<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 1996
REGISTRATION NO. 333-4450
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SCPIE HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 6719 95-4557980
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE IDENTIFICATION NO.)
ORGANIZATION) NUMBER)
</TABLE>
9441 WEST OLYMPIC BOULEVARD, BEVERLY HILLS, CALIFORNIA 90213-4015
(310) 551-5900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DONALD J. ZUK, PRESIDENT
9441 WEST OLYMPIC BOULEVARD
P.O. BOX 4015
BEVERLY HILLS, CALIFORNIA 90213-4015
(310) 551-5900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
DONALD P. NEWELL, ESQ. ALEXANDER M. DYE, ESQ.
LATHAM & WATKINS LEBOEUF, LAMB, GREENE & MACRAE, L.L.P.
701 "B" STREET, SUITE 2100 125 WEST 55TH STREET
SAN DIEGO, CA 92101-1234 NEW YORK, NY 10019-5389
(619) 236-1234 (212) 424-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
NOVEMBER 13, 1996
PROSPECTUS
2,000,000 SHARES
SCPIE HOLDINGS INC.
COMMON STOCK
($.0001 PAR VALUE)
All of the shares of Common Stock offered hereby are being sold by SCPIE
Holdings Inc. (the "Company").
The shares of Common Stock offered hereby constitute a portion of the shares of
the Company being issued in connection with a plan of reorganization pursuant to
which Southern California Physicians Insurance Exchange, a California reciprocal
insurer (the "Exchange"), will reorganize as a stock insurer and become a wholly
owned subsidiary of the Company (the "Reorganization"). In connection with the
Reorganization, 9,994,491 shares of Common Stock will be issued to members of
the Exchange. See "The Reorganization."
Prior to the Offering, there has been no public market for the Common Stock. It
is anticipated that the initial public offering price will be between $19.00 and
$21.00 per share. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price.
The Common Stock has been approved for listing, subject to official notice of
issuance, on the New York Stock Exchange under the symbol "SKP".
SEE "RISK FACTORS" COMMENCING ON PAGE 7 HEREIN FOR CERTAIN FACTORS RELEVANT TO
AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE
TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1)
<S> <C> <C> <C>
Per Share............... $ $ $
Total(2)................ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) Before deducting expenses of the Offering payable by the Company, estimated
to be $ .
(2) The Company has granted to the Underwriters an option, exercisable within 30
days after the date hereof, to purchase up to an aggregate of 300,000
additional shares of Common Stock at the Price to Public, less Underwriting
Discount, solely to cover over-allotments, if any. If the Underwriters
exercise such option in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
The shares of Common Stock are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the shares of Common Stock will be made at the
offices of Salomon Brothers Inc, Seven World Trade Center, New York, New York,
or through the facilities of The Depository Trust Company, on or about ,
1996.
- --------------------------------------------------
SALOMON BROTHERS INC
- --------------------------------------------------------------------------------
The date of this Prospectus is , 1996.
(LOGO)
<PAGE> 3
FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER OF INSURANCE PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS DOCUMENT.
STATE INSURANCE HOLDING COMPANY LAWS AND REGULATIONS APPLICABLE TO THE
COMPANY IN GENERAL PROVIDE THAT NO PERSON MAY ACQUIRE CONTROL OF THE COMPANY,
AND THUS INDIRECT CONTROL OF ITS INSURANCE SUBSIDIARIES, UNLESS SUCH PERSON HAS
PROVIDED CERTAIN REQUIRED INFORMATION TO, AND SUCH ACQUISITION IS APPROVED (OR
NOT DISAPPROVED) BY, THE APPROPRIATE INSURANCE REGULATORY AUTHORITIES.
GENERALLY, ANY PERSON ACQUIRING BENEFICIAL OWNERSHIP OF 10% OR MORE OF THE
COMMON STOCK WOULD BE PRESUMED TO HAVE ACQUIRED SUCH CONTROL, UNLESS THE
APPROPRIATE INSURANCE REGULATORY AUTHORITIES UPON ADVANCE APPLICATION DETERMINE
OTHERWISE.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
------------------------
AVAILABLE INFORMATION
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements reported upon by its
independent auditors and quarterly reports containing unaudited consolidated
financial information for each of the first three quarters of each fiscal year.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (together with all amendments, exhibits,
schedules and supplements thereto, the "Registration Statement"), on Form S-1
(Registration No. 333-4450) under the Securities Act of 1933, as amended (the
"Securities Act") with respect to the shares of Common Stock to be issued in the
Offering. As permitted by the rules and regulations of the Commission, this
Prospectus, which constitutes a part of the Registration Statement, does not
contain all information set forth in the Registration Statement. For further
information, please refer to the Registration Statement, including the exhibits
thereto. The Registration Statement, including exhibits and schedules thereto,
can be inspected and copied at the Commission's Public Reference Room, Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
public reference facilities maintained by the Commission at its regional offices
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York
10048. Copies of such materials can be obtained from the Commission at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Additionally, material filed by the
Company can be inspected at the offices of the New York Stock Exchange at 20
Broad Street, New York, New York 10005. In addition, the Commission maintains a
Web site (http://www.sec.gov) that contains registration statements, reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission, including the Company. Statements
contained in this Prospectus relating to the contents of any contract or other
document referred to herein are not necessarily complete, and reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified by such reference.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
appearing elsewhere in this Prospectus. Financial data and ratios set forth in
this Prospectus have been presented in accordance with generally accepted
accounting principles, unless otherwise indicated. Except as otherwise
specified, all information in this Prospectus assumes that the Underwriters'
over-allotment option is not exercised. See "Glossary of Selected Insurance
Terms" for definitions of certain terms used in this Prospectus.
For purposes of this Prospectus, the terms "SCPIE" and the "Company" refer,
at all times prior to the effective date of the Reorganization, to Southern
California Physicians Insurance Exchange (the "Exchange") and its subsidiaries,
collectively, and at all times on or after such effective date, to SCPIE
Holdings Inc. and its subsidiaries, collectively; the term "SCPIE Holdings"
refers at all times to SCPIE Holdings Inc., excluding its subsidiaries; and the
term "Insurance Subsidiaries" refers, at all times prior to such effective date,
to the Exchange, SCPIE Indemnity Company, a California stock insurer ("SCPIE
Indemnity"), and two currently inactive insurance companies, and at all times on
or after such effective date, to SCPIE Indemnity and such inactive insurance
companies. The offering of the common stock of SCPIE Holdings is referred to
herein as the "Offering" and will be consummated substantially concurrent with
the effective date of the Reorganization.
THE COMPANY
The Company is the largest provider of medical malpractice insurance in
California, based on direct premiums written in 1995. SCPIE currently insures
approximately 10,100 California physicians and oral and maxillofacial surgeons
practicing alone or in medical groups or clinics or other healthcare
organizations. The Company also insures a variety of other healthcare providers,
including hospitals, emergency department facilities, outpatient surgery centers
and hemodialysis, clinical and pathology laboratories.
The Company's total revenues and net income were $165.0 million and $24.4
million, respectively, for the year ended December 31, 1995 and were $133.1
million and $19.8 million, respectively, for the nine months ended September 30,
1996. As of September 30, 1996, the Company had $790.4 million of total assets
and $271.9 million of total equity.
Medical malpractice insurance, or medical professional liability insurance,
insures the physician, hospital or other healthcare provider against liabilities
arising from the rendering of or failure to render professional medical
services. Under the typical medical malpractice insurance policy, the insurer
also defends the insured against potentially covered claims. Based on data
compiled by A.M. Best Company, Inc. ("A.M. Best"), in 1995, total medical
malpractice premiums in the United States were $6.0 billion. In California, the
second largest market for medical malpractice insurance based on premiums
written, approximately $587.7 million of medical malpractice premiums were
written in 1995. The Company's share of the medical malpractice premiums written
in California in 1995 was approximately 21%. The Company's market share is
substantially higher in Southern California where more than 95% of the Company's
insureds are located.
The Company believes that its leading market share for medical malpractice
insurance in California is, in large part, due to the loyalty of its insured
physicians. The Company attributes this loyalty to the high quality,
personalized service it provides and its traditional focus on the California
physician marketplace. The medical malpractice insurance offered by the Company
has been endorsed by twelve county medical associations and specialty societies
in California.
The Company believes that the growth in managed healthcare and the
emergence of multi-state integrated healthcare providers and delivery systems
will lead to major changes in the medical malpractice insurance industry.
Practice management organizations, hospitals, administrators of large group
practices and managed care organizations have an increasing influence over the
purchasing decision for the medical malpractice insurance coverages of their
affiliated physicians. As the consolidation of healthcare providers continues,
the number of physicians insured through such organizations will increase and
the Company believes that such organizations increasingly will seek
well-capitalized medical malpractice insurers that can provide a full range of
products and a high level of service in each state in which such organizations
conduct business.
To position the Company to compete and grow its business successfully in
this changing environment, the Company has adopted a strategy that includes: (i)
expanding the Company's product offerings, particularly to meet the liability
insurance needs of larger, more diverse healthcare entities;
3
<PAGE> 5
(ii) diversifying geographically by increasing writings of medical malpractice
insurance in states other than California; (iii) positioning the Company to take
advantage of acquisition and consolidation opportunities relating to medical
malpractice insurance; (iv) maintaining the Company's relationship with its
primary policyholder base of California physician and medical group insureds;
and (v) maintaining sufficient capital to take advantage of future market
opportunities and to retain strong insurance ratings.
The Company has taken the following steps to implement its strategy:
Increased Focus on the Liability Insurance Needs of Healthcare
Entities. Historically, the Company's business has primarily been medical
malpractice insurance for physicians. Recently, SCPIE has increasingly focused
its efforts on providing products to meet the malpractice and other liability
insurance needs of hospitals and other healthcare entities. The Company believes
that such organizations represent an increasing share of the market for
malpractice insurance and provide the Company with a significant area for future
growth. In 1994, the Company began offering malpractice insurance to California
hospitals and, in 1995, began offering errors and omissions coverage to managed
care organizations. The Company currently insures five hospitals and 27 managed
care organizations. In 1994, the Company began writing directly directors and
officers liability insurance for healthcare entities.
In addition, SCPIE assumes reinsurance of medical malpractice and
participates in excess insurance programs. The Company believes participation in
these lines of business will become an increasingly important aspect of its
operations as healthcare entities become larger and obtain higher policy limits.
Relationship with Sullivan, Kelly. In August 1995, the Company entered into
an exclusive marketing agreement with Sullivan, Kelly and Associates, Inc.
("SKA"), one of the leading hospital malpractice insurance brokers in the
Western United States. Under the agreement, SKA has the exclusive right to
market SCPIE's malpractice coverage for hospitals in all states, and SCPIE
recognizes SKA as the exclusive broker for medical group coverage in all states
other than California. SKA has informed the Company that it has relationships
with approximately 600 healthcare entities in 15 states which generated more
than $80.0 million of malpractice insurance premiums for a large insurance group
in 1995. Following the recent termination by the insurance group of this
relationship, SKA and SCPIE are actively working to obtain a significant portion
of this business for SCPIE. As of November 1996, the Company had issued binders
to 64 hospitals and managed care organizations representing approximately $10.1
million in annual premiums.
The Company believes that its marketing relationship with SKA will provide
(i) a significant advantage in marketing to hospitals and other healthcare
entities, and (ii) a cost-effective means of entering new geographic markets.
Entering New States. To facilitate its geographic expansion, in March 1996,
SCPIE acquired the outstanding stock of two inactive property and casualty
insurance companies, one of which is licensed in 44 states plus the District of
Columbia and the other of which is licensed in one state. The Company will
capitalize these companies with a portion of the proceeds of the Offering, and
will attempt to ensure that they are fully licensed and able to underwrite
medical malpractice insurance as quickly as possible. In the meantime, the
Company has a fronting arrangement to allow the Company to accommodate SKA in
all of the markets in which SKA operates. As of November 1996, the Company was
doing business through this arrangement in six states in addition to California.
The Company believes that the medical malpractice insurance industry in
California is currently experiencing a "soft insurance market," that is, an
insurance market in which the underwriting capacity exceeds current demand and
premium rates are relatively low. The Company believes that its strategy will
position it to expand premium writings and market share when the market
"hardens," that is, when demand coincides more closely with capacity and premium
rates increase to more appropriate levels.
THE REORGANIZATION
The Exchange is a California reciprocal insurer. The business of the
Exchange has been managed by SCPIE Management Company, the attorney-in-fact for
the Exchange, which is a wholly owned subsidiary of the Exchange. Prior to July
1996, SCPIE Management Company was a wholly owned subsidiary of Organization of
Southern California Physicians, Inc., a California mutual benefit corporation
indirectly controlled by the Exchange ("OSCAP").
On March 21, 1996, the Board of Governors of SCPIE (the "Board of
Governors") adopted a Plan and Agreement of Merger and on August 8, 1996 the
Board of Governors adopted an Amended and
4
<PAGE> 6
Restated Plan and Agreement of Merger (the "Merger Agreement") whereby the
Exchange will reorganize from a reciprocal insurer to a stock insurance company
and become a wholly owned subsidiary of SCPIE Holdings. Pursuant to the
Reorganization, the Exchange will merge (the "Merger") with and into SCPIE
Indemnity, a newly organized California stock insurer and a wholly owned
subsidiary of SCPIE Holdings that will be the surviving corporation in the
Reorganization. SCPIE Indemnity is licensed to write property and casualty
insurance in the State of California, but has not conducted business prior to
the Reorganization. In connection with the Reorganization, in July 1996, OSCAP
was liquidated into the Exchange and SCPIE Management Company became a
subsidiary of the Exchange.
The principal purpose of the Reorganization is to improve the Company's
access to the capital markets and to raise capital to permit the growth of
existing business and develop new business opportunities in the professional
liability insurance industry. The Reorganization will also provide members of
the Exchange with shares of Common Stock in exchange for their membership
interests in the Exchange.
The Merger Agreement was submitted to the members of the Exchange for
approval at a special meeting (the "Special Meeting") held on November 5, 1996.
At the Special Meeting, 8,844 members, or 80% of the members of the Exchange
entitled to vote, voted in favor of the Merger Agreement, which substantially
exceeded the two-thirds vote necessary for approval. The Reorganization is
expected to be consummated substantially concurrent with closing of the
Offering. In connection with the Reorganization, 9,994,491 shares of Common
Stock will be issued to members of the Exchange and 500,000 shares of Common
Stock will be issued to SCPIE Indemnity. See "Shares Eligible for Future Sale."
The Company has requested a ruling from the Internal Revenue Service (the
"Service") that the Merger, which is a part of the Reorganization, will
constitute a tax-free reorganization for Federal income tax purposes. In the
event the Service does not so rule or does not issue the ruling prior to the
time the Merger becomes effective, Latham & Watkins, tax counsel to the Exchange
("Tax Counsel"), will render its opinion to the Company to the effect that the
Merger will constitute a tax-free reorganization for Federal income tax
purposes. See "The Reorganization -- Federal Tax Consequences to the Company."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby.................. 2,000,000 shares
Common Stock to be outstanding after the
Offering(1)................................ 11,994,491 shares
Use of Proceeds.............................. Of the $36.5 million estimated net proceeds
from the Offering, approximately $34.0
million will be contributed to the Insurance
Subsidiaries to support the continued growth
of the Company's business and the balance
will be retained by SCPIE Holdings for
general corporate purposes.
Dividend Policy.............................. Subject to declaration by the Board of
Directors of the Company, the Company
currently intends to pay a quarterly cash
dividend of $.05 per share of Common Stock
commencing in the first quarter of 1997. See
"Dividend Policy."
New York Stock Exchange Symbol............... "SKP"
</TABLE>
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(1) Excludes 300,000 shares subject to the Underwriters' over-allotment option
and 500,000 shares to be issued to SCPIE Indemnity. See "Underwriting."
RISK FACTORS
Potential investors should carefully consider the factors set forth herein
under "Risk Factors" commencing on page 7, as well as the other information
contained in this Prospectus.
5
<PAGE> 7
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth selected financial data for the Exchange and
OSCAP. The selected income statement data set forth below for each of the years
in the three year period ended December 31, 1995 and the selected balance sheet
data as of December 31, 1995 and 1994 are derived from the financial statements
audited by Ernst & Young LLP, independent auditors, included elsewhere herein
and should be read in conjunction with, and are qualified by reference to such
statements and the related notes thereto. The selected income statement data for
the years ended December 31, 1992 and 1991 and for the nine months ended
September 30, 1996 and 1995 and the selected balance sheet data as of December
31, 1993, 1992 and 1991 and as of September 30, 1996 and 1995, are derived from
unaudited financial statements of the Exchange and OSCAP which management
believes incorporate all of the adjustments necessary for the fair presentation
of the financial condition and results of operations for such periods.
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1):
Direct premiums written................. $ 93,147 $ 91,273 $122,277 $120,024 $112,459 $107,126 $112,085
======== ======== ======== ======== ======== ======== ========
Premiums earned......................... $ 90,144 $ 88,097 $116,354 $111,659 $113,194 $112,122 $108,895
Net investment income................... 31,184 29,921 40,424 39,663 39,738 44,044 47,091
Realized investment gains and other
revenue............................... 11,733 7,043 8,231 755 16,254 18,950 11,946
-------- -------- -------- -------- -------- -------- --------
Total revenues........................ 133,061 125,061 165,009 152,077 169,186 175,116 167,932
-------- -------- -------- -------- -------- -------- --------
Losses and loss adjustment expenses..... 86,554 91,827 118,023 108,720 125,354 135,959 124,280
Other operating expenses................ 10,164 9,580 12,561 11,844 9,734 8,520 8,394
-------- -------- -------- -------- -------- -------- --------
Total expenses........................ 96,718 101,407 130,584 120,564 135,088 144,479 132,674
-------- -------- -------- -------- -------- -------- --------
Income before policyholder dividends and
Federal income taxes.................. 36,343 23,654 34,425 31,513 34,098 30,637 35,258
Policyholder dividends(2)............... 9,000 0 0 0 0 2,366 31,726
Federal income taxes (benefit).......... 7,494 6,849 10,056 9,212 8,618 7,899 (1,375)
-------- -------- -------- -------- -------- -------- --------
Net income............................ $ 19,849 $ 16,805 $ 24,369 $ 22,301 $ 25,480 $ 20,372 $ 4,907
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA(1):
Total investments(3).................... $691,996 $676,798 $695,021 $636,909 $679,257 $629,289 $592,192
Total assets............................ 790,416 766,857 781,358 751,605 775,667 722,563 694,347
Total liabilities....................... 518,481 509,388 507,539 542,069 548,268 540,920 534,294
Total equity(3)......................... 271,935 257,469 273,819 209,536 227,399 181,643 160,053
ADDITIONAL DATA(1):
Earnings per share(4)................... $ 1.98 $ 1.68 $ 2.44 $ 2.23 $ 2.55 $ 2.04 $ 0.49
Book value per share(4)................. 27.19 25.75 27.38 20.95 22.74 18.16 16.01
GAAP ratios:
Loss ratio............................ 96.0% 104.2% 101.4% 97.4% 110.7% 121.3% 114.1%
Expense ratio......................... 11.3 10.9 10.8 10.6 8.6 7.6 7.7
Combined ratio........................ 107.3 115.1 112.2 108.0 119.3 128.9 121.8
Statutory combined ratio................ 107.1 115.8 112.8 108.1 120.1 129.6 122.6
Statutory surplus....................... $245,933 $212,730 $235,352 $187,299 $171,589 $154,675 $146,765
</TABLE>
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(1) Financial data as of and for the periods ended December 31, 1995, 1994,
1993, 1992 and 1991, and September 30, 1995 are derived from the combined
financial statements of the Exchange and OSCAP. On July 12, 1996, OSCAP was
liquidated into the Exchange. Financial data as of and for the period ended
September 30, 1996 are derived from the consolidated financial statements of
the Exchange.
(2) Includes $31.0 million of Proposition 103 refunds in 1991. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General." In the second quarter of 1996, the Company estimated
an additional $9.0 million of policyholder dividends would be paid due to
favorable loss experience related to policy years 1987 through 1992. This
$9.0 million policyholder dividend will be paid to members of the Exchange
in the form of premium credits in 1997. Except for this final dividend,
after the Reorganization, the Company will cease paying such dividends to
its policyholders.
(3) Due to the adoption of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," on
December 31, 1993, total investments and total equity were adjusted to
reflect changes in market values. This change resulted in a decrease to
total investments of $1.5 million, an increase of $12.6 million, an increase
of $24.0 million, a decrease of $28.8 million and an increase of $30.1
million as of September 30, 1996 and 1995 and as of December 31, 1995, 1994
and 1993, respectively, and which resulted in a decrease to equity of $1.0
million, an increase of $8.2 million, an increase of $15.6 million, a
decrease of $18.7 million and an increase of $19.6 million as of September
30, 1996 and 1995 and as of December 31, 1995, 1994 and 1993, respectively.
