restrictions for the purpose of protecting the Income Tax Net
Operating Loss Carryover. Any such
<PAGE> 99
interpretation shall be final and binding on any Person or Public
Group who Owns or purports to acquire Ownership of Stock.
K. Damages. Any person who knowingly violates
the Restrictions, and any persons controlling, controlled by or
under common control with such a person, shall be jointly and
severally liable to the corporation for, and shall indemnify and
hold the corporation harmless against, any and all damages
suffered as a result of such violation, including but not limited
to damages resulting from a reduction in or elimination of the
corporation's ability to utilize its Income Tax Net Operating
Loss Carryover, and attorneys' and accountants' fees incurred in
connection with such violation.
L. Severability. If any part of the
Restrictions is judicially determined to be invalid or otherwise
unenforceable, such invalidity or unenforceability shall not
affect the remainder of the Restrictions, which shall be
thereafter interpreted as if the invalid or unenforceable part
were not contained herein, and, to the maximum extent possible,
in a manner consistent with preserving the ability of the
corporation to utilize to the greatest extent possible the Income
Tax Net Operating Loss Carryover.
M. Effect on Stock Exchange Transactions.
Nothing in the Restrictions shall preclude the settlement of a
transaction entered into through the facilities of the New York
Stock Exchange. The Stock that is the subject of such transaction
shall continue to be subject to the terms of the Restrictions
after such settlement.
N. Definitions:
"AIG" shall mean American International
Group, Inc., a Delaware corporation, and its subsidiaries,
collectively.
"Charitable Beneficiary" shall mean an
organization described in Sections 170(b)(1)(A), 170(c)(2) and
501(c)(3) of the Code designated in writing by the corporation.
"Code" shall mean the Internal Revenue Code
of 1986, as amended and as it may be amended from time to time
hereafter.
"Control" shall mean the possession, direct
or indirect, of the power to direct or cause the direction of the
management, policies or decisions of a Person, whether through
the ownership of voting securities, by contract, family
relationship or otherwise. The terms "controlling," "controlled
by" and "under common control with" shall have correlative
meanings. A Person shall be deemed to control or be under common
control with a Purported Transferee if the Excess Stock Owned by
such Person is treated as Owned by the
<PAGE> 100
Purported Transferee by virtue of the family attribution rules of
Section 318 of the Code.
"5% Shareholder" shall mean any Person or
Public Group who is a "5-percent shareholder" of the corporation
within the meaning of Section 382, substituting "4.75 percent"
for "5 percent" each place it appears therein.
"Income Tax Net Operating Loss Carryover"
shall mean the net operating loss, capital loss, net unrealized
built-in loss, general business credit, alternative minimum tax
credit, foreign tax credit and any other carryovers or losses as
determined for United States federal income tax purposes that are
or could become subject to limitation under Section 382, and to
which the corporation is entitled under the Code and Regulations,
at any time during which the Restrictions are in force.
"Investment Agreement" shall mean that
Investment and Strategic Alliance Agreement between the
corporation and AIG, dated as of October 17, 1994, including the
Exhibits and Schedules thereto, as it may be amended from time to
time.
"Limit" shall mean the lesser of (i) 4.75
Percent of the Stock, (ii) 4.75 percent of the outstanding Common
Shares or (iii) 4.75 percent of the outstanding Series A
Convertible Preferred Stock.
"Option" shall mean any interest that could
give rise to the Ownership of Stock and that is an option,
contract, warrant, convertible instrument, put, call, stock
subject to a risk of forfeiture, pledge of stock or any interest
that is similar to any of such interests or any other interest
that would be treated, under paragraph (d)(9) of Treasury
Regulation Section 1.382-4, in the same manner as an option,
whether or not any of such interests is subject to contingencies.
"Own," and all derivations of the word
"Own," shall mean any direct or indirect, actual or beneficial
interest, including, except as otherwise provided, a constructive
ownership interest under the attribution rules (including the
option attribution rules) of Section 382. In determining whether
a Person Owns an amount of Stock in excess of the Limit, Options
Owned by such Person (or other Persons whose Ownership of Stock
is or would be attributable under Section 382 to such Person)
shall be treated as exercised (and the Stock that would be
acquired by such exercise as outstanding) and Options Owned by
other Persons shall be treated as not exercised (and the Stock
that would be acquired if such Options Owned by other Persons
were exercised shall be treated as not outstanding), in each case
without regard to whether such treatment would result in an
ownership change within the meaning of Section 382. In
determining whether a Transfer that is an exercise, conversion or
similar transaction with respect to an Option increases the
Percentage Ownership of Stock of any Person
<PAGE> 101
or Public Group, such Option shall be treated as if it were not
Owned by such Person immediately prior to such Transfer.
"Percent," "Percentage" or "%" shall mean
percent or percentage by value.
"Person" shall mean any individual (other
than a Public Group treated as an individual under Section 382)
or any "entity" as that term is defined in Regulations Section
1.382-3(a).
"Public Group" shall have the meaning
assigned to such term in the applicable Regulations under Section
382. Any Transfer or attempted Transfer of Stock to or from an
individual or entity whose Stock is included in determining the
Percentage of Stock Owned by a Public Group for purposes of
Section 382 shall be treated as a Transfer or attempted Transfer
to such Public Group.
"Purported Transferee" shall mean a Person
or Public Group who acquires Ownership of Excess Stock in a
Prohibited Transfer or, except as otherwise provided in the
Restrictions, any subsequent transferee of such Excess Stock.
"Purported Transferor" shall mean a Person
who Transfers Excess Stock in a Prohibited Transfer.
"Regulations" shall mean Treasury
Regulations, including proposed or temporary regulations,
promulgated under the Code, as the same may be amended from time
to time. References herein to specific provisions of temporary
Regulations shall include the analogous provisions of final
Regulations or other successor Regulations.
"Restriction Effective Date" shall mean the
date of the closing of the purchase of the Series A Convertible
Preferred Stock by AIG pursuant to the Investment Agreement.
"Restriction Termination Date" shall mean
the earliest to occur of (a) the end of the thirty-eighth (38th)
month following the Restriction Effective Date, (b) the first day
of the first taxable year following the taxable year (or years)
in which the Income Tax Net Operating Loss Carryover has been
reduced to zero, or (c) the date upon which the Board of
Directors has determined that there has been a change in law
(including but not limited to the repeal of Section 382 without a
successor provision that places restrictions on the Income Tax
Net Operating Loss Carryover based on changes of ownership of the
corporation's Stock similar to Section 382) eliminating the need
for the Restrictions in order to preserve the corporation's
ability to utilize the Income Tax Net Operating Loss Carryover.
<PAGE> 102
"Restrictions" shall mean the restrictions
on the Transfer and Ownership of Stock as set forth in this
Article V.
"Section 382" shall mean Section 382 of the
Code and the Regulations promulgated thereunder, and any
successor statute and regulations.
"Stock" shall mean the Common Shares, the
Series A Convertible Preferred Stock, and any interest in the
corporation that would be treated as stock under Section 382,
without regard to clauses (ii)(B) and (iii)(B) of paragraph
(f)(18) of Temporary Treasury Regulation Section 1.382-2T (but
only if, in determining the Ownership by any Person of Stock, the
uniform treatment of such interest as Stock or as not Stock, as
the case may be, would increase such Person's Percentage
Ownership of Stock), and shall also include any Stock the
ownership of which may be acquired by the exercise of an Option.
"Transfer" shall mean any direct or
indirect acquisition or disposition of stock, whether by sale,
exchange, merger, consolidation, transfer, assignment,
conveyance, distribution, pledge, inheritance, gift, mortgage,
the creation of any security interest in, or lien or encumbrance
upon, or any other acquisition or disposition of any kind and in
any manner, whether voluntary or involuntary, knowing or
unknowing, by operation of law or otherwise. Notwithstanding any
understandings or agreements to which an Owner of Stock is a
party, any arrangement, the effect of which is to transfer any or
all of the rights arising from Ownership of Stock, shall be
treated as a Transfer. A Transfer shall also include (i) a
transfer of an interest in an entity and a change in the
relationship between two or more Persons that results in a change
in the Ownership of Stock and (ii) the creation, grant, exercise,
conversion, Transfer or other disposition of or with respect to
an Option, regardless of whether such Option previously had been
treated as exercised or converted for any other purpose;
provided, however, that a Transfer shall not include the issuance
or disposition (other than a conversion, exercise or similar
transaction in which Stock is acquired) of an Option described in
paragraph (d)(9) of Treasury Regulation Section 1.382-4, and
whether an Option is so described shall be determined by the
Board of Directors in its sole and absolute discretion.
"Transfer Agent" means the Person
responsible for maintaining the books and records in which are
recorded the ownership and transfer of shares of Stock or any
Person engaged by the corporation for the purpose of fulfilling
the duties required to be fulfilled by the Transfer Agent
hereunder.
"Trustee" means the trustee of the trust
appointed by the corporation, provided that the Trustee shall be
a Person unaffiliated with the corporation, any 5% Shareholder,
and any Person purchasing or disposing of Stock in a Prohibited
Transfer.
<PAGE> 103
5. The foregoing amendments to the Articles of
Incorporation of the corporation have been approved by the Board of
Directors.
6. The foregoing amendments to the Articles of
Incorporation of the corporation have been duly approved by the required
vote of shareholders in accordance with Section 902 of the Corporations
Code. The corporation has only one class of shares outstanding, to wit,
Common Stock. The total number of outstanding shares of Common Stock of
the corporation is 51,472,471. The vote of a majority of the outstanding
shares of Common Stock was required to approve the foregoing amendments.
The number of shares of Common Stock voting in favor of the amendments
equaled or exceeded the vote required.
NEIL H. ASHLEY
------------------------
JOHN R. BOLLINGTON
------------------------
Each of the undersigned declares under penalty of
perjury under the laws of the State of California that the matters set
forth in the foregoing Certificate are true and correct of his own
knowledge and that this declaration was executed on December 15, 1994,
at Woodland Hills, California.
NEIL H. ASHLEY
------------------------
JOHN R. BOLLINGTON
------------------------
<PAGE> 104
CERTIFIED COPY OF THE AMENDED AND
RESTATED BYLAWS OF 20TH CENTURY INDUSTRIES,
A CALIFORNIA CORPORATION
I, JOHN R. BOLLINGTION, hereby certify:
1. That I am duly elected and acting Secretary of 20th
Century Industries.
2. That the attached Amended and Restated Bylaws,
approved by the Board of Directors on December 15,
1994, are a true and complete copy.
WITNESS my hand and corporate seal this 3rd day of January,
1995 at Woodland Hills, California.
20TH CENTURY INDUSTRIES
John R. Bollington
---------------------------
Secretary
<PAGE> 105
Annex B
-------
AMENDED AND RESTATED
BYLAWS
OF
20th CENTURY INDUSTRIES,
A California Corporation
ARTICLE I. OFFICES
-------------------
Section 1.01 Principal Executive Office. The
--------------------------
principal executive office of the corporation is hereby fixed
at 6301 Owensmouth Avenue, Woodland Hills, California 91367.
The Board of Directors (hereinafter called the "Board") is
hereby granted full power and authority to change said
principal office from one location to another.
Section 1.02 Other Offices. The corporation may
-------------
also have an office or offices at such other place or places,
either within or without the State of California, as the Board
may from time to time determine or as the business of the
corporation may require.
ARTICLE II. SHAREHOLDERS
-------------------------
Section 2.01 Annual Meetings. The Annual Meeting
---------------
of shareholders of the corporation, for the purpose of
electing directors and for the transaction of such other
proper business as may come before such meeting, shall be held
on the fourth Tuesday of May of each year at 10:00 a.m., or
such other date or time as may be fixed by the Board.
<PAGE> 106
Section 2.02 Special Meetings. Special Meetings
----------------
of shareholders may be called at any time for any purpose or
purposes permitted under California law by the Board, by the
Chairman of the Board, by the President or by holders of the
common stock of the corporation entitled to cast not less than
ten percent (10%) of the votes entitled to be cast at such
meeting.
Section 2.03 Place of Meetings. All meetings of
-----------------
shareholders shall be held either at the principal executive
office of the corporation or at any other location within or
without the State of California, as shall be determined from
time to tine by the Board of Directors or as specified in the
respective notices or waivers of notice thereof.
Section 2.04 Notice of Meetings.
------------------
(a) Written notice of each Annual or Special
Meeting of shareholders shall be given not less than ten (10)
nor more than sixty (60) days before the date of the meeting
to each shareholder entitled to vote thereat. Such notice
shall state the place, date, and hour of the meeting, and (i)
in the case of a Special Meeting, the general nature of the
business to be transacted; or (ii) in the case of the Annual
Meeting, those matters which the Board, at the time of the
mailing of the notice, intends to present for action by the
shareholders, but any proper matter may be presented at the
meeting for such action. The notice of any meeting at which
directors are to be
<PAGE> 107
elected shall include the names of the nominees intended, at
the time of the notice, to be presented by management for
election.
(b) Notice of a meeting of shareholders shall be
given either personally or by mail addressed, postage prepaid,
to the shareholder at the address of such shareholder
appearing on the authorized record books of the corporation,
or if no such address appears or is given, by publication at
least once in a newspaper of general circulation in the City
of Los Angeles, California. Notice of any meeting of
shareholders shall not be required to be given to any
shareholder who shall have waived such notice; and such notice
shall be deemed to be waived by any shareholder who shall
attend such meeting in person or by proxy, except a
shareholder who shall attend such meeting for the express
purpose of objecting, at the beginning of the meeting, to the
transaction of any business on the grounds that the meeting
has not been lawfully called or convened. An affidavit of
mailing of any notice or report in accordance with the
provisions of the California General Corporation Law, executed
by the Secretary, Assistant Secretary or any transfer agent,
shall be prima facie evidence of the giving of notice or
report.
Section 2.05 Quorum and Vote Required.
------------------------
(a) At any meeting of shareholders, holders of
record of shares of stock having a majority of the votes
entitled to be cast thereat, represented in person or by
proxy, shall constitute a quorum for the transaction of
business. The affirmative vote of the holders of shares of
stock having a majority of the votes
<PAGE> 108
so constituting a quorum shall be considered to be the act of
the shareholders, unless the vote of a greater number or
voting by classes is required by the California General
Corporation Law or by the Articles of Incorporation of the
corporation.
(b) The shareholders present at a duly called or
held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding withdrawal of
enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by holders of
shares of stock having at least a majority of the number of
votes required to constitute a quorum.
Section 2.06 Adjourned Meeting and Notice Thereof.
------------------------------------
(a) Any meeting of shareholders, whether or not a
quorum is present, may be adjourned from time to time. In the
absence of a quorum [except as provided in Section 2.05(b) of
this Article], no other business may be transacted at such
adjourned meeting.
(b) It shall not be necessary to give any notice of
the time and place of an adjourned meeting or of the business
to be transacted thereat, other than by announcement at the
meeting at which such adjournment is taken; provided, however,
that when a meeting of shareholders is adjourned for more than
fifteen (15) days or, if after adjournment a new record date
is fixed for the adjourned meeting, notice of the adjourned
meeting shall be given as in the case of an original meeting.
<PAGE> 109
Section 2.07 Voting.
------
(a) The shareholders entitled to notice of any
meeting or to vote at any such meeting shall be only persons
in whose name shares stand on the share records of the
corporation on the record date determined in accordance with
Section 2.08 of this Article. Persons holding shares of the
corporation in a fiduciary capacity shall be entitled to vote
such shares. Persons whose shares are pledged shall be
entitled to vote the pledged shares, unless in the transfer by
the pledgor, the pledgor shall have expressly empowered the
pledgee to vote thereon, in which case only the pledgee, or
his proxy, may represent such shares and vote thereon. Shares
having voting power standing of record in the names of two or
more persons, whether fiduciaries, members of a partnership,
joint tenants, tenants in common, tenants by the entirety or
otherwise, or with respect to which two or more persons have
the same fiduciary relationship, shall be voted by any one of
the registered holders, either in person or by proxy.
(b) The vote at any meeting of shareholders on any
question need not be by written ballot unless so directed by
the Chairman of the meeting or so requested by any shareholder
at such meeting. On a vote by written ballot, each ballot
shall be signed by the shareholder voting, or by his duly
appointed proxy if there be such proxy, and it shall state the
number of shares voted.
Section 2.08 Record Date.
-----------
<PAGE> 110
(a) The Board may fix in advance a record date for
the determination of shareholders entitled to notice of any
meeting or to vote or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or
entitled to rights, or entitled to exercise any rights in
respect to any other lawful action. The record date so fixed
shall be not more than sixty (60) nor less than ten (10) days
prior to the date of the meeting, nor more than sixty (60)
days prior to any of the other aforementioned actions. When a
record date is so fixed, only shareholders of record on that
date are entitled to notice of and to vote at the meeting or
to receive the dividend, distribution, or allotment of rights,
or to exercise of the rights, as the case may be,
notwithstanding any transfer of shares on the books of the
corporation after the record date. A determination of
shareholders of record entitled to notice of or to vote at a
meeting of shareholders shall apply to any adjournment of the
meeting unless the Board fixes a new record date for the
adjourned meeting. The Board shall fix a new record date if
the meeting is adjourned for more than fifteen (15) days from
the date set for the original meeting.
(b) If no record date is fixed by the Board, the
record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be the close of
business on the fifth (5th) business day next preceding the
day on which notice is given or, if notice is waived, at the
close of business on the fifth (5th) business day next
preceding the day on which the meeting is held. If no record
date is fixed by the
<PAGE> 111
Board, the record date for determining shareholders for any
other purpose shall be at the close of business on the fifth
(5th) business day next preceding the day on which the Board
adopts the resolution relating thereto, or the sixtieth (60th)
day prior to the date of such other action, whichever is
later.
Section 2.09 Consent of Absentees. The
--------------------
transactions of any meeting of shareholders, however called
and noticed, and wherever held, are as valid as though had at
a meeting duly held after regular call and notice, if a quorum
is present either in person or by proxy, and if, either before
or after the meeting, each of the persons entitled to vote,
not present in person or by proxy, signs a written waiver of
notice or a consent to the holding of the meeting or an
approval of the minutes thereof. All such waivers, consents,
or approvals shall be filed with the corporate records or be
made a part of the minutes of such meeting.
Section 2.10 Action Without Meeting. Any action
----------------------
which, under any provision of law, may be taken at any Annual
or Special Meeting of shareholders, may be taken without a
meeting and without prior notice thereof if a consent in
writing, setting forth the actions so taken, shall be signed
by shareholders having not less than the minimum number of
votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were
present and voted. Unless a record date for voting purposes
be fixed as provided in Section 2.08 of this Article, the
record date for determining
<PAGE> 112
shareholders entitled to give consent pursuant to this Section
2.10, when no prior action by the Board has been taken, shall
be the day on which the first written consent is given.
Section 2.11 Proxies. Every person entitled to
-------
vote shares has the right to do so either in person or by one
or more persons authorized by a written proxy executed by such
shareholder and filed with the Secretary of the corporation
before or at the meeting; provided, however, that no proxy may
be voted or acted upon after eleven (11) months from the date
set forth on the said proxy unless the proxy shall provide
therein for a longer period. A proxy may be revoked by a
writing delivered to the Secretary of the corporation stating
that the proxy is revoked, or by a subsequent proxy executed
by the person executing the prior proxy and presented to the
meeting, or, as to any meeting, by actual attendance at such
meeting in person and voting in person by the person executing
the proxy.