(4) Gives effect in all periods to the Reorganization (including the allocation
of 10,000,000 shares of Common Stock to members of the Exchange in
connection therewith). Does not give effect to the sale of Common Stock in
the Offering. The 500,000 shares of Common Stock issued to SCPIE Indemnity
are not considered outstanding for purposes of determining per share
amounts.
6
<PAGE> 8
RISK FACTORS
In addition to other information set forth in this Prospectus, the
following factors should be carefully considered by potential investors in
making an investment decision regarding the Common Stock.
CONCENTRATION OF BUSINESS
Substantially all of the Company's premiums written are generated from
medical malpractice insurance policies issued to physicians and medical groups.
As a result, negative developments in the economic, competitive or regulatory
conditions affecting the medical malpractice insurance industry, particularly as
such developments might affect medical malpractice insurance for physicians,
could have a material adverse effect on the Company's results of operations.
Substantially all of the Company's direct premiums written are generated in
Southern California. The revenues and profitability of the Company are therefore
subject to prevailing regulatory, economic and other conditions in Southern
California. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations."
The Company's strategy includes expanding and diversifying its insurance
products and geographic operations. There can be no assurance that the Company
will be successful in implementing this strategy. See "-- Entry into New
Markets."
INDUSTRY FACTORS
Many factors influence the financial results of the medical malpractice
insurance industry, several of which are beyond the control of the Company.
These factors include, among other things: changes in severity and frequency of
claims; changes in applicable law and regulatory reform; changes in judicial
attitudes toward liability claims; and changes in inflation, interest rates and
general economic conditions.
The availability of medical malpractice insurance, or the industry's
underwriting capacity, is determined principally by the industry's level of
capitalization, historical underwriting results, returns on investment and
perceived premium rate adequacy. Historically, the financial performance of the
medical malpractice industry has tended to fluctuate in cyclical patterns
characterized by periods of greater competition in pricing and underwriting
terms and conditions (a "soft insurance market") followed by periods of capital
shortage and lesser competition (a "hard insurance market"). In a soft insurance
market, competitive conditions could result in premium rates and underwriting
terms and conditions which may be below profitable levels. For a number of
years, the medical malpractice insurance industry in California has faced a soft
insurance market. There can be no assurance as to whether or when industry
conditions will improve or the extent to which any improvement in industry
conditions may improve the Company's results of operations.
COMPETITION
The Company competes with numerous insurance companies in the California
market. The Company's principal competitors for physicians and medical groups
consist of three physician-owned mutual or reciprocal insurance companies,
several commercial companies and a physicians' mutual protection trust, which
levies assessments primarily on a "claims paid" basis. In addition, commercial
insurance companies such as Farmers Group, Inc. and MMI Companies, Inc. compete
for the medical malpractice insurance business of larger medical groups,
hospitals and other healthcare providers. Several of these competitors have
greater financial resources than the Company. In the last several years, the
Company has increased premium rates, while most of its competitors have
maintained their rates or instituted smaller increases. The Company has lost
some of its policyholders, in part due to its rate increases, but has realized a
modest increase in its premium volume and improved its underwriting results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General -- Competitive Environment" and "Business -- Rates and
Dividends." In addition to pricing, competitive factors may include dividend
policy, financial stability, breadth and flexibility of coverage and the quality
7
<PAGE> 9
and level of services provided. The Company paid dividends to its members of
$9.5 million, $11.2 million and $18.6 million in 1995, 1994 and 1993,
respectively, and $7.1 million during the first nine months of 1996, in the form
of premium credits. Such dividends were paid primarily to insureds who were
members of the Exchange in 1990 and prior policy years and were based primarily
on underwriting results in such years. On August 8, 1996, the Board of Governors
declared a final dividend to members of the Exchange of $9.0 million which will
be paid in the form of premium credits in 1997. Except for this final dividend,
after the Reorganization, the Company will cease paying such premium credit
dividends to its policyholders. Therefore, the Company may find it more
difficult to compete with other insurance companies offering such dividends. The
competitive environment could also result in lower premium rates and fees,
reduced profitability and loss of market share. As the Company expands into new
product lines and new geographic markets, it will need to compete with
established companies in such markets, many of which will have existing
relationships with the doctors and medical groups that the Company will be
seeking to insure. See "Business -- Competition."
LOSS AND LAE RESERVES
The reserves for losses and loss adjustment expenses ("LAE") established by
the Company are estimates of amounts needed to pay reported and unreported
claims and related LAE. The estimates are based on assumptions related to the
ultimate cost of settling such claims based on facts and interpretation of
circumstances then known, predictions of future events, estimates of future
trends in claims frequency and severity and judicial theories of liability,
legislative activity and other factors. However, establishment of appropriate
reserves is an inherently uncertain process involving estimates of future losses
and there can be no assurance that currently established reserves will prove
adequate in light of subsequent actual experience. The inherent uncertainty is
greater for certain types of insurance, such as medical malpractice, where a
longer period may elapse before a definite determination of ultimate liability
is made, and where the judicial, political and regulatory climates are changing.
Medical malpractice claims and expenses may be paid over a period of ten or more
years, which is longer than most property and casualty claims. Trends in losses
on long-tail lines of business such as medical malpractice may be slow to
appear, and accordingly, the Company's reaction in terms of modifying
underwriting practices and changing premium rates may lag underlying loss
trends. In addition, emerging changes in the practice of medicine, such as the
emergence of new, larger medical groups that do not have an established claims
history and additional claims resulting from restrictions on treatment by
managed care organizations, may require the Company to adjust its underwriting
and reserving practices. See "-- Changes in Healthcare." While the Company
believes that its reserves for losses and LAE are adequate, there can be no
assurance that the Company's ultimate losses and LAE will not deviate, perhaps
substantially, from the estimates reflected in the Company's financial
statements. If the Company's reserves should prove inadequate, the Company will
be required to increase reserves, which could have a material adverse effect on
the Company's financial condition or results of operations.
The Company believes it has been conservative in establishing loss and LAE
reserves. In recent years, the Company has revised estimates of loss severity
and determined that certain of its reserves were redundant. Redundant reserves,
which have been released in every year since 1985, contributed significantly to
reported earnings in 1995, 1994 and 1993. The Company reduced reserves for prior
years by $57.8 million, $60.4 million and $43.4 million in the years ending
December 31, 1995, 1994 and 1993, respectively, and by $38.6 million for the
nine months ended September 30, 1996. See Note 3 of Notes to Financial
Statements. The Company cannot predict whether similar redundancies will be
experienced in future years. The Company continues to establish its loss and LAE
reserves at what it believes is the upper end of a reasonable range of reserve
estimates, but there is no assurance that such reserves will ultimately prove to
be redundant. If reserves ultimately prove redundant, then the redundant amount
will become income in the period such amount is released from reserves and will
be included in stockholders' equity. If such redundancies do not occur or loss
and LAE experience does not improve, the Company's net income could be
significantly reduced or a net loss could occur. To the extent that reserves
prove to be inadequate in the future, the Company would have to increase such
reserves and incur a charge to earnings in the period that such reserves are
increased, which could have a material adverse effect on the
8
<PAGE> 10
Company's results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General -- Loss and LAE Reserves" and "-- Results of Operations"
and "Business -- Loss Reserves."
CHANGES IN HEALTHCARE
Significant attention has recently been focused on reforming the healthcare
system at both the Federal and state levels. A broad range of healthcare reform
measures have been suggested, and public discussion of such measures will likely
continue in the future. Proposals have included, among others, spending limits,
price controls, limits on increases in insurance premiums, limits on the
liability of doctors and hospitals for tort claims and changes in the healthcare
insurance system. The Company cannot predict which, if any, reform proposals
will be adopted, when they may be adopted or what impact they may have on the
Company. While some of these proposals could be beneficial to the Company, the
adoption of others could have a material adverse effect on the Company's
financial condition or results of operations.
In addition to regulatory and legislative efforts, there have been
significant market driven changes in the healthcare environment. In recent
years, a number of factors related to the emergence of "managed care" have
negatively impacted or threatened to impact the medical practice and economic
independence of physicians. Physicians have found it more difficult to conduct a
traditional fee for service practice and many have been driven to join or
contractually affiliate with managed care organizations, healthcare delivery
systems or practice management organizations. This consolidation could result in
the elimination or significant decrease in the role of the physician and the
medical group from the medical professional liability purchasing decision. In
addition, the consolidation could reduce primary medical malpractice insurance
premiums paid by healthcare systems, as larger healthcare systems generally
retain more risk by accepting higher deductibles and self-insured retentions or
form their own captive insurance companies.
ENTRY INTO NEW MARKETS
The Company's strategy is to expand and diversify its products and
operations to meet the insurance needs of large healthcare organizations, while
maintaining its traditional personalized service for physicians and medical
groups, both large and small. SCPIE has recently introduced policies providing
hospital professional liability, managed care organization errors and omissions
and directors and officers liability insurance for healthcare organizations.
SCPIE has also participated in recent years as a reinsurer in the excess medical
professional liability market. There is no assurance, however, that this
diversification will be successful.
Another aspect of the Company's strategy is to expand its market by
offering a variety of healthcare related liability insurance products to
hospitals, large medical groups and managed care and other healthcare systems
outside California. After the Merger, the Company will be licensed to write
liability insurance only in California. In March 1996, SCPIE Holdings acquired
two inactive insurance companies, one of which is licensed in 44 states plus the
District of Columbia and the other of which is licensed in one state. The
licenses will have to be modified in a number of states and certain rate filings
will need to be made to permit the Company to write medical malpractice
insurance in certain states. The Company could encounter delays in meeting such
regulatory requirements. In the meantime, the Company is marketing certain of
its policies through a licensed fronting insurer under an arrangement whereby
the Company reinsures all or substantially all of the policy risks under the
policies.
In August 1995, SCPIE entered into a marketing agreement with SKA, a
leading healthcare insurance broker in the Western United States. Under the
agreement, SKA has the exclusive right to market SCPIE's malpractice coverage
for hospitals in all states, and SCPIE recognizes SKA as the exclusive broker
for medical group coverage in all states other than California. The agreement
with SKA has been renewed until October 1997 and will continue to renew on an
annual basis unless terminated by either
9
<PAGE> 11
party on 90 days' notice. SKA has offices in the states of California, Arizona,
Florida, Hawaii, Illinois, Maryland, Tennessee, Texas and Washington. SKA has
informed the Company that it has relationships with approximately 600 healthcare
entities in 15 states which generated more than $80.0 million of malpractice
insurance premiums for a large insurance group in 1995. Following the recent
termination by the insurance group of this relationship, SKA and SCPIE are
actively working to obtain a significant portion of this business for SCPIE. As
of November 1996, the Company had issued binders to 64 hospitals and managed
care organizations representing approximately $10.1 million in annual premiums.
There is no assurance that SCPIE will obtain any of such business or that any
business written pursuant to its arrangements with SKA will ultimately be
profitable for the Company. If SKA is not successful in marketing SCPIE's
products to hospitals in California or to hospitals and medical groups in other
states, or if the SKA arrangement is not renewed, SCPIE may have difficulty in
directly marketing its own products in other states or developing an alternative
marketing relationship.
SKA and the insurance group mentioned above are currently engaged in
litigation in the California state court regarding rights to certain insurance
information and the ability to solicit professional liability insurance from
hospitals and medical groups currently insured by the insurance group through
SKA. On September 13, 1996, the court entered a preliminary injunction placing
some restrictions on the ability of the insurance group to solicit renewals of
these policies and ordering certain information returned to SKA. The preliminary
injunction was modified on October 3, 1996 with respect to use of certain
information by the insurance group related to excess insurance policies or
self-insured retention policies and prohibiting misrepresentations regarding the
preliminary injunction and disparaging remarks about the parties. Additionally,
a cross-complaint seeking damages, restitution and certain injunctive relief was
filed by the insurance group against SKA on October 14, 1996. The Company does
not know what effect, if any, this litigation or the termination of SKA by the
insurance group will have on its efforts to obtain the business currently
underwritten by the insurance group.
PHYSICIAN AND MEDICAL ASSOCIATION RELATIONSHIPS
The Exchange was organized in 1976 by physicians, received the exclusive
endorsement and active support of a number of local county medical associations
in building its physician and medical group policyholder base and, as a
reciprocal insurance company, has been wholly owned and governed by its members.
The Exchange has relied on its relationship with physicians and medical
associations in marketing its policies in competition with commercial insurance
companies and other physician-owned companies. The Company will endeavor to
maintain its medical association endorsements and to continue its close
relationship with physicians and medical groups through personalized service.
There can be no assurance that the Company will be able to maintain these
relationships.
IMPORTANCE OF RATINGS
Ratings have become an increasingly important factor in establishing the
competitive position of insurance companies. SCPIE is rated "A (Excellent)" by
A.M. Best, the third highest rating of 13 ratings assigned to solvent insurance
companies, which currently range from "A++ (Superior)" to "D (Very Vulnerable)."
A.M. Best's ratings reflect its opinion of an insurance company's financial
strength, operating performance and ability to meet its obligations to
policyholders and are not evaluations directed to purchasers of an insurance
company's securities. In June 1996, A.M. Best reduced the Company's rating from
"A+ (Superior)," citing significant uncertainty in the medical malpractice
marketplace, caused, in part, by evolving managed care issues, the Company's
narrow product line and geographic concentration, and intense competition and
weakening premium rates in the medical malpractice industry. A.M. Best similarly
reduced the ratings of three other medical malpractice insurance companies
domiciled in California and several other medical malpractice companies
domiciled in states other than California. The Company's ability to maintain or
improve its rating by A.M. Best may depend on its ability to implement
successfully its business strategy. See "Business -- A.M. Best Rating." If
SCPIE's rating is materially reduced from its current level by A.M. Best, the
Company's results of operations could be adversely affected. The Insurance
Subsidiaries have entered into a reinsurance pooling arrangement and
10
<PAGE> 12
each of the Insurance Subsidiaries has been assigned the same "pooled" "A
(Excellent)" A.M. Best rating based on their consolidated performance.
REINSURANCE
The amount and cost of reinsurance available to companies specializing in
medical professional liability insurance are subject, in large part, to
prevailing market conditions beyond the control of the Company. The Company's
ability to provide professional liability insurance at competitive premium rates
and coverage limits on a continuing basis will depend in part upon its ability
to secure adequate reinsurance in amounts and at rates that are commercially
reasonable. Although the Company anticipates that it will continue to be able to
obtain such reinsurance, there can be no assurance that this will be the case.
Further, the Company is subject to a credit risk with respect to its reinsurers
because reinsurance does not relieve the Company of liability to its insureds
for the risks ceded to reinsurers. Although the Company places its reinsurance
with reinsurers it believes to be financially stable, a significant reinsurer's
inability to make payment under the terms of a reinsurance treaty could have a
material adverse effect on the Company. See "Business -- Reinsurance."
HOLDING COMPANY STRUCTURE; LIMITATION ON DIVIDENDS
SCPIE Holdings is an insurance holding company whose assets consist of all
of the outstanding capital stock of the Insurance Subsidiaries and, following
the Offering, will include a portion of the net proceeds of the Offering. As an
insurance holding company, SCPIE Holdings' ability to meet its obligations and
to pay dividends, if any, may depend upon the receipt of sufficient funds from
its subsidiaries. The payment of dividends to SCPIE Holdings by the Insurance
Subsidiaries is subject to general limitations imposed by applicable insurance
laws. See "Business -- Regulation -- Regulation of Dividends from Insurance
Subsidiaries."
ANTI-TAKEOVER PROVISIONS
SCPIE Holdings' amended and restated certificate of incorporation (the
"Restated Certificate") and amended and restated bylaws (the "Bylaws") include
provisions that may be deemed to have anti-takeover effects and may delay, defer
or prevent a takeover attempt that stockholders may consider to be in their best
interests. These provisions include: a Board of Directors consisting of three
classes; authorization to issue up to 5,000,000 shares of preferred stock, par
value $1.00 per share (the "Preferred Stock"), in one or more series with such
rights, obligations, powers and preferences as the Board of Directors of SCPIE
Holdings (the "SCPIE Holdings Board") may provide; a limitation which permits
only the SCPIE Holdings Board, or the Chairman or the President of SCPIE
Holdings to call a special meeting of stockholders; a prohibition against
stockholders acting by written consent; provisions which provide that directors
may be removed only for cause and only by the affirmative vote of holders of
two-thirds (66 2/3%) of the outstanding shares of voting securities; provisions
which provide that the SCPIE Holdings Board may increase the size of the Board
and may fill vacancies and newly created directorships; and certain advance
notice procedures for nominating candidates for election to the SCPIE Holdings
Board and for proposing business before a meeting of stockholders. In addition,
state insurance holding company laws applicable to the Company in general
provide that no person may acquire control of SCPIE Holdings without the prior
approval of appropriate insurance regulatory authorities. See "Management,"
"Description of Capital Stock -- Delaware Law and Certain Charter and Bylaw
Provisions" and "Business -- Regulation -- Holding Company Regulation."
REGULATORY AND RELATED MATTERS
Insurance companies are subject to supervision and regulation by the state
insurance authority in each state in which they transact business. Such
supervision and regulation relate to numerous aspects of an insurance company's
business and financial condition, including limitations on lines of business,
underwriting limitations, the setting of premium rates, the establishment of
standards of solvency, statutory surplus requirements, the licensing of insurers
and agents, concentration of investments, levels
11
<PAGE> 13
of reserves, the payment of dividends, transactions with affiliates, changes of
control and the approval of policy forms. Such regulation is concerned primarily
with the protection of policyholders' interests rather than stockholders'
interests. See "Business -- Regulation."
State regulatory oversight and various proposals at the Federal level may
in the future adversely affect the Company's results of operations. In recent
years, the state insurance regulatory framework has come under increased Federal
scrutiny, and certain state legislatures have considered or enacted laws that
alter and, in many cases, increase state authority to regulate insurance
companies and insurance holding company systems. Further, the National
Association of Insurance Commissioners (the "NAIC") and state insurance
regulators are reexamining existing laws and regulations, which in many states
has resulted in the adoption of certain laws that specifically focus on
insurance company investments, issues relating to the solvency of insurance
companies, risk-based capital ("RBC") guidelines, interpretations of existing
laws, the development of new laws and the definition of extraordinary dividends.
See "Business -- Regulation -- Regulation of Dividends from Insurance
Subsidiaries," "-- Risk-Based Capital" and "-- Regulation of Investments."
SHARES ELIGIBLE FOR FUTURE SALE
All of the 9,994,491 shares of Common Stock issued to members of the
Exchange in connection with the Reorganization (except for the 14,220 shares
issued to members of the Board of Governors) will be eligible for immediate sale
in the public market. No prediction can be made as to the effect, if any, that
future sales of shares, or the availability of shares for future sale, will have
on the market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of such shares of Common Stock in the public market
following effectiveness of the Reorganization and the Offering or the perception
that such sales could occur could adversely affect the market price of the
Common Stock and could impair the Company's future ability to raise capital
through an offering of its equity securities. See "Shares Eligible for Future
Sale."
LACK OF PRIOR PUBLIC MARKET FOR COMMON STOCK
Prior to the Reorganization and the Offering, there has been no public
market for the Common Stock and there can be no assurance that an active trading
market will develop or be sustained. The shares of Common Stock have been
approved for listing, subject to official notice of issuance, on the New York
Stock Exchange. The initial public offering price will be determined by
agreement between the Company and the Underwriters. The price at which the
Common Stock is sold in the Offering may not be indicative of the market price
of the Common Stock after completion of the Offering. In addition, factors such
as the variations in the Company's financial results or other developments
affecting the Company could cause the market price of the Common Stock to
fluctuate significantly after the Offering. See "Underwriting."
12
<PAGE> 14
THE COMPANY
The Company is the largest provider of medical malpractice insurance in
California, based on direct premiums written in 1995. SCPIE currently insures
approximately 10,100 California physicians and oral and maxillofacial surgeons
practicing alone or in medical groups or clinics or other healthcare
organizations. The Company also insures a variety of other healthcare providers,
including hospitals, emergency department facilities, outpatient surgery centers
and hemodialysis, clinical and pathology laboratories.
The Company's total revenues and net income were $165.0 million and $24.4
million, respectively, for the year ended December 31, 1995 and were $133.1
million and $19.8 million, respectively, for the nine months ended September 30,
1996. As of September 30, 1996, the Company had $790.4 million in total assets
and $271.9 million of total equity.
SCPIE Holdings was incorporated in the State of Delaware in September 1995
and was organized in February 1996. The Company's principal offices are located
at 9441 West Olympic Boulevard, Beverly Hills, California 90213-4015, and its
telephone number is (310) 551-5900.
THE REORGANIZATION
The following discussion of the Reorganization is qualified in its entirety
by reference to the Merger Agreement, a copy of which is filed as an exhibit to
the Registration Statement of which this Prospectus forms a part.
In connection with the Reorganization, the Exchange will merge with and
into SCPIE Indemnity, a wholly owned subsidiary of SCPIE Holdings. As a result
of the Reorganization, membership rights in the Exchange will be extinguished
and members of the Exchange will receive shares of Common Stock of SCPIE
Holdings as consideration for the extinguishment of such rights. SCPIE
Indemnity, the surviving corporation of the Merger, will remain a wholly owned
subsidiary of SCPIE Holdings and will have access to the capital markets through
SCPIE Holdings.
PURPOSE
The principal purpose of the Reorganization is to improve the Company's
access to the capital markets and to raise capital to permit the growth of
existing business and develop new business opportunities in the professional
liability insurance industry. The Reorganization provides members of the
Exchange with an opportunity to convert their interests as members of the
Exchange into publicly traded shares of Common Stock.
APPROVAL OF THE REORGANIZATION; EFFECTIVE DATE
The Board of Governors, the SCPIE Holdings Board and the Board of Directors
of SCPIE Indemnity approved the Reorganization on March 21, 1996, and approved
amendments to the Merger Agreement on August 8, 1996.
On September 16, 1996, the Insurance Commissioner of the State of
California (the "Insurance Commissioner") approved the Reorganization for
submission to the members of the Exchange.
At the Special Meeting held on November 5, 1996, the Merger Agreement was
submitted to the members of the Exchange for approval. At the Special Meeting,
8,844 members, or 80% of the members of the Exchange entitled to vote, voted in
favor of the Merger Agreement, which substantially exceeded the two-thirds vote
necessary for approval. The Reorganization is expected to be consummated
substantially concurrent with the closing of the Offering.
The Company must obtain final approval of the Reorganization by the
Insurance Commissioner prior to the closing of the Offering.
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<PAGE> 15
SHARES OF COMMON STOCK ISSUED IN THE REORGANIZATION
In connection with the Reorganization, 9,994,491 shares of Common Stock
will be issued to members of the Exchange and 500,000 shares of Common Stock
will be issued to SCPIE Indemnity. See "Shares Eligible for Future Sale." The
shares of Common Stock issued to SCPIE Indemnity will be issued in consideration
of the cancellation of the outstanding shares of Common Stock of SCPIE Holdings
currently held by the Exchange which will be cancelled in the Reorganization.
Such shares will not be entitled to vote, but will be entitled to receive
dividends.
FEDERAL TAX CONSEQUENCES TO THE COMPANY
It is a condition to the Company's obligation to effect the Merger that the
Company shall have received a private letter ruling from the Service or an
opinion from a law firm of recognized standing (the "Merger Tax Opinion") that,
for federal income tax purposes, the members of the Exchange receiving Common
Stock in the Merger generally will recognize no gain or loss on the exchange of
their membership interests for such shares of Common Stock. The Exchange has
requested a ruling from the Service that the Merger will constitute a tax-free
reorganization for Federal income tax purposes, and, if the Service does not so
rule or does not so rule prior to the effective time of the Merger, Tax Counsel
will render the Merger Tax Opinion in satisfaction of the conditions of the
Merger Agreement. If the Merger were not to qualify as a tax-free reorganization
under Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Exchange would recognize, in a taxable transaction, gain equal to
the excess of the fair market value of the total number of shares of Common
Stock that the members of the Exchange are entitled to receive pursuant to the
Merger over the Exchange's aggregate tax basis in its assets transferred to
SCPIE Indemnity in the Merger.
There is a pending project at the Service dealing with the tax consequences
of transactions involving the "inversion" of members of an affiliated group
(i.e., the positions of such members are inverted or otherwise reversed). The
Service has announced in Notice 94-93 that any Treasury Regulations addressing
inversion transactions will apply to certain transactions occurring on or after
September 22, 1994. Notice 94-93 provides that future Treasury Regulations may
require, where appropriate, "recognition of income or gain at the time of an
inversion transaction" or "reductions to the basis (or increases in gain on the
sale or other disposition) of the stock of one or more corporations that are
involved in inversion transactions." While the potential scope of any future
Treasury Regulations or other Service positions applicable to inversion
transactions is unclear, Tax Counsel does not believe that income or gain
recognition should be required in connection with the Merger and the related
transactions.
SCPIE Indemnity will be taxed as a stock insurance company, which is
generally taxed as a corporation subject to certain special rules. Under the
Internal Revenue Code, an insurance company's Federal taxable income
incorporates all income, including premiums, investment income and underwriting
income. The Code currently establishes the maximum corporate tax rate of 35% and
imposes a corporate alternative minimum tax rate of 20%.
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<PAGE> 16
USE OF PROCEEDS
Based upon an assumed public offering price of $20.00 per share, the net
proceeds to the Company from the Offering are estimated to be approximately
$36.5 million (or $42.1 million if the Underwriters' over-allotment option is
exercised in full) after deducting the underwriting discount and estimated
Offering expenses payable by the Company. The Company expects to contribute
approximately $34.0 million to the Insurance Subsidiaries to support the
continued growth of the Company's business and the balance will be retained by
the Company for general corporate purposes. The Company will not receive any
proceeds from the issuance of the Common Stock to members of the Exchange
pursuant to the Reorganization.
DIVIDEND POLICY
The Company currently intends to pay regular quarterly cash dividends. The
Company initially expects to pay a quarterly cash dividend of $.05 per share
commencing in the first quarter of 1997. The declaration and payment of
dividends to holders of Common Stock will be at the discretion of the SCPIE
Holdings Board and will be dependent upon SCPIE Holdings' financial condition,
results of operations, cash requirements, future prospects, regulatory
restrictions on the payment of dividends to SCPIE Holdings by the Insurance
Subsidiaries and other factors deemed relevant by the SCPIE Holdings Board.
There can be no assurance that SCPIE Holdings will declare and pay any
dividends. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
SCPIE Holdings is an insurance holding company whose assets consist
primarily of all of the outstanding shares of the common stock of the Insurance
Subsidiaries. Although SCPIE Holdings intends to retain approximately $2.5
million of the net proceeds from the Offering for general corporate purposes,
SCPIE Holdings' ability to pay dividends to its stockholders and meet its other
obligations, including operating expenses and any debt service, will depend
primarily upon the receipt of sufficient funds from the Insurance Subsidiaries.
The payment of dividends by the Insurance Subsidiaries to SCPIE Holdings will be
restricted by applicable insurance law. See "Risk Factors -- Holding Company
Structure; Limitation on Dividends," "Business -- Regulation -- Regulation of
Dividends from Insurance Subsidiaries" and "Description of Capital Stock."
15
<PAGE> 17
CAPITALIZATION
The information set forth in the table presented below is derived from the
financial statements and the related notes thereto included elsewhere in this
Prospectus. The table presents the capitalization at September 30, 1996 of: (i)
the Exchange; and (ii) SCPIE Holdings as adjusted to reflect the Reorganization
and the sale of 2,000,000 shares of Common Stock in the Offering at an assumed
public offering price of $20.00 per share and the application of the estimated
net proceeds therefrom as set forth under "Use of Proceeds." See "The
Reorganization." The table should be read in conjunction with the historical
financial statements and the related notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
------------------------------
ACTUAL AS ADJUSTED(1)
----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total debt...................................................... $ -- $ --
Equity:
Preferred Stock, $1.00 par value, 5,000,000 shares authorized;
no shares issued and outstanding........................... -- --
Common Stock, $0.0001 par value, 30,000,000 shares authorized;
0 shares issued and outstanding; 12,494,491 issued and
11,994,491 outstanding, as adjusted(2)..................... -- 1
Additional paid-in capital.................................... -- 305,044
Surplus....................................................... 270,445 --
Net unrealized appreciation of invested assets................ 1,490 1,490
-------- --------
Total equity.......................................... 271,935 306,535
-------- --------
Total capitalization............................................ $ 271,935 $306,535
======== ========
</TABLE>
- ---------------
(1) The As Adjusted column reflects the Offering at an assumed Initial Public
Offering price of $20.00 per share for the Common Stock, after deducting
estimated underwriting discounts and expenses of the Offering of $3.5
million and estimated expenses related to the Reorganization of $1.9
million.
(2) The 500,000 shares issued to SCPIE Indemnity in the Merger are treated as
issued but not outstanding under GAAP.
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<PAGE> 18
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial data for the Exchange and
OSCAP. The selected income statement data set forth below for each of the years
in the three year period ended December 31, 1995 and the selected balance sheet
data as of December 31, 1995 and 1994 are derived from the financial statements
audited by Ernst & Young LLP, independent auditors, included elsewhere herein
and should be read in conjunction with, and are qualified by reference to, such
statements and the related notes thereto. The selected income statement data for
the years ended December 31, 1992 and 1991 and for the nine months ended
September 30, 1996 and 1995 and the selected balance sheet data as of December
31, 1993, 1992 and 1991 and as of September 30, 1996 and 1995, are derived from
unaudited financial statements of the Exchange and OSCAP which management
believes incorporate all of the adjustments necessary for the fair presentation
of the financial condition and results of operations for such periods.
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS
ENDED SEPTEMBER 30,
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1):
Direct premiums written.............................. $ 93,147 $ 91,273 $122,277 $120,024 $112,459 $107,126 $112,085
======== ======== ======== ======== ======== ======== ========
Premiums earned...................................... $ 90,144 $ 88,097 $116,354 $111,659 $113,194 $112,122 $108,895
Net investment income................................ 31,184 29,921 40,424 39,663 39,738 44,044 47,091
Realized investment gains and other revenue.......... 11,733 7,043 8,231 755 16,254 18,950 11,946
-------- -------- -------- -------- -------- -------- --------
Total revenues................................... 133,061 125,061 165,009 152,077 169,186 175,116 167,932
-------- -------- -------- -------- -------- -------- --------
Losses and loss adjustment expenses.................. 86,554 91,827 118,023 108,720 125,354 135,959 124,280
Other operating expenses............................. 10,164 9,580 12,561 11,844 9,734 8,520 8,394
-------- -------- -------- -------- -------- -------- --------
Total expenses................................... 96,718 101,407 130,584 120,564 135,088 144,479 132,674
-------- -------- -------- -------- -------- -------- --------
Income before policyholder dividends and Federal
income taxes....................................... 36,343 23,654 34,425 31,513 34,098 30,637 35,258
Policyholder dividends(2)............................ 9,000 0 0 0 0 2,366 31,726
Federal income taxes (benefit)....................... 7,494 6,849 10,056 9,212 8,618 7,899 (1,375)
-------- -------- -------- -------- -------- -------- --------
Net income....................................... $ 19,849 $ 16,805 $ 24,369 $ 22,301 $ 25,480 $ 20,372 $ 4,907
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA(1):
Total investments(3)................................. $691,996 $676,798 $695,021 $636,909 $679,257 $629,289 $592,192
Total assets......................................... 790,416 766,857 781,358 751,605 775,667 722,563 694,347
Total liabilities.................................... 518,481 509,388 507,539 542,069 548,268 540,920 534,294
Total equity(3)...................................... 271,935 257,469 273,819 209,536 227,399 181,643 160,053
ADDITIONAL DATA(1):
Earnings per share(4)................................ $ 1.98 $ 1.68 $ 2.44 $ 2.23 $ 2.55 $ 2.04 $ 0.49
Book value per share(4).............................. 27.19 25.75 27.38 20.95 22.74 18.16 16.01
GAAP ratios:
Loss ratio......................................... 96.0% 104.2% 101.4% 97.4% 110.7% 121.3% 114.1%
Expense ratio...................................... 11.3 10.9 10.8 10.6 8.6 7.6 7.7
Combined ratio..................................... 107.3 115.1 112.2 108.0 119.3 128.9 121.8
Statutory combined ratio............................. 107.1 115.8 112.8 108.1 120.1 129.6 122.6
Statutory surplus.................................... $245,933 $212,730 $235,352 $187,299 $171,589 $154,675 $146,765
</TABLE>
- ---------------
(1) Financial data as of and for the periods ended December 31, 1995, 1994,
1993, 1992 and 1991, and September 30, 1995 are derived from the combined
financial statements of the Exchange and OSCAP. On July 12, 1996, OSCAP was
liquidated into the Exchange. Financial data as of and for the period ended
September 30, 1996 are derived from the consolidated financial statements of
the Exchange.
(2) Includes $31.0 million of Proposition 103 refunds in 1991. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General." In the second quarter of 1996, the Company estimated
an additional $9.0 million of policyholder dividends would be paid due to
favorable loss experience related to policy years 1987 through 1992. This
$9.0 million policyholder dividend will be paid to members of the Exchange
in the form of premium credits in 1997. Except for this final dividend,
after the Reorganization, the Company will cease paying such dividends to
its policyholders.
(3) Due to the adoption of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," on
December 31, 1993, total investments and total equity were adjusted to
reflect changes in market values. This change resulted in a decrease to
total investments of $1.5 million, an increase of $12.6 million, an increase
of $24.0 million, a decrease of $28.8 million and an increase of $30.1
million as of September 30, 1996 and 1995 and as of December 31, 1995, 1994
and 1993, respectively, and which resulted in a decrease to equity of $1.0
million, an increase of $8.2 million, an increase of $15.6 million, a
decrease of $18.7 million and an increase of $19.6 million as of September
30, 1996 and 1995 and as of December 31, 1995, 1994 and 1993, respectively.
(4) Gives effect in all periods to the Reorganization (including the allocation
of 10,000,000 shares of Common Stock to members of the Exchange in
connection therewith). Does not give effect to the sale of Common Stock in
the Offering. The 500,000 shares of Common Stock issued to SCPIE Indemnity
are not considered outstanding for purposes of determining per share
amounts.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the related notes thereto appearing elsewhere in this Prospectus.
GENERAL
Cyclical Nature of Medical Malpractice Insurance Industry. Many factors
influence the financial results of the medical malpractice insurance industry,
several of which are beyond the control of the Company. These factors include,
among other things, changes in severity and frequency of claims; changes in
applicable law and regulatory reform; changes in judicial attitudes toward
liability claims; and changes in inflation, interest rates and general economic
conditions.
The availability of medical malpractice insurance, or the industry's
underwriting capacity, is determined principally by the industry's level of
capitalization, historical underwriting results, returns on investment and
perceived premium rate adequacy. Historically, the financial performance of the
medical malpractice industry has tended to fluctuate between a soft insurance
market and a hard insurance market. In a soft insurance market, competitive
conditions could result in premium rates and underwriting terms and conditions
which may be below profitable levels. For a number of years, the medical
malpractice insurance industry in California has faced a soft insurance market.
There can be no assurance as to whether or when industry conditions will improve
or the extent to which any improvement in industry conditions may improve the
Company's financial condition and results of operations.
Changing Nature of SCPIE's Business. The vast majority of the Company's
business is professional liability insurance for physicians written on a claims
made and reported basis. The Company believes that the integration of healthcare
delivery in recent years, particularly in California, will result in the growing
importance of large medical groups and other healthcare entities, and a
corresponding change in the entities that make professional liability purchasing
decisions. The Company believes that these changes have created a need for the
Company to further diversify. As a result, the Company has adopted a strategy
that includes expanding the type of products offered by the Company and
diversifying geographically by offering products in states other than
California. The Company began to implement its strategy in 1994 by offering
professional liability insurance to hospitals in California and, in 1995, began
offering errors and omissions coverage for managed care organizations. In
addition, the Company has entered into a marketing arrangement with SKA to
expand its business to other states. See "Business -- Overview."
Competitive Environment. The California medical malpractice insurance
market for medical groups and physicians has become extremely competitive in
recent years. SCPIE's principal competitors are three other physician-owned
companies and a physicians' mutual protection trust. In addition, commercial
insurance companies have recently returned to the California market to insure
medical groups and physicians.
In the late 1980s many medical malpractice insurance companies began to
experience significantly improved claims cost trends and attempted to attract
medical groups and physicians insured by other companies by reducing premium
rates. Beginning in 1990, the Company implemented annual rate decreases
aggregating more than 25% during the next three years, which resulted in a
reduction in premium volume to approximately $107.1 million in 1992, and a
deterioration of underwriting results. Since 1993, however, SCPIE has instituted
annual overall rate increases ranging from 4.4% to 9.2% in order to improve its
underwriting results. These rate increases have been higher than those
implemented by most of its competitors. As a result, the Company has lost some
of its policyholders, in part due to these rate increases, but has realized a
modest increase in its premium volume and has improved its underwriting results.
See "Risk Factors -- Competition" and "Business -- Rates and Dividends."
Policyholder Dividends. Since 1981, SCPIE has followed a practice of paying
discretionary dividends to its physician and other healthcare provider members
in the form of premium credits on the basis
18
<PAGE> 20
of the results of prior policy years, as the actual experience for such years
becomes known. The Company paid dividends to its members of $9.5 million, $11.2
million and $18.6 million in 1995, 1994 and 1993, respectively, and $7.1 million
during the first nine months of 1996, in the form of premium credits. Such
dividends were paid primarily to insureds who were members of the Exchange in
1990 and prior policy years and were based primarily on underwriting results in
such years. These dividends have been accrued as an expense for the year in
which the related premiums were earned and not the year paid or declared. On
August 8, 1996, the Board of Governors declared a final dividend of $9.0 million
to members of the Exchange of record on the date of the Special Meeting, which
will be paid in the form of premium credits in 1997. This dividend is reflected
as an expense in the nine-month period ended September 30, 1996. See "-- Results
of Operations -- Nine Months Ended September 30, 1996 Compared to Nine Months
Ended September 30, 1995." Except for this final dividend, after the
Reorganization, the Company will cease paying such premium credit dividends to
its policyholders. Therefore, the Company may find it more difficult to compete
with other insurance companies offering such dividends. See "Risk
Factors -- Competition."
Loss and LAE Reserves. Medical malpractice and other property and casualty
loss and LAE reserves are established based on known facts and interpretation of
circumstances, including the Company's experience with similar cases and
historical trends involving claim payment patterns, loss payments and pending
levels of unpaid claims, as well as court decisions and economic conditions. The
effects of inflation are considered in the reserving process. Establishment of
appropriate reserves is an inherently uncertain process, and there can be no
assurance that currently established reserves will prove adequate in light of
subsequent actual experience. The Company follows a practice of conservatively
estimating its future liabilities relating to losses already incurred and has
attempted to establish its loss and LAE reserves at the upper end of a
reasonable range of reserve estimates. The Company believes that it has been
particularly difficult to make such estimates for medical malpractice claims in
California because of the uncertain benefits of tort reform measures and more
recently a change in the judicial process. The tort reform measures, known as
the Medical Injury Compensation Reform Act of 1975 ("MICRA"), were not declared
constitutional by the California Supreme Court until the mid-1980s and their
impact on settlements was difficult to evaluate until some years later. The
change in judicial process, known as "fast-track," became fully effective for
most California counties in 1992 and requires, among other things, that all
non-complex civil actions, including most medical malpractice actions, proceed
to trial within approximately one year after filing. Prior to this rule, in some
of California's larger counties, a trial typically did not occur until more than
four years after the related complaint had been filed. "Fast-track" has
accelerated costs and expenses of investigation and defense, but has also led to
more rapid settlements, judicial resolutions and, the Company believes, overall
cost reductions. The Company believes that it has now realized virtually all of
the benefits from the past tort reform legislation and from the institution of
"fast-track."
Beginning in 1988, the Company implemented several changes to its claims
procedures including the establishment of increased levels of authority within
the claims department for approval of reserves and settlement of claims. The
Company believes that these changes resulted in (i) earlier recognition of
liability, and therefore higher case reserves and (ii) faster settlement of
claims, ultimately resulting in lower indemnity payments and reduced legal
expenses.
The Company believes that a combination of the factors discussed above and
other factors have contributed to the recent redundancies in reserves
established by SCPIE for prior years. The original reserves were established
without full knowledge of the effect of these factors. Redundant reserves, which
have been released in every year since 1985, have contributed significantly to
reported earnings in 1995, 1994 and 1993. The Company reduced reserves for prior
years by $57.8 million, $60.4 million and $43.4 million in the years ended
December 31, 1995, 1994 and 1993, respectively. See Note 3 of Notes to Financial
Statements. The Company cannot predict whether similar redundancies will be
experienced in future years. The Company continues to establish its loss and LAE
reserves at what it believes is the upper end of a reasonable range of reserve
estimates, but there is no assurance that such reserves will ultimately prove to
be redundant. The Company believes that some reduction in the amount of the
19
<PAGE> 21
redundancies recently experienced is reasonably likely. If such redundancies do
not occur or loss and LAE experience does not improve, the Company's net income
could be significantly reduced or a net loss could occur. See "Business -- Loss
Reserves."