Section 2.12 Conduct of Meetings. The Chairman of
-------------------
the corporation or his designee (which designee shall be an
executive officer of the corporation), or in the absence of
the Chairman and any such designee the Vice Chairman, shall
preside as Chairman at all meetings of shareholders. The
Chairman shall conduct each such meeting in a businesslike and
fair manner, but shall not be obligated to follow any
technical, formal or parliamentary rules or principles of
procedure. The Chairman's ruling on procedural matters shall
be conclusive and binding on all shareholders; unless at the
time of such ruling a request for
<PAGE> 113
a vote is made by a shareholder entitled to vote and who is
represented in person or by proxy at the meeting, in which
case the decision of shareholders holding a majority of the
votes represented at the meeting and entitled to be cast shall
be conclusive and binding on all Shareholders. Without
limiting the generality of the foregoing, the Chairman shall
have all of the powers usually vested in the chairman of a
meeting of Shareholders.
Section 2.13 Inspectors of Election. In advance
----------------------
of any meeting of shareholders, the Board may appoint
inspectors of election to act at the meeting and any
adjournment thereof. If inspectors are not appointed, or if
any persons so appointed fail to appear or refuse to act, the
Chairman of such meeting may appoint inspectors at the
meeting. The number of inspectors shall be either one or
three. Each inspector so appointed shall first subscribe an
oath to faithfully execute the duties of an inspector at such
meeting with strict impartiality and according to the best of
his ability. Such inspectors shall have the duties prescribed
by Section 707(b) of the California General Corporation Law
and they (i) shall decide upon the qualification of those
entitled to vote, (ii) shall report the number of shares
represented at the meeting and entitled to vote on the
question presented, (iii) shall conduct the balloting and
accept the votes, and (iv) when the voting is completed, shall
ascertain and report the number of votes respectively for and
against each question presented. Reports of the inspectors
shall be in writing and subscribed and delivered by them to
the Secretary of
<PAGE> 114
the corporation. If there are three inspectors of election,
the decision, act, or certificate of a majority is effective
in all respects as the decision, act or certificate of all.
ARTICLE III. DIRECTORS
-----------------------
Section 3.01 Powers. Subject to any limitation of
------
the Articles of Incorporation, of these Bylaws, and of actions
required by law to be approved by the shareholders, the
business and affairs of the corporation shall be managed and
all corporate powers shall be vested in, and exercised by or
under the direction of the Board of Directors. The Board may,
as permitted by law, delegate the management of the day-to-day
operation of the business of the corporation to a management
company or other persons or officers of the corporation,
provided that the business and affairs of the corporation
shall be managed and all corporate powers shall be exercised
under the ultimate direction and policies of the Board.
Section 3.02 Number of Directors. The authorized
-------------------
number of directors of the corporation shall be twelve.
Section 3.03 Election and Term of Office.
---------------------------
(a) Directors will be elected in the manner
provided herein at each Annual Meeting of shareholders, but if
such Annual Meeting of shareholders is not held or the
directors are not elected thereat, the directors may be
elected at any Special Meeting of shareholders held for that
purpose. Each director, including a director elected to fill
a vacancy, shall hold office until the next Annual Meeting of
shareholders and until a
<PAGE> 115
successor has been duly elected and qualified, or until he or
she shall resign or shall have been removed.
(b) At each election, the persons receiving the
greatest number of votes from the class of stock entitled to
vote therefor, up to the number of directors then to be
elected by such class, shall be the persons then elected. The
election of directors shall be subject to any provisions
contained in the Articles of Incorporation relating thereto,
and to any provisions of California law for cumulative voting
in the election of directors. Nominations of persons to serve
as directors shall be submitted to the Secretary of the
corporation at the meeting of shareholders at which directors
will be elected.
Section 3.04 Resignation. Any director may resign
-----------
at any time by giving written notice to the Board or to the
Chairman of the Board, the President or the Secretary of the
corporation. Any such resignation shall take effect at the
times specified therein or, if the time be not specified, it
shall take effect immediately upon its receipt; and, unless
otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective. If a
resignation is to be effective at a future time, a successor
may be elected to take office when the resignation becomes
effective.
Section 3.05 Vacancies.
---------
(a) A vacancy or vacancies in the Board shall be deemed to
exist in case of the death, resignation or removal of any
director, or if the authorized number of directors be
<PAGE> 116
increased, or if the holders of any class of stock fail at any
Annual or Special Meeting of shareholders at which any
directors are elected to elect the full authorized number of
directors to be voted for by such class at said meeting.
(b) The Board may declare vacant the office of a
director who has been declared of unsound mind by an order of
court of duly authorized jurisdiction or a director who has
been convicted of a felony. Except to the extent it would be
contrary to the Articles of Incorporation or law, any director
may be removed at any time, with or without cause, by the
affirmative vote of the holders of a majority of the voting
power of the class of stock entitled to elect such director
given at a Special Meeting of shareholders called for that
purpose; provided, however, that no director may be removed
(unless the entire Board of Directors is removed) when the
votes from the class of stock entitled to elect such director
cast against such removal, or not consenting in writing to
such removal, would be sufficient to elect such director if
voted cumulatively at an election at which the total number of
votes entitled to be cast by such class were cast (or if such
action is taken by written consent, all shares entitled to
vote were voted) and the entire number of directors authorized
to be elected by such class at the time of the directors' most
recent election were then being elected.
(c) No reduction of the authorized number of
directors shall have the effect of removing any director prior
to the expiration of the director's term of office.
<PAGE> 117
(d) Except as otherwise provided in the Articles of
Incorporation, any vacancy on the Board, whether because of
death, resignation, disqualification, an increase in the
number of directors, or any other cause, may be filled by the
vote of the majority of the remaining directors, although less
than a quorum; provided, however, that a vacancy occurring by
reason of removal of a director by the vote of shareholders
entitled to remove such director may be filled only by the
vote of such shareholders. The shareholders of a class of
stock entitled to elect a director may elect such director at
any time to fill a vacancy not filled by the directors, and
any such election by such shareholders shall require the
consent of a majority of the votes of such shareholders
entitled to be cast therefor; provided, however, that no
director shall be elected by written consent to fill a vacancy
created by removal of any director, except by the unanimous
written consent of all shareholders of the class of stock
entitled to vote for the election of such director. Each
director chosen to fill a vacancy shall hold office until the
next Annual Meeting of shareholders and until his successor
shall have been elected and qualified or until he shall resign
or shall have been removed.
Section 3.06 Place of Meetings. All meetings of
-----------------
the Board shall beheld either at the principal executive
office of the corporation or at any other location within or
without the State of California as shall be determined, from
time to time, by the Board of Directors, or as specified in
the respective notices or waivers of notice thereof.
<PAGE> 118
Section 3.07 First Meeting. Immediately following
-------------
each Annual Meeting of shareholders the Board shall meet for
the purpose of organization, selection of a Chairman of the
Board, election of officers, and the transaction of any other
proper business. Except as provided by law, notice of such
First Meeting is hereby dispensed with.
Section 3.08 Regular Meetings. The Board of
----------------
Directors shall hold Regular Meetings on the last Tuesday of
February and August, and in November on the Tuesday of the
week preceding that in which Thanksgiving falls, at 10:00
a.m., but the Executive Committee of the Board, if any is
created, may meet more often if the Committee deems it
necessary or appropriate. Except as provided by law, notice
of Regular Meetings of the Board of Directors is hereby
dispensed with.
Section 3.09 Special Meetings.
----------------
(a) Special Meetings of the Board may be called at
any time by the Chairman of the Board, the President, or the
Secretary or by any two directors.
(b) Special Meetings of the Board shall be held
upon at least four days' written notice or 48 hours' notice
given personally or by telephone, telegraph, telex or other
similar means of communication. Any such notice shall be
addressed or delivered to each director at such director's
address as it is shown upon the records of the corporation or
as may have been given to the corporation by the director for
purposes of notice.
<PAGE> 119
Section 3.10 Quorum. The presence of a majority
------
of the authorized number of directors shall be required to
constitute a quorum of the Board of Directors for the
transaction of business at any meeting of the Board, except to
adjourn as hereinafter provided. Every act or decision done
or made by a majority of the directors present at a meeting
duly held at which a quorum is present shall be regarded as
the act of the Board, unless a greater number of directors is
required for any specific action by law, or by these Bylaws,
or by the Articles of Incorporation of the corporation. A
meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors,
and every act or decision approved by at least a majority of
the number of directors required, as noted above, to
constitute a quorum for such meeting shall be regarded as the
act or decision of the Board, unless a greater number of
directors is required by law, by the Bylaws, or by the
Articles of Incorporation of the corporation. The directors
shall act only as a Board, and the individual directors shall
have no power as such, unless such power be expressly
conferred upon a director by a duly adopted resolution of the
Board.
Section 3.11 Participation in Meetings by
----------------------------
Conference Telephone. Members of the Board may participate in
--------------------
a meeting of the Board through use of conference telephone or
similar communications equipment, but only so long as all
members participating in such meeting can hear and freely
communicate with one another.
<PAGE> 120
Section 3.12 Waiver of Notice. The transactions
----------------
of any meeting of the Board, however called and noticed or
wherever held, shall be as valid as though had at a meeting
duly held after regular call and notice if a quorum be present
at such meeting, and if, either before or after the meeting,
each of the directors not present signs a written waiver of
notice, and a consent to the holding of such meeting, or an
approval of the minutes thereof. All such waivers and
consents or approvals shall be filed with the corporate
records or be made a part of the minutes of the meeting.
Section 3.13 Adjournment. A majority of the
-----------
directors present,whether or not a quorum is present, may
adjourn any meeting of directors to another time and place.
If the meeting is adjourned for more than twenty-four (24)
hours, notice of such adjournment to another time or place
shall be given prior to the time of the reconvening of the
adjourned meeting to the directors who were not present at the
meeting at the time of the adjournment.
Section 3.14 Fees and Compensation. Directors and
---------------------
members of committees may receive such compensation, if any,
for their services and such reimbursement for expenses, as may
be fixed or determined by the Board.
Section 3.15 Action Without Meeting. Any action
----------------------
required or permitted to be taken by the Board may be taken
without a meeting of the Board if all members of the Board
shall individually or collectively consent in writing to such
action.
<PAGE> 121
Such unanimous written consent or consents shall have the same
effect as a unanimous vote of the Board, and shall be filed
with the minutes of the proceedings of the Board.
Section 3.16 Committees.
----------
(a) The Board may, by resolution passed by a
majority of the authorized number of directors, designate one
or more committees of the Board, each committee to consist of
one or more of the directors of the corporation. Among the
committees which may be appointed may be an Executive
Committee which shall have and may exercise all the powers and
authority of the Board in the management of the affairs of the
corporation between Regular or Special meetings of the Board.
(b) All committees shall have and may exercise the
powers and authority of the Board in the management of the
business and affairs of the corporation to the extent provided
in the resolution of the Board creating said committees; but
no committee shall have any power or authority in reference to
(i) the approval of any action which requires shareholders'
approval or approval of the outstanding shares; (ii) amending
the Articles of Incorporation; (iii) adopting an agreement of
merger or consolidation; (iv) recommending to the shareholders
the sale, lease or exchange of all or substantially all of the
corporation's properties and assets; (v) recommending to the
shareholders a dissolution of the corporation or a revocation
of the dissolution; (vi) amending or repealing the Bylaws of
the corporation; (vii) the filling of vacancies on the Board
or on
<PAGE> 122
any committee; (viii) the fixing of compensation of directors
for serving on the Board or on any committee; (ix) amending or
repealing any resolution of the Board which by its express
terms is not so amendable or repealable by the Board; (x)
declaring a distribution to shareholders; and (x) issuing
shares.
(c) The Board shall have the power to prescribe the
manner in which the proceedings of any such committee shall be
conducted. Unless the Board or such committee shall otherwise
provide, the regular or special meetings and other actions of
any such committee shall be governed by the provisions in this
Article applicable to meetings and actions of the Board.
Written Minutes shall be kept of each meeting of each
committee of the Board.
Section 3.17 Officers of the Board. The Chairman
---------------------
of the Board shall preside at all meetings of the shareholders
(or shall designate an executive officer of the corporation to
so preside, as provided in Section 2.12 of these Bylaws) and
at all meetings of the Board. The Board also shall have a
Vice-Chairman of the Board who shall preside at meetings of
shareholders (in the absence or disability of the Chairman and
in the absence of a designee of the Chairman to preside as
provided in Section 2.12 of these Bylaws) and the Board of
Directors (in the absence or disability of the Chairman of the
Board). The Chairman and Vice-Chairman shall have such other
powers and duties as are specifically designated by the Board.
The Board may appoint individuals to serve as a Chairman
Emeritus or Director Emeritus.
<PAGE> 123
A Chairman Emeritus or Director Emeritus shall have no duties
or responsibilities, and shall not be entitled to vote in
their capacity as Chairman Emeritus or Director Emeritus in
connection with any meeting or proceeding of the Board and may
be appointed or removed at the pleasure of the Board. A
Chairman Emeritus or Director Emeritus shall not be deemed to
be a member of the Board for any purpose whatsoever, solely by
reason of such designation.
ARTICLE IV. OFFICERS
---------------------
Section 4.01 Officers. The officers of the
--------
corporation shall be a Chairman of the Board, a Vice-Chairman
of the Board, a Chief Executive Officer, a President, a
Secretary, and a Chief Financial Officer. The Corporation may
also have at the discretion of the Board such other officers,
each to hold office for a period, and have authority to
perform such duties as the Board may from time to time
determine.
Section 4.02. Chairman of the Board. The Chairman
---------------------
of the Board shall preside at all meetings of the shareholders
(or shall designate an executive officer of the corporation to
so preside, as provided in Section 2.12 of these Bylaws) and
at all meetings of the Board of Directors.
Section 4.03. Vice-Chairman of the Board. The
--------------------------
Vice-Chairman of the Board shall perform the duties of the
Chairman, during the Chairman's absence or disability.
Section 4.04 Chief Executive Officer. The Chief
-----------------------
Executive Officer shall be the General Manager of the
corporation
<PAGE> 124
and shall have, subject to the control of the Board, general
supervision and direction of the business and affairs of the
corporation.
Section 4.05 President. The President shall have
the general powers
---------
and duties of management as are described by the Board.
Section 4.06. Secretary. The Secretary shall be
---------
responsible for the maintenance of the corporate records of
the Company, such as the Articles of Incorporation, Bylaws,
minutes and list of shareholders. The Secretary shall be
responsible for the maintenance of the list of shareholders
which may be delegated to a transfer agent. The Secretary
shall give or cause to be given notice of all meetings of
shareholders and of the Board and any committees of the Board
required by the Bylaws or by law to be given. The Secretary
shall have other powers and duties as may be described by the
Board.
Section 4.07. Chief Financial Officer. The Chief
-----------------------
Financial Officer of the corporation shall maintain or cause
to be maintained adequate and correct accounts of the
properties, and financial and business transactions of the
Corporation, and shall send or cause to be sent to the
shareholders of the Corporation such financial statements and
reports as are by law and these Bylaws required to be sent to
them.
Section 4.08 Appointment. The Chairman of the
-----------
Board, the Vice-Chairman of the Board, and the Chief Executive
Officer,
<PAGE> 125
the President and Chief Operating Officer, the Chief Financial
Officer and the Secretary shall be elected by the Board.
Other officers may be elected or appointed and their duties
prescribed by the Board or the Chief Executive Officer. If
such appointment is by the Chief Executive Officer, it shall
terminate at the next meeting of the Board unless the Board
affirms the appointment.
Section 4.09. Removal and Resignation.
-----------------------
(a) All officers shall serve as officers and
employees of the corporation at the pleasure of the Board and
may be removed from office, and their employment may be
terminated with or without cause, and with or without notice:
(i) by the Board, or
(ii) by the Chief Executive Officer, prior to
the affirmation of the officer's appointment by the
Board if such officer was appointed by the Chief
Executive Officer, or
(iii) by the Chief Executive Officer, with
the concurrence or ratification of the Board, or the
Executive Committee of the Board.
No officer of the corporation shall have any
employment status other than that of an "at will" employee
whose employment can be terminated at any time pursuant to the
procedures set forth in this Section 4.09, unless there is a
written agreement altering this "at will" employment status,
<PAGE> 126
approved by a resolution of the board before it is binding and
effective.
(b) Any officer may resign at any time without
prejudice to the rights of the corporation under any contract
to which the corporation is a party by giving written notice
to the Board, or to the Chief Executive Officer or to the
Secretary of the Corporation. Any such resignation shall take
effect at the date of the receipt of such notice or at any
later time specified therein; and unless otherwise provided
therein, the acceptance of such resignation shall not be
necessary to make it effective.
Section 4.10. Vacancies. A vacancy of any office
---------
because of death, resignation, removal, disqualification or
any other cause shall be filled in the manner prescribed by
these Bylaws for the regular appointment to such office.
Section 4.11 Retirement of Officers. Provided
----------------------
that the exemption conditions set forth in applicable Federal
and California statutes are satisfied (e.g. 29 USC Section
631(c); 29 CFR Sections 1625.12 and 1627.17; Cal. Govt. Code
Section 12942(c) and FEHC Regulation Subsection 7296(c)(2)),
each officer elected or required to be elected by the Board
shall retire as of the last day of the month in which such
officer's 65th birthday occurs; however, such officer may
continue to be employed for such additional period of time,
and under such conditions as are specifically authorized by
resolution of the Board of Directors.
<PAGE> 127
ARTICLE V. CONTRACTS, CHECKS,
------------------------------
DRAFTS, BANK ACCOUNTS, ETC.
---------------------------
Section 5.01 Execution of Contracts. Except as
----------------------
these Bylaws may otherwise provide, the Board may, by duly
adopted resolution, authorize any officer or agent of the
corporation to enter into any contract or execute any
instrument in the name and on behalf of the corporation, and
such authority may be general or confined to specific
instances; and unless so authorized by the Board or by these
Bylaws, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or
engagement or to pledge its credit or to render it liable for
any purpose or in any amount.
Section 5.02 Checks, Drafts, Etc. All checks,
--------------------
drafts or other orders for payment of money, notes or other
evidence of indebtedness issued in the name of or which are
payable to the corporation, shall be signed by or endorsed by
such person or persons and in such manner as, from time to
time, shall be determined by resolution of the Board. Each
such person shall give such bond, if any, as the Board may
require.
Section 5.03 Deposit. All funds of the
-------
corporation not otherwise employed shall be deposited from
time to time to the credit of the corporation in such banks,
trust companies or other depositories as the Board may select,
or as may be selected by any Board committee, officer,
assistant, agent or attorney of the corporation to whom such
power shall have been delegated by the Board. For the purpose
of deposit and for the purpose of
<PAGE> 128
collection for the account of the corporation, the President,
Secretary, any Vice-President or the Treasurer (or any other
officer, assistant, agent or attorney of the corporation who
shall from time to time be determined by the Board) may
endorse, assign and deliver checks, drafts and other orders
for the payment of money which are payable to the order of the
corporation.
Section 5.04 General and Special Bank Accounts.