Operating Expenses. The Company's planned expansion into other states and
markets may increase operating expense levels to achieve and service this
expansion. The Company believes that its relationship with SKA will increase its
marketing expenses, but it also believes that this relationship will reduce the
need to make other significant expenditures in order to expand into other
states. Commissions for hospital and other healthcare provider liability
policies, which are sold on a brokerage basis through SKA and other brokers,
typically range from 7.5% to 15.0% of premiums, whereas the Company does not
incur commissions on products sold directly. To the extent that hospital and
other healthcare provider policies represent an increased percentage of the
Company's business in the future, expense ratios will increase. See
"Business -- Marketing and Policyholder Services."
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Premiums Earned. Premiums earned increased approximately $2.0 million, or
2.3%, to $90.1 million for the nine months ended September 30, 1996 from $88.1
million for the same period in 1995. The increase was principally due to a $2.0
million increase in assumed reinsurance premiums. Medical malpractice premiums
from physicians and medical groups were approximately $85.9 million for the nine
months ended September 30, 1996 compared to $86.0 million for the same period in
1995. An average 4.4% increase in premium rates in effect during the 1996 period
was offset by a 4.6% decrease in the average number of policies in force during
the 1996 period as compared to the 1995 period. Hospital medical malpractice
premiums were approximately $1.1 million for the nine months ended September 30,
1996 compared to $0.9 million for the same period in 1995. Assumed reinsurance
premiums were approximately $2.5 million for the nine months ended September 30,
1996 compared to $0.5 million for the same period in 1995.
Net Investment Income. Net investment income increased approximately $1.3
million, or 4.2%, to $31.2 million for the nine months ended September 30, 1996
from $29.9 million for the same period in 1995. Invested assets increased $28.2
million to $693.5 million for the nine months ended September 30, 1996 as
compared to a decrease of $1.5 million to $664.2 million for the nine months
ended September 30, 1995. The average pre-tax yield on the investment portfolio
increased to 6.1% for the nine months ended September 30, 1996 compared to 5.7%
for the same period in 1995. See "Business -- Investment Portfolio."
Realized Investment Gains and Other Revenue. Realized investment gains were
approximately $11.6 million for the nine months ended September 30, 1996
compared to $6.9 million for the same period in 1995. Approximately $10.8
million of the gains from 1996 resulted from the sale of equity securities in
connection with the Company's decision in the first quarter to increase the
focus of its investment portfolio on fixed maturity securities. The remainder
were attributable to sales made in the fixed maturity portion of the investment
portfolio to take advantage of more favorable yields or to reposition the
maturity of the portfolio.
Losses and LAE. Losses and LAE decreased $5.2 million, or 5.7%, to $86.6
million for the nine months ended September 30, 1996 from $91.8 million for the
same period in 1995. As a percentage of premiums earned, losses and LAE
decreased to 96.0% for the nine months ended September 30, 1996 from 104.2% for
the same period in 1995. For the nine months ended September 30, 1996, the
Company reduced loss and LAE reserves incurred in prior policy years
approximately $38.6 million as compared to a reserve reduction of $42.6 million
for the same period in 1995 for claims incurred in prior policy years.
Other Operating Expenses. Other operating expenses increased $0.6 million,
or 6.1%, to $10.2 million for the nine months ended September 30, 1996 from $9.6
million for the same period in 1995. This increase was principally attributable
to increases in policy acquisition expenses and payroll expenses of
20
<PAGE> 22
$0.4 million and $0.6 million, respectively, offset partially by lower legal
fees of $0.6 million. The ratio of other operating expenses to premiums earned
is referred to as the expense ratio, which was 11.3% for the nine months ended
September 30, 1996 and 10.9% for the same period in 1995.
Policyholder Dividends. The Board of Governors declared a final dividend of
$9.0 million to members of the Exchange of record on the date of the Special
Meeting who were also members of the Exchange during policy years 1987 through
1992. Such dividend will be paid in the form of premium credits during 1997.
This dividend is reflected as an expense for the nine months ended September 30,
1996. Dividends declared in prior years have been accrued as an expense for the
period in which the related premiums were earned and not the year paid or
declared. Accordingly, there is no expense reflected for the comparable period
in 1995.
Federal Income Taxes. Federal income taxes increased $0.6 million, or 9.4%,
to $7.5 million for the nine months ended September 30, 1996 from $6.9 million
for the same period in 1995. The effective tax rate decreased to 27.4% for the
nine months ended September 30, 1996 from 29.0% for the same period in 1995, due
primarily to an increase in tax-exempt interest for the nine months ended
September 30, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Premiums Earned. Premiums earned increased $4.7 million, or 4.2%, to $116.4
million in 1995 from $111.7 million in 1994. The increase was principally
attributable to an average 8.9% increase in premium rates in effect throughout
1995, which was partially offset by a 3.4% decrease in the average number of
policies in force during 1995. Medical malpractice premiums from physicians and
medical groups were approximately $113.3 million in 1995 compared to $109.7
million in 1994, while the Company had hospital medical malpractice premiums of
$1.3 million in 1995 compared to $0.3 million in 1994. Assumed reinsurance
premiums were less than $1.0 million in both years.
Net Investment Income. Net investment income increased approximately $0.7
million, or 1.9%, to $40.4 million in 1995 from $39.7 million in 1994. Invested
assets decreased by $.4 million to $665.2 million for the year ended December
31, 1995 as compared to a $16.6 million increase to $665.6 million for the year
ended December 31, 1994. The average pre-tax yield on the investment portfolio
was virtually unchanged at 5.9% in both 1995 and 1994. The increase in
investment income resulted from additional interest of approximately $1.9
million on a Federal income tax refund due the Company and was partially offset
by lower rates available on fixed maturity investments purchased since 1994.
Realized Investment Gains and Other Revenue. Net realized gains were
approximately $8.0 million in 1995 compared to $0.5 million in 1994.
Approximately $4.6 million of the 1995 gains were net gains realized from the
sale of equity securities to take advantage of appreciation in the market price
of those securities. The remainder of the net gains were attributable to sales
made in the fixed maturities portion of the investment portfolio to take
advantage of more favorable yields or to reposition the maturity of the
portfolio.
Losses and LAE. Losses and LAE increased $9.3 million, or 8.6%, to $118.0
million in 1995 from $108.7 million in 1994. As a percentage of premiums earned,
losses and LAE increased to 101.4% in 1995 from 97.4% in 1994. In 1995, SCPIE
increased its prior accident years' reserves by $23.9 million for free tail
coverage to be provided by the Company to currently insured physicians at the
time of their death, disability or retirement. The increase was the result of a
refinement in the actuarial methodology used to calculate this reserve. See
"Business -- Products." This additional expense was more than offset by a
decrease of approximately $81.7 million in loss and LAE reserves in 1995 for
claims incurred in prior accident years, compared to a reserve decrease of $60.4
million in 1994 for claims incurred in prior accident years.
Other Operating Expenses. Other operating expenses increased $0.8 million,
or 6.1%, to $12.6 million in 1995 from $11.8 million in 1994. This increase was
principally attributable to legal and consulting
21
<PAGE> 23
fees incurred in 1995 relating to an employment law matter in litigation, which
the Company successfully defended, and a small increase in personnel and
compensation levels. The expense ratio was 10.8% in 1995 and 10.6% in 1994.
Federal Income Taxes. Federal income taxes increased $0.9 million, or 9.2%,
to $10.1 million in 1995 from $9.2 million in 1994. The effective tax rate was
29.2% in both years.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Premiums Earned. Premiums earned decreased by $1.5 million, or 1.4%, to
$111.7 million in 1994 from $113.2 million in 1993. The decrease in premiums
earned is due to the fact that reinsurance premiums ceded in 1994 were
approximately $7.5 million, while they were negligible in 1993. Reinsurance
premiums in 1993 included an offset of $7.2 million in profits realized on the
1993 commutation of certain reinsurance by SCPIE attributable to prior years.
There was no comparable offset in 1994. Direct premiums written in 1994
increased by approximately $7.5 million, or 6.7%, to $120.0 million in 1994 from
$112.5 million in 1993, due primarily to an average 9.0% increase in premium
rates in effect during 1994, which was partially offset by a 3.3% decrease in
the average number of policies in force during 1994.
Net Investment Income. Net investment income was virtually unchanged in
1994 as compared to 1993, remaining at approximately $39.7 million. Invested
assets increased $16.6 million to $665.6 million for the year ended December 31,
1994 as compared to a $19.8 million increase to $649.1 million for the year
ended December 31, 1993. The average pre-tax yield on the investment portfolio
decreased to 5.9% in 1994 from 6.2% in 1993.
Realized Investment Gains and Other Revenue. Net realized gains were $0.5
million in 1994 compared to $16.0 million in 1993. The Company realized
significant gains in 1993 primarily due to changes in investment mix that
occurred as the Company changed its investment allocation in response to market
conditions and the Company's expected Federal income tax position based on its
underwriting results. These changes were in the fixed maturities portion of the
portfolio, which produced a net gain of $13.2 million. Sales of equity
securities produced a gain of approximately $2.8 million.
Losses and LAE. Losses and LAE decreased $16.7 million, or 13.3%, to $108.7
million in 1994 from $125.4 million in 1993. As a percentage of premiums earned,
losses and LAE also decreased to 97.4% in 1994 from 110.7% in 1993. In 1994,
there was a decrease of approximately $60.4 million in estimated losses and LAE
incurred in prior years compared to a decrease of $43.4 million in 1993. Both
years reflect favorable changes in reserve estimates made in prior years, as
more experience became available for analysis by management.
Other Operating Expenses. Other operating expenses increased $2.1 million,
or 21.7%, to $11.8 million in 1994 from $9.7 million in 1993. This increase was
attributable to general increases in most expense categories, as SCPIE expanded
into hospital liability insurance and other products. The expense ratio was
10.6% in 1994 and 8.6% in 1993.
Federal Income Taxes. Federal income taxes increased $0.6 million, or 6.9%,
to $9.2 million in 1994 from $8.6 million in 1993. The effective tax rate
increased to 29.2% in 1994 from 25.3% in 1993, principally due to an increase in
the Federal income tax marginal rate to 35.0% in 1994 from 34.0% in 1993.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of the Company's liquidity are insurance premiums, net
investment income, recoveries from reinsurers and proceeds from the maturity or
sale of invested assets. Funds are used to pay claims, LAE, operating expenses,
reinsurance premiums and taxes. SCPIE has also paid significant dividends, in
the form of premium credits, to its members in each year since 1980. SCPIE paid
$9.5 million, $11.2 million and $18.6 million of such dividends during the years
ended December 31, 1995, 1994 and 1993, respectively, and $7.1 million during
the first nine months of 1996. The Board of Governors has declared a final
dividend to members of the Exchange of $9.0 million, which will be paid in
22
<PAGE> 24
the form of premium credits during 1997. Except for this final dividend, after
the Reorganization, the Company will cease paying such premium credit dividends
to its policyholders.
SCPIE had positive cash flow from operations in each of the last three
years. Positive cash flow has resulted from long-term timing differences between
the collection of premiums and payment of claims. Because of uncertainty related
to the timing of the payment of claims, cash from operations for a property and
casualty insurance company can vary substantially from year to year. Cash
provided by operating activities for SCPIE, before the payment of dividends to
policyholders, was $21.0 million in 1995 and $14.9 million in 1994. The smaller
amount of cash flow from operations in 1994 compared to 1995 was due to
significantly higher payments of losses and LAE in that year. The Company
believes that the greater amount of paid claims and LAE in 1994 was the result
of accelerated payout patterns due principally to developments in California's
"fast-track" rules and changes in the Company's claims management procedures,
emphasizing early resolution of claims. The Company believes that the trend in
accelerated payout patterns may, over time, favorably impact results of
operations, as claims settled relatively quickly may result in lower losses and
LAE. Any such reductions in loss and LAE payments, however, may be offset
entirely or partially by lower investment income, as loss and LAE reserves are
held for shorter periods.
The Company invests its positive cash flow from operations in both fixed
maturity securities and equity securities. A change in SCPIE's investment
philosophy in 1993 resulted in an increase in the purchase of equity securities
and a reduction in the purchase of fixed maturity securities. The Company's
current policy is to limit its investment in equity securities and real estate
to no more than 8.0% of the total market value of its investments. Accordingly,
SCPIE's portfolio of unaffiliated equity securities was reduced from $61.1
million at December 31, 1995 to $18.8 million at September 30, 1996. The Company
plans to continue this focus on fixed maturity securities investments for the
indefinite future. The Company has made limited investments in real estate,
which is used almost entirely in the Company's operating activities, with the
remainder leased to third parties.
The Company maintains a portion of its investment portfolio in high
quality, short-term securities to meet short-term operating liquidity
requirements, including the payment of losses and LAE. Short-term investments
totalled $27.8 million, or 4.0% of invested assets, at December 31, 1995. The
Company believes that all of its short-term and fixed maturity securities are
readily marketable.
SCPIE Holdings is an insurance holding company whose assets consist of all
of the capital stock of the Insurance Subsidiaries and, following the Offering,
will include a portion of the net proceeds of the Offering. Its principal
sources of funds will be dividends from its subsidiaries and proceeds from the
issuance of debt and equity securities. The Insurance Subsidiaries are
restricted by state regulation in the amount of dividends they can pay in
relation to earnings or surplus, without the consent of the applicable state
regulatory authority. See "Business -- Regulation -- Regulation of Dividends
from Insurance Subsidiaries." SCPIE Holdings' direct subsidiary, SCPIE
Indemnity, may pay dividends to SCPIE Holdings in any year, without regulatory
approval, to the extent such dividends do not exceed the greater of (i) 10% of
its statutory surplus at the end of the preceding year or (ii) its net income
for the preceding year. Applicable regulations further require that an insurer's
statutory surplus following a dividend or other distribution be reasonable in
relation to its outstanding liabilities and adequate to meet its financial
needs, and permit the payment of dividends only out of statutory earned
(unassigned) surplus unless the payment out of other funds is approved by the
Insurance Commissioner. If SCPIE had been a stock insurer on December 31, 1995,
the amount of dividends it would be able to pay during 1996 without approval
from the California Department would have been approximately $23.5 million.
The Company is seeking to obtain a new bank facility in the principal
amount of approximately $30.0 million from a large lender. The Company expects
that this facility will be an unsecured revolving line of credit to be used by
the Company for general corporate purposes. There can be no assurance that the
Company will be able to obtain this new bank facility, or any bank facility, on
terms that are satisfactory to the Company.
23
<PAGE> 25
Based on historical trends, market conditions and its business plans, the
Company believes that its sources of funds will be sufficient to meet its
liquidity needs over the next 18 months and beyond. However, because economic,
market and regulatory conditions may change, there can be no assurance that the
Company's sources of funds will be sufficient to meet these liquidity needs. The
short- and long-term liquidity requirements of the Company may vary because of
the uncertainties regarding the settlement dates for unpaid claims.
The Company has no planned material expenditures for property or equipment.
EFFECT OF INFLATION
The primary effect of inflation on the Company is considered in pricing and
estimating reserves for unpaid losses and LAE for claims in which there is a
long period between reporting and settlement, such as medical malpractice
claims. The actual effect of inflation on the Company's results cannot be
accurately known until claims are ultimately settled. Based on actual results to
date, the Company believes that loss and LAE reserve levels and the Company's
ratemaking process adequately incorporate the effects of inflation.
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<PAGE> 26
BUSINESS
OVERVIEW
The Company is the largest provider of medical malpractice insurance in
California, based on direct premiums written in 1995. SCPIE currently insures
approximately 10,100 California physicians and oral and maxillofacial surgeons
practicing alone or in medical groups or clinics or other healthcare
organizations. The Company also insures a variety of other healthcare providers,
including hospitals, emergency department facilities, outpatient surgery centers
and hemodialysis, clinical and pathology laboratories.
The Company's total revenues and net income were $165.0 million and $24.4
million, respectively, for the year ended December 31, 1995 and were $133.1
million and $19.8 million, respectively, for the nine months ended September 30,
1996. As of September 30, 1996, the Company had $790.4 million of total assets
and $271.9 million of total equity.
Medical malpractice insurance, or medical professional liability insurance,
insures the physician, hospital or other healthcare provider against liabilities
arising from the rendering of, or failure to render, professional medical
services. Under the typical medical malpractice insurance policy, the insurer
also defends the insured against potentially covered claims. Based on data
compiled by A.M. Best, in 1995, total medical malpractice premiums in the United
States were $6.0 billion. In California, the second largest market for medical
malpractice insurance based on premiums written, approximately $587.7 million of
medical malpractice premiums were written in 1995. The Company's share of the
medical malpractice premiums written in California in 1995 was approximately
21%. The Company's market share is substantially higher in Southern California
where more than 95% of the Company's insureds are located.
The Company believes that its leading market share for medical malpractice
insurance in California is in large part due to the loyalty of its insured
physicians. The Company attributes this loyalty to the high quality,
personalized service it provides and its traditional focus on the California
physician marketplace. The medical malpractice insurance offered by the Company
has been endorsed by twelve county medical associations and specialty societies
in California.
The Company believes that the growth in managed healthcare and the
emergence of multi-state integrated healthcare providers and delivery systems
will lead to major changes in the medical malpractice insurance industry.
Practice management organizations, hospitals, administrators of large group
practices and managed care organizations have an increasing influence over the
purchasing decision for the medical malpractice insurance coverages of their
affiliated physicians. As the consolidation of healthcare providers continues,
the number of physicians insured through such organizations will increase and
the Company believes that such organizations increasingly will seek
well-capitalized medical malpractice insurers that can provide a full range of
products and a high level of service in each state in which such organizations
conduct business.
To position the Company to compete and grow its business successfully in
this changing environment, the Company has adopted a strategy that includes: (i)
expanding the Company's product offerings, particularly to meet the liability
insurance needs of larger, more diverse healthcare entities; (ii) diversifying
geographically by increasing writings of medical malpractice insurance in states
other than California; (iii) positioning the Company to take advantage of
acquisition and consolidation opportunities relating to medical malpractice
insurance; (iv) maintaining the Company's relationship with its primary
policyholder base of California physician and medical group insureds; and (v)
maintaining sufficient capital to take advantage of future market opportunities
and to retain strong insurance ratings.
The Company has taken the following steps to implement its strategy:
Increased Focus on the Liability Insurance Needs of Healthcare
Entities. Historically, the Company's business has primarily been medical
malpractice insurance for physicians. Recently, SCPIE has increasingly focused
its efforts on providing products to meet the malpractice and other liability
insurance needs of hospitals and other healthcare entities. The Company believes
that such organizations represent an increasing share of the market for
malpractice insurance and provide the Company with a significant area
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<PAGE> 27
for future growth. In 1994, the Company began offering malpractice insurance to
California hospitals and, in 1995, began offering errors and omissions coverage
to managed care organizations. The Company currently insures five hospitals and
27 managed care organizations. In 1994, the Company began writing directly
directors and officers liability insurance for healthcare entities.
In addition, SCPIE assumes reinsurance of medical malpractice and
participates in excess insurance programs. The Company believes participation in
these lines of business will become an increasingly important aspect of its
operations as healthcare entities become larger and obtain higher policy limits.
Relationship with Sullivan, Kelly. In August 1995, the Company entered into
an exclusive marketing agreement with SKA, one of the leading hospital
malpractice insurance brokers in the Western United States. Under the agreement,
SKA has the exclusive right to market SCPIE's malpractice coverage for hospitals
in all states, and SCPIE recognizes SKA as the exclusive broker for medical
group coverage in all states other than California. SKA has informed the Company
that it has relationships with approximately 600 healthcare entities in 15
states which generated more than $80.0 million of malpractice insurance premiums
for a large insurance group in 1995. Following the recent termination by the
insurance group of this relationship, SKA and SCPIE are actively working to
obtain a significant portion of this business for SCPIE. As of November 1996,
the Company had issued binders to 64 hospitals and managed care organizations
representing approximately $10.1 million in annual premiums.
The Company believes that its marketing relationship with SKA will provide
(i) a significant advantage in marketing to hospitals and other healthcare
entities, and (ii) a cost-effective means of entering new geographic markets.
Entering New States. To facilitate its geographic expansion, in March 1996,
SCPIE acquired the outstanding stock of two inactive property and casualty
insurance companies, one of which is licensed in 44 states plus the District of
Columbia and the other of which is licensed in one state. The Company will
capitalize these companies with a portion of the proceeds of the Offering, and
will attempt to ensure that they are fully licensed and able to underwrite
medical malpractice insurance as quickly as possible. In the meantime, the
Company has a fronting arrangement to allow the Company to accommodate SKA in
all of the markets in which SKA operates. As of November 1996, the Company was
doing business through this arrangement in six states in addition to California.
The Company believes that the medical malpractice insurance industry in
California is currently experiencing a "soft insurance market," that is, an
insurance market in which the underwriting capacity exceeds current demand and
premium rates are relatively low. The Company believes that its strategy will
position it to expand premium writings and market share when the market
"hardens," that is, when demand coincides more closely with capacity and premium
rates increase to more appropriate levels.
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PRODUCTS
SCPIE underwrites professional and related liability policy coverages for
physicians (including oral and maxillofacial surgeons), physician medical groups
and clinics, hospitals, managed care organizations and other providers in the
healthcare industry. The following table summarizes, by product, the direct
premiums written by the Company for the periods indicated:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
------------------- ----------------------------------
1996 1995 1995 1994 1993
------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Physician and medical group
liability:
Physician and medical group
standard professional
liability.................... $88,069 $87,695 $116,894 $116,425 $110,154
Special risk physicians......... 1,096 327 674 261 164
Emergency medicine program...... 481 391 596 322 113
Urgent care centers............. 196 167 224 263 226
------- ------- -------- -------- --------
Subtotal medical liability... 89,842 88,580 118,388 117,271 110,657
Excess personal liability....... 626 665 877 957 1,012
------- ------- -------- -------- --------
Subtotal physician and
medical group liability.... 90,468 89,245 119,265 118,228 111,669
Hospital liability................ 1,635 1,377 2,103 960 --
Healthcare provider liability..... 570 556 757 800 790
Managed care organization errors
and omissions................... 275 59 105 -- --
Directors and officers
liability....................... 199 36 47 36 --
------- ------- -------- -------- --------
Total........................... $93,147 $91,273 $122,277 $120,024 $112,459
======= ======= ======== ======== ========
</TABLE>
An affiliated insurance agency allows the Company to meet a wide range of
insurance needs of its customers by offering, on a brokerage basis, coverages
not underwritten by SCPIE, including a comprehensive property protection program
and stop loss insurance related to the provision of managed care services. The
Company intends, in the future, to directly underwrite its own property lines as
part of its overall strategy to meet the principal insurance needs of healthcare
providers.
Physician and Medical Group Liability. SCPIE offers separate policy forms
for physicians who are sole practitioners and for those who practice as part of
a medical group or clinic. The policy issued to sole practitioners includes
coverage for professional liability that arises in the medical practice and also
for certain other "premises" liabilities that may arise in the non-professional
operations of the medical practice, such as slip and fall accidents, and a
limited defense reimbursement benefit for proceedings by governmental
disciplinary boards. The professional liability insurance for sole practitioners
and for medical groups provides protection against the legal liability of the
insureds for such things as injury caused by or as a result of the performance
of patient treatment, failure to treat and failure to diagnose.
The policy issued to medical groups and their physician members includes
not only professional liability coverage and defense reimbursement benefits, but
also substantially more comprehensive coverages for commercial general liability
and employee benefit program liability and also provides a small medical
payments benefit to injured persons. The comprehensive general liability
coverage included in the medical group policy does not exclude coverage for
certain employment related liabilities and for pollution, which are normally
excluded under a standard commercial general liability form. SCPIE also offers,
as part of its standard policy forms for both sole and group practitioners,
optional excess personal liability for the insured physicians. Excess personal
liability insurance provides coverage to the physician for personal liabilities
in excess of amounts covered under the physician's homeowners and automobile
policies.
The professional liability coverages are issued primarily on a "claims made
and reported" basis. Coverage is provided for claims reported to the Company
during the policy period arising from incidents
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<PAGE> 29
that occurred at any time the insured was covered by the policy. The Company
also offers "tail coverage" for claims reported after the expiration of the
policy for occurrences during the coverage period. The price of the tail
coverage is based on the length of time the insured has been covered under the
Company's claims made and reported form. SCPIE provides free tail coverage for
insured physicians who die or become disabled during the coverage period of the
policy and those who have been insured by SCPIE for at least five consecutive
years and retire completely from the practice of medicine. Free tail coverage is
automatically provided to physicians with at least five consecutive years of
coverage who are also at least 65 years old.
Comprehensive general liability coverage for medical groups and clinics and
the excess personal liability insurance is underwritten on an occurrence basis.
Under occurrence coverage, the coverage is provided for incidents that occur at
any time the policy is in effect, regardless of when the claim is reported. With
occurrence coverage, there is no need to purchase tail coverage.
The Company offers limits of insurance up to $5.0 million per claim or
occurrence, with up to a $10.0 million aggregate policy limit for all claims
reported or occurrences for each calendar year or other 12-month policy period.
The most common limit is $1.0 million per claim or occurrence, subject to a $3.0
million aggregate policy limit. The Company's limit of liability under the
excess personal liability insurance coverage is $1.0 million per occurrence with
no aggregate limit. The defense reimbursement benefit for governmental
disciplinary proceedings is $25,000, and the medical payments benefit for
persons injured in non-professional activities is $10,000.
The following table summarizes the Company's physician and medical group
professional liability direct premiums written for the year ended December 31,
1995:
<TABLE>
<CAPTION>
GROUP SIZE
------------------------------------------------- DIRECT
PREMIUMS PERCENTAGE
WRITTEN OF TOTAL
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Sole practitioner physicians..................... $ 73,436 62.0%
Group with less than five physicians............. 17,322 14.6
Group with five through eight physicians......... 8,890 7.5
Group with nine or more physicians............... 18,740 15.9
-------- -----
Total.................................. $118,388 100.0%
======== =====
</TABLE>
Hospital Liability. The Company writes primary liability insurance on both
a claims made and reported basis and a modified occurrence basis that in effect
includes tail coverage for up to seven years after the policy terminates. The
policy issued to hospitals provides protection for professional liabilities
related to the operation of a hospital and its various staff committees,
together with the same comprehensive general liability, medical payments and
employee benefit program liability coverages included in the policy for large
medical groups. The limits of coverage under the hospital policies issued by
SCPIE, net of reinsurance, are $500,000 for each claim or occurrence, with no
aggregate limit.
Healthcare Provider Liability. SCPIE offers its professional liability
coverage to a variety of specialty provider organizations, including hospital
emergency departments, outpatient surgery centers, medical urgent care
facilities and hemodialysis, clinical and pathology laboratories. These policies
include the standard professional liability coverage provided to physicians and
medical groups, with certain modifications to meet the special needs of these
healthcare providers. The policies are generally issued on a claims made and
reported basis with the limits of liability up to those offered to larger
medical groups. The limits of coverage under the current healthcare provider
policies issued by SCPIE are between $1.0 million and $5.0 million per incident,
subject to $3.0 million to $10.0 million aggregate policy limits.
Managed Care Organization Errors and Omissions. SCPIE has recently
introduced a policy for managed care organizations that provides coverage for
liability arising from the errors and omissions in managed care operations, for
the vicarious liability of a managed care organization for the acts or omissions
of non-employed physician providers and for liability of directors and officers
of a managed
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<PAGE> 30
care organization. These policies are generally issued on a claims made and
reported basis. The annual aggregate limits of coverage under the current
managed care organization policies issued by SCPIE are between $1.0 million and
$5.0 million.
Directors and Officers Liability. The Company historically has brokered
directors and officers liability coverage through its affiliated agency, which
will become a wholly owned subsidiary of the Company after the Reorganization.
This agency produced approximately $293,000, $271,000 and $240,000 in premiums
for other insurers in 1995, 1994 and 1993, respectively. In 1995, the Company
directly wrote one directors and officers liability policy, accounting for
approximately $47,000 of direct premiums written. Currently, the Company is
seeking to write renewals of the business it produced for other insurers and is
marketing its product to prospective new insureds. The directors and officers
liability policies are generally issued on a claims made and reported basis. The
limits of coverage on directors and officers liability policies written by SCPIE
are between $1.0 million and $5.0 million.
MARKETING AND POLICYHOLDER SERVICES
The Company markets directly to its insureds through a marketing
organization with approximately 25 employees providing sales solicitation and
communications services. SCPIE markets to sole practitioner physicians and other
prospective policyholders through its relationships with medical associations,
referrals by existing policyholders, advertisements in medical journals, the
presentation of seminars on timely topics for physicians, telemarketing and
direct mail solicitation to licensed physicians and members of specialty group
organizations. SCPIE attracts new physicians through special rates for medical
residents and discounts for physicians just entering medical practice. In
addition, SCPIE participates as a sponsor and participant in various medical
group and hospital administrators' programs, medical association and specialty
society conventions and similar programs. The Company believes that this
personal, comprehensive approach to marketing is essential to providing
professional liability insurance, where special knowledge and experience is a
prerequisite.
The SCPIE professional liability program is endorsed by ten Southern
California county medical associations and the statewide associations of oral
and maxillofacial surgeons and osteopathic physicians. SCPIE considers these
endorsements to be helpful in its marketing efforts. The county medical
associations also perform certain limited information verification services for
SCPIE.
SCPIE commenced marketing its own hospital professional liability policies
during 1994 and currently underwrites coverage for five hospitals. In August
1995, SCPIE entered into a marketing agreement with SKA, one of the leading
insurance brokers of hospital and large medical group coverages in the Western
United States. Under the agreement, SKA has the exclusive right to market
SCPIE's malpractice coverage for hospitals in all states, and SCPIE recognizes
SKA as the exclusive broker for medical group coverage in all states other than
California. SKA has informed the Company that it has relationships with
approximately 600 healthcare entities in 15 states which generated more than
$80.0 million of malpractice insurance premiums for a large insurance group in
1995. Following the recent termination by the insurance group of this
relationship, SKA and SCPIE are actively working to obtain a significant portion
of this business for SCPIE. As of November 1996, the Company had issued binders
for approximately $10.1 million in annual premiums representing 64 hospitals and
managed care organizations. The Company believes that its marketing relationship
with SKA will provide (i) a significant advantage in marketing to hospitals and
other healthcare entities, and (ii) a cost-effective means of entering new
geographic markets.
SKA and the insurance group mentioned above are currently engaged in
litigation in the California state court regarding rights to certain insurance
information and the ability to solicit professional liability insurance from
hospitals and medical groups currently insured by the insurance group through
SKA. On September 13, 1996, the court entered a preliminary injunction placing
some restrictions on the ability of the insurance group to solicit renewals of
these policies and ordering certain information returned to SKA. The preliminary
injunction was modified on October 3, 1996 with respect to use of certain
information related to excess insurance policies or self-insured retention
policies and prohibiting misrepresentations
29
<PAGE> 31
regarding the preliminary injunction and disparaging remarks about the parties.
Additionally, a cross-complaint seeking damages, restitution and certain
injunctive relief was filed by the insurance group against SKA on October 14,
1996. The Company does not know what effect, if any, this litigation or the
termination of SKA by the insurance group will have on its efforts to obtain
hospital business currently underwritten by the insurance group.
SCPIE also has a policyholder services department that provides account
information to all insureds and maintains relationships with the small medical
groups and sole practitioners insured by SCPIE. Each of these smaller insureds
has a designated client service representative who can answer most inquiries
and, in other instances, can provide the insured with immediate access to the
person with expertise in a particular department. For hospitals and large and
mid-size medical groups, SCPIE has an account manager assigned to each group who
heads a service team comprised of underwriting, risk management and claims
management representatives, each of whom may be contacted directly by the
policyholder for prompt response. SCPIE also provides online computer access to
the large groups and hospitals so that loss and LAE information can be accessed
immediately.
SCPIE provides comprehensive risk management services designed to heighten
its insureds' awareness of situations giving rise to potential loss exposures,
to educate its insureds as to ways to improve their medical practice procedures,
and to assist its insureds in implementing risk modification measures. The
Company maintains a 24-hour hotline to provide immediate access to its risk
management personnel. SCPIE conducts surveys for hospitals and large medical
groups both to review their practice procedures generally and to focus on
specific areas in which there may be some concern. Complete reports that specify
areas of the insured's medical practice that may need attention are provided to
the policyholder. SCPIE also provides an annual program review for each of its
medical groups. SCPIE presents periodic seminars and evening "town hall"
meetings at medical societies at which pertinent subjects are presented. SCPIE
risk management representatives also regularly participate in programs presented
by healthcare-related societies. These educational offerings are designed to
increase risk awareness and the effectiveness of various healthcare
professionals. Additionally, the Company provides risk management and claims
administration services to certain entities on a fee-for-service basis.
UNDERWRITING
The underwriting department consists of a vice president in charge of
underwriting, an assistant underwriting manager, six other underwriters and five
technical and administrative assistants. Certain of these underwriters
specialize in underwriting hospitals, managed care organizations and directors
and officers liability products. The Company's underwriting department is
responsible for the evaluation of applicants for professional liability and
other coverages, the issuance of policies and the establishment and
implementation of underwriting standards for all of the coverages underwritten
by SCPIE.
The Company follows a strict procedure with respect to the issuance of all
physician professional liability policies. Each applicant or member of an
applicant medical group is required to complete a detailed application that
provides a personal and professional history, the type and nature of the
applicant's professional practice, certain information relating to specific
practice procedures, hospital and professional affiliations and a complete
history of any prior claims and incidents. The application is forwarded to the
county medical association for verification of educational and professional
information. The Company performs its own independent verification of these
matters and conducts an investigation to determine if there are any lawsuits
that may not have been disclosed in the application.
SCPIE performs a continuous process of reunderwriting its insured
physicians. Information concerning physicians with large losses, a high
frequency of claims or unusual practice characteristics is developed through
online claims and risk management reports. Each year, SCPIE also sends current
practice questionnaires to approximately 15% of its insured physicians. These
questionnaires request information similar to that submitted in connection with
the physician's original application for insurance, and are designed to detect
any changes in the specialty or practice characteristics of the physician that
may require a higher or lower premium rate or possible removal from the program.
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<PAGE> 32
The underwriting department submits all recommendations for premium
surcharges or non-renewal to the underwriting committee of SCPIE, which is
comprised solely of physicians, many of whom are insureds or retired insureds of
the Company, and members of the Board of Directors. Members of the committee are
not employees of the Company, but receive compensation for their services on the
committee. Physicians have the right to seek reconsideration of surcharges from
the committee. SCPIE has found that physician interchange with the committee is
often helpful in improving the practice characteristics of the insured.
Although SKA performs the principal hospital marketing functions for the
Company, SCPIE makes all underwriting and rating decisions on this and all of
its direct business. Except as set forth below, each hospital is required to
submit an application that provides detailed information on operations,
financial position and risk factors. The Company reviews loss experience for at
least the past five years, prior insurance policies and endorsements, financial
reports and reports from the principal accreditation agencies for the hospital
industry. Risk management surveys are performed as needed to supplement this
information.
For hospitals currently insured with the insurance group that recently
terminated its relationship with SKA, the Company generally intends to issue its
policies without its normal underwriting review. At the present time, the
Company will utilize schedules of coverage, limits, rating factors and other
pertinent information supplied to the Company by SKA. The Company will perform
its normal underwriting review at the first renewal date of each such policy. In
addition, the Company intends to underwrite any policies offered at rates that
are significantly lower than those changed by the insurance group.
RATES AND DIVIDENDS
SCPIE establishes, through its own actuarial staff and independent
actuaries, rates and rating classifications for its physician and medical group
insureds based on the loss and LAE experience it has developed over the past 20
years and upon rates charged by its competitors. The Company has various rating
classifications based on practice location, medical specialty and other factors.
SCPIE utilizes various discounts, including discounts for part-time practice,
physicians just entering medical practice and large medical groups. SCPIE has
developed a special risk program for physicians who have unfavorable loss
history or practice characteristics, but whom SCPIE considers insurable.
Policies issued in this program have significant surcharges. SCPIE has
established its premium rates and rating classifications for hospitals and
managed care organizations utilizing data publicly filed by other insurers. The
data for managed care organization errors and omissions liability is extremely
limited, as tort exposures for these organizations are only recently beginning
to develop. All rates for liability insurance in California are subject to the
prior approval of the Insurance Commissioner.
SCPIE instituted annual average rate increases of 4.4%, 8.9%, 9.2% and 7.3%
in 1996, 1995, 1994 and 1993, respectively, on its physician professional
liability policies in order to improve its underwriting results. These rate
increases have been higher than those implemented by most of its competitors.
The number of policyholders insured by the Company has declined by a small
percentage in each of these years, in part due to these rate increases, but the
Company has realized a modest increase in its premium volume and has improved
its underwriting results. The California Department recently approved a 5.4%
rate increase on physician professional liability policies for the Company for
1997. See "Risk Factors -- Competition" and "Management's Discussion and
Analysis of Financial Condition and Results of
Operations -- General -- Competitive Environment."
The Company paid dividends of $9.5 million, $11.2 million and $18.6 million
in 1995, 1994 and 1993, respectively, and $7.1 million during the first nine
months of 1996, in the form of premium credits. Such dividends were paid
primarily to insureds who were members of the Exchange in 1990 and prior years
and were based primarily on underwriting results in such years. On August 8,
1996, the Board of Governors declared a final dividend to the members of the
Exchange of $9.0 million which will be paid in the form of premium credits in
1997. Except for this final dividend, after the Reorganization, the Company
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<PAGE> 33
will cease paying such premium credit dividends to its policyholders. Therefore,
the Company may find it more difficult to compete with other insurance companies
offering such dividends.
CLAIMS
The claims department of the Company is responsible for claims
investigation, establishment of appropriate case reserves for loss and LAE,
defense planning and coordination, control of attorneys engaged by the Company
to defend a claim and negotiation of the settlement or other disposition of a
claim. Under most of the Company's policies, except managed care organization
errors and omissions policies and directors and officers liability policies, the
Company is obligated to defend its insureds, which is in addition to the limit
of liability under the policy. Medical malpractice claims often involve the
evaluation of highly technical medical issues, severe injuries and conflicting
expert opinions. In almost all cases, the person bringing the claim against the
physician is already represented by legal counsel when SCPIE learns of the
potential claim.
The claims department staff includes managers, litigation supervisors,
investigators and other experienced professionals trained in the evaluation and
resolution of medical professional liability and general liability claims. The
claims department staff consists of approximately 48 employees, including twelve
clerical personnel. SCPIE has five unit managers responsible for specific
geographic areas, and additional units for specialty areas such as hospitals,
birth injuries and policy coverage issues. The Company also occasionally uses
independent claims adjusters, primarily to investigate claims in remote
locations. SCPIE selects legal counsel from among a group of law firms in the
geographic area in which the action is filed.
California has adopted a standard of judicial administration that requires
its trial courts to set goals to dispose of 90% of all cases within twelve
months after filing and 100% of cases within 24 months. The courts in the
various counties in which SCPIE defends claims have sought to comply with these
"fast-track" standards during the past few years. The effect of this change has
been significant. Before this requirement was implemented, cases in certain
counties did not proceed to trial for many years after filing. The claims
department staff now must make earlier evaluations and reserve estimates,
authorize discovery expenses early in the litigation process and be prepared to
settle the case or proceed to trial within one year.
SCPIE emphasizes early evaluation and aggressive management of claims.
Claims department professionals complete a full evaluation and reserving of
claims under "fast-track" within six months of the filing of a claim and on all
other cases within twelve months after filing. The Company has established
different levels of authority within the claims department for approval of
reserves and settlement of claims. SCPIE has a claims committee comprised solely
of physicians which meets bi-monthly with the vice president in charge of claims
and other claims managers to consider and evaluate cases that have complex
medical issues and subject the Company to large exposures. At September 30,
1996, the Company had 3,258 open claims.
SCPIE vigorously defends its insureds against claims, but seeks to resolve
expediently cases with high exposure potential. The defense of a medical
professional liability claim requires significant cooperation between the
litigation supervisor or claims department manager responsible for the claim and
the insured physician. California law requires that a medical professional
liability claim cannot be settled for an amount in excess of $30,000 without the
consent of the physician insured. California law further requires that the
insurer report all such settlements to a medical disciplinary board, and Federal
law requires that any claim payment, regardless of amount, be reported to a
national data bank which can be accessed by various state licensing and
disciplinary boards and medical peer evaluation committees. Thus, the physician
is often placed in a difficult position of knowing that a settlement may result
in the initiation of a disciplinary proceeding or some other impediment to the
physician's ability to practice. The claims department supervisor must be able
to fully evaluate considerations of settlement or trial and to communicate
effectively SCPIE's recommendation to its insured. If the insured will not
consent to a settlement offer, the Company may be exposed to a larger judgment
if the case proceeds to trial.