---------------------------------
The Board may from time to time authorize the opening and
keeping of general and special bank accounts with such banks,
trust companies or other depositories as the Board may select
or as may be selected by any Board committee, officer,
assistant, agent or attorney of the corporation to whom such
power shall have been delegated by the Board. The Board may
make such special rules and regulations with respect to such
bank accounts, not inconsistent with the provisions of these
Bylaws, as it may deem expedient.
ARTICLE VI. SHARES AND THEIR TRANSFER
--------------------------------------
Section 6.01 Certificates for Shares.
-----------------------
(a) Every owner of shares of the corporation shall
be entitled to have a certificate or certificates, to be in
such form as the Board shall prescribe, certifying the number
and class of shares of the corporation owned by him. The
certificates representing such shares shall be numbered in the
order in which they shall be issued, and shall be signed in
the name of the corporation by the Chairman of the Board, or
by the
<PAGE> 129
President and by the Secretary or Assistant Secretary, or by
the duly appointed transfer agent or registrar of the
corporation. Any of the signatures on the certificates may be
a facsimile signature, provided that at least the signature of
the corporation's transfer agent or registrar on the
certificate is an original signature. In case any officer,
transfer agent or registrar who has signed or whose facsimile
signature has been placed upon any such certificate shall
thereafter have ceased to be such officer, transfer agent or
registrar before such certificate is issued, such certificate
may nevertheless be issued by the corporation with the same
effect as though the person who signed such certificate, or
whose facsimile signature shall have been placed thereupon,
were such officer, transfer agent or registrar at the date of
issue.
(b) A record shall be kept of the respective names
of the persons, firms or corporations owning the shares
represented by such certificates, the number and classes of
shares represented by such certificates, respectively, and the
respective issuance dates thereof, and in case of
cancellation, the respective dates of cancellation. Every
certificate surrendered to the corporation for exchange or
transfer shall be cancelled, and no new certificate or
certificates shall be issued in exchange for any existing
certificate until such existing certificate shall have been so
cancelled, except in cases provided for in Section 6.04.
<PAGE> 130
Section 6.02 Transfer of Shares. Transfers of
------------------
shares of the corporation shall be made only on the books of
the corporation by the registered holder thereof, or by his
attorney thereunto authorized by written power of attorney
duly executed and filed with the Secretary of the corporation
or with a transfer agent duly appointed as provided in Section
6.03, and upon surrender of the certificate or certificates
for such shares properly endorsed and the payment of all
required taxes thereon. The person in whose name shares of
stock stand on the books of the corporation shall be deemed
the owner thereof for all purposes as regards the corporation.
Whenever any transfer of shares shall be made for collateral
security purposes, and not absolutely, such fact shall be
expressly stated in the entry of transfer if, when the
certificate or certificates shall be presented to the
corporation for transfer, both the transferor and the
transferee request the corporation to do so.
Section 6.03 Regulations. The Board may make such
-----------
rules and regulations as it may deem expedient, not
inconsistent with these Bylaws, concerning the issue, transfer
and registration of certificates for shares of the
corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer agents and one or
more registrars, and may require all certificates for shares
to bear the signature or signatures or facsimiles thereof of
any of them.
Section 6.04 Lost, Stolen, Destroyed, and
----------------------------
Mutilated Certificates.
----------------------
In any case of loss, theft, destruction, or
<PAGE> 131
mutilation of any certificate of shares, another certificate
may be issued in its place upon proof of such loss, theft,
destruction, or mutilation, and upon the giving of a bond of
indemnity to the corporation in such form and in such sum as
the Board may direct; provided, however, that a new
certificate may be issued without requiring any bond when, in
the judgment of the Board, it is appropriate and proper so to
do.
ARTICLE VII. INDEMNIFICATION
-----------------------------
Section 7.01 For the purposes of this Article VII,
"agent" means any person who is or was a director, officer,
employee or other agent of the corporation, or is or was
serving at the request of the corporation as a director,
officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other
enterprise, or was a director, officer, employee or agent of a
foreign or domestic corporation which was a predecessor
corporation of the corporation or of another enterprise at the
request of such predecessor corporation; "proceeding" means
any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative; and
"expenses" includes without limitation attorneys' fees and any
expenses of establishing a right to indemnification under
Section 7.04 or Section 7.05(d) of this Article VII.
Section 7.02 The corporation shall have power to
indemnify any person who was or is a party or is threatened to
be made a party to any proceeding (other than an action by or
in the
<PAGE> 132
right of the corporation to procure a judgment in its favor)
by reason of the fact that such person is or was an agent of
the corporation, against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred
in connection with such proceeding if such person acted in
good faith and in a manner such person reasonably believed to
be in the best interests of the corporation and, in the case
of a criminal proceeding, had no reasonable cause to believe
the conduct of such person was unlawful. The termination of
any proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the person did not act in
good faith and in a manner which the person reasonably
believed to be in the best interests of the corporation or
that the person had reasonable cause to believe that the
person's conduct was unlawful.
Section 7.03 The corporation shall have power to
indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action
by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that such person is or was an
agent of the corporation, against expenses actually and
reasonably incurred by such person in connection with the
defense or settlement of such action if such person acted in
good faith, in a manner such person believed to be in the best
interests of the corporation and its shareholders.
<PAGE> 133
No indemnification shall be made under this Section 7.03 for
any of the following:
(a) In respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the
corporation in the performance of such person's duty to the
corporation and its shareholders, unless and only to the
extent that the court in which such proceeding is or was
pending shall determine upon application that, in view of all
the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for expenses and only to the
extent that the court shall determine;
(b) Of amounts paid in settling or otherwise
disposing of a pending action without court approval; or
(c) Of expenses incurred in defending a pending
action which is settled or otherwise disposed of without court
approval.
Section 7.04 To the extent that an agent of the
corporation has been successful on the merits in defense of
any proceeding referred to in Section 7.02 or Section 7.03 or
in defense of any claim, issue or matter therein, the agent
shall be indemnified against expenses actually and reasonably
incurred by the agent in connection therewith.
Section 7.05 Except as provided in Section 7.04,
any indemnification under this Article VII shall be made by
the corporation only if authorized in the specific case, upon
a determination that indemnification of the agent is proper in
the
<PAGE> 134
circumstances because the agent has met the applicable
standard of conduct set forth in Section 7.02 or Section 7.03,
by any of the following:
(a) A majority vote of a quorum consisting of
directors who are not parties to such proceeding;
(b) If such a quorum of directors is not
obtainable, by independent legal counsel in a written opinion;
(c) Approval by the affirmative vote of the holders
of a majority of the shares of common stock of the corporation
entitled to vote represented at a duly held meeting at which a
quorum is present or by the written consent of the holders of
a majority of the outstanding shares of common stock entitled
to vote. For this purpose, the shares owned by the person to
be indemnified shall not be considered outstanding and shall
not be entitled to vote thereon; or
(d) The court in which such proceeding is or was
pending upon application made by the corporation or the agent
or the attorney or other person rendering services in
connection with the defense, whether or not such application
by the agent, attorney or other person is opposed by the
corporation.
Section 7.06 Expenses incurred in defending any
proceeding may be advanced by the corporation prior to the
final disposition of such proceeding upon receipt of an
undertaking by or on behalf of the agent to repay such amount
if it shall be
<PAGE> 135
determined ultimately that the agent is not entitled to be
indemnified as authorized in this Article VII.
Section 7.07 The indemnification provided by this
Article VII shall not be deemed exclusive of any other rights
to which those seeking indemnification may be entitled under
these Bylaws or under any agreement, vote of shareholders or
disinterested directors or otherwise, both as to action in an
official capacity and as to action in another capacity while
holding such office, to the extent such additional rights to
indemnification are authorized in the Articles of
Incorporation. The rights to indemnity hereunder shall
continue as to a person who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of
the heirs, executors and administrators of the person.
Nothing contained in this Article VII shall affect any right
to indemnification to which persons other than such directors
and officers may be entitled by contract or otherwise.
Section 7.08 No indemnification or advance shall
be made under this Article VII, except as provided in Section
7.04 or Section 7.05(d), in any circumstance where it appears:
(a) That it would be inconsistent with a provision
of the Articles of Incorporation, these Bylaws, a resolution
of the shareholders or an agreement in effect at the time of
the accrual of the alleged cause of action asserted in the
proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits
indemnification; or
<PAGE> 136
(b) That it would be inconsistent with any condition
expressly imposed by a court in approving a settlement.
Section 7.09 The corporation shall have power to
purchase and maintain insurance on behalf of any agent of the
corporation against any liability asserted against or incurred
by the agent in such capacity or arising out of the agent's
status as such whether or not the corporation would have the
power to indemnify the agent against such liability under the
provisions of this Article VII. The fact that the corporation
owns all or a portion of the shares of the company issuing a
policy of insurance shall not render this Section inapplicable
if either of the following conditions are satisfied:
(a) If the Articles of Incorporation authorize
indemnification in excess of that authorized in this Article
VII and the insurance provided by this Section is limited as
indemnification is required to be limited by paragraph (11) of
subdivision (a) of Section 204 of the California Corporations
Code; or
(b) (i) The company issuing the insurance policy
is organized, licensed and operated in a manner that complies
with the insurance laws and regulations applicable to its
jurisdiction of organization;
(ii) The company issuing the policy provides
procedures for processing claims that do not permit that
company
<PAGE> 137
to be subject to the direct control of the corporation that
purchased that policy; and
(iii) The policy issued provides for some manner of
risk sharing between the issuer and purchaser of the policy,
on the one hand, and some unaffiliated person or persons, on
the other, such as by providing for more than one unaffiliated
owner of the company issuing the policy or by providing that a
portion of the coverage furnished will be obtained from some
unaffiliated insurer or reinsurer.
Section 7.10 The provisions of this Article VII do
not apply to any proceeding against any trustee, investment
manager or other fiduciary of any employee benefit plan in
such person's capacity as such, even though such person may
also be an agent of the employer corporation as defined in
Section 7.01 of this Article VII. The corporation shall have
power to indemnify such a trustee, investment manager or other
fiduciary to the extent permitted by subdivision (f) of
Section 207 of the California Corporations Code.
ARTICLE VIII. MISCELLANEOUS
----------------------------
Section 8.01 Seal. The Board shall provide a
----
corporate seal, which shall be in the form of a circle and
shall bear the name of the corporation and words and figures
showing that the corporation was incorporated in the State of
California and the year of the incorporation.
<PAGE> 138
Section 8.02 Waiver of Notices. Whenever notice
-----------------
is required to begiven by these Bylaws or the Articles of
Incorporation or by law, the person entitled to said notice
may waive such notice in writing, either before or after the
time stated therein, and such waiver shall be deemed
equivalent to notice.
Section 8.03 Fiscal Year. The fiscal year of the
-----------
corporation shall be that twelve-month period ending on
December 31 in each year.
Section 8.04 Dividends. The Board may from time
---------
to time declare,and the corporation may pay, dividends on its
outstanding shares in the manner and on the terms and
conditions provided by law, subject to any legal, regulatory
or contractual restrictions to which the corporation is then
subject.
Section 8.05 Representation of Shares of Other
---------------------------------
Corporations.
------------
The Chairman of the Board or any officer or officers
authorized by the Board or by the Chairman of the Board are
each authorized to vote, represent, and exercise on behalf of
the corporation all rights incident to any and all shares of
any other corporation or corporations standing in the name of
this corporation, including subsidiaries of the corporation.
The authority granted herein may be exercised either by any
such officer in person or by any other person authorized to do
so by proxy or power of attorney duly executed by said
officer.
<PAGE> 139
Section 8.06 Inspection of Bylaws.
--------------------
The corporation shall keep at its principal executive office
the original or a copy of its Bylaws as amended to date, which
copy shall be open to inspection by shareholders at all
reasonable times during office hours. If the principal
executive office of the corporation is outside the State of
California and the corporation has no principal business
office in such state, it shall upon the written notice of any
shareholder furnish to such shareholder a copy of these Bylaws
as amended to date. The original or a copy of the Bylaws
certified to be a true copy by the Secretary or an Assistant
Secretary of the corporation shall be prima facie evidence of
the adoption of such Bylaws and of the matters stated therein.
Section 8.07 Amendment of Bylaws. Subject to the right of
-------------------
the outstanding shares to adopt, amend, or repeal Bylaws,
these Bylaws may, from time to time and at any time, be
amended or repealed, and new or additional Bylaws adopted, by
approval of the Board; provided, however, that such Bylaws may
not contain any provision in conflict with law or with the
Articles of Incorporation of the corporation. After the
issuance of shares, any Bylaw specifying or changing a fixed
number of directors or the maximum or minimum number or
changing from a fixed to a variable Board or vice versa may
only be adopted by approval of the outstanding shares;
provided, however, that a Bylaw or amendment of the Articles
of Incorporation reducing a fixed number or the minimum number
of directors to a number less than five cannot be adopted if
the vote cast against its adoption
<PAGE> 140
at a meeting, or the shares not consenting in the case of
action by written consent, are equal to more than 16 2/3
percent of the votes entitled to be cast.
Section 8.08 Construction of Bylaws. Unless
----------------------
otherwise stated in these Bylaws or unless the context
requires, the definitions contained in the California General
Corporation Law shall govern the construction of these Bylaws.
Without limiting the generality of the foregoing, the
masculine gender includes the feminine and neuter, the
singular number includes the plural and the plural number
includes the singular, and the word "person" includes a
corporation or other entity as well as a natural person.
Section 8.09 Annual Report to Shareholders. The
-----------------------------
annual report to shareholders referred to in Section 1501 of
the California General Corporation Law is expressly dispensed
with, but nothing herein shall be interpreted as prohibiting
the Board of Directors from issuing annual or other periodic
reports to the shareholders of the corporation as they
consider to be appropriate.
Section 8.10 National Emergency. In the event of
------------------
a national emergency as described in Section 688 of the
California Insurance Code, this corporation shall be
considered to have those emergency bylaw provisions which are
provided for by statute in Article 1.7 of Chapter 1 of Part 2
of Division 1 of the California Insurance Code as now in
effect or as hereafter may be amended.
<PAGE> 141
PROPERTY CATASTROPHE EXCESS OF LOSS
REINSURANCE CONTRACT
(hereinafter referred to as the "Contract")
between
20TH CENTURY INSURANCE COMPANY
and/or
21ST CENTURY CASUALTY COMPANY
(hereinafter referred to as the "Company")
and
The SUBSCRIBING REINSURERS executing the attached
Interests and Liabilities Contract
(hereinafter referred to as the "Reinsurer")
ARTICLE 1
---------
BUSINESS COVERED
----------------
This Contract applies to loss occurrences which take place
during the currency of this Contract under all policies,
certificates, binders and/or contracts of insurance or
reinsurance, oral or written, or other evidences of liability
(hereinafter called "policy" or "policies") which are issued or
may be issued for or by the Company and classified by the
Company as Homeowners (Section I only), Condominium Owners
(Section I only), Dwelling Fire, Inland Marine, and/or
Automobile Physical Damage.
ARTICLE 2
---------
TERM AND EXTENDED EXPIRATION
----------------------------
This Contract shall take effect from 12:01 a.m., Pacific
Daylight Savings Time, July 1, 1994, to 12:01 a.m., Pacific
Daylight Savings Time July 1, 1995, and shall apply to all loss
occurrences which take place during the currency of this
Contract.
If this Contract shall terminate while a loss occurrence
covered hereunder is in progress, it is agreed that, subject to
the other conditions of this Contract, the Reinsurer is
responsible for its proportion of the entire loss.
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ARTICLE 3
---------
TERRITORY
---------
This Contract shall apply to the State of California of the
United States of America.
ARTICLE 4
---------
TAXES
-----
In consideration of the terms under which this Contract is
issued, the Company undertakes not to claim any deduction in
respect of the premium hereon when making tax returns, other
than Income or Profits Tax returns, to any State or Territory or
the District of Columbia.
The Reinsurer (if not domiciled in the United States of America)
has agreed to allow for the purpose of paying the Federal Excise
Tax the percentage specified by United States law of the premium
payable hereon to the extent such premium is subject to Federal
Excise Tax (subject to the provisions of any applicable
international tax treaties). In the event of any return of
premium becoming due hereunder the Reinsurer will deduct the
percentage specified by United States law from the amount of the
return and the Company or its agent will take steps to recover
the Tax from the United States Government.
ARTICLE 5
---------
CURRENCY
--------
Wherever the word "Dollars" and/or the sign "$" appear in this
Contract, they shall be construed to mean United States Dollars.
Where the Company receives premiums or pays losses in currencies
other than United States Currency, such premiums and losses
shall be converted into United States Dollars at the actual
rates of exchange at which such premiums or losses are entered
on the Company's books.
ARTICLE 6
---------
EXCLUSIONS
----------
This Contract specifically excludes:
1. Flood and/or Earthquake when written alone.
2. Mortgage Impairment Business.
3. All reinsurance assumed other than facultative.
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4. War risk, bombardment, invasion, insurrection, rebellion,
revolution, military or usurped power, or confiscation by order
of any government or public authority, as excluded under a
standard policy continuing a standard War Exclusion Clause.
5. All liability of the Company arising, by contract, operation of
law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund. "Insolvency
Fund" includes any guaranty fund, insolvency fund, plan, pool,
association, fund or other arrangement, howsoever denominated,
established or governed; which provides for any assessment of or
payment or assumption by the Company of part or all of any
claim, debt, charge, fee, or other obligation of an insurer, or
its successors or assigns, which has been declared by any
competent authority to be insolvent, or which is otherwise
deemed unable to meet any claim, debt, charge, fee, or other
obligation in whole or in part.
6. Third Party Bodily Injury or Death Liability, Third Party
Personal Injury Liability, Third Party Property Damage Liability
and Medical Payments insurance; however, nothing herein
contained shall be construed as excluding liability for damage
to property in an insureds care, custody or control for which
the insured may be liable.
7. Loss and/or damage and/or costs and/or expenses arising from
Seepage and/or Pollution and/or Contamination, other than
contamination from smoke damage. Nevertheless, this exclusion
does not preclude any payment of the cost of the removal of
debris of property damaged by a loss otherwise covered hereunder
but subject always to a limit of 25% of the Company's property
loss under the original policy.
8. Special Programs as declared by the Company.
9. Liability of the Company as excluded by the following clauses,
which are attached to and made a part of this Contract:
a. Nuclear Incident Exclusion Clauses - Physical Damage -
Reinsurance - U.S.A. and Canada; and Nuclear Energy Risk
Exclusion Clause (Reinsurance) - Worldwide Excluding U.S.A.
and Canada.
b. Pools, Associations and Syndicates Exclusion Clause.
10. Extra Contractual Obligations and/or Losses in Excess of Policy
Limits.
"Extra Contractual Obligations" are defined as those liabilities
not covered under any other provision of this Contract and which
arise from the handling of any claim on business covered
hereunder, such liabilities arising because of, but not limited
to, the following: failure by the Company to settle within the
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<PAGE> 144
policy limit, or by reason of alleged or actual negligence,
fraud or bad faith in rejecting an offer of settlement or in the
preparation of the defense or in the trial of any action against
its insured or reinsured or in the preparation or prosecution of
an appeal consequent upon such action.