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The claims department staff utilizes structured settlements to resolve
certain large claims. In a structured settlement, the Company will typically
purchase an annuity from another insurance company that will satisfy periodic
payments owed to the claimant as part of the settlement. The Company typically
obtains a release from the claimant for its insured and itself and assigns the
annuity to a third party for payment. The Company purchased annuities during the
early 1980s from a life insurance company that subsequently became insolvent and
could not satisfy its obligations. In some instances, SCPIE has concluded that
it is obligated to satisfy any shortfall in these periodic payments and is
making these shortfall payments. The Company has established a reserve to cover
these expected shortfall obligations. See Note 8 of Notes to Financial
Statements.
LOSS RESERVES
The determination of loss reserves is a projection of ultimate losses
through an actuarial analysis of the claims history of the Company and other
professional liability insurers, subject to adjustments deemed appropriate by
the Company due to changing circumstances. Included in its claims history are
losses and LAE paid by the Company in prior periods and case reserves for
anticipated losses and LAE developed by the Company's claims department as
claims are reported and investigated. Actuaries rely primarily on such
historical loss experience in determining reserve levels on the assumption that
historical loss experience provides a good indication of future loss experience
despite the uncertainties in loss cost trends and the delays in reporting and
settling claims. As additional information becomes available, the estimates
reflected in earlier loss reserves may be revised. Any increase in the amount of
reserves, including reserves for insured events of prior years, could have an
adverse effect on the Company's results for the period in which the adjustments
are made.
The uncertainties inherent in estimating ultimate losses on the basis of
past experience have grown significantly in recent years principally as a result
of judicial expansion of liability standards and expansive interpretations of
insurance contracts. These uncertainties may be further affected by, among other
factors, changes in the rate of inflation and changes in the propensities of
individuals to file claims. The inherent uncertainty of establishing reserves is
relatively greater for companies writing long-tail casualty insurance, including
medical malpractice insurance, due primarily to the longer-term nature of the
resolution of claims.
The Company utilizes both its internal actuarial staff and independent
actuaries in establishing its reserves. The Company's independent actuaries
review the Company's reserves for losses and LAE at the end of each fiscal year
and prepare a report that includes a recommended level of reserves. The Company
considers this recommendation as well as other factors, such as known,
anticipated or estimated changes in frequency and severity of claims, loss
retention levels and premium rates, in establishing the amount of its reserves
for losses and LAE. The Company continually refines reserve estimates as
experience develops and further claims are reported and settled. The Company
reflects adjustments to reserves in the results of the periods in which such
adjustments are made. Since medical malpractice insurance is a long-tail line of
business for which the initial loss and LAE estimates may be adversely impacted
by events occurring long after the reporting of the claim, such as sudden severe
inflation or adverse judicial or legislative decisions, SCPIE has attempted to
establish its loss and LAE reserves at the upper end of a reasonable range of
reserve estimates.
33
<PAGE> 35
SCPIE's loss reserve experience is shown in the following table, which sets
forth a reconciliation of beginning and ending reserves for unpaid losses and
LAE for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Reserves for losses and LAE at beginning
of period............................. $466,187 $468,743 $468,743 $490,773 $492,004
Less reinsurance recoverables........... 19,560 19,177 19,177 18,644 26,580
-------- -------- -------- -------- --------
Net reserves for losses and LAE at
beginning of period................... 446,627 449,566 449,566 472,129 465,424
-------- -------- -------- -------- --------
Provision for losses and LAE for claims,
net of reinsurance, occurring in:
The current period.................... 125,160 134,392 175,856 169,143 168,784
Prior periods(1)...................... (38,606) (42,565) (57,833) (60,423) (43,430)
-------- -------- -------- -------- --------
Total incurred losses and LAE......... 86,554 91,827 118,023 108,720 125,354
-------- -------- -------- -------- --------
Less loss and LAE payments for claims,
net of reinsurance, occurring in:
The current period.................... 3,413 3,848 11,481 10,178 12,971
Prior periods......................... 78,710 87,580 109,481 121,105 105,678
-------- -------- -------- -------- --------
Total payments........................ 82,123 91,428 120,962 131,283 118,649
-------- -------- -------- -------- --------
Net reserves for losses and LAE at end
of period............................. 451,058 449,965 446,627 449,566 472,129
Add reinsurance recoverables............ 21,778 15,975 19,560 19,177 18,644
-------- -------- -------- -------- --------
Reserves for losses and LAE at end of
period................................ $472,836 $465,940 $466,187 $468,743 $490,773
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Consists of a reduction in estimated losses and LAE for prior years of $64.8
million at September 30, 1995 and $81.7 million at December 31, 1995 and an
increase in prior years' reserves for free tail coverage provided by the
Company in the amount of $22.2 million at September 30, 1995 and $23.9
million at December 31, 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of
Operations -- Year Ended December 31, 1995 Compared to Year Ended December
31, 1994 -- Losses and LAE."
34
<PAGE> 36
The following table reflects the development of losses and LAE reserves for
the periods indicated at the end of that year and each subsequent year. The
first line shows the reserves, net of reinsurance recoverables, as originally
reported at the end of the stated year. Each calendar year-end reserve includes
the estimated unpaid liabilities for that report or accident year and for all
prior report or accident years. The section under the caption "Liability
reestimated as of" shows the original recorded reserve as adjusted as of the end
of each subsequent year to reflect the cumulative amounts paid and all other
facts and circumstances discovered during each year. The line "Cumulative
redundancy" reflects the difference between the latest reestimated reserve
amount and the reserve amount as originally established. The section under the
caption "Cumulative amount of liability paid through" shows the cumulative
amounts paid related to the reserve as of the end of each subsequent year.
In evaluating the information in the table below, it should be noted that
each amount includes the effects of all changes in amounts of prior periods. For
example, if a loss determined in 1993 to be $100,000 was first reserved in 1985
at $150,000, the $50,000 redundancy (original estimate minus actual loss) would
be included in the cumulative redundancy in each of the years 1985 through 1995
shown below. This table presents development data by calendar year and does not
relate the data to the year in which the claim was reported or the accident
actually occurred. Conditions and trends that have affected the development of
these reserves in the past will not necessarily recur in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss and
LAE
reserves $218,988 $282,805 $329,369 $389,404 $412,679 $427,049 $439,908 $465,423 $472,129 $449,566 $446,627
Liability
reestimated
as
of:
One
year
later... 205,016 261,970 327,627 362,058 375,764 401,878 409,966 421,994 411,915 391,733
Two
years
later... 194,668 269,855 312,956 337,901 348,781 368,124 364,105 368,521 363,562
Three
years
later... 204,583 260,089 295,438 315,718 320,319 324,370 316,220 325,073
Four
years
later... 198,365 248,613 278,339 299,308 294,992 284,628 282,291
Five
years
later... 191,809 234,449 267,880 284,972 266,649 264,582
Six
years
later... 185,373 228,628 260,544 266,423 256,900
Seven
years
later... 180,714 229,152 249,644 262,642
Eight
years
later... 182,897 223,055 248,595
Nine
years
later... 181,127 222,460
Ten
years
later... 180,221
Cumulative
redundancy 38,767 60,345 80,774 126,762 155,779 162,467 157,617 140,350 108,567 57,833
Cumulative
amount
of
liability
paid
through:
One
year
later... 41,764 59,435 78,951 93,607 85,771 103,983 101,001 105,678 121,106 109,481
Two
years
later... 84,979 121,037 147,865 155,505 162,264 171,327 171,429 184,883 192,519
Three
years
later... 126,658 167,331 188,038 206,413 204,129 206,499 205,829 219,649
Four
years
later... 156,074 190,148 220,575 232,777 221,479 221,654 221,884
Five
years
later... 167,783 205,362 233,807 242,140 228,922 230,606
Six
years
later... 171,861 211,665 236,809 244,587 234,202
Seven
years
later... 173,446 214,314 238,105 248,319
Eight
years
later... 174,117 215,155 239,652
Nine
years
later... 174,699 215,647
Ten
years
later... 175,121
Net
reserves --
December
31....... $449,566 $446,627
Reinsurance
recoverables... 19,177 19,560
-------- --------
Gross
reserves... $468,743 $466,187
======== ========
</TABLE>
35
<PAGE> 37
SCPIE has historically experienced favorable loss and LAE reserve
development. The Company believes that the favorable loss and LAE reserve
development since 1985 has resulted from four factors: (i) SCPIE's conservative
approach to establishing reserves for medical malpractice insurance losses and
LAE; (ii) the continuing benefits from MICRA, the California tort reform
legislation that was declared constitutional in a series of decisions by the
California Supreme Court in the mid-1980s; (iii) benefits from California's
"fast-track" legislation; and (iv) improved results from a restructuring of
SCPIE's internal claims process. See "-- Regulation -- Medical Malpractice Tort
Reform" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General." The Company believes, based on its analysis
of annual statements filed with state regulatory authorities, that its principal
California competitors have experienced similar favorable loss and LAE reserve
development in past years.
General liability losses have been less than 2.9% of medical malpractice
losses in the last five years. The Company does not have material reserves for
pollution claims and the Company's claims experience for pollution coverage has
been negligible.
While the Company believes that its reserves for losses and LAE are
adequate, there can be no assurance that the Company's ultimate losses and LAE
will not deviate, perhaps substantially, from the estimates reflected in the
Company's financial statements. If the Company's reserves should prove
inadequate, the Company will be required to increase reserves, which could have
a material adverse effect on the Company's financial condition or results of
operation.
REINSURANCE
Reinsurance Ceded. SCPIE follows customary industry practice by reinsuring
a portion of its risks. SCPIE cedes to reinsurers a portion of its risks and
pays a fee based upon premiums received on all policies subject to such
reinsurance. Insurance is ceded principally to reduce net liability on
individual risks and to provide protection against large losses. Although
reinsurance does not legally discharge the ceding insurer from its primary
liability for the full amount of the policies reinsured, it does make the
reinsurer liable to the insurer to the extent of the reinsurance ceded. SCPIE
determines how much reinsurance to purchase based upon its evaluation of the
risks it has insured, consultations with its reinsurance brokers and market
conditions, including the availability and pricing of reinsurance. In 1995,
SCPIE ceded $8.5 million of its earned premiums to reinsurers.
SCPIE's reinsurance arrangements are generally placed through its exclusive
reinsurance broker, Willcox Incorporated Reinsurance Intermediaries. The Company
retains the first $1.0 million of loss incurred per incident and has various
reinsurance treaties covering losses in excess of $1.0 million up to $20.0
million per incident. Losses in excess of $20.0 million are retained by the
Company. SCPIE often has more than one insured named as a defendant in a lawsuit
or claim arising from the same incident, and, therefore, multiple policies and
limits of liability may be involved. The Company's reinsurance program is
purchased in several layers, the limits of which may be reinstated under certain
circumstances at the Company's option subject to the payment of additional
premium. SCPIE also reinsures a portion of the reinstatement premiums under a
separate treaty, together with certain other miscellaneous liability exposures,
including retroactive liability for two insurance layers from several past years
and aggregate extension coverage which provides additional aggregate loss limits
for the layer $1.0 million excess of $1.0 million, each occurrence, for
specified years. The reinsurers also bear their proportionate share of loss
expenses for claims in which they have an indemnity obligation.
The Company has a separate quota share reinsurance treaty for 1996 with
respect to its managed care organization errors and omissions policies and any
directors and officers liability policies it may write. Under this treaty, the
reinsurers bear 80% of all losses and LAE incurred under these policies.
Reinsurance is placed under reinsurance treaties and agreements with a
number of individual companies and syndicates at Lloyd's of London ("Lloyd's")
to avoid concentrations of credit risk. The following table identifies the
Company's most significant reinsurers, their percentage participation in the
Company's aggregate reinsured risk based upon premiums paid by the Company and
their rating as of
36
<PAGE> 38
December 31, 1995. No other single reinsurer's percentage participation in 1995
exceeded 5% of total reinsurance premiums.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
REINSURANCE
RATING(1) PREMIUMS
PREMIUMS CEDED --------- -------------------
FOR YEAR ENDED
DECEMBER 31, 1995
-----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Hannover Ruckversicherungs........ $ 3,253 A+ 38.1%
Lloyd's Syndicates................ 1,791 NR 21.0
Eisen und Stahl
Ruckversicherungs............... 898 A+ 10.5
Swiss Reinsurance Co. U.S.
Branch.......................... 547 A+ 6.4
Transatlantic Reinsurance Co...... 541 A+ 6.3
-----
82.3%
=====
</TABLE>
- ---------------
(1) All ratings are assigned by A.M. Best. The Company's minimum requirement for
ratings of its reinsurers is B or better from A.M. Best.
The Company analyzes the credit quality of its reinsurers and relies on its
brokers and intermediaries to assist it in such analysis. To date, the Company
has not experienced any material difficulties in collecting reinsurance
recoverables. No assurance can be given, however, regarding the future ability
of any of the Company's reinsurers to meet their obligations. Among the
reinsurers to which the Company cedes reinsurance are certain Lloyd's
syndicates. In recent years, Lloyd's has reported substantial aggregate losses
which have had adverse effects on Lloyd's in general and on certain syndicates
in particular. In addition, there has been a decrease in the underwriting
capacity of Lloyd's syndicates in recent years. The substantial losses and other
adverse developments could affect the ability of certain syndicates to continue
to trade and the ability of insureds to continue to place business with
particular syndicates. It is not possible to predict what effects the
circumstances described above may have on Lloyd's and the Company's contractual
relationship with Lloyd's syndicates in future years. The Company understands
that Lloyd's syndicates have created new trust funds to hold reserves for
reinsurance purchased by United States reinsureds gross of outward reinsurance.
This arrangement applies to all purchases on or after August 1, 1995.
Reinsurance and Excess Liability Insurance Assumed. SCPIE assumes a small
amount of reinsurance covering medical professional liability risks primarily in
the United States. The principal reinsurance treaty, which has been in effect
since 1988, is with a Lloyd's syndicate. Under this surplus share treaty, the
Company assumes 50% of one or more layers of coverage above $1.0 million, which
must be retained by the primary insurer. The reinsured receives a ceding
commission and a profit share. The maximum amount of SCPIE's liability for any
one risk is $500,000, and SCPIE does not participate as a reinsurer in any of
its own policies. The annual premiums earned under this treaty have ranged from
$160,000 in 1989 to $674,000 in 1995. In 1996, this treaty will also include
reinsurance of excess layers of workers' compensation and clash casualty
liability risks. SCPIE's liability for any one risk is limited to $500,000 above
a $1.5 million layer assumed by other members of the syndicate.
The Company also entered into a reinsurance treaty for 1995 with Hannover
Ruckversicherungs ("Hannover Re"). The treaty is a quota share treaty, under
which SCPIE reinsures up to $500,000 for each physician medical malpractice
claim and up to $750,000 for each hospital professional liability claim on
policies or contracts with limits in excess of $2.0 million. The reinsured
receives an override commission and is required to retain not less than 20% of
the risk, subject to a minimum retention of $1.0 million. Premiums earned under
this treaty were $106,000 for 1995.
37
<PAGE> 39
SCPIE is a participant in a program for which SKA is the exclusive broker
that provides excess liability insurance for approximately 600 healthcare
facilities throughout the United States. The program provides excess coverage in
various layers up to $50.0 million above a primary insurance layer of $500,000.
SCPIE has assumed, as a reinsurer, a 5% share of each loss above $500,000.
SCPIE has an indirect quota share participation in a reinsurance program of
Hannover Re that provides high layer excess of loss property catastrophe
coverage for international risks, other than in the United States and Japan.
SCPIE has participated in this program since 1994 through the purchase of a $5.0
million Credit Note issued by a limited liability company organized by Hannover
Re to underwrite a portion of this coverage. SCPIE purchased this note through
the issuance of a letter of credit, which can be drawn to cover SCPIE's
proportionate share of losses in this program. Interest on the note is based
upon profits, if any, of the limited liability company. The outstanding Credit
Note is held by SCPIE in its investment portfolio, and the amount of the letter
of credit is included in "Other Liabilities in the Balance Sheets." See
"-- Investment Portfolio."
SCPIE has committed to participate indirectly in another reinsurance
program of Hannover Re similar to the one described above through a swap
agreement arranged by Citibank, N.A. Under the swap agreement, SCPIE will be
required to issue a letter of credit, which can be drawn to cover SCPIE's
proportionate share of losses in this program. SCPIE will share proportionately
the underwriting profit of this program and interest income on premium receipts,
and its aggregate maximum share of losses will be $5.0 million.
The Company intends to seek additional assumed reinsurance arrangements in
future years. The Company believes that as more managed care organizations and
integrated healthcare delivery systems retain a larger part of their own
exposure directly or through captive insurance arrangements, they will need to
obtain excess insurance or reinsurance for the potentially larger losses.
INVESTMENT PORTFOLIO
An important component of the Company's operating results has been the
return on its invested assets. Investments of the Company are made by investment
managers under policies established and supervised by the Board of Directors.
The Company's investment policy has placed primary emphasis on investment grade,
fixed maturity securities and maximization of after-tax yields. The investment
manager since 1978 for the portfolio of fixed maturity securities is Brown
Brothers Harriman & Co., and the investment manager for the equity securities
portion of the portfolio is Hotchkis & Wiley.
38
<PAGE> 40
The following table sets forth the composition of the investment portfolio
of the Company at the dates indicated. All of the fixed maturity securities are
held as available-for-sale.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------- ---------------------- ----------------------
COST OR COST OR COST OR
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturity securities:
Bonds:
U.S. Government and
Agencies................. $341,405 $339,442 $304,091 $319,119 $300,131 $281,931
State, municipalities and
political subdivisions... 222,367 223,450 149,693 155,118 110,423 109,392
Mortgage-backed securities,
U.S. Government.......... 85,084 84,503 80,279 81,898 51,175 47,033
Corporate.................. 10,131 10,095 46,951 48,889 120,353 115,256
Other...................... 105 105 105 105 2,644 2,284
-------- -------- -------- -------- -------- --------
Total bonds........... 659,092 657,595 581,119 605,129 584,726 555,896
Redeemable preferred stock... -- -- 996 1,026 3,018 3,018
-------- -------- -------- -------- -------- --------
Total fixed maturity
securities.......... 659,092 657,595 582,115 606,155 587,744 558,914
-------- -------- -------- -------- -------- --------
Equity securities:
Non-redeemable preferred
stock...................... -- -- -- -- 1,061 1,036
Common stock................. 14,964 18,754 49,396 61,083 42,228 45,404
-------- -------- -------- -------- -------- --------
Total equity
securities.......... 14,964 18,754 49,396 61,083 43,289 46,440
-------- -------- -------- -------- -------- --------
Total.......................... $674,056 $676,349 $631,511 $667,238 $631,033 $605,354
======== ======== ======== ======== ======== ========
</TABLE>
During 1996, the Company sold all equity securities in the portfolio with
the exception of approximately $18.8 million of publicly traded common stocks.
The Board of Directors has adopted a policy that no more than 8% of the total
market value of invested assets may be held in equity securities and real
estate.
The Company's investment portfolio of fixed maturity securities consists
primarily of intermediate-term, investment-grade securities. The Company's
investment policy provides that fixed maturity investments are limited to
purchases of investment-grade securities or unrated securities which, in the
opinion of a national investment advisor, should qualify for such rating. The
table below contains additional information concerning the investment ratings of
the Company's fixed maturity investments at September 30, 1996:
<TABLE>
<CAPTION>
AMORTIZED FAIR PERCENTAGE OF
TYPE/RATING OF INVESTMENT(1) COST VALUE FAIR VALUE
---------------------------------------------- --------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
AAA (including U.S. Government and
Agencies)................................... $ 522,612 $520,693 79.2%
AA............................................ 93,703 93,593 14.2
A............................................. 37,672 38,204 5.8
Non rated(2).................................. 5,105 5,105 0.8
-------- -------- -----
$ 659,092 $657,595 100.0%
======== ======== =====
</TABLE>
- ---------------
(1) The ratings set forth above are based on the ratings, if any, assigned by
Standard & Poor's Corporation ("S&P"). If S&P's ratings were unavailable,
the equivalent ratings supplied by Moody's Investors Services, Inc. were
used.
(2) Includes a credit note received from a catastrophe reinsurance limited
liability company controlled by Hannover Re with an amortized cost and fair
value of $5.0 million. See "-- Reinsurance."
39
<PAGE> 41
The following table sets forth certain information concerning the
maturities of fixed maturity securities in the Company's investment portfolio as
of September 30, 1996:
<TABLE>
<CAPTION>
AMORTIZED FAIR PERCENTAGE OF
COST VALUE FAIR VALUE
--------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Years to maturity:
One or less................................. $ 4,958 $ 4,964 0.8%
After one through five...................... 93,878 93,942 14.3
After five through ten...................... 234,399 236,130 35.9
After ten................................... 240,773 238,056 36.2
Mortgage-backed securities.................... 85,084 84,503 12.8
-------- -------- -----
Totals.............................. $ 659,092 $657,595 100.0%
======== ======== =====
</TABLE>
The average maturity of the securities in the Company's fixed maturity
portfolio as of September 30, 1996 was 6.4 years. The average duration of the
Company's fixed maturity portfolio as of September 30, 1996 was 5.5 years.
The Company also maintains cash and highly liquid equivalent short-term
investments, which at September 30, 1996 totalled $15.6 million.
The following table summarizes the Company's investment results for the
three years ended December 31, 1995 and for the nine months ended September 30,
1996 and 1995.
<TABLE>
<CAPTION>
AS OF OR FOR THE NINE
MONTHS ENDED AS OF OR FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
--------------------- ----------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FIXED MATURITY SECURITIES:
Average invested assets (includes short-
term cash investments)(1)............. $642,266 $614,811 $614,492 $614,005 $595,192
Net investment income:
Before income taxes................... 30,189 27,972 37,471 37,705 38,148
After income taxes.................... 21,841 19,732 26,481 26,379 27,017
Average annual return on investments:
Before income taxes................... 6.27% 6.07% 6.10% 6.14% 6.41%
After income taxes.................... 4.53% 4.28% 4.31% 4.30% 4.54%
Net realized investment gains after
income tax............................ $ 522 $ 1,757 $ 2,202 $ 165 $ 8,711
Net increase (decrease) in unrealized
gains on all fixed maturity
investments after income taxes........ (16,599) 26,915 34,366 (38,184) 8,276
EQUITY SECURITIES:
Average invested assets(2).............. $ 37,084 $ 50,087 $ 50,927 $ 43,338 $ 43,983
Net investment income:
Before income taxes................... 678 466 1,506 1,063 1,042
After income taxes.................... 626 449 1,189 972 952
Average annual return on investments:
Before income taxes................... 2.44% 1.24% 2.96% 2.45% 2.37%
After income taxes.................... 2.25% 1.19% 2.33% 2.24% 2.17%
Net realized investment gains after
income tax............................ $ 6,988 $ 2,700 $ 2,965 $ 191 $ 1,840
Net increase (decrease) in unrealized
gains on all equity investments after
income taxes.......................... (5,134) 4,172 5,548 (1,980) 1,004
</TABLE>
- ---------------
(1) Fixed maturity securities at cost.
(2) Equities at market.
40
<PAGE> 42
COMPETITION
The physician professional liability insurance market in California is
highly competitive. The Company competes principally with three physician-owned
mutual or reciprocal insurance companies, Norcal Mutual Insurance Company, The
Doctors' Company and Medical Insurance Exchange of California, with several
commercial insurers, including CNA Insurance Companies and Fremont Indemnity
Company, and also with a physicians' mutual protection trust, Mutual Protection
Trust. The physician-owned insurance companies were organized at approximately
the same time as SCPIE and all of these companies have expanded their operations
in California. Each of these companies is actively engaged in soliciting
insureds in Southern California, SCPIE's primary area of operations, and each
has offered assessments or premiums at very competitive rates during the past
few years. The Company believes that the principal competitive factors, in
addition to pricing, include dividend policy, financial stability, breadth and
flexibility of coverage and the quality and level of services provided. In
addition, commercial insurance companies such as Farmers Group, Inc. and MMI
Companies, Inc. now actively compete for larger medical groups in the California
market, and companies endorsed by specialty medical societies are also entering
the market.
The Company believes that SCPIE's dividend policy has been an important
competitive factor in the past. On August 8, 1996, the Board of Governors
declared a final dividend to members of the Exchange of $9.0 million which will
be paid in the form of premium credits in 1997. Except for this final dividend,
after the Reorganization, the Company will cease paying such premium credit
dividends to its policyholders. Therefore, the Company may find it more
difficult to compete with other insurance companies offering such dividends. See
"Risk Factors -- Competition" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General -- Policyholder
Dividends."
The hospital professional liability insurance market is also extremely
competitive. Most of the Company's principal insurance company competitors for
physicians and medical groups, as well as a hospital industry sponsored captive
insurance company, actively compete in the hospital professional liability
insurance market. The largest writer of malpractice insurance for hospitals in
California is an affiliate of Farmers Group, Inc., which until recently
underwrote its coverage through SKA. The Company believes that the Company's
current relationship with SKA will enable it to expand its hospital
policyholders in California and other states.
The Company expects to encounter similar competition from local
doctor-owned insurance companies and commercial companies in other states as it
carries out its expansion plans. The Company plans to compete in other states
principally through its relationship with SKA and by offering superior
policyholder services. All markets in which the Company now writes insurance and
in which it expects to enter have certain competitors with substantially greater
financial and operating resources than the Company. See "Risk
Factors -- Competition."
REGULATION
General. Insurance companies are regulated by government agencies in states
in which they transact insurance. The extent of regulation varies by state, but
such regulation usually includes: (i) regulating premium rates and policy forms;
(ii) setting minimum capital and surplus requirements; (iii) regulating guaranty
fund assessments; (iv) licensing companies and agents; (v) approving accounting
methods and methods of setting statutory loss and expense reserves; (vi) setting
requirements for and limiting the types and amounts of investments; (vii)
establishing requirements for the filing of annual statements and other
financial reports; (viii) conducting periodic statutory examinations of the
affairs of insurance companies; (ix) approving proposed changes of control; and
(x) limiting the amounts of dividends that may be paid without prior regulatory
approval. Such regulation and supervision are primarily for the benefit and
protection of policyholders and not for the benefit of investors.
The Company has written all of its insurance in California, and SCPIE
Indemnity will be domiciled in that state. California laws and regulations,
including the tort liability laws, and laws relating to professional liability
exposures and reports, have the most significant impact on the Company and its
operations.
41
<PAGE> 43
Insurance Guaranty Associations. Most states, including California, require
admitted property and casualty insurers to become members of insolvency funds or
associations which generally protect policyholders against the insolvency of
such insurers. Members of the fund or association must contribute to the payment
of certain claims made against insolvent insurers. Maximum contributions
required by law in any one year vary by state, and California permits a maximum
assessment of 1% of annual premiums written by a member in that state during the
preceding year. The largest assessment paid by SCPIE was $697,000 in 1994.
However, such payments are recoverable through policy surcharges.
Holding Company Regulation. SCPIE Holdings is subject to the California
Insurance Holding Company System Regulatory Act (the "Holding Company Act"). The
Holding Company Act requires the Company periodically to file information with
the California Department and other state regulatory authorities, including
information relating to its capital structure, ownership, financial condition
and general business operations. Certain transactions between an insurance
company and its affiliates, including sales, loans or investments which in any
twelve-month period aggregate at least 5% of its admitted assets or 25% of its
statutory capital and surplus, whichever is less, also are subject to prior
approval by the California Department. Recently, legislation was adopted in
California which requires 30 days advance notice to the California Department of
a material transaction, rather than prior approval, and increases the types of
transactions subject to the notice requirement.
The Holding Company Act also provides that the acquisition or change of
"control" of a California insurance company or of any person or entity that
controls such an insurance company cannot be consummated without the prior
approval of the Insurance Commissioner. In general, a presumption of "control"
arises from the ownership of voting securities and securities that are
convertible into voting securities, which in the aggregate constitute 10% or
more of the voting securities of a California insurance company or of a person
or entity that controls a California insurance company, such as SCPIE Holdings.
A person or entity seeking to acquire "control," directly or indirectly, of the
Company is generally required to file with the Insurance Commissioner an
application for change of control containing certain information required by
statute and published regulations and provide a copy of the application to the
Company. The Holding Company Act also effectively restricts the Company from
consummating certain reorganizations or mergers without prior regulatory
approval.
The Company will also be subject to insurance holding company laws in other
states that contain similar provisions and restrictions.
Regulation of Dividends from Insurance Subsidiaries. The Holding Company
Act also limits the ability of SCPIE Indemnity to pay dividends to the Company.
Without prior notice to and approval of the Insurance Commissioner, SCPIE
Indemnity may not declare or pay an extraordinary dividend, which is defined as
any dividend or distribution of cash or other property whose fair market value
together with other dividends or distributions made within the preceding twelve
months exceeds the greater of such subsidiary's statutory net income of the
preceding calendar year or 10% of statutory surplus as of the preceding December
31. Applicable regulations further require that an insurer's statutory surplus
following a dividend or other distribution be reasonable in relation to its
outstanding liabilities and adequate to meet its financial needs, and permit the
payment of dividends only out of statutory earned (unassigned) surplus unless
the payment out of other funds is approved by the Insurance Commissioner. In
addition, an insurance company is required to give the California Department
notice of any dividend after declaration, but prior to payment.
The other Insurance Subsidiaries will be subject to similar provisions and
restrictions under the insurance holding company laws of other states.
Risk-Based Capital. The NAIC has developed a new methodology for assessing
the adequacy of statutory surplus of property and casualty insurers which
includes a risk-based capital ("RBC") formula that attempts to measure statutory
capital and surplus needs based on the risks in a company's mix of products and
investment portfolio. The formula is designed to allow state insurance
regulators to identify potentially under-capitalized companies. Under the
formula, a company determines its RBC by taking into account certain risks
related to the insurer's assets (including risks related to its investment
portfolio and
42
<PAGE> 44
ceded reinsurance) and the insurer's liabilities (including underwriting risks
related to the nature and experience of its insurance business). The RBC rules
provide for different levels of regulatory attention depending on the ratio of a
company's total adjusted capital to its "authorized control level" of RBC. At
December 31, 1995, SCPIE's RBC was $87.7 million, exceeding the threshold
requiring the least regulatory attention, which was $39.4 million.
NAIC-IRIS Ratios. The NAIC Insurance Regulatory Information System ("IRIS")
was developed by a committee of state insurance regulators and is primarily
intended to assist state insurance departments in executing their statutory
mandates to oversee the financial condition of insurance companies operating in
their respective states. IRIS identifies twelve ratios for the property and
casualty insurance industry and specifies a range of "usual values" for each
ratio. Departure from the "usual value" range on four or more ratios may lead to
increased regulatory oversight from individual state insurance commissioners. In
1993, SCPIE had one ratio outside the usual value range, which resulted from a
large Proposition 103 refund. No ratios outside the usual value range resulted
in 1994 or 1995.
Regulation of Investments. The Insurance Subsidiaries are subject to state
laws and regulations that require diversification of their investment portfolios
and limit the amount of investments in certain investment categories such as
below investment grade fixed income securities, real estate and equity
investments. Failure to comply with these laws and regulations would cause
investments exceeding regulatory limitations to be treated as nonadmitted assets
for purposes of measuring statutory surplus and, in some instances, would
require divestiture of such non-qualifying investments over specified time
periods unless otherwise permitted by the state insurance authority under
certain conditions.
Prior Approval of Rates and Policies. Pursuant to the California Insurance
Code, the Company must submit rating plans, rates, policies and endorsements to
the Insurance Commissioner for prior approval. The possibility exists that the
Company may be unable to implement desired rates, policies, endorsements, forms
or manuals if such items are not approved by the Insurance Commissioner. See
"Risk Factors -- Regulatory and Related Matters." In the past, all of the
Company's rate applications have been approved in the normal course of review.
The Company recently acquired two inactive insurance companies, one of which is
licensed in 44 states plus the District of Columbia and the other of which is
licensed in one state. The licenses will have to be modified in a number of
states and certain rate filings will need to be made to permit the Company to
write medical malpractice insurance in certain states.
Medical Malpractice Tort Reform. MICRA, enacted in 1975, has been one of
the most comprehensive medical malpractice tort reform measures in the United
States. MICRA currently provides for limitations on damages for pain and
suffering of $250,000, limitations on fees for plaintiffs' attorneys according
to a specified formula, periodic payment of medical malpractice judgments and
the introduction of evidence of collateral source benefits payable to the
injured plaintiff. The Company believes that this legislation has brought
stability to the medical malpractice insurance marketplace in California by
making it more feasible for insurers to assess the risks involved in
underwriting this line of business.
The constitutionality of the various provisions of MICRA were judicially
challenged soon after its enactment, and California trial courts and
intermediate appellate courts reached conflicting decisions. The California
Supreme Court, in a series of decisions rendered during 1984 and 1985, upheld
the constitutionality of MICRA. Bills have been introduced in the California
Legislature from time to time to modify or limit certain of the tort reform
benefits provided to physicians and other healthcare providers by MICRA. In
1987, the principal proponents and opponents of MICRA signed an agreement under
which the parties agreed to a five-year moratorium on amendments to MICRA,
except for an increase in the limits on plaintiffs' attorneys' fees, which was
enacted at the time of this agreement. This moratorium expired by its terms on
December 31, 1992. Neither the proponents or opponents have attempted to enact
significant changes since that time. The Company cannot predict what changes, if
any, to MICRA may be enacted during the next few years or what effect such
changes might have on the Company's medical malpractice insurance operations.
Medical Malpractice Reports. SCPIE is required to report detailed
information with regard to settlements or judgments against its California
physician insureds in excess of $30,000 to the Medical Board of California,
which has responsibility for investigations and initiation of proceedings
relating to
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<PAGE> 45
professional medical conduct in California. In addition, all payments must also
be reported to the Federal National Practitioners' Data Bank and such reports
are accessible by state licensing and disciplinary authorities, hospital and
other peer review committees and other providers of medical care. A California
statute also requires that defendant physicians must consent to all medical
professional liability settlements in excess of $30,000, unless the physician
waives this requirement. The SCPIE policy provides the physician with the right
to consent to any such settlement, regardless of the amount, but that the matter
of consent may be submitted to a county medical review board by either party. In
virtually all instances, the Company must obtain the consent of the insured
physician prior to any settlement.
A.M. BEST RATING
A.M. Best, which rates insurance companies based on factors of concern to
policyholders, currently assigns SCPIE an "A (Excellent)" rating. Such rating is
the third highest rating of 13 ratings that A.M. Best assigns to solvent
insurance companies, which currently range from "A++ (Superior)" to "D (Very
Vulnerable)." Publications of A.M. Best indicate that the A rating is assigned
to those companies that in A.M. Best's opinion have a strong ability to meet
their obligations to policyholders over a long period of time. In evaluating a
company's financial and operating performance, A.M. Best reviews the company's
profitability, leverage and liquidity, as well as its book of business, the
adequacy and soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its loss reserves, the adequacy of its
surplus, its capital structure, the experience and competence of its management
and its market presence. A.M. Best's ratings reflect its opinion of an insurance
company's financial strength, operating performance and ability to meet its
obligations to policyholders and are not evaluations directed to purchasers of
an insurance company's securities.
In June 1996, A.M. Best reduced the Company's rating from "A+ (Superior),"
citing significant uncertainty in the medical malpractice marketplace, caused,
in part, by evolving managed care issues, the Company's narrow product line and
geographic concentration, and intense competition and weakening premium rates in
the medical malpractice industry. A.M. Best similarly reduced the ratings of
three other medical malpractice insurance companies domiciled in California. See
"Risk Factors -- Importance of Ratings." A.M. Best also noted, however, the
Company's "strong capitalization, favorable loss reserve development and
leadership position in its principal market." No assurance can be given that
A.M. Best will not reduce its current rating of the Company in the future. The
Insurance Subsidiaries have entered into a pooling arrangement and each of the
Insurance Subsidiaries has been assigned the same "pooled" "A (Excellent)" A.M.
Best rating based on their consolidated performance.
EMPLOYEES
As of September 30, 1996, the Company employed 167 persons. None of the
employees is covered by a collective bargaining agreement. The Company believes
that its employee relations are good.
PROPERTIES
The Company is the owner of two office buildings, both located in Beverly
Hills, California. One building contains approximately 25,000 square feet of
office space and is used by the Company and its subsidiaries as a home office.
The other office building contains approximately 24,000 square feet, of which
the Company and its subsidiaries occupy approximately 17,000 square feet and the
remaining 7,000 square feet of space in this office building are leased to
unaffiliated persons. Both office buildings owned by the Company are currently
unencumbered. The Company leases office space for a claims office in San Diego,
California and a sales office in Oakland, California. The Company believes that
its office space is adequate for its present purposes and that it will be able
to secure additional office space in the future if necessary.
LITIGATION
The Company is a defendant in one material litigation, currently on appeal
by SCPIE in the California District Court of Appeal, in which an adverse
judgment was rendered for $4.2 million of compensatory
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<PAGE> 46
damages and $14.0 million of punitive damages. The case involves an action
against SCPIE by the bankruptcy estate of an uninsured physician who incurred an
adverse jury verdict in a medical malpractice case. The physician's bankruptcy
estate alleged that SCPIE had an undisclosed conflict of interest when it
provided the physician with a free courtesy defense by an attorney who had
represented the interests of SCPIE insureds in other cases. The plaintiff in the
malpractice action was an infant who had suffered severe injuries at birth, and
had obtained a judgment against two SCPIE insured physicians as well as the
uninsured physician. The jury originally rendered a verdict that included $65.0
million in punitive damages, which was reduced to $14.0 million by the trial
judge. SCPIE believes that the action is entirely without merit and plans to
pursue aggressively its rights on appeal.
The Company is from time to time named as a defendant in various lawsuits
incidental to its insurance business. In many of these actions, plaintiffs
assert claims for exemplary and punitive damages which are not insurable under
California judicial decisions. The Company vigorously defends these actions,
unless a reasonable settlement appears appropriate. The Company believes that
adverse results, if any, in the actions currently pending should not have a
material adverse effect on the Company's consolidated financial condition.
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<PAGE> 47
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the individuals who
serve as directors and executive officers of SCPIE Holdings:
<TABLE>
<CAPTION>
NAME POSITION
------------------------ ------------------------------------------------
<S> <C>
Mitchell S. Karlan, M.D. Chairman of the Board
Donald J. Zuk President, Chief Executive Officer and Director
Patrick S. Grant Senior Vice President, Marketing
Joseph P. Henkes Senior Vice President, Operations and Actuarial
Services
Patrick T. Lo Vice President and Chief Financial Officer
Jack E. McCleary, M.D. Treasurer and Director
Wendell L. Moseley, M.D. Secretary and Director
Allan K. Briney, M.D. Director
Willis T. King, Jr. Director
Charles B. McElwee, M.D. Director
Donald P. Newell Director
Harriet M. Opfell, M.D. Director
William A. Renert, M.D. Director
Henry L. Stoutz, M.D. Director
Reinhold A. Ullrich, Director
M.D.
</TABLE>
The Company's Board of Directors consists of twelve persons, divided into
three classes of directors and elected for staggered terms as follows: Class I,
comprised of four persons and elected for a term expiring at the 1997 Annual
Meeting of stockholders; Class II, comprised of four persons and elected for a
term expiring at the 1998 Annual Meeting of stockholders; and Class III,
comprised of four persons and elected for a term expiring at the 1999 Annual
Meeting of stockholders. Class I directors are Messrs. Briney, King, Ullrich and
Ms. Opfell. Class II directors are Messrs. Karlan, Moseley, McCleary and Newell.
Class III directors are Messrs. Zuk, McElwee, Renert and Stoutz. Following
expiration of the initial term as described above, directors will serve for
three-year terms.
Mitchell S. Karlan, M.D., 68, Chairman of the Board, was a member of the
Board of Governors of the Exchange from 1986 until the time of the
Reorganization. He has been a board-certified general surgeon in Beverly Hills,
California, for more than five years. He is a former President of the Los
Angeles County Medical Association ("LACMA"), a former Chairman of the LACMA's
Board of Trustees and a recent past member of the California Medical
Association's ("CMA") Board of Trustees.
Donald J. Zuk, 60, Director, has been President and Chief Executive Officer
of SCPIE Management Company since 1989. Prior to joining SCPIE Management
Company, he served 22 years with Johnson & Higgins, insurance brokers. His last
position there was Senior Vice President in charge of its Los Angeles Health
Care operations, which included the operations of SCPIE under a contract that
then existed with SCPIE Management Company. Since 1993, Mr. Zuk has served on
the Board of Directors of GCR Holdings Limited, a catastrophe property
reinsurance company.
Patrick S. Grant, 54, has been with SCPIE since 1990 serving initially as
Vice President, Marketing. He was named Senior Vice President, Marketing in
1992. Prior to that time, he spent almost 20 years with the insurance brokerage
firm of Johnson & Higgins. His last position there was Vice President,
Professional Liability. Mr. Grant has worked on SCPIE operations since 1976.
Joseph P. Henkes, 47, has been with SCPIE since 1990 serving initially as
Vice President, Operations and Actuarial Services. He was named Senior Vice
President, Operations and Actuarial Services in 1992. Prior to that time he
spent almost five years with Johnson & Higgins, where his services
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<PAGE> 48
were devoted primarily to SCPIE. He has been an Associate of the Casualty
Actuarial Society since 1975, and a member of the American Academy of Actuaries
since 1980.