"Loss in excess of the Policy limit" is defined as any loss
exceeding the limit of the Company's policy, having been
incurred because of failure by the Company to settle within the
policy limit or by reason of alleged or actual negligence, fraud
or bad faith in rejecting an offer of settlement or in the
preparation of the defense or in the trial of any action against
its insured or reinsured or in the preparation or prosecution of
an appeal consequent upon such action. For the purposes of this
definition, the word "loss" shall mean any amounts for which the
Company would have been contractually liable to pay had it not
been for the limit of the policy.
"Extra Contractual Obligations" and "Loss In Excess Of Policy
Limit" shall also include any exemplary or punitive damages
assessed against the Company due to the fraud of a member of the
Board of Directors or a corporate officer of the Company acting
individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in
the presentation, defense or settlement of any claim covered
hereunder.
ARTICLE 7
---------
DEFINITION OF LOSS OCCURRENCE
-----------------------------
The term "Loss Occurrence" wherever appearing in this contract
shall mean the sum of all individual losses directly occasioned
by any one disaster, accident or loss or series of disasters,
accidents or losses arising out of one event which occurs within
the area of one state of the United States or province of Canada
and states or provinces contiguous thereto and to one another.
However, the duration and extent of any one loss occurrence
shall be limited to all individual losses sustained by the
Company occurring during any period of 168 consecutive hours
arising out of and directly occasioned by the same event, except
that the term "loss occurrence" shall be further defined as
follows:
1. AS REGARDS WINDSTORM, HAIL, TORNADO, HURRICANE, CYCLONE
(INCLUDING ENSUING COLLAPSE AND WATER DAMAGE) All individual
losses sustained by the Company occurring during any period of
72 consecutive hours arising out of and directly occasioned by
the same event.
2. AS REGARDS RIOT, RIOT ATTENDING A STRIKE, CIVIL COMMOTION,
VANDALISM AND MALICIOUS MISCHIEF All individual losses
sustained by the Company occurring during any period of 72
consecutive hours within the area of one municipality or county
and the municipalities or counties contiguous thereto arising
out of and directly occasioned by the same event. The maximum
duration of 72 consecutive hours may be extended in respect of
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<PAGE> 145
individual losses which occur beyond such 72 consecutive hours
during the continued occupation of an insureds premises by
strikers, provided such occupation commenced during the
aforesaid period.
3. AS REGARDS EARTHQUAKE (THE EPICENTER OF WHICH NEED NOT
NECESSARILY BE WITHIN THE TERRITORIAL CONFINES REFERRED TO IN
THE FIRST PARAGRAPH OF THIS ARTICLE) AND FIRE FOLLOWING DIRECTLY
OCCASIONED BY THE EARTHQUAKE
Only those individual fire losses which commence during the
period of 168 consecutive hours may be included in the Company's
loss occurrence.
4. AS REGARDS FREEZE Only individual losses directly occasioned by
collapse, breakage or glass, and water damage (caused by
bursting of frozen pipes and tanks) may be included in the
Company's loss occurrence.
For all those loss occurrences other than 2. above, the Company
may choose the date and time when any such period of consecutive
hours commences provided that it is not earlier than the date
and time of the occurrence of the first recorded individual loss
sustained by the Company arising out of that disaster, accident
or loss and provided that only one such period of 168
consecutive hours shall apply with respect to one event, except
for any loss occurrence referred to in 1. above, where only one
such period of 72 consecutive hours shall apply with respect to
one event, regardless of the duration of the event.
As respects those loss occurrences referred to in 2. above, if
the disaster, accident or loss occasioned by the event is of
greater duration than 72 consecutive hours, then the Company may
divide that disaster, accident or loss into two or more loss
occurrences provided no two periods overlap and no individual
loss is included in more than one such period and provided that
no period commences earlier than the date and time of the
occurrence of the first recorded individual loss sustained by
the Company arising out of that disaster, accident or loss.
No individual losses occasioned by an event that would be
covered by 72 hour clauses may be included in any loss
occurrence claimed under the 168 hour provisions.
ARTICLE 8
---------
ULTIMATE NET LOSS
-----------------
The term "ultimate net loss" wherever used in this Contract
shall mean:
1. the actual loss or losses paid by the Company, plus
2. expenses of litigation (if any), plus
3. all other loss expenses of the Company (excluding office
expenses and salaries of officials of the Company except in the
case of field claim adjusters or staff attorneys, and then only
when the time spent by any adjuster or staff attorney is
definitely allocated to a specific claim or specific
catastrophe), less
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<PAGE> 146
4. salvages and/or recoveries (if any), less
5. recoveries from all other reinsurance's effected by the Company
relating to the business described in ARTICLE 1, whether
collected or not (except that the Company is permitted to carry
underlying Catastrophe reinsurance, recoveries under which shall
inure to the Company's sole benefit), all relating to any one
loss occurrence.
All salvages, recoveries or payments recovered or received
subsequent to a loss settlement under this contract shall be
applied as if recovered or received prior to the aforesaid
settlement, and all necessary adjustments shall be made by the
parties hereto.
Nothing in this Article, however, shall be construed as meaning
that losses are not recoverable from the Reinsurer until the
ultimate net loss to the company has been ascertained.
ARTICLE 9
---------
NET RETAINED LINES
------------------
This Contract applies only to that portion of any insurance or
reinsurance which the Company retains net for its own account.
In calculating the amount of any loss hereunder and also in
computing the amount or amounts in excess of which this contract
attaches, only loss or losses in respect of that portion of any
insurance or reinsurance which the Company retains net for its
own account shall be included.
The amount of the Reinsurer's liability hereunder in respect of
any loss or losses shall not be increased by reason of the
inability of the Company to collect from any other reinsurers,
whether specific or general, any amounts which may have become
due from them, whether such inability arises from the insolvency
of such other reinsurers or otherwise.
ARTICLE 10
----------
CLAIMS
------
The Company shall give immediate notice to the Reinsurer of any
loss occurrence which they have reason to believe could involve
this Contract.
The Company shall keep the Reinsurer informed of all
developments likely to affect any payment by the Reinsurer under
this Contract.
The Company may commence, continue, defend, settle or withdraw
from actions, suits or prosecutions and generally do all such
things relating to any loss occurrence in which the Reinsurer is
interested as, in the Company's judgment, may be beneficial or
expedient to both parties.
All settlements made by the Company, provided same are within
the original terms of this Contract, shall be unconditionally
binding upon the Reinsurer. The share of the Reinsurer in any
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<PAGE> 147
settlement shall be payable by the Reinsurer to the Company upon
reasonable evidence of the amount paid or to be paid being given
by the Company.
ARTICLE 11
----------
LOSS RESERVES
-------------
This Article applies only if the Reinsurer does not qualify for
credit by any state or any other governmental authority having
jurisdiction over the Company's loss reserves; if the Reinsurer
does not qualify, they shall be subject to the terms of the Loss
Reserves Clause attached to and forming a part of this Contract.
ARTICLE 12
----------
ACCESS TO RECORDS
-----------------
The duly accredited representative of the Reinsurer, at all
reasonable times during the currency of this Contract and to the
extent of the Reinsurer's interest thereafter, shall have access
at the offices of the Company to all records of the Company
which pertain in any way to this Contract or the subject matter
thereof, provided always that the Reinsurer shall have given to
the Company prior written notice of their desire to obtain
information.
ARTICLE 13
----------
ERRORS AND OMISSIONS
--------------------
Any inadvertent error, omission or delay in complying with the
terms and conditions of this Contract shall not be held to
relieve or increase the liability of either party hereto. Upon
discovery of such an incident, rectification shall be made as
soon as reasonably practicable, following which the position of
the parties shall be as though the incident had not occurred.
ARTICLE 14
----------
SERVICE OF SUIT (Applicable only to Reinsurers not domiciled in
---------------
the United States of America, and/or is not authorized in any
State, Territory and/or District of the United States where
authorization is required by insurance regulatory authorities.)
In the event of the failure of the Reinsurer to pay any amount
claimed to be due hereunder, the Reinsurer, at the request of
the Company, will submit to the jurisdiction of a Court of
competent jurisdiction within the United States. Nothing in
this Article constitutes or should be understood to constitute a
waiver of the Reinsurer's rights to commence an action in any
Court of competent jurisdiction in the United States, to remove
an action to a United States District Court, or to seek a
transfer of a case to another Court as permitted by the laws of
the United States or of any State in the United States.
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<PAGE> 148
Service of process in such suit may be made upon Mendes & Mount,
Citicorp Plaza, 725 South Figueroa Street, 19th, floor, Los
Angeles, California 90017 (but only as respects suit brought in
the State of New York, service of process on the Reinsurer in
such suit may be made upon Messrs. Mendes & Mount, 750 Seventh
Avenue, New York, New York 10019-6829) and in any suit
instituted against the Reinsurer upon this Contract, the
Reinsurer will abide by the final decision of such Court or of
any Appellate Court in the event of an appeal.
The above named are authorized and directed to accept service of
process on behalf of the Reinsurer in any such suit and/or upon
the company's request to give a written undertaking to the
Company that they will enter a general appearance upon the
Reinsurer's behalf in the event such a suit shall be instituted.
Further, pursuant to any statute of any state, territory or
district of the United States which makes provision therefore,
the Reinsurer hereby designates the Superintendent, Commissioner
or Director of Insurance or other officer specified for the
purpose in the statute, or his successor or successors in
office, as their true and lawful attorney upon whom may be
served any lawful process in any action, suit or proceeding
instituted by or on behalf of the Company or any beneficiary
hereunder arising out of this Contract, and hereby designates
the above named as the firm to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE 15
----------
ARBITRATION
-----------
As a precedent to any right of action hereunder, any dispute
between the Company and the Reinsurer (hereinafter referred to
as the "parties") with reference to their rights and obligations
under this Contract, whether during or after the currency
hereof, shall be submitted to three arbitrators, one to be
chosen by each party, and the third by the two so chosen. All
correspondence between all participants in the arbitration shall
be sent by certified or registered mail, return receipt
requested; refusal to accept any such correspondence is equal to
an acknowledgment of receipt.
The party requesting arbitration (claimant) shall mail to the
other party (respondent) written notice to that effect and name
its arbitrator. If the respondent refuses or neglects to
appoint its arbitrator within thirty days after the receipt of
said written notice from the claimant, the claimant shall
appoint a second arbitrator. If the two arbitrators fail
otherwise to agree in the selection of the third arbitrator they
shall, within thirty days of their appointment, each name three,
of whom the other shall decline two and the decision shall be
made by drawing lots.
All arbitrators shall be active or retired executive officers of
insurance or reinsurance companies or Underwriters at Lloyd's,
London, none of whom have any personal interest in the outcome
of the dispute. The arbitrators shall interpret this Contract
as an honorable engagement and not only as a legal obligation.
They are relieved of all judicial formalities and may abstain
from following the strict rules of law. They shall make their
decision with a view to effecting the general purpose of this
Contract in a reasonable manner rather than in accordance with a
literal interpretation of the language.
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<PAGE> 149
Each party shall submit its case to the arbitrators within
thirty days of the selection of the third arbitrator. Thirty
additional days shall then be allowed for rejoinder and
surrejoinder before the arbitrators shall be required to hand
down their decision. The majority decision of the arbitrators,
when filed in writing with the parties, shall be final and
binding on both parties. The parties hereby consent to the
entry of judgment upon the final decision of the arbitrators in
any Court having jurisdiction.
The arbitrators are empowered to prolong the terms granted above
for the filing of papers and equally of the handing down of a
decision, but in any event they shall be bound to give their
decision within five months from the day of receipt by the
respondent of the written request for arbitration by the
claimant.
Each party shall bear the expense of the arbitrator appointed by
or for it, and shall jointly and equally bear with the other
party the expense of the third arbitrator and of the
arbitration. Said arbitration shall take place in the city in
which the Company's Head Office is located unless some other
place is mutually agreed upon by the parties.
ARTICLE 16
----------
INSOLVENCY
----------
In the event of the insolvency of the Company and the
appointment of a conservator, liquidator, receiver or statutory
successor of the Company, this reinsurance shall be payable
directly to such conservator, liquidator, receiver or statutory
successor immediately upon demand, with reasonable provision for
verification, on the basis of claims allowed against the
insolvent company by any court of competent jurisdiction or by
any conservator, liquidator, receiver or statutory successor of
the Company having authority to allow such claims, without
diminution because of such insolvency or because such
conservator, liquidator, receiver or statutory successor has
failed to pay all or a portion of any claims. It is agreed,
however, that the conservator, liquidator, receiver or statutory
successor of the Company shall give written notice to the
Reinsurer of the pendency of a claim against the Company
indicating the policy or bond reinsured which claim would
involve a possible liability on the part of the Reinsurer within
a reasonable time after such claim is filed in the conservation
or liquidation proceeding or in the receivership, and that
during the pendency of such claim, the Reinsurer may investigate
such claim and interpose, at its own expense, in the proceeding
where such claim is to be adjudicated any defense or defenses
that it may deem available to the Company or its conservator,
liquidator, receiver or statutory successor. The expense thus
incurred by the Reinsurer shall be chargeable, subject to the
approval of the court, against the Company as part of the
expense of conservation or liquidation to the extent of a pro
rata share of the benefit which may accrue to the Company solely
as a result of the defense undertaken by the Reinsurer.
Where two or more Reinsurers on this Contract are involved in
the same claim and a majority in interest elect to interpose
defense to such claim, the expense shall be apportioned in
accordance with the terms of this Contract as though such
expense had been incurred by the Company.
As to all reinsurance made, ceded, renewed or otherwise becoming
effective under this Contract, the reinsurance shall be payable
as set for above by the Reinsurer to the Company or to its
conservator, liquidator, receiver or statutory successor, except:
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<PAGE> 150
1. as provided by Sections 4118 (a)(1)(A) and 1114(c) of the New
York Insurance Law, or
2. where the original contract of insurance or reinsurance
specifically provides another payee in the event of the
insolvency of the Company; and where the Reinsurer, with the
consent of the direct insured or insureds, has assumed such
policy obligations of the Company as direct obligations of the
Reinsurer to the payees under such policies and in substitution
for the obligations of the Company to such payees. Then, and in
that event only, the Company, with the prior approval of the
certificate of assumption on New York risks by the
Superintendent of Insurance of the State of New York, is
entirely released from its obligation and the Reinsurer pays any
loss directly to payees under such policy.
ARTICLE 17
----------
INTERMEDIARY
------------
Guy Carpenter & Company, Inc. is hereby recognized as the
Intermediary negotiating this Contract for all business
hereunder. All communications (including but not limited to
notices, statements, premiums, return premiums, commissions,
taxes, losses, loss adjustment expenses, salvages, and loss
settlements) relating thereto shall be transmitted to the
Company or the Reinsurer through Guy Carpenter & Company, Inc.
Payments by the Company to the Intermediary shall be deemed to
constitute payment to the Reinsurer. Payments by the Reinsurer
to the Intermediary shall be deemed to constitute payment to the
Company only to the extent that such payments are actually
received by the Company.
ARTICLE 18
----------
MODIFICATIONS
-------------
Any mutually agreed modifications to this Contract (whether by
Addendum or correspondence) shall be binding on both parties and
shall be deemed to form a part of this Contract.
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<PAGE> 151
EXHIBIT A
---------
FIRST PROPERTY CATASTROPHE EXCESS OF LOSS
REINSURANCE CONTRACT
----------------------------------------------------
SECTION 1 - AMOUNT OF COVER
---------------------------
The Reinsurer shall not be liable for any loss hereunder until
the Company's ultimate net loss in each loss occurrence exceeds
$10,000,000 and then the Reinsurer shall be liable for the
amount of the Company's ultimate net loss in each loss
occurrence the excess of $10,000,000, but the Reinsurer's
liability shall not exceed $90,000,000 ultimate net loss in each
loss occurrence. For the purposes of the Contract, "Ultimate
Net Loss" shall be as defined in ARTICLE 8, "Loss Occurrence"
shall be as defined in ARTICLE 7, "Company's retention" shall be
as defined in Section 2 of this Exhibit, and the amount of
coverage provided shall be further subject to the limitations
stated in Section 4 of this Exhibit.
SECTION 2 - WARRANTED COMPANY RETENTION
---------------------------------------
It is warranted by the Company that they will retain 5% of the
limit of this Contract (being 5% or $4,500,000 part of
$90,000,000 each loss occurrence) net for their own account.
SECTION 3 - PREMIUM
-------------------
The Company shall pay the Reinsurer an annual premium of
$18,000,000, payable quarterly in advance of equal installments
of $4,500,000 each, on July 1, October 1, January 1 and April 1.
SECTION 4 - REINSTATEMENT
-------------------------
Each claim hereon reduces the amount of indemnity from the time
of occurrence of the loss by the sum paid, but any amount so
exhausted is hereby reinstated from the time of occurrence of
the loss, and for each amount so reinstated the Company agrees
to pay an additional premium (hereafter called the
"reinstatement premium").
The reinstatement premium shall be calculated on the ultimate
premium stated in Section 3 of this Exhibit. To such ultimate
premium shall be applied the ratio which the payment made by the
Reinsurer in respect of the loss occurrence bears to $90,000,000.
The reinstatement premium shall be deducted by the Reinsurer
from the amount of the loss payment.
Notwithstanding the foregoing, the liability of the Reinsurer
shall never be more than:
1. $90,000,000 in respect of any one loss occurrence, nor
2. $180,000,000 in all during the term of this Contract.
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<PAGE> 152
EXHIBIT B
---------
SECOND PROPERTY CATASTROPHE EXCESS OF LOSS
REINSURANCE CONTRACT
-----------------------------------------------------
SECTION 1 - AMOUNT OF COVER
---------------------------
The Reinsurer shall not be liable for any loss hereunder until
the Company's ultimate net loss in each loss occurrence exceeds
$100,000,000 and then the Reinsurer shall be liable for the
amount of the Company's ultimate net loss in each loss
occurrence the excess of $100,000,000, but the Reinsurer's
liability shall not exceed $100,000,000 ultimate net loss in
each loss occurrence. For the purposes of the Contract,
"Ultimate Net Loss" shall be as defined in ARTICLE 8, "Loss
Occurrence" shall be as defined in ARTICLE 7, "Company's
retention" shall be as defined in Section 2 of this Exhibit and
the amount of coverage provided shall be further subject to the
limitations stated in Section 4 of this Exhibit.
SECTION 2 - WARRANTED COMPANY RETENTION
---------------------------------------
It is warranted by the Company that they will retain 5% of the
limit of this Contract (being 5% or $5,000,000 part of
$100,000,000 each loss occurrence) net for their own account.
SECTION 3 - PREMIUM
-------------------
The Company shall pay the Reinsurer an anual premium of
$12,000,000 payable quarterly in advance in installments of
$3,000,000 each, on July 1, October 1, January 1 and April 1.
SECTION 4 - REINSTATEMENT
-------------------------
Each claim hereon reduces the amount of indemnity from the time
of occurrence of the loss by the sum paid, but any amount so
exhausted is hereby reinstated from the time of occurrence of
the loss, and for each amount so reinstated the Company agrees
to pay an additional premium (hereafter called the
"reinstatement premium").
The reinstatement premium shall be calculated on the ultimate
premium stated in Section 3 of this Exhibit. To such ultimate
premium shall be applied the ratio which the payment made by the
Reinsurer in respect of the loss occurrence bears to
$100,000,000.
The reinstatement premium shall be deducted by the Reinsurer
from the amount of the loss payment.
Notwithstanding the foregoing, the liability of the Reinsurer
shall never be more than:
1. $100,000,000 in respect of any one loss occurrence, nor
2. $200,000,000 in all during the term of this Contract.
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<PAGE> 153
Page 1 of 6
No. 3341-00-0002-00-95-03-00-00
San Francisco, January 4, 1995
20th Century Insurance Company
6301 Owensmouth
Woodland Hills, California 91367
Gentlemen:
We are in receipt of confirmation that the following reinsurance has
been effected for your account:
REASSURED 20th Century Insurance Company
21st Century Casualty Company
Woodland Hills, California
TREATY 60% QUOTA SHARE TREATY applying to all business
classified by the Reassured as Personal Excess Liability
Policy (P.E.L.P.).
LIMIT 60% Quota Share of a maximum of $1,000,000 CSL any one
risk (Maximum cession $600,000 CSL any one risk).
The Reassured shall be the sole judge of what constitutes
one risk.
TERRITORY This reinsurance shall apply wherever the Reassured's
policies apply.
RETENTION 40% Quota Share subject only to Contingency Reinsurance.
Recoveries under which shall inure to the Reassured's
sole benefit.
PERIOD Continuous and to apply to new, renewal and
reunderwritten policies incepting on and after
12:01 a.m., Pacific Standard Time January 1, 1995.
<PAGE> 154
Page 2 of 6
3341-00-0002-00-95-03-00-00
CANCELLATION At 12:01 a.m., Pacific Standard Time of any January 1
following 90 days' notice. In the event of cancellation,
the Reassured shall have the option of terminating
Reinsurers' liability in force at cancellation date with
return by Reinsurers of the unearned premium portfolio,
or of continuing Reinsurers' liability until the first
anniversary date following cancellation.
Irrespective of the cancellation option chosen by the
Reassured, Reinsurers will remain liable for losses
occurring on risks in force at cancellation which for any
reason the Reassured is unable to cancel but in no event
shall Reinsurers liability continue for more than three
years from cancellation date.
PREMIUM AND
COMMISSION Gross original rates as allocated by the Reassured less
22.5% commission.
ACCOUNTS Quarterly within 45 days of close of quarter with
settlement within 60 days of close of quarter.
CASH LOSSES $100,000
WARRANTY Reassured shall use only their Policy.
EXCLUSIONS As per attached Exclusion List.
LOSS ADJUSTMENT
AND
LEGAL EXPENSES Pro rated and in proportion to each party's share of loss
and in addition to limit hereof, except where the limit
of the Reassured's policy includes defense costs as part
of the limit.
STATISTICAL
REPORTS Quarterly reports of unearned premiums and outstanding
losses.
<PAGE> 155
Page 3 of 6
3341-00-0002-00-95-03-00-00
NON-ADMITTED
REINSURERS Agree to provide clean, irrevocable and unconditional
Letters of Credit as respects outstanding loss reserves,
IBNR, LAE and unearned premiums.
CLAUSES Extended Expiration Clause
Original Conditions Clause
Extra Contractual Obligations Clause (Combined
contractual and extra contractual loss not to exceed the
limit of this Reinsurance).
Excess of Policy Limits Clause
Access to Records Clause
Errors and Omissions Clause
Tax/Federal Excise Tax Statutory Amount
Service of Suit Clause
Arbitration Clause
Insolvency Clause
Guy Carpenter Intermediary Clause
<PAGE> 156
Page 4 of 6
3341-00-0002-00-95-03-00-00
REINSURERS
----------
The Mercantile and General Reinsurance Company of America 15.0%
SCOR Reinsurance Company 15.0%
Underwriters Reinsurance Company 30.0%
-----
60.0%
=====
GUY CARPENTER & COMPANY, INC.
Timothy J. Brophy
Senior Vice President
<PAGE> 157
Page 5 of 6
3341-00-0002-00-95-03-00-00
20TH CENTURY INSURANCE COMPANY
PERSONAL EXCESS LIABILITY QUOTA SHARE TREATY
--------------------------------------------
EXCLUSION LIST
--------------
This Contract does not apply to and specifically excludes the following:
1. Perils and clauses which are excluded in the Reassureds Personal Excess
Liability Policy (P.E.L.P.).
2. Assumed Reinsurance except Agency Reinsurance.
3. Nuclear Incident Exclusion Clause.
4. War risks, bombardment, invasion, insurrection, rebellion, revolution,
military or usurped power, and confiscation by order of any government
or civil authority, as excluded under a standard policy containing a
standard war exclusion clause.
5. Accident and Health Insurance.
6. Losses arising out of seepage and pollution as per original exclusions.
However, this exclusion shall not apply when the Reassured includes its
seepage and pollution exclusion on a policy and the judicial entity
having legal jurisdiction invalidates the Reassured's exclusion, thereby
obligating the Reassured for liability for seepage and pollution when
such liability was intended to be excluded from coverage by the
Reassured's seepage and pollution exclusion.
7. All liability of the Company arising, by contract, operation of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency Fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, howsoever denominated, established or governed; which
provides for any assessment of or payment or assumption by the Company
of part or all of any claim, debt, charge, fee, or other obligation of
an insurer, or its successors or assigns, which has been declared by any
competent authority to be insolvent, or which is otherwise deemed unable
to meet any claim, debt, charge, fee, or other obligation in whole or in
part.
<PAGE> 158
Page 6 of 6
3341-00-0002-00-95-03-00-00
LOSSES AND LOSS ADJUSTMENT EXPENSES
-----------------------------------
As provided in ARTICLE 12, the Company shall settle all losses, and such
settlements shall be unconditionally binding upon the Reinsurer in proportion
to its participation.
In addition to the limit hereunder, as shown in ARTICLE 4, the Reinsurer
shall be liable for its pro rata share of all loss adjustment expenses, as
defined herein, incurred by the Company in connection with the settlement of,
resistance to and negotiations concerning claims and losses. Notwithstanding
the foregoing, if the Company's policy includes defense costs as part of the
policy limit, such defense costs shall be included with the loss (if any) in
making up the recovery from the Reinsurer, up to the limit of this Agreement.
The term "loss adjustment expenses" shall mean court costs, interest
upon awards and judgments, allocated expenses for investigation and
adjustment, and all allocated legal expenses paid by the Company which shall
include all legal expense and costs associated with any declaratory judgment
actions brought to determine the Company's defense and/or indemnification
obligations arising under policies ceded to this Agreement. The Reinsurer
shall not, however, be required to contribute to the salary charges of any
officials or permanent employees of the Company except in the case of field
claim adjusters or staff attorneys, and then only when the time spent by any
adjuster or staff attorney is definitely allocated to a specific claim or
loss.
The Reinsurer shall be credited with its proportionate share of salvage
or recovery made by the Company on account of claims and settlement involving
reinsurance hereunder. The Company hereby agrees to enforce its rights to
salvage or subrogation relating to any loss, a part of which loss was
sustained by the Reinsurer and to prosecute all claims arising out of such
rights. All salvages, recoveries or payments recovered or received
subsequent to a loss settlement under this Agreement shall be applied as if
recovered or received prior to the aforesaid settlement, and all necessary
adjustment shall be made by the parties hereto.
The amounts due from the Reinsurer shall be charged in the quarterly
accounts. If the amount due from the Reinsurer in respect of any one loss
exceeds its percentage of $100,000 the Reinsurer shall upon demand forthwith
remit the amount due. The Reinsurer reserves the right to reduce such amount
by the amount of any balances under this Agreement which may be due to the
Reinsurer in current account.
<PAGE> 159
Reinsurer Reference RA 1121
PROPERTY CATASTROPHE EXCESS OF LOSS
REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
between
20th CENTURY INSURANCE COMPANY
and/or
21st CENTURY CASUALTY COMPANY,
Woodland Hills, California
(hereinafter referred to collectively as the "Company")
and
NATIONAL INDEMNITY COMPANY,
Omaha, Nebraska
(hereinafter referred to as the "Reinsurer")
Article I. Business Covered.
This Contract applies to loss occurrences which take place during
the currency of this Agreement under all policies, certificates,
binders and/or contracts of insurance or reinsurance (hereinafter
called "policy" or "policies") which are issued or may be issued by
or on behalf of the Company and classified by the Company as
Homeowners (Section I only), Condominium Owners (Section I only),
Dwelling Fire, Inland Marine, and/or Automobile Physical Damage.
Article II. Term.
This Agreement shall take effect from 12:01 a.m., Pacific Daylight
Savings Time, January 23, 1995 to 11:59 p.m., Pacific Standard
Time, May 15, 1995 (hereinafter, the "Period"), and shall apply to
Loss Occurrences which take place during the Period of this
Agreement.
If this Agreement shall terminate while a Loss Occurrence covered
hereunder is in progress, it is agreed that, subject to the other
terms and conditions of this Agreement, the Reinsurer is
responsible for its proportion of the entire loss. Conversely, if
this
<PAGE> 160
Agreement shall commence while a Loss Occurrence otherwise
covered hereunder is in progress, it is agreed that the Reinsurer
shall not be responsible for any Ultimate Net Loss arising from
such Loss Occurrence, regardless of when such Ultimate Net Loss is
incurred.
Article III. Premium.
The Company shall pay to the Reinsurer, by wire transfer, a Premium
of $7,747,500 prior to 5:00 p.m., Eastern Standard Time, January
20, 1995. The Premium shall be non-refundable and fully earned
upon inception of the coverage provided hereunder.
Article IV. Amount of Cover.
The Reinsurer shall not be liable for any loss hereunder until the
Company's Ultimate Net Loss in each Loss Occurrence exceeds the
indicated Retention, and then the Reinsurer shall be liable for the
amount of the Company's Ultimate Net Loss in each Loss Occurrence
excess of the Retention, but the Reinsurer's liability shall not
exceed the indicated Limit, as set forth below, in Ultimate Net
Loss in each Loss Occurrence.
PERIOD LIMIT RETENTION
01/23/95 - 02/15/95 $200,000,000 $250,000,000
02/16/95 - 02/28/95 $200,000,000 $200,000,000
03/01/95 - 03/15/95 $175,000,000 $200,000,000
03/16/95 - 03/31/95 $145,000,000 $200,000,000
04/01/95 - 04/15/95 $105,000,000 $200,000,000
04/16/95 - 04/30/95 $70,000,000 $200,000,000
05/01/95 - 05/15/95 $35,000,000 $200,000,000
The above limit of liability applies to Ultimate Net Loss as a
result of each Loss Occurrence excess of the Retention. In the
event of a Loss Occurrence in excess of the Retention, the
applicable limit of liability under this Agreement will be
determined based on the date of that first Loss Occurrence (first
Loss Occurrence being determined chronologically). If the first
Loss Occurrence results in losses ceded to this Agreement
<PAGE> 161
equal to the applicable limit stated above for the date of the first Loss
Occurrence, then no further coverage will be provided hereunder for
any subsequent Loss Occurrence.
In the event that the first Loss Occurrence is less than the
applicable limit for the date of that first Loss Occurrence, then
the remaining limit available hereunder for the second Loss
Occurrence excess of the Retention will be determined by first
taking the applicable full limit for the first Loss Occurrence as
stated above less the Ultimate Net Loss finally ceded to the
Reinsurer from the first Loss Occurrence and dividing that
difference by the applicable limit stated above for the first Loss
Occurrence. The resulting fraction will then be multiplied by the
limit stated above applicable to the date of the second Loss
Occurrence. The resulting product is the limit available hereunder
excess of the Retention for the second Loss Occurrence.
If the second Loss Occurrence does not exhaust the remaining limit,
then the remaining limit for the third and subsequent chronological
Loss Occurrences during the Period of this cover excess of the
Retention shall be determined in the same manner. If the second
Loss Occurrence does exhaust the pro rata remaining limit as
determined above, there shall be no further coverage hereunder. No
loss payment for the second or subsequent Loss Occurrences shall be
made until the Reinsurer and Company mutually agree on the total
loss to be ceded hereunder for each of the chronologically prior
Loss Occurrences.
Article V. Territory.
This Agreement shall apply only to the State of California of the
United States of America.
Article VI. Exclusions.
This Agreement specifically excludes from the Limits and Retentions
hereunder:
1. Flood and/or Earthquake when written alone.
2. Mortgage Impairment Business.
3. All reinsurance assumed other than facultative.
4. War risk, bombardment, invasion, insurrection, rebellion,
revolution, military or usurped power, or confiscation by
order of any government or public authority, as excluded under
a standard policy containing a standard War Exclusion Clause.
5. All liability of the Company arising by contract, by operation
of law, or otherwise,
<PAGE> 162
from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency fund" includes
any guaranty fund, insolvency fund, plan, pool, association, fund
or other arrangement, howsoever denominated, established or
governed; which provides for any assessment of or payment or
assumption by the Company of part or all of any claim, debt,
charge, fee or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority to
be insolvent, or which is otherwise deemed unable to meet any claim,
debt, charge, fee or other obligation in whole or in part.
6. Third Party Bodily Injury or Death Liability, Third Party
Personal Injury Liability, Third Party Property Damage
Liability and Medical Payments insurance; however, nothing
herein contained shall be construed as excluding liability for
damage to property in an insured's care, custody or control
for which the insured may be liable.
7. Loss and/or damage and/or costs and/or expenses arising from
Seepage and/or Pollution and/or Contamination, other than
contamination from smoke damage. Nevertheless, this exclusion
does not preclude any payment of the cost of the removal of
debris of property damaged by a loss otherwise covered
hereunder but subject always to a limit of 25% of the
Company's property loss under the original policy.
8. Special Programs as declared by the Company.
9. Liability of the Company as excluded by the following clauses,
which are attached hereto and made a part of this Agreement:
a. Nuclear Incident Exclusion Clauses - Physical Damage -
Reinsurance - U.S.A. and Canada; and Nuclear Energy Risk
Exclusion Clause (Reinsurance) - Worldwide Excluding
U.S.A. and Canada.
b. Pools, Associations and Syndicates in accordance with the
Pools, Associations and Syndicates Exclusions Clause.
10. Extra Contractual Obligations and/or Losses in Excess of
Policy Limits.
"Extra Contractual Obligations" are defined as those
liabilities not covered under any other provision of this
Agreement and which arise from the handling of any claim on
business covered hereunder, such liabilities arising because
of, but not limited to, the following: failure by the Company
to settle within the policy limit, or by reason of alleged or
actual negligence, fraud or bad faith in rejecting an offer of
settlement or in the preparation of the defense or in the
trial of any action
<PAGE> 163
against its insured or reinsured or in the preparation or
prosecution of an appeal consequent upon such action.
"Losses in Excess of Policy Limits" are defined as any losses
exceeding the limit of the Company's policy, having been
incurred because of failure by the Company to settle within
the policy limit or by reason of alleged or actual negligence,
fraud or bad faith in rejecting an offer of settlement or in
the preparation of the defense or in the trial of any action
against its insured or reinsured or in the preparation or
prosecution of an appeal consequent upon such action. For the
purposes of this definition, the word "loss" shall mean any
amounts for which the Company would have been contractually
liable to pay had it not been for the limit of the policy.
"Extra Contractual Obligations" and "Losses in Excess of
Policy Limits" shall also include any exemplary or punitive
damages assessed against the Company due to the fraud of a
member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion
with any individual or corporation or any other organization
or party involved in the presentation, defense or settlement
of any claim covered hereunder.
11. "Unallocated Loss Adjustment Expenses", which shall mean all
court costs, attorneys' fees, expenses and interest which are
not allocated to a specific Loss Occurrence for which
reimbursement is due the Company under this Agreement.
Unallocated Loss Adjustment Expenses shall include salaries of
officers and permanent employees of the Reinsured.
Article VII. Loss Occurrence.
The term "Loss Occurrence" wherever appearing in this Agreement
shall mean the sum of all individual losses directly occasioned by
any one disaster, accident or loss or series of disasters,
accidents or losses arising out of one event which occurs within
the Territory as defined in Article V. of this Agreement. However,
the duration and extent of any one Loss Occurrence shall be limited
to all individual losses sustained by the Company occurring during
any period of 168 consecutive hours arising out of and directly
occasioned by the same event, except that the term "Loss
Occurrence" shall be further defined as follows:
1. AS REGARDS WINDSTORM, HAIL, TORNADO, HURRICANE, CYCLONE,
INCLUDING ENSUING COLLAPSE AND WATER DAMAGE, all
individual losses sustained by the Company occurring
during any period of 72 consecutive hours arising out of
and directly occasioned by the same event.
<PAGE> 164
2. AS REGARDS RIOT, RIOT ATTENDING A STRIKE, CIVIL
COMMOTION, VANDALISM AND MALICIOUS MISCHIEF, all
individual losses sustained by the Company occurring
during any period of 72 consecutive hours within the area
of one municipality or county and the municipalities or
counties contiguous thereto arising out of and directly
occasioned by the same event. The maximum duration of 72
consecutive hours may be extended in respect of
individual losses which occur beyond such 72 consecutive
hours during the continued occupation of an insured's
premises by strikers, provided such occupation commenced
during the aforesaid period.
3. AS REGARDS EARTHQUAKE (THE EPICENTER OF WHICH NEED NOT
NECESSARILY BE WITHIN THE TERRITORIAL CONFINES REFERRED
TO IN THE OPENING PARAGRAPH OF THIS ARTICLE) AND FIRE
FOLLOWING DIRECTLY OCCASIONED BY THE EARTHQUAKE, only
those individual fire losses which commence during the
period of 168 consecutive hours may be included in the
Company's Loss Occurrence.
4. AS REGARDS "FREEZE", only individual losses directly
occasioned by collapse, breakage of glass and water
damage (caused by bursting of frozen pipes and tanks) may
be included in the Company's Loss Occurrence.
For all those "Loss Occurrences" the Company may choose the date
and time when any such period of consecutive hours commences
provided that it is not earlier than the date and time of the
occurrence of the first recorded individual loss sustained by the
Company arising out of that disaster, accident or loss and provided
that only one such period of 168 consecutive hours shall apply with
respect to one event, except for those "Loss Occurrences" referred
to in subparagraphs 1 and 2 above, where only one such period of 72
consecutive hours shall apply with respect to one event, regardless
of the duration of the event.
No individual losses occasioned by an event that would be covered
by a 72 hours clause may be included in any "Loss Occurrence"
claimed under the 168 hours provision.
Article VIII. Ultimate Net Loss.
The term "Ultimate Net Loss" wherever used in this Agreement shall
mean:
1. the actual loss or losses paid by the Company, plus
2. expenses of litigation (if any) not otherwise excluded
hereunder, plus
<PAGE> 165
3. all other loss expenses of the Company (excluding office
expenses and salaries of officials of the Company except
in the case of field claim adjusters or staff attorneys,
and then only when the time spent by any adjuster or
staff attorney is definitely allocated to a specific
claim or specific catastrophe), less
4. salvages and/or recoveries (if any) as determined in
accordance with Article XI. of this Agreement,
Subrogation and Salvage, less
5. recoveries from all other reinsurances effected by the
Company relating to the business described in Article I,
whether collected or not (except that the Company is
permitted to carry underlying Catastrophe reinsurance,
recoveries under which shall inure to the Company's sole
benefit), all relating to any one Loss Occurrence.
All salvages, recoveries or payments recovered or received
subsequent to a loss settlement under this Agreement shall be
applied as if recovered or received prior to the aforesaid
settlement, and all necessary adjustments shall be made by the
parties hereto.
It is understood and agreed that the Company shall have the benefit
of underlying catastrophe excess of loss reinsurance, recoveries
under which shall inure to the sole benefit of the Company.
Nothing in this Article, however, shall be construed as meaning
that losses are not recoverable from the Reinsurer until the
Ultimate Net Loss to the Company has been ascertained.
Article IX. Net Retained Lines.
This Agreement applies only to that portion of any insurance or
reinsurance which the Company retains net for its own account. In
calculating the amount of any loss hereunder and also in computing
the amount or amounts in excess of which this Agreement attaches,
only loss or losses in respect of that portion of any insurance or
reinsurance which the Company retains net for its own account shall
be included.
The amount of the Reinsurer's liability hereunder in respect of any
loss or losses shall not be increased by reason of the inability of
the Company to collect from any other reinsurers, whether specific
or general, any amounts which may have become due from them,
whether such inability arises from the insolvency of such other
reinsurers or otherwise.
<PAGE> 166
Article X. Claims.
The Company shall give immediate notice to the Reinsurer of any
Loss Occurrence which they have reason to believe could involve
this Agreement.
The Company shall furthermore keep the Reinsurer informed of all
developments likely to affect any payment by the Reinsurer under
this Agreement.
The Company may commence, continue, defend, settle or withdraw from
actions, suits or prosecutions and generally do all such things
relating to any Loss Occurrence in which the Reinsurer is
interested as, in the Company's judgment, may be beneficial or
expedient to both parties. While the Reinsurer is not obligated to
do so, the Reinsurer shall nevertheless be afforded the right to
associate, solely in its discretion and at its own expense, in the
defense, resistance or settlement of any claims arising from a Loss
Occurrence which may possibly give rise to a claim hereunder.
All settlements made by the Company, provided same are within the
original terms of the policies reinsured hereunder and the terms of
this Agreement, shall be unconditionally binding upon the
Reinsurer. The share of the Reinsurer in any settlement shall be
payable by the Reinsurer to the Company upon receipt by the
Reinsurer of proof of loss satisfactory to the Reinsurer.
Article XI. Salvage and Subrogation.
(A) The Reinsurer shall be subrogated, as respects any Ultimate
Net Loss for which the Reinsurer shall actually pay or become
liable to pay, but only to the extent of the amounts of payment by,
or the amount of liability of, the Reinsurer, to all rights of the
Company against any person or other entity who may be legally
responsible in damages for said Ultimate Net Loss. The Company
hereby agrees to enforce such rights. In the event the Company
shall fail or neglect to do so, the Reinsurer is hereby authorized
and empowered to bring any appropriate action in the name of the
Company or insured under a reinsurance contract or insurance policy
reinsured hereunder to enforce such rights.
(B) In determining the amount of recoveries, salvages or
reimbursements, there shall first be deducted from any amount
recovered the expenses incurred in effecting the recovery
(excluding salaries and expenses of officers and employees of the
Company). Once such expense has been paid, any rights of
subrogation, recoveries, salvages or reimbursements applying to
Loss Occurrences reinsured under this Agreement shall always be
used to reimburse the reinsurers excess of Reinsurer (from the last
to the first, beginning with the reinsurer of the last excess)
according their participation, before being
<PAGE> 167
used in any way to reimburse the Reinsurer. The Company shall
recover for the Retention from recoveries, salvages or reimbursements
only after the Reinsurer has been reimbursed in full for its Ultimate
Net Loss reimbursement payment.
(C) All salvages, recoveries or reimbursements, after deduction of
all expenses allowed under Paragraph B of this Article applicable
thereto, recovered or received subsequent to an Ultimate Net Loss
reimbursement by the Reinsurer under this Agreement shall be
applied as if recovered or received prior to the aforesaid
settlement and all necessary adjustments shall be made by the
parties hereto; provided that nothing in this Article shall be
construed to mean that Ultimate Net Losses under this Agreement are
not recoverable until all salvage, recovery and reimbursement has
been determined.
Article XII. Audit and Inspection.
The duly authorized representative of the Reinsurer, at all
reasonable times during the Period of this Agreement (and
thereafter to the extent of any interest expressed by the Reinsurer
in the business reinsured hereunder) shall have access at the
offices of the Company to all records of the Company which pertain
in any way to this Agreement or the subject matter thereof,
provided always that the Reinsurer shall have given to the Company
prior written notice of their desire to obtain information.
Article XIII. Errors and Omissions.
Any inadvertent error, omission or delay in complying with the
terms and conditions of this Agreement shall not be held to relieve
or increase the liability of either party hereto. Upon discovery
of such an incident, rectification shall be made as soon as
reasonably practicable, following which the position of the parties
shall be as though the incident had not occurred.
Article XIV. Insolvency.
The portion of any risk or obligation assumed by the Reinsurer,
when such portion is ascertained, shall be payable on demand of the
Company at the same time as the Company shall pay its net retained
portion of such risk or obligation, with reasonable provision of
verification before payment, and the reinsurance shall be payable
by the Reinsurer, on the basis of the liability of the Company
under the contract or contracts reinsured without diminution
because of the insolvency of the Company.
In the event of the insolvency of the Company and the appointment
of a conservator,
<PAGE> 168
liquidator, receiver or statutory successor of the Company, this
reinsurance shall be payable directly to such conservator,
liquidator, receiver or statutory successor
immediately upon demand, with reasonable provision for
verification, on the basis of claims allowed against the insolvent
company by any court of competent jurisdiction or by any
conservator, liquidator, receiver or statutory successor of the
Company having authority to allow such claims, without diminution
because of such insolvency or because such conservator, liquidator,
receiver or statutory successor has failed to pay all or a portion
of any claim. It is agreed, however, that the conservator,
liquidator, receiver or statutory successor of the Company shall
give written notice to the Reinsurer of the pendency of a claim
against the Company indicating the policy or bond reinsured which
claim would involve a possible liability on the part of the
Reinsurer within a reasonable time after such claim is filed in the
conservation or liquidation proceeding or in the receivership. It
is furthermore agreed that during the pendency of such claim, the
Reinsurer may investigate such claim and interpose, at its own
expense, in the proceeding where such claim is to be adjudicated
any defense or defenses that it may deem available to the Company
or its conservator, liquidator, receiver or statutory successor.
The expense thus incurred by the Reinsurer shall be chargeable,
subject to the approval of the court, against the Company as part
of the expense of conservation or liquidation to the extent of a
pro rata share of the benefit which may accrue to the Company
solely as a result of the defense undertaken by the Reinsurer.
Where two or more Reinsurers on this Contract are involved in the
same claim and a majority in interest elect to interpose defense to
such claim, the expense shall be apportioned in accordance with the
terms of this Contract as though such expense had been incurred by
the Company.
As to all reinsurance made, ceded, renewed or otherwise becoming
effective under this Contract, the reinsurance shall be payable as
set forth above by the Reinsurer to the Company or to its
conservator, liquidator, receiver or statutory successor, except:
1. as provided by Sections 4118(a)(1)(A) and 1114(c) of the
New York Insurance Law, or
2. where the original contract of insurance or reinsurance
specifically provides another payee in the event of the
insolvency of the Company; and where the Reinsurer, with
the consent of the direct insured or insureds, has
assumed such policy obligations of the Company as direct
obligations of the Reinsurer to the payees under such
policies and in substitution for the obligations of the
Company to such payees. Then, and in that event only,
the Company, with the prior approval of the certificate
of assumption on New York risks by the Superintendent of
Insurance of the State of New York, is entirely released
from its obligation and the Reinsurer pays any loss
<PAGE> 169
directly to payees under such policy.
Article XV. Non-Waiver.
The failure of the Company or the Reinsurer to insist on strict
compliance with this Agreement, or to exercise any right or remedy
hereunder, shall not constitute a waiver of any rights contained
herein nor estop the parties from thereafter demanding full and
complete compliance nor prevent the parties from exercising such
remedy in the future.
Article XVI. Modifications.
Any mutually agreed modifications to this Agreement shall be
binding on both parties and shall be deemed to form a part of this
Agreement only when signed by an authorized representative of each
party.
Article XVII. Offset.
The Reinsured or the Reinsurer may offset any balance(s), including
but not limited to offsetting premium and claims payments, which
may become due and owing hereunder. This offset right shall apply
regardless of whether the balances arose on account of premium,
commission, claims, losses, loss adjustment expense, salvage or any
other amount(s) due from one party to the other under this
Agreement or under any other agreement heretofore or hereafter
entered into between the Company and the Reinsurer. This right of
offset shall apply regardless of whether either party was acting as
assuming reinsurer or ceding reinsured or was acting in any other
capacity related or not related to reinsurance.
Article XVIII. Currency.
Whenever the word "Dollars" and/or the sign "$" appears in this
Agreement, it shall be understood to mean United States Dollars.
Where the Company receives premiums or pays losses in currencies
other than United States Dollars, such premiums and losses shall be
converted into United States Dollars at the actual rates of
exchange at which such premiums or losses are entered on the
Company's books.
<PAGE> 170
Article XIX. Taxes.
In consideration of the terms under which this Agreement is issued,
the Company undertakes not to claim any deduction in respect of the
premium hereon when making tax returns, other than Income or
Profits Tax returns, to any State or Territory or the District of
Columbia.
Article XX. No Third Party Rights.
In no event shall anyone other than the Reinsurer of the Company
(or its statutory successor as set forth in Article XVI. hereof)
have any rights under this Agreement.
Article XXI. Arbitration.
This Article shall form a separate Agreement between the Company
and the Reinsurer from the main Property Catastrophe Excess of Loss
Reinsurance Agreement.
All matters in difference in relation to this reinsurance,
including its formation and validity and whether arising during or
after the period of this reinsurance, shall be submitted to binding
arbitration for resolution.
The dispute shall be submitted to three arbitrators, one to be
chosen by each party, and the third by the two so chosen. The
party requesting arbitration (petitioner) shall mail to the other
party (respondent) a written demand of arbitration naming its
arbitrator. The respondent shall appoint its arbitrator within
thirty days of receipt of the demand. If the respondent refuses or
neglects to appoint its arbitrator within that time, the claimant
shall appoint a second arbitrator. If the two arbitrators fail
otherwise to agree in the selection of the third arbitrator (the
umpire), they shall within thirty days of their appointment each
nominate three, of whom the other shall decline two and the
decision shall be made by drawing lots.
All members of the arbitration panel shall be active or retired
disinterested officers of insurance or reinsurance companies or
Underwriters at Lloyd's of London. The arbitration panel shall
interpret this reinsurance agreement as an honorable engagement and
not only as a legal obligation. They are relieved of all judicial
formalities and may abstain from following strict rules of law.
They shall make their decision with a view to effecting the general
purpose of this reinsurance agreement and the mutual intentions of
the parties thereto in a reasonable manner. Unless otherwise
mutually agreed or directed by the arbitration panel, the seat of
the arbitration shall be the city in which the Company's head
office is located.
<PAGE> 171
The arbitration panel shall have authority to fix all procedural
rules for the holding of the arbitration including discretionary
power to make orders as to any matters which it may consider proper
in the circumstances of the case with regard to scheduling,
pleadings, discovery, inspection of documents, examination of
witnesses and any other matter whatsoever relating to the conduct
of the arbitration and may receive and act upon such evidence
whether oral or written strictly admissible or not as it shall in
its discretion deem fit. The panel shall render a written decision
within sixty days of the matter being referred to them for
deliberations.
Each party shall bear their own expenses and costs and the costs of
its arbitrator, and the parties shall share equally in the costs of
the umpire and the hearing. The arbitration panel may not award
exemplary, punitive, multiple or other damages of a similar nature.
The award of the arbitration panel shall be in writing and binding
upon the parties who covenant to carry out the same. If either of
the parties should fail to carry out any award, the other may apply
for its enforcement to any court of competent jurisdiction in any
territory in which the party in default is domiciled or has assets
or carries on business.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in duplicate by their duly authorized
representatives.
This 14th day of March , 1995 by 20TH CENTURY INSURANCE COMPANY
---- ------------- ------- 21ST CENTURY CASUALTY COMPANY
by: Charles I. Petit
-----------------------------
Vice President
and this 8th day of March , 1995 by NATIONAL INDEMNITY COMPANY
---- -------------- -------
by: Brian G. Snoven
-----------------------------
Asst. Vice President
<PAGE> 172
AMENDMENT NO. 2
---------------
This Amendment (this "Amendment") is entered into as of December
31, 1994 by and among 20th Century Industries, a California corporation
(the "Borrower"), Union Bank, individually and as Agent, The First
National Bank of Chicago, individually and as Documentary Agent, and the
other financial institutions signatory hereto.
RECITALS
--------
A. The Borrower, the Agent, the Documentary Agent and the Lenders
are party to that certain Credit Agreement dated as of June 30, 1994 (as
heretofore amended, the "Credit Agreement"). Unless otherwise specified
herein, each capitalized term used and not otherwise defined in this
Amendment shall have the meaning ascribed to it by the Credit Agreement.
B. The Borrower, the Agents and the Lenders wish to amend the
Credit Agreement on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual execution hereof and
other good and valuable consideration, the parties hereto agree as
follows:
1. Amendment of Credit Agreement. The Credit Agreement is
-----------------------------
hereby amended as follows:
(a) The definition of "Applicable ABR Margin" in Article
-------
I is amended in its entirety to read as follows:
"'Applicable ABR Margin' means (a) 0.5% during
---------------------
Period I, (b) 1.5% during Period II, (c) .75% during
Period III and (d) 0.25% during Period IV; provided,
--------
however, that for the period from and including January
1, 1995 to and including March 31, 1995 the Applicable
ABR Margin shall be 2.0%."
(b) The definition of "Applicable Eurodollar Margin" in
Article I is amended in its entirety to read as follows:
---------
"'Applicable Eurodollar Margin'" means (a) 2.5%
----------------------------
during Period II, (b) 1.75% during Period III and (c)
1.25% during Period IV; provided, however, that for the
-----------------
period from and including January 1, 1995 to and
including March 31, 1995 the Applicable Eurodollar Margin
shall be 3.25%. The Applicable Eurodollar Margin may
change during an Interest Period to the extent required
by this definition."
(c) Section 6.23.1 is amended in its entirety to read as
--------------
follows:
"6.23.1 Surplus as Regards Policyholders.
--------------------------------
Commencing June 30, 1994 (after giving effect to the
application of the proceeds of the Loans) and determined
as at the end of each calendar quarter (commencing as of
such date), at all times after the date hereof, maintain
<PAGE> 173
an aggregate Surplus as Regards Policyholders of at least
(a) $200 million in the case of the calendar quarter
ending December 31, 1994, (b) $225 million in the case of
the calendar quarter ending March 31, 1995 and (c) $250
million in the case of all other calendar quarters."
(d) The reference in Section 6.23.2 to "4.50 to 1.00"
--------------
with respect to the period "6/30/94 - 6/30/95" is replaced with a
reference to "5.00 to 1.00".
(e) Section 6.23.3 is amended in its entirety to read as
--------------
follows:
"6.23.3 Coverage Ratio. As of the end of each
--------------
fiscal quarter of the Borrower ending on or after March
31, 1995, maintain a ratio (the "Coverage Ratio") of (a)
--------------
the sum of (i) the amount of cash and cash equivalents of
the Borrower, on a non-consolidated basis, as of the end
of such fiscal quarter plus (ii) consolidated Statutory
Net Income of the Insurance Subsidiaries for the most
recent four fiscal quarters (or lesser number of fiscal
quarters specified below) then ended to (b) the amount of
principal and interest on all Indebtedness of the
Borrower (other than repayments of principal on the Loans
pursuant to Sections 2.6 or 2.7(b)) and cash dividends on
------------ ------
the Preferred Stock paid during the four fiscal quarters
(or lesser number of fiscal quarters specified below)
then ended of not less than 1.50 to 1.00; provided,
--------
however, that for purposes of determining any of the
-------
foregoing amounts such amounts will be calculated for the
fiscal quarter ending on March 31, 1995, for the two most
recent fiscal quarters ending on June 30, 1995, for the
three most recent fiscal quarters ending on September 30,
1995, and, thereafter, on a four-quarter basis."
2. Representations and Warranties of the Borrower. The
----------------------------------------------
Borrower represents and warrants that:
(a) The execution, delivery and performance by the
Borrower of this Amendment has been duly authorized by all
necessary corporate action on the part of the Borrower and does not
(i) violate any law, rule or regulation, order, writ, judgment,
injunction, decree or award binding on the Borrower or any
Subsidiary or the Borrower's or any Subsidiary's articles or
certificate of incorporation or bylaws, (ii) violate the provisions
of or require the approval or consent of any party to any
indenture, instrument or agreement to which the Borrower or any
Subsidiary is a party or is subject or by which it, or its
property, is bound, or (iii) conflict with or constitute a default
thereunder or require the approval or consent of any Governmental
Authority.
(b) This Amendment is a legal, valid and binding
obligation of the Borrower enforceable against the Borrower in
accordance with its terms, except as the enforcement thereof may be
<PAGE> 174
subject to (i) the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar law affecting creditors'
rights generally and (ii) general principles of equity (regardless
of whether such enforcement is sought in a proceeding in equity or
at law); and
(c) No Default or Unmatured Default has occurred and is
continuing.
(d) As of the date hereof, (i) each Insurance Subsidiary
is in compliance with all applicable California or California
Department of Insurance statutes, rules, regulations, orders and
directives (each a "Legal Requirement") relative to minimum levels
of Surplus as Regards Policyholders and (ii) to the best knowledge
of the Borrower, there exists no Legal Requirement that between the
date hereof and June 30, 1995 the aggregate Surplus as Regards
Policyholders of the Borrower's Consolidated Insurance Subsidiaries
exceed $200 million.
3. Effective Time. This Amendment shall become effective
--------------
upon its execution and delivery by the Borrower, the Agent, the
Documentary Agent and the Required Lenders (without respect to whether
it has been executed and delivered by all Lenders).
4. Reference to and Effect Upon the Credit Agreement.
-------------------------------------------------
(a) Except as specifically amended above, the Credit
Agreement and each other Loan Document shall remain in full force
and effect and are hereby in all respects ratified and confirmed.
(b) The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or
remedy of the Agents or any Lender under the Credit Agreement or
any Loan Document, nor constitute a waiver of any provision of the
Credit Agreement or any Loan Document.
(c) From and after the effectiveness hereof, each
reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of similar import shall mean and be a
reference to the Credit Agreement as amended hereby.
5. Costs and Expenses. Without limiting its obligations
------------------
under Section 9.7 of the Credit Agreement, the Borrower affirms it has
agreed to reimburse the Agents for the reasonable fees and expenses of
Winston & Strawn incurred in connection with this Amendment.
6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS
OF LAWS PROVISIONS) OF THE STATE OF NEW YORK BUT GIVING EFFECT TO
FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
7. Headings. Section headings in this Amendment are
--------
included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purposes.
<PAGE> 175
8. Counterparts. This Amendment may be executed in any
------------
number of counterparts, each of which when so executed shall be deemed
an original but all such counterparts shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date and year first above written.
UNION BANK, individually and THE FIRST NATIONAL BANK OF
as Agent CHICAGO, individually and as
Documentary Agent
By: Robert C Dawson By:
---------------------------- ----------------------------
Its: VP Its:
---------------------------- ----------------------------
By:____________________________
Its:___________________________
THE BANK OF NEW YORK BANK ONE, TEXAS, N.A.
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
FIRST UNION NATIONAL BANK OF SANWA BANK CALIFORNIA
NORTH CAROLINA
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
SHAWMUT BANK CONNECTICUT, N.A. 20TH CENTURY INDUSTRIES
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
C:\DOCS\GSM\1STCHGO\20TH\AMEND-2.1
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<PAGE> 176
8. Counterparts. This Amendment may be executed in any
------------
number of counterparts, each of which when so executed shall be deemed
an original but all such counterparts shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date and year first above written.
UNION BANK, individually and THE FIRST NATIONAL BANK OF
as Agent CHICAGO, individually and as
Documentary Agent
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
By:____________________________
Its:___________________________
THE BANK OF NEW YORK BANK ONE, TEXAS, N.A.
By: Timothy J. Starbaugh By:
---------------------------- ----------------------------
Its: Vice President Its:
---------------------------- ----------------------------
FIRST UNION NATIONAL BANK OF SANWA BANK CALIFORNIA
NORTH CAROLINA
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
SHAWMUT BANK CONNECTICUT, N.A. 20TH CENTURY INDUSTRIES
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
C:\DOCS\GSM\1STCHGO\20TH\AMEND-2.1
12-21-94/09:23am
<PAGE> 177
8. Counterparts. This Amendment may be executed in any
------------
number of counterparts, each of which when so executed shall be deemed
an original but all such counterparts shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date and year first above written.
UNION BANK, individually and THE FIRST NATIONAL BANK OF
as Agent CHICAGO, individually and as
Documentary Agent
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
By:____________________________
Its:___________________________
THE BANK OF NEW YORK BANK ONE, TEXAS, N.A.
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
FIRST UNION NATIONAL BANK OF SANWA BANK CALIFORNIA
NORTH CAROLINA
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
SHAWMUT BANK CONNECTICUT, N.A. 20TH CENTURY INDUSTRIES
By: Timothy B. Brown By:
---------------------------- ----------------------------
Its: Assistant Vice President Its:
---------------------------- ----------------------------
C:\DOCS\GSM\1STCHGO\20TH\AMEND-2.1
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<PAGE> 178
8. Counterparts. This Amendment may be executed in any
------------
number of counterparts, each of which when so executed shall be deemed
an original but all such counterparts shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date and year first above written.
UNION BANK, individually and THE FIRST NATIONAL BANK OF
as Agent CHICAGO, individually and as
Documentary Agent
By: By: Paul T. Schultz
---------------------------- ----------------------------
Its: Its: Vice President
---------------------------- ----------------------------
By:____________________________
Its:___________________________
THE BANK OF NEW YORK BANK ONE, TEXAS, N.A.
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
FIRST UNION NATIONAL BANK OF SANWA BANK CALIFORNIA
NORTH CAROLINA
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
SHAWMUT BANK CONNECTICUT, N.A. 20TH CENTURY INDUSTRIES
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
C:\DOCS\GSM\1STCHGO\20TH\AMEND-2.1
12-21-94/09:23am
<PAGE> 179
8. Counterparts. This Amendment may be executed in any
------------
number of counterparts, each of which when so executed shall be deemed
an original but all such counterparts shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date and year first above written.
UNION BANK, individually and THE FIRST NATIONAL BANK OF
as Agent CHICAGO, individually and as
Documentary Agent
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
By:____________________________
Its:___________________________
THE BANK OF NEW YORK BANK ONE, TEXAS, N.A.
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
FIRST UNION NATIONAL BANK OF SANWA BANK CALIFORNIA
NORTH CAROLINA
By: By: Richard H. Palmer
---------------------------- ----------------------------
Its: Its: Vice President
---------------------------- ----------------------------
SHAWMUT BANK CONNECTICUT, N.A. 20TH CENTURY INDUSTRIES
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
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<PAGE> 180
8. Counterparts. This Amendment may be executed in any
------------
number of counterparts, each of which when so executed shall be deemed
an original but all such counterparts shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date and year first above written.
UNION BANK, individually and THE FIRST NATIONAL BANK OF
as Agent CHICAGO, individually and as
Documentary Agent
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
By:____________________________
Its:___________________________
THE BANK OF NEW YORK BANK ONE, TEXAS, N.A.
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
FIRST UNION NATIONAL BANK OF SANWA BANK CALIFORNIA
NORTH CAROLINA
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
SHAWMUT BANK CONNECTICUT, N.A. 20TH CENTURY INDUSTRIES
By: By: Neil H. Ashley
---------------------------- ----------------------------
Its: Its: C E O
---------------------------- ----------------------------
C:\DOCS\GSM\1STCHGO\20TH\AMEND-2.1
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<PAGE> 181
WAIVER
------
This Waiver ("Waiver") is dated as of March 15, 1995 by and among 20th
Century Industries, a California corporation (the "Borrower"), Union Bank,
individually and as Agent, The First National Bank of Chicago, individually and
as Documentary Agent, and the other financial institutions signatory hereto.
RECITALS
--------
A. The Borrower, the Agent, the Documentary Agent and the Lenders are
party to that certain Credit Agreement dated as of June 30, 1994 (as previously
amended, the "Credit Agreement"). Unless otherwise specified herein, each
capitalized term used in this Waiver shall have the meaning ascribed to it by
the Credit Agreement.
B. The Agents and the Lenders wish to waive certain provisions of the
Credit Agreement on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual execution hereof and other
good and valuable consideration, the parties hereto agrees as follows:
1. Waiver. The Lenders hereby waive any Default under
------
Section 6.10 of the Credit Agreement arising solely out of the payment of up to
------------
$4.5 million of dividends on the Preferred Stock during the month of March of
1995.
2. Representations and Warranties of the Borrower. As an
----------------------------------------------
inducement to the Lenders to grant the foregoing waiver, the Borrower represents
and warrants that:
(a) The execution, delivery and performance by the Borrower
of this Waiver has been duly authorized by all necessary corporate action on
the part of the Borrower and does not (i) violate any law, rule or
regulation, order, writ, judgment, injunction, decree or award binding on the
Borrower or any Subsidiary or the Borrower's or any Subsidiary's articles or
certificate of incorporation or bylaws, (ii) violate the provisions of or
require the approval or consent of any party to any indenture, instrument or
agreement to which the Borrower or any Subsidiary is a party or is subject or
by which it, or its property, is bound, (iii) conflict with or constitute a
default thereunder or (iv) require the approval or consent of any
Governmental Authority.
(b) This Waiver is a legal, valid and binding obligation of
the Borrower enforceable against the Borrower in accordance with its terms,
except as the enforcement thereof may be subject to (i) the effect of any
applicable bankruptcy,insolvency, reorganization, moratorium or similar law
affecting creditors' rights
<PAGE> 182
generally and (ii) general principles of equity (regardless of whether such
enforcement is sought in a proceeding in equity or at law).
(c) No Default or Unmatured Default has occurred and is
continuing.
(d) The representations and warranties of the Borrower set
forth in Article V of the Credit Agreement are true and correct on and as of
---------
the date hereof except to the extent that such representations and warranties
specifically relate to an earlier date.
3. Effective Time. This Waiver shall become effective at such
--------------
time as this Waiver has been executed and delivered by the Borrower, the Agents
and the Required Lenders without respect to whether it has been executed by all
the Lenders.
4. Effect Upon the Credit Agreement. The execution, delivery and
--------------------------------
effectiveness of this Waiver shall not operate as a waiver of any right, power
or remedy of the Agents or any Lender under the Credit Agreement or any Loan
Document, nor constitute a waiver of any provision of the Credit Agreement or
any Loan Document, except as specifically set forth herein. Subject only to
waivers pursuant to the express terms of Section 1 above, the Lenders expressly
reserve any and all rights and remedies they may have under the Loan Documents
with respect to any and all existing or future Defaults and Unmatured Defaults.
5. Costs and Expenses. Without limiting its obligations under
------------------
Section 9.7 of the Credit Agreement, the Borrower affirms it has agreed to
-----------
reimburse the Agents for the reasonable fees and expenses of Winston & Strawn in
connection with this Waiver.
6. GOVERNING LAW. THIS WAIVER SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAWS
PROVISIONS) OF THE STATE OF NEW YORK BUT GIVING EFFECT TO FEDERAL LAWS
APPLICABLE TO NATIONAL BANKS.
7. Headings. Section headings in this Waiver are included herein
--------
for convenience of reference only and shall not constitute a part of this Waiver
for any other purposes.
8. Counterparts. This Waiver may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed an original but all
such counterparts shall constitute one and the same instrument.
[signature page follows]
<PAGE> 183
IN WITNESS WHEREOF, the parties have executed this Waiver as of the
date and year first above written.
UNION BANK, individually and THE FIRST NATIONAL BANK OF
as Agent CHICAGO, individually and as
Documentary Agent
By: By:
------------------------ --------------------------
Its: Its:
------------------------ --------------------------
By:
------------------------ --------------------------
Its:
------------------------ --------------------------
THE BANK OF NEW YORK BANK ONE, TEXAS, N.A.
By: By:
------------------------ --------------------------
Its: Its:
------------------------ --------------------------
FIRST UNION NATIONAL BANK OF SANWA BANK CALIFORNIA
NORTH CAROLINA
By: By:
------------------------ --------------------------
Its: Its:
------------------------ --------------------------
SHAWMUT BANK CONNECTICUT, N.A. 20TH CENTURY INDUSTRIES
By: By: William L. Mellick
------------------------ --------------------------
Its: Its: President & CEO
------------------------ --------------------------
C:\DOCS\GSM\1STCHGO\20TH\WAIVER.1
3-13-95/11:09am
<PAGE> 184
AMENDMENT NO. 1 TO
INVESTMENT AND STRATEGIC ALLIANCE AGREEMENT
This Amendment No. 1 to Investment and Strategic Alliance Agreement ("Amendment
No. 1") is made and entered into this 23rd day of March, 1995 by and between
20th Century Industries, a corporation organized and existing under the laws of
the State of California (the "Company"), and American International Group, Inc.,
a corporation organized and existing under the laws of the State of Delaware
(the "Investor").
R E C I T A L S
- - - - - - - -
WHEREAS, the Company and the Investor entered into an Investment
and Strategic Alliance Agreement (the "Agreement") on October 17, 1994, pursuant
to which the Company issued to affiliates of the Investor (a) 200,000 shares of
Series A Convertible Preferred Stock, stated value $1,000 per share, having the
rights, preferences, privileges and restrictions set forth in the Certificate of
Determination of the Company (the "Series A Certificate of Determination")
governing the Series A Convertible Preferred Stock (the "Series A Preferred
Shares"), and (b) 16,000,000 Series A Warrants, each exercisable for one share
of Common Stock, no par value, of the Company ("Common Stock"), subject to
adjustment, having the terms set forth in a Warrant Certificate dated December
16, 1994 (the "Warrant Certificate") (the "Series A Warrants");
WHEREAS, on January 27, 1995, the California Department of
Insurance (the "DOI") and the Company entered into a Stipulation, and, on
January 28, 1995, the DOI issued an Order under California Insurance Code
Sections 1065.1 and 1065.2, pursuant to which the DOI has required that the
Company raise an additional $50 million of capital for contribution to the
Company's insurance subsidiaries (the "DOI Capital Requirement"), the first $30
million of which must be raised by March 31, 1995 and the remaining $20 million
of which must be raised by December 31, 1995; and
WHEREAS, the Company and the Investor have agreed upon a $20
million capital contribution to the Company by the Investor to fund a portion of
the DOI Capital Requirement, in exchange for which the Company will issue
additional Series A Preferred Shares to the Investor pursuant to Section 4.3 of
the Agreement, and, in connection therewith, the Company and the Investor desire
to amend Section 4.3 of the Agreement as set forth herein.
A G R E E M E N T
- - - - - - - - -
NOW, THEREFORE, for good and valuable consideration, the receipt
of which is hereby acknowledged, the parties hereto agree as follows:
Section 1. Issuance of Series A Preferred Shares. Concurrently
-------------------------------------
with the execution of this Amendment No. 1, the Investor is contributing $20
million to the Company pursuant to Section 4.3 of the Agreement to fund a
portion of the DOI Capital Requirement. The Company and the Investor agree
that, notwithstanding the formula set forth in Section 4.3 for determining the
number of Series A Preferred Shares to be issued to the Investor in respect of
such contribution, the Investor and the Company agree that, in consideration for
such contribution, the Company shall issue to the Investor 20,000
<PAGE> 185
Series A Preferred Shares, having an aggregate liquidation value equal to the
amount contributed to the Company by the Investor.
Section 2. Amendment. In order to memorialize the agreement of
---------
the Company and the Investor to modify the formula for determining the number of
Series A Preferred Shares to be issued in respect of the Investor's $20 million
contribution to the Company, Section 4.3 of the Agreement is hereby amended to
read in its entirety as follows:
"Section 4.3 Investor Contribution and
Additional Shares; Adjustment to Series A Warrants
Exercise Price. If at any time (before or after the
Closing Date) there shall be any Excess Loss Amount as
defined above, the Investor shall, if requested in writing
by the Company after the Closing Date (and subject to the
Closing hereunder), contribute to the capital of the
Company at the request of the Company, in whole or in
part, an amount up to the lesser of (i) $70,000,000 or
(ii) the Excess Loss Amount (the "Investor Contribution").
In consideration for the first $20 million of the Investor
Contribution pursuant to this Section 4.3 (the "$20
Million Contribution"), the Company shall issue to the
Investor that number of fully paid and nonassessable
Series A Preferred Shares having an aggregate liquidation
value equal to $20 million. In consideration of the
contribution of the remainder of the Investor Contribution
following the $20 Million Contribution (the "Remaining
Investor Contribution"), the Company shall issue to the
Investor that number of fully paid and nonassessable
Series A Preferred Shares having an aggregate liquidation
value equal to (x) the amount of the Remaining Investor
Contribution plus (y) an amount equal to the product of,
(1) the Remaining Investor Contribution, (2) 0.65 and (3)
the quotient of (I) the number of shares of Common Stock
beneficially owned or obtainable by the Investor and its
affiliates by virtue of ownership of the Series A
Preferred Shares (including any additional shares actually
issued by virtue of the provision permitting payment of
dividends in kind on the Series A Preferred Shares) and
the Series A Warrants and conversion or exercise thereof
divided by (II) the sum of (A) the total number of shares
of Common Stock of the Company outstanding at the date of
this Agreement plus (B) the number of shares referred to
in (I); provided, however, that the aggregate liquidation
value of any Series A Preferred Shares issued pursuant to
this sentence (without taking into account any Series A
Preferred Shares issuable as a dividend in kind on any
outstanding Series A Preferred Shares) shall not exceed
$63.2474 million. The amount represented as "(y)" in the
above formula is designed to represent Investor's
proportional share of the Company's after-tax loss
resulting from the Excess Loss Amount. Successive
contributions under this Section 4.3 for partial amounts
reflecting development over time shall be permitted, with
minimum cash contributions prior to the final contribution
being for no less than $10 million. In the event that the
Excess Loss Amount exceeds $95,000,000, the exercise
<PAGE> 186
price of the Series A Warrants shall be reduced as
provided in the Series A Warrants."
Section 3. Defined Terms. Capitalized terms not otherwise
-------------
defined herein shall have the meanings ascribed to such terms in the Agreement.
Section 4. Reconfirmation of Agreement. Except as otherwise
---------------------------
provided herein, all of the terms and provisions of the Agreement shall remain
in full force and effect.
Section 5. Counterparts. This Amendment No. 1 shall be executed
------------
in any number of counterparts, each of which shall be deemed to be one and the
same instrument.
IN WITNESS WHEREOF, the Company and the Investor have executed
this Amendment No. 1 as of the date first above written.
20TH CENTURY INDUSTRIES
By: William L. Mellick
_____________________________________
Title: President & Chief Executive Officer
AMERICAN INTERNATIONAL GROUP, INC.
By: Robert M. Sandler
_____________________________________
Title: Senior Vice President
Kathleen E. Shannon
By: _____________________________________
Title: Secretary
<PAGE> 187
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE> 188
QUOTA SHARE REINSURANCE AGREEMENT
between
20TH CENTURY INSURANCE COMPANY
(hereinafter referred to as the "Company")
and
NEW HAMPSHIRE INSURANCE COMPANY (the "Reinsurer")
PREAMBLE
The Reinsurer hereby agrees to reinsure the Company in respect
of the Company's net liability under all policies, contracts and
binders of insurance (hereafter referred to as "policies") issued
during the term of this Agreement subject to the following terms
and conditions:
ARTICLE I
TERM
This Agreement shall be effective from 12:01 A.M., pacific
standard time, January 1, 1995 and shall remain continuously in
force through December 31, 1999. The Reinsurer has the option to
renew this Agreement annually for four additional years by
notifying the Company prior to December 31, 1999 or prior to the
expiration date of any renewal.
ARTICLE II
PARTICIPATION
The Company shall cede and the Reinsurer shall accept 10% of
the Company's net liability for losses on policies incepting during
the term of this Agreement. As consideration, the Reinsurer shall
receive a 10% share of the net written premiums, less ceding
commission as described in Article III, generated by such policies.
In the event the Reinsurer elects to renew this Agreement for
annual periods following December 31, 1999 the participation shall
be 8% on the first renewal, 6% on the second renewal, 4% on the
third renewal and 2% on the fourth renewal.
ARTICLE III
COMMISSION
The Reinsurer shall allow the Company a commission of 10.8% of
the ceded written premium for policies with effective dates from
January 1, 1995 and through December 31, 1995. For policies with
effective dates in each subsequent underwriting year, the
commission shall be equal to the rate of the Company's incurred
underwriting expenses (as recorded in the Company's statutory
statement) to net written premium for the prior calendar year.
<PAGE> 189
ARTICLE IV
REPORTS AND ACCOUNTS
1. The Company shall furnish within forty-five days after
the close of each calendar quarter an account reflecting the
following separately for each underwriting year:
A. Net written premium ceded during the quarter (credited).
B. Commission on the ceded premium (debited).
C. Net paid losses (debited).
D. Net paid adjustment expenses (debited).
E. Net outstanding losses.
F. Net unearned premium.
If the balance of A through D is a credit such
amount shall be remitted with the account. If the
balance of A through D is a debit, the Reinsurer shall
remit such amount within 15 days of receipt of the
account. Accounts by line of business shall also
be provided by the Company including the aforementioned
information.
ARTICLE V
DEFINITION
Underwriting year shall mean all policies with effective dates
from 12:01 A.M., pacific standard time, January 1st through
December 31st of each calendar year.
Net written premium or net losses or net liability shall mean
the gross amount less deductions for all other reinsurance.
CURRENCY
All premium and loss payments hereunder shall be in United
States currency.
ARTICLE VI
ACCESS TO RECORDS
The Reinsurer or its duly appointed representatives shall have
free access at all reasonable times to such books and records of
those Divisions, Departments and Branch Offices of the Company
which are directly involved with the subject matter business of
this Agreement as shall reflect premium and loss transactions of
the Company for the purpose of obtaining any and all information
concerning this Agreement or the subject matter hereof. All non-
public information provided in the course of the inspection shall
be kept confidential by the Reinsurer as against third parties.
<PAGE> 190
ARTICLE VII
INSOLVENCY
The portion of any risk or obligation assumed by the
Reinsurer, when such portion is ascertained, shall be payable on
demand of the Company at the same time as the Company shall pay its
net retained portion of such risk or obligation, with reasonable
provision for verification before payment, and the reinsurance
shall be payable by the Reinsurer on the basis of the liability of
the Company under the contract or contracts reinsured without
diminution because of the insolvency of the Company. In the event
of the insolvency of the Company, this reinsurance shall be payable
directly to the Company, or to its liquidator, receiver,
conservator or statutory successor. Immediately upon demand, on
the basis of the liability of the Company without diminution
because of the insolvency of the Company or because the liquidator,
receiver, conservator or statutory successor of the Company has
failed to pay all or a portion of any claim. It is agreed, however,
that the liquidator, receiver, conservator or statutory successor
of the Company shall give written notice to the Reinsurer of the
pendency of a claim against the Company which would involve a
possible liability on the part of the Reinsurer, indicating the
policy or bond reinsured, within a reasonable time after such claim
is filed in the conservation or liquidation proceeding or in the
receivership. It is further agreed that during the pendency of
such claim the Reinsurer may investigate such claim and interpose,
at its own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses that it may deem available to
the Company or its liquidator, receiver, conservator, or statutory
successor. The expense thus incurred by the Reinsurer shall be
chargeable, subject to the approval of the Court, against the
Company as part of the expense of conservation or liquidation to
the extent of a pro rata share of the benefit which may accrue to
the Company solely as a result of the defense undertaken by the
Reinsurer.
ARTICLE VIII
ARBITRATION
A. All disputes or differences arising out of the interpretation
of this Agreement shall be submitted to the decision of two
arbitrators, one to be chosen by each party, and in the event of
the arbitrators failing to agree, to the decision of an umpire to
be chosen by the arbitrators. The arbitrators and umpire shall be
disinterested active or retired executive officials of fire or
casualty insurance or reinsurance companies or Underwriters at
Lloyd's, London. If either of the parties fails to appoint an
arbitrator within one month after being required by the other party
in writing to do so, or if the arbitrators fail to appoint an
umpire within one month of a request in writing by either of them to
do so, such arbitrator or umpire, as the case may be, shall at the
request of either party be appointed by a Justice of the Supreme
Court of the State of New York.
B. The arbitration proceeding shall take place in the city in
which the Company's Head Office is located. The applicant shall
submit its case within one month after the appointment of the court
of arbitration, and the respondent shall submit its reply within
one month after the receipt of the claim. The arbitrators and
umpire are relieved from all judicial formality and may abstain
from following the strict rules of law. They shall settle any
dispute under the Agreement according to an equitable rather than
a strictly legal interpretation of its terms.
C. Their written decision shall be provided to both parties
within ninety days of the close of arbitration and shall be final
and not subject to appeal.
D. Each party shall bear the expenses of his arbitrator and shall
jointly and equally share with the other the expenses of the umpire
and of the arbitration.
E. This Article shall survive the termination of this Agreement.
<PAGE> 191
ARTICLE IX
ERRORS AND OMISSIONS
Any inadvertent delay, omission or error shall not relieve
either party hereto from any liability which would attach to it
hereunder if such delay, omission or error had not been made,
provided such delay, omission or error is rectified immediately
upon discovery.
ARTICLE X
LOSS & LOSS ADJUSTMENT EXPENSE
A. The Company alone and at its full discretion shall adjust,
settle or compromise all claims and losses. All such adjustments,
settlements, and compromises shall be binding on the Reinsurer in
proportion to its participation. The Company shall likewise at its
sole discretion commence, continue, defend, compromise, settle or
withdraw from actions, suits or proceedings and generally do all
such matters and things relating to any claim or loss as in its
judgment may be beneficial or expedient, and all payments made and
costs and expenses incurred in connection therewith or in taking
legal advice therefor shall be shared by the Reinsurer
proportionately. The Reinsurer shall, on the other hand, benefit
proportionately from all reductions of losses by salvage,
compromise or otherwise.
ARTICLE XI
EXTRA CONTRACTUAL OBLIGATIONS
This Agreement shall protect the Company where the ultimate
net loss includes any extra contractual obligations. The term
"extra contractual obligations" is defined as those liabilities not
covered under any other provision of the Contract and which arise
from the handling of any claim on business covered hereunder, such
liabilities arising because of, but not limited to , the following:
failure by the Company to settle within the policy limit, or by
reason of alleged or actual negligence, fraud or bad faith in
rejecting an offer of settlement or in the preparation of the
defense or in the trail of any action against its insured or
reinsured or in the preparation of prosecution of an appeal
consequent upon such action. The Reinsurer's liability for extra
contractual obligations shall not exceed their participation of the
maximum limit of liability on the policy from which the extra
contractual obligation arises.
The date on which any extra contractual obligation is incurred
by the Company shall be deemed, in all circumstances, to be the
date of the original disaster and/or casualty. However, this
Article shall not apply where the loss has been incurred due to
fraud or a member of the Board of Directors or a corporate officer
of the Company acting individually or collectively or in collusion
with any individual or corporation or any other organization or
party involved in the presentation, defense or settlement of any
claim covered hereunder.
ARTICLE XII
OFFSET
Each party hereto shall have, and may exercise at any time and
from time to time, the right to offset any undisputed balance or
balances, whether on account of premiums or on account of losses or
otherwise, due from such party to the other party hereto under this
Agreement.
<PAGE> 192
ARTICLE XIII
TERMINATION
Either party may terminate this Agreement with thirty days'
notice in the event that:
1. One party should at any time become insolvent, or suffer any
impairment of capital, or file a petition in bankruptcy, or go into
liquidation or rehabilitation, or have a receiver appointed, or be
acquired or controlled by any other insurance company or
organization, or
2. Any law or regulation of any Federal or any State or any Local
Government of any jurisdiction in which the Company is doing
business should render illegal the arrangement made herein, or
3. With the agreement of the other party.
In the event of termination, the Reinsurer shall refund to the
Company the applicable unearned premium minus the ceding commission
and shall continue to remain liable for all losses occurring prior
to the date of termination. However, if this Contract shall
terminate while a loss occurrence covered hereunder is in progress,
it is agreed that, subject to the other conditions of this
Contract, the Reinsurer is responsible for its proportion of the
entire loss.
ARTICLE XIV
TAX
In consideration of the terms under which this Agreement is
issued, the Company undertakes not to claim any deduction of the
premium hereon when making tax returns, other than income or
Profits Tax returns, to any State or Territory of the United States
or to the District of Columbia.
ARTICLE XV
COUNTERPARTS
This Agreement may be executed in counterparts, each of which
shall be an original, but all of which together shall constitute
one and the same instrument.
<PAGE> 193
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives,
this 16th day of December, 1994.
20TH CENTURY INSURANCE COMPANY
By: William L. Mellick
--------------------------
Title: President & Chief Operating Officer
NEW HAMPSHIRE INSURANCE COMPANY
By:
--------------------------
Title:
By:
--------------------------
Title:
<PAGE> 194
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives,
this 16th day of December, 1994.
20TH CENTURY INSURANCE COMPANY
By:
--------------------------
Title:
NEW HAMPSHIRE INSURANCE COMPANY
By: Howard I. Smith
--------------------------
Title: Vice President
By: Elizabeth M. Tuck
--------------------------
Title: Secretary
<PAGE> 195
QUOTA SHARE REINSURANCE AGREEMENT
between
21ST CENTURY CASUALTY COMPANY
(hereinafter referred to as the "Company")
and
NEW HAMPSHIRE INSURANCE COMPANY (the "Reinsurer")
PREAMBLE
The Reinsurer hereby agrees to reinsure the Company in respect
of the Company's net liability under all policies, contracts and
binders of insurance (hereafter referred to as "policies") issued
during the term of this Agreement subject to the following terms
and conditions:
ARTICLE I
TERM
This Agreement shall be effective from 12:01 A.M., pacific
standard time, January 1, 1995 and shall remain continuously in
force through December 31, 1999. The Reinsurer has the option to
renew this Agreement annually for four additional years by
notifying the Company prior to December 31, 1999 or prior to the
expiration date of any renewal.
ARTICLE II
PARTICIPATION
The Company shall cede and the Reinsurer shall accept 10% of
the Company's net liability for losses on policies incepting during
the term of this Agreement. As consideration, the Reinsurer shall
receive a 10% share of the net written premiums, less ceding
commission as described in Article III, generated by such policies.
In the event the Reinsurer elects to renew this Agreement for
annual periods following December 31, 1999 the participation shall
be 8% on the first renewal, 6% on the second renewal, 4% on the
third renewal and 2% on the fourth renewal.
ARTICLE III
COMMISSION
The Reinsurer shall allow the Company a commission of 10.8% of
the ceded written premium for policies with effective dates from
January 1, 1995 and through December 31, 1995. For policies with
effective dates in each subsequent underwriting year, the
commission shall be equal to the rate of the Company's incurred
underwriting expenses (as recorded in the Company's statutory
statement) to net written premium for the prior calendar year.
<PAGE> 196
ARTICLE IV
REPORTS AND ACCOUNTS
1. The Company shall furnish within forty-five days after
the close of each calendar quarter an account reflecting the
following separately for each underwriting year:
A. Net written premium ceded during the quarter (credited).
B. Commission on the ceded premium (debited).
C. Net paid losses (debited).
D. Net paid adjustment expenses (debited).
E. Net outstanding losses.
F. Net unearned premium.
If the balance of A through D is a credit such
amount shall be remitted with the account. If the
balance of A through D is a debit, the Reinsurer shall
remit such amount within 15 days of receipt of the
account. Accounts by line of business shall also
be provided by the Company including the aforementioned
information.
ARTICLE V
DEFINITION
Underwriting year shall mean all policies with effective dates
from 12:01 A.M., pacific standard time, January 1st through
December 31st of each calendar year.
Net written premium or net losses or net liability shall mean
the gross amount less deductions for all other reinsurance.
CURRENCY
All premium and loss payments hereunder shall be in United
States currency.
ARTICLE VI
ACCESS TO RECORDS
The Reinsurer or its duly appointed representatives shall have
free access at all reasonable times to such books and records of
those Divisions, Departments and Branch Offices of the Company
which are directly involved with the subject matter business of
this Agreement as shall reflect premium and loss transactions of
the Company for the purpose of obtaining any and all information
concerning this Agreement or the subject matter hereof. All non-
public information provided in the course of the inspection shall
be kept confidential by the Reinsurer as against third parties.
<PAGE> 197
ARTICLE VII
INSOLVENCY
The portion of any risk or obligation assumed by the
Reinsurer, when such portion is ascertained, shall be payable on
demand of the Company at the same time as the Company shall pay its
net retained portion of such risk or obligation, with reasonable
provision for verification before payment, and the reinsurance
shall be payable by the Reinsurer on the basis of the liability of
the Company under the contract or contracts reinsured without
diminution because of the insolvency of the Company. In the event
of the insolvency of the Company, this reinsurance shall be payable
directly to the Company, or to its liquidator, receiver,
conservator or statutory successor. Immediately upon demand, on
the basis of the liability of the Company without diminution
because of the insolvency of the Company or because the liquidator,
receiver, conservator or statutory successor of the Company has
failed to pay all or a portion of any claim. It is agreed, however,
that the liquidator, receiver, conservator or statutory successor
of the Company shall give written notice to the Reinsurer of the
pendency of a claim against the Company which would involve a
possible liability on the part of the Reinsurer, indicating the
policy or bond reinsured, within a reasonable time after such claim
is filed in the conservation or liquidation proceeding or in the
receivership. It is further agreed that during the pendency of
such claim the Reinsurer may investigate such claim and interpose,
at its own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses that it may deem available to
the Company or its liquidator, receiver, conservator, or statutory
successor. The expense thus incurred by the Reinsurer shall be
chargeable, subject to the approval of the Court, against the
Company as part of the expense of conservation or liquidation to
the extent of a pro rata share of the benefit which may accrue to
the Company solely as a result of the defense undertaken by the
Reinsurer.
ARTICLE VIII
ARBITRATION
A. All disputes or differences arising out of the interpretation
of this Agreement shall be submitted to the decision of two
arbitrators, one to be chosen by each party, and in the event of
the arbitrators failing to agree, to the decision of an umpire to
be chosen by the arbitrators. The arbitrators and umpire shall be
disinterested active or retired executive officials of fire or
casualty insurance or reinsurance companies or Underwriters at
Lloyd's, London. If either of the parties fails to appoint an
arbitrator within one month after being required by the other party
in writing to do so, or if the arbitrators fail to appoint an
umpire within one month of a request in writing by either of them to
do so, such arbitrator or umpire, as the case may be, shall at the
request of either party be appointed by a Justice of the Supreme
Court of the State of New York.
B. The arbitration proceeding shall take place in the city in
which the Company's Head Office is located. The applicant shall
submit its case within one month after the appointment of the court
of arbitration, and the respondent shall submit its reply within
one month after the receipt of the claim. The arbitrators and
umpire are relieved from all judicial formality and may abstain
from following the strict rules of law. They shall settle any
dispute under the Agreement according to an equitable rather than
a strictly legal interpretation of its terms.
C. Their written decision shall be provided to both parties
within ninety days of the close of arbitration and shall be final
and not subject to appeal.
D. Each party shall bear the expenses of his arbitrator and shall
jointly and equally share with the other the expenses of the umpire
and of the arbitration.
E. This Article shall survive the termination of this Agreement.
<PAGE> 198
ARTICLE IX
ERRORS AND OMISSIONS
Any inadvertent delay, omission or error shall not relieve
either party hereto from any liability which would attach to it
hereunder if such delay, omission or error had not been made,
provided such delay, omission or error is rectified immediately
upon discovery.
ARTICLE X
LOSS & LOSS ADJUSTMENT EXPENSE
A. The Company alone and at its full discretion shall adjust,
settle or compromise all claims and losses. All such adjustments,
settlements, and compromises shall be binding on the Reinsurer in
proportion to its participation. The Company shall likewise at its
sole discretion commence, continue, defend, compromise, settle or
withdraw from actions, suits or proceedings and generally do all
such matters and things relating to any claim or loss as in its
judgment may be beneficial or expedient, and all payments made and
costs and expenses incurred in connection therewith or in taking
legal advice therefor shall be shared by the Reinsurer
proportionately. The Reinsurer shall, on the other hand, benefit
proportionately from all reductions of losses by salvage,
compromise or otherwise.
ARTICLE XI
EXTRA CONTRACTUAL OBLIGATIONS
This Agreement shall protect the Company where the ultimate
net loss includes any extra contractual obligations. The term
"extra contractual obligations" is defined as those liabilities not
covered under any other provision of the Contract and which arise
from the handling of any claim on business covered hereunder, such
liabilities arising because of, but not limited to , the following:
failure by the Company to settle within the policy limit, or by
reason of alleged or actual negligence, fraud or bad faith in
rejecting an offer of settlement or in the preparation of the
defense or in the trail of any action against its insured or
reinsured or in the preparation of prosecution of an appeal
consequent upon such action. The Reinsurer's liability for extra
contractual obligations shall not exceed their participation of the
maximum limit of liability on the policy from which the extra
contractual obligation arises.
The date on which any extra contractual obligation is incurred
by the Company shall be deemed, in all circumstances, to be the
date of the original disaster and/or casualty. However, this
Article shall not apply where the loss has been incurred due to
fraud or a member of the Board of Directors or a corporate officer
of the Company acting individually or collectively or in collusion
with any individual or corporation or any other organization or
party involved in the presentation, defense or settlement of any
claim covered hereunder.
ARTICLE XII
OFFSET
Each party hereto shall have, and may exercise at any time and
from time to time, the right to offset any undisputed balance or
balances, whether on account of premiums or on account of losses or
otherwise, due from such party to the other party hereto under this
Agreement.
<PAGE> 199
ARTICLE XIII
TERMINATION
Either party may terminate this Agreement with thirty days'
notice in the event that:
1. One party should at any time become insolvent, or suffer any
impairment of capital, or file a petition in bankruptcy, or go into
liquidation or rehabilitation, or have a receiver appointed, or be
acquired or controlled by any other insurance company or
organization, or
2. Any law or regulation of any Federal or any State or any Local
Government of any jurisdiction in which the Company is doing
business should render illegal the arrangement made herein, or
3. With the agreement of the other party.
In the event of termination, the Reinsurer shall refund to the
Company the applicable unearned premium minus the ceding commission
and shall continue to remain liable for all losses occurring prior
to the date of termination. However, if this Contract shall
terminate while a loss occurrence covered hereunder is in progress,
it is agreed that, subject to the other conditions of this
Contract, the Reinsurer is responsible for its proportion of the
entire loss.
ARTICLE XIV
TAX
In consideration of the terms under which this Agreement is
issued, the Company undertakes not to claim any deduction of the
premium hereon when making tax returns, other than income or
Profits Tax returns, to any State or Territory of the United States
or to the District of Columbia.
ARTICLE XV
COUNTERPARTS
This Agreement may be executed in counterparts, each of which
shall be an original, but all of which together shall constitute
one and the same instrument.
<PAGE> 200
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives,
this 16th day of December, 1994.
21ST CENTURY CASUALTY COMPANY
By: William L. Mellick
--------------------------
Title: President & Chief Operating Officer
NEW HAMPSHIRE INSURANCE COMPANY
By:
--------------------------
Title:
By:
--------------------------
Title:
<PAGE> 201
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives,
this 16th day of December, 1994.
21ST CENTURY CASUALTY COMPANY
By:
--------------------------
Title:
NEW HAMPSHIRE INSURANCE COMPANY
By: Howard I. Smith
--------------------------
Title: Vice President
By: Elizabeth M. Tuck
--------------------------
Title: Secretary
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 20TH CENTURY
INDUSTRIES FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 941406
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 768
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 942174
<CASH> 249834
<RECOVER-REINSURE> 2737
<DEFERRED-ACQUISITION> 14776
<TOTAL-ASSETS> 1702810
<POLICY-LOSSES> 756243
<UNEARNED-PREMIUMS> 298519
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 69340
0
200000
<OTHER-SE> 48604
<TOTAL-LIABILITY-AND-EQUITY> 1702810
1034003
<INVESTMENT-INCOME> 84761
<INVESTMENT-GAINS> 61554
<OTHER-INCOME> (46)
<BENEFITS> 1828346
<UNDERWRITING-AMORTIZATION> 43409
<UNDERWRITING-OTHER> 57214
<INCOME-PRETAX> (786107)
<INCOME-TAX> (288087)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (498020)
<EPS-PRIMARY> (9.69)
<EPS-DILUTED> (9.69)
<RESERVE-OPEN> 574619
<PROVISION-CURRENT> 1897390
<PROVISION-PRIOR> (84453)
<PAYMENTS-CURRENT> 1287579
<PAYMENTS-PRIOR> 344876
<RESERVE-CLOSE> 755101
<CUMULATIVE-DEFICIENCY> (84453)
</TABLE>