Patrick T. Lo, 44, has been Vice President and Chief Financial Officer of
SCPIE since 1993. From 1990 to 1993 he served as Vice President and Controller
of SCPIE. Prior to that time, he spent nine years as Assistant Controller,
Assistant Vice President and Vice President at The Doctors' Company, a
California medical malpractice insurance company.
Jack E. McCleary, M.D., 69, Director, was a member of the Board of
Governors of the Exchange from 1982 until the time of the Reorganization. He has
been a board-certified dermatologist in Sherman Oaks, California, for more than
five years. Dr. McCleary is currently the President of the CMA. He is a former
LACMA President and Speaker of the CMA House of Delegates.
Wendell L. Moseley, M.D., 69, Director, was a member of the Board of
Governors of the Exchange from 1983 until the time of the Reorganization. He has
been a board-certified family practitioner in San Bernardino, California, for
more than five years, and is on the clinical faculty of the Loma Linda
University School of Medicine. Dr. Moseley is a past President of the San
Bernardino County Medical Society. Dr. Moseley has served as a CMA delegate for
26 years.
Allan K. Briney, M.D., 74, Director, was Chairman of the Board of Governors
of the Exchange from 1976 until the time of the Reorganization. He has been a
board-certified radiologist in Whittier, California, for more than five years.
He is a past President of the LACMA, and is a former Chairman of the LACMA's
Board of Trustees.
Willis T. King, Jr., 52, Director, has been a director and officer of
Johnson & Higgins for more than five years, and since 1986 has been Chairman and
Chief Executive Officer of Willcox Incorporated Reinsurance Intermediaries, a
subsidiary of Johnson & Higgins engaged in reinsurance.
Charles B. McElwee, M.D., 66, Director, was a member of the Board of
Governors of the Exchange from 1995 until the time of the Reorganization. He has
been a board-certified orthopedic surgeon in Covina, California, for more than
five years, and is also affiliated with the University of Southern California
School of Medicine. Dr. McElwee is a former President of the LACMA, Chairman of
the Board of Trustees of the LACMA and a member of the Board of Trustees of the
CMA. He is also Vice-Chairman of the CALPAC, the legislative arm of the CMA.
Donald P. Newell, 58, Director, has been a partner at the law firm of
Latham & Watkins in San Diego, California, for more than five years. Mr. Newell
is also a director of Mercury General Corporation, an insurance holding company.
Harriet M. Opfell, M.D., 72, Director, was a member of the Board of
Governors of the Exchange from 1981 until the time of the Reorganization. She
has been a board-certified pediatrician in Orange, California, for more than
five years, and is a clinical professor of pediatrics at the University of
California at Irvine. Dr. Opfell is a former President of the Orange County
Medical Association and served as President of the medical staff at Children's
Hospital of Orange County.
William A. Renert, M.D., 56, Director, was a member of the Board of
Governors of the Exchange from 1990 until the time of the Reorganization. He has
been a board-certified radiologist in La Mesa, California, for more than five
years. Dr. Renert is a past President of the San Diego County Medical Society,
and is a CMA delegate and an American Medical Association delegate.
Henry L. Stoutz, M.D., 64, Director, was a member of the Board of Governors
of the Exchange from 1976 until the time of the Reorganization. He has been a
board-certified urologist in Ventura, California, for more than five years, and
is a clinical instructor, Department of Urology, at the University of California
at Los Angeles ("UCLA") School of Medicine. He is Chairman of the Ventura County
Medical Society Professional Liability Committee.
Reinhold A. Ullrich, M.D., 69, Director, was a member of the Board of
Governors of the Exchange from 1991 until the time of the Reorganization. He has
been a board-certified obstetrician and
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<PAGE> 49
gynecologist in Torrance, California, for more than five years, and has been on
the clinical faculty at the UCLA School of Medicine since 1954. Dr. Ullrich is a
former President of the LACMA, and is the immediate past Chairman of its Board
of Trustees. He served on the CMA Board of Trustees from 1989 to 1995.
COMMITTEES OF THE SCPIE HOLDINGS BOARD
The SCPIE Holdings Board has the following standing committees:
Executive Committee. The Executive Committee has the authority to exercise
all powers of the SCPIE Holdings Board between meetings of the SCPIE Holdings
Board, except in cases where action of the entire SCPIE Holdings Board is
required by the Restated Certificate, the Bylaws or applicable law. The
Executive Committee consists of four members, one of whom is required to be the
Chairman of the SCPIE Holdings Board. The members of the Executive Committee are
Messrs. Karlan (Chairman), Briney, Moseley and Zuk.
Audit Committee. The Audit Committee makes recommendations concerning the
engagement of independent public accountants, reviews the scope of audit
engagement, reviews comment letters of such accountants and management's
response thereto, approves professional services provided by such accountants,
reviews the independence of such accountants, reviews any major accounting
changes made or contemplated, considers the range of audit and non-audit fees
and reviews the adequacy of the Company's internal accounting controls. The
Audit Committee consists of three members, all of whom are independent
directors. The members of the Audit Committee are Messrs. Moseley (Chairman),
Karlan and McCleary.
Compensation Committee. The Compensation Committee establishes remuneration
levels for the Chief Executive Officer, Chief Financial Officer and Senior Vice
Presidents of the Company, reviews significant employee benefit programs and
establishes, as it deems appropriate, and administers executive compensation
programs, including bonus plans, stock option and other equity-based programs,
deferred compensation plans and any other such cash or stock incentive programs.
The Chief Executive Officer of the Company establishes remuneration levels for
other employees of the Company. The Compensation Committee consists of three
members. The members of the Compensation Committee are Messrs. Karlan
(Chairman), Moseley and King.
The SCPIE Holdings Board may from time to time establish certain other
committees to facilitate the management of SCPIE Holdings.
DIRECTOR COMPENSATION
Each non-employee Director will receive an annual retainer of $25,000. The
Chairman of the Board of Directors of SCPIE Holdings will be paid $1,500 per
Board meeting and other non-employee Directors will be paid $1,000 per Board
meeting. Fees to non-employee Directors for participation on committees of the
Board of Directors will be $1,000 per meeting. The Chairman of the Executive
Committee will receive an additional annual retainer of $24,000. All
non-employee Directors will be reimbursed for reasonable travel and other
expenses incurred to attend meetings of the SCPIE Holdings Board and committees
thereof.
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<PAGE> 50
EXECUTIVE COMPENSATION
SCPIE Holdings was organized as a Delaware corporation in February 1996 and
consequently did not pay any cash compensation to its executive officers for the
year ended December 31, 1995. The following Summary Compensation Table sets
forth information concerning the compensation of (i) the Company's President and
Chief Executive Officer and (ii) the three other most highly compensated
executive officers of the Company (collectively, the "Named Executive
Officers"), for the year ended December 31, 1995. During such time period, the
Named Executive Officers were compensated by SCPIE Management Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------
NAME AND PRINCIPAL OTHER ANNUAL ALL OTHER
POSITION(S) YEAR(1) SALARY BONUS COMPENSATION(2) COMPENSATION(3)
- ------------------------- ------- -------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Donald J. Zuk 1995 $391,378 $52,085 $ 1,581 $28,970
President and Chief
Executive Officer
Joseph P. Henkes 1995 $190,000 $ 5,000 -- $11,400
Senior Vice President,
Operations and
Actuarial Services
Patrick S. Grant 1995 $165,000 $15,000 -- $ 9,990
Senior Vice President,
Marketing
Patrick T. Lo 1995 $131,000 $10,000 -- $ 7,860
Vice President and Chief
Financial Officer
</TABLE>
- ---------------
(1) Under the rules promulgated by the Commission, since the Company was not a
reporting company during the three immediately preceding fiscal years, only
the information with respect to the most recent completed fiscal year is
reported in the Summary Compensation Table.
(2) Other Annual Compensation for Mr. Zuk consists of payments for medical
expenses that are in addition to those covered by the Company's medical
benefit plans.
(3) All Other Compensation consists of contributions to the SMC Cash
Accumulation Plan of SCPIE (the "401(k) Plan") for each Named Executive
Officer and expenses related to a vehicle provided to Mr. Zuk by the
Company.
EMPLOYMENT AGREEMENT
SCPIE Management Company has in effect an employment agreement (the
"Employment Agreement") with Mr. Zuk, which is guaranteed by SCPIE. The
Employment Agreement will be assumed by the Company. The Employment Agreement
provides for a term expiring on December 31, 2000, at a current salary of
$413,409 per annum, with annual increases indexed to increases in the Consumer
Price Index for the preceding calendar year. The Employment Agreement also
provides for payment of bonuses at the discretion of the Board of Directors of
SCPIE Management Company, subject to the approval of SCPIE. In the event of
termination of the Employment Agreement by SCPIE Management Company, severance
pay of up to two years' salary is due under certain circumstances. Mr. Zuk may
also terminate the Employment Agreement at any time, with or without cause, upon
90 days' written notice to SCPIE Management Company. No other employment
agreements currently exist.
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<PAGE> 51
COMPENSATION PLANS
401(k) Plan. Following the Reorganization, the Company will assume the
401(k) Plan. The 401(k) Plan offers eligible employees of SCPIE Management
Company an opportunity to contribute to the 401(k) Plan on a regular basis
through payroll deductions in amounts equal to but not greater than 15% of their
compensation. The 401(k) Plan's benefits are based on amounts contributed and
individual account investment performance. All full-time employees of SCPIE
Management Company (defined as employees whose work week constitutes at least
38 3/4 hours) who are over age 21 years are eligible to participate in the
401(k) Plan.
The Company matches 100% of an employee's contribution to the 401(k) Plan
up to 6% of such employee's compensation. The amount of matching contributions
made by the Company for the fiscal years ended December 31, 1995, 1994 and 1993
were $436,000, $350,000 and $304,000, respectively. In addition, the Company may
make discretionary contributions to the 401(k) Plan to be allocated among the
employees' accounts on the basis of their relative levels of compensation.
Pension Benefits. Following the Reorganization, the Company will assume two
retirement plans that provide pensions for employees of SCPIE. The SCPIE
Management Company Retirement Income Plan (the "Retirement Plan") is an employee
non-contributory tax qualified defined benefit plan that provides each employee
with a basic annual benefit at normal retirement (age 65) equal to 1.15% of the
employee's earnings for each year of service after 1989 (subject to applicable
law limitations on the amount of earnings which may be considered for benefit
accrual purposes under tax qualified plans) while with the Company and the
employee's benefit accrued under a prior plan of SCPIE Management Company.
Employees attaining age 35 or attaining age 21 and having completed one year of
service are eligible to participate in the Retirement Plan. Benefits vest after
five years of service. The Supplemental Retirement Plan for Selected Employees
of SCPIE Management Company (the "Supplemental Plan") enhances the benefits
under the Retirement Plan for selected employees of the Company (currently all
15 Vice Presidents and the President of SCPIE Management Company). The enhanced
benefit under the Supplemental Plan provides an annual benefit at normal
retirement age (age 65) equal to 1.5% of the average annual rate of earnings
during the employee's 36 highest consecutive months in his or her last ten years
of service immediately prior to retirement, multiplied by the employee's years
of service with the Company or SCPIE Management Company, less the employee's
benefits under the Retirement Plan and under the Johnson & Higgins Retirement
Income Plan. In addition, the Supplemental Plan provides for a lump sum payment
equal to the difference between (i) the amount of the benefits that the employee
would have accrued under the 401(k) Plan if the Company's contribution allocated
to the employee's account had not been limited by certain provisions of the Code
that limit the amount which can be allocated to the employee's account under the
401(k) Plan and the amount of each employee's annual compensation which can be
taken into account under the 401(k) Plan and (ii) the amount of the benefits
accrued by the employee under the 401(k) Plan. The period of service under both
the Retirement Plan and the Supplemental Plan includes any period of service
with Johnson & Higgins, which formerly managed the business of SCPIE.
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<PAGE> 52
The following table shows the estimated annual benefits payable under the
Supplemental Plan and the Retirement Plan to Company employees in the higher
salary classifications upon retirement:
<TABLE>
<CAPTION>
SUPPLEMENTAL PLAN
REMUNERATION
(AVERAGE OF 36 ESTIMATED ANNUAL BENEFIT ($)
HIGHEST -------------------------------------------------------------------
CONSECUTIVE
MONTHS IN FINAL YEARS OF CREDITED SERVICE AT AGE 65
TEN YEARS OF -------------------------------------------------------------------
SERVICE) 10 15 20 25 30 35
----------------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$100,000 $15,000 $ 22,500 $ 30,000 $ 37,500 $ 45,000 $ 52,500
$150,000 22,500 33,750 45,000 56,250 67,500 78,750
$200,000 30,000 45,000 60,000 75,000 90,000 105,000
$250,000 37,500 56,250 75,000 93,750 112,500 131,250
$300,000 45,000 67,500 90,000 112,500 135,000 157,500
$350,000 52,500 78,750 105,000 131,250 157,500 183,750
$400,000 60,000 90,000 120,000 150,000 180,000 210,000
$450,000 67,500 101,250 135,000 168,750 202,500 236,250
$500,000 75,000 112,500 150,000 187,500 225,000 262,500
</TABLE>
The amounts shown in the table are straight life annuities payable under
the plans without reduction for the joint and survivor annuity. Retirement
benefits listed in the table are not subject to any deduction for Social
Security benefits, but are reduced by any pension amounts payable to the
employee under a Johnson & Higgins retirement plan.
The earnings subject to the retirement plans for each of the executive
officers in the Summary Compensation Table is determined from the compensation
amounts shown under "Salary," but not the amounts shown under "Bonus." As of
December 31, 1995, the years of service of Messrs. Zuk, Henkes, Grant and Lo are
29 years, 9 years, 24 years and 5 years, respectively.
Frozen Retirement Plan for Members of the SCPIE Board of Governors. SCPIE
has maintained the SCPIE Retirement Plan for Outside Governors and Affiliated
Directors (the "Board of Governors' Retirement Plan"), a nonqualified
supplemental retirement plan that provides a $12,000 annual retirement benefit
for members of the SCPIE Board of Governors and directors of affiliated entities
who have at least five years of service as defined in the Board of Governors'
Retirement Plan. After the Reorganization, SCPIE's obligations under the Board
of Governors' Retirement Plan will become the obligations of SCPIE Indemnity.
Participation in the Board of Governors' Retirement Plan will be frozen on
December 31, 1996. Any persons receiving benefits on that date will continue to
receive them. All other eligible persons under the Board of Governors'
Retirement Plan will, on that date, become 100% vested in the benefits accrued
prior to that date and no additional benefits will accrue in the future. No
additional individuals, including directors of SCPIE Indemnity or directors of
SCPIE Holdings, will be eligible to participate in the Board of Governors'
Retirement Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The DGCL permits a Delaware corporation to include in its charter and
bylaws certain provisions to eliminate the personal liability of directors for
monetary damages and to indemnify its directors and officers. The SCPIE Holdings
Bylaws provide that SCPIE Holdings shall indemnify its directors and officers
and may indemnify its employees and agents, who are parties or threatened to be
made parties to any action, suit or proceeding by reason of such person's
capacity as a director, officer, employee or agent of SCPIE Holdings, from and
against expenses (including legal fees), judgments, fines and settlements
arising from such action, suit or proceeding to the fullest extent permitted by
applicable law. Section 145(a) of the DGCL provides that a corporation may
indemnify a director, officer, employee or agent if such person acted in good
faith and in a manner reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal proceeding, had
no reasonable cause to believe the conduct was unlawful. In addition, effective
upon consummation of the Reorganization, SCPIE Holdings will enter into
indemnification agreements with each of its directors and certain of its
51
<PAGE> 53
executive officers that generally provide for similar indemnification. See
"Description of Capital Stock -- Delaware Law and Certain Charter and Bylaw
Provisions -- Indemnification."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has employed in the past, and intends to employ in the future,
the law firm of Latham & Watkins, to perform legal services. Donald P. Newell, a
director of the Company, is a partner of Latham & Watkins.
The Company has entered into in the past, and intends to enter into in the
future, certain contracts with the firms of Willcox Incorporated Reinsurance
Intermediaries and Johnson & Higgins, for whom Willis T. King, Jr., a director
of the Company, serves as a director and officer. Johnson & Higgins serves as an
insurance broker for the Company and received commissions for these services of
$46,142, $81,658 and $114,559, in 1995, 1994 and 1993, respectively. The Company
has six reinsurance contracts that are placed by Willcox Incorporated
Reinsurance Intermediaries, which is the reinsurance division of Johnson &
Higgins. Willcox Incorporated Reinsurance Intermediaries received commissions on
the placement of these policies of $679,825, $571,613 and $717,807 in 1995, 1994
and 1993, respectively.
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of the closing of the Offering by (i) each person
who will own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director and executive officer named in the Summary
Compensation Table and (iii) all directors and executive officers of SCPIE
Holdings as a group. The number of shares of Common Stock beneficially owned by
each director represents the number of shares each director and certain persons
and entities affiliated with each director will receive as members of the
Exchange pursuant to the Reorganization. This estimate does not include any
shares which any director or executive officer may purchase in the Offering.
Except as noted below, each holder listed below will have sole investment and
voting power with respect to the shares beneficially owned by the holder. The
address for all stockholders listed in the table is c/o SCPIE Holdings Inc.,
9441 West Olympic Boulevard, Beverly Hills, California 90213-4015.
<TABLE>
<CAPTION>
NUMBER OF SHARES
TO BE PERCENT
NAME BENEFICIALLY OWNED OF TOTAL
------------------------------------------------- ------------------ ---------
<S> <C> <C>
Mitchell S. Karlan, M.D.......................... 2,610 *
Donald J. Zuk.................................... -- --
Patrick S. Grant................................. -- --
Joseph P. Henkes................................. -- --
Patrick T. Lo.................................... -- --
Jack E. McCleary, M.D............................ 786 *
Wendell L. Moseley, M.D.......................... 470 *
Allan K. Briney, M.D............................. 571 *
Willis T. King, Jr............................... -- --
Charles B. McElwee, M.D.......................... 3,040 *
Donald P. Newell................................. -- --
Harriet M. Opfell, M.D........................... 445 *
William A. Renert, M.D........................... 895 *
Henry L. Stoutz, M.D............................. 1,202 *
Reinhold A. Ullrich, M.D......................... 4,201 *
-------- ---------
All directors and executive officers as a group
(15 persons)................................... 14,220 *
</TABLE>
- ---------------
* Less than 1%.
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<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company as of the completion of the
Reorganization will consist of 30,000,000 shares of Common Stock, $.0001 par
value per share, and 5,000,000 shares of Preferred Stock, the rights,
preferences and powers of which may be designated by the SCPIE Holdings Board.
At present, there are no shares of Preferred Stock issued or outstanding. Upon
completion of the Reorganization and the Offering, there will be approximately
11,994,491 shares (12,294,491 shares if the Underwriters' over-allotment option
is exercised in full) of Common Stock issued and outstanding.
The following description of the capital stock of SCPIE Holdings does not
purport to be complete or to give full effect to Delaware statutory or common
law and is, in all respects, qualified by reference to the applicable provisions
of the Delaware General Corporation Law ("DGCL"), the Restated Certificate and
the Bylaws.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on
matters to be voted upon by the stockholders and, subject to the prior rights of
the holders of Preferred Stock, to receive dividends ratably when and as
declared by the SCPIE Holdings Board with funds legally available therefor and
to share ratably in the assets of the Company legally available for distribution
to the stockholders in the event of liquidation or dissolution, after payment of
all debts and other liabilities. Holders of the Common Stock are not entitled to
preemptive rights and will have no subscription, redemption or conversion
privileges. The Common Stock does not have cumulative voting rights, which means
the holder or holders of more than one-half of the shares of Common Stock voting
for the election of directors can elect all of the directors then being elected.
All of the outstanding shares of Common Stock are, and the shares to be issued
in the Reorganization when issued and paid for will be, fully paid and
nonassessable. The rights, preferences and powers of holders of Common Stock are
subject to the rights of the holders of shares of any series of Preferred Stock
which the Company may issue in the future. Pursuant to Section 160 of the DGCL,
SCPIE Indemnity will not be entitled to vote the shares of Common Stock issued
to it in the Reorganization. See "The Reorganization -- Shares of Common Stock
Issued in the Reorganization."
PREFERRED STOCK
The SCPIE Holdings Board has the authority, without further stockholder
approval, to issue up to 5,000,000 shares of Preferred Stock in one or more
series and to determine the dividend rights, any conversion rights or rights of
exchange, voting powers, rights and terms of redemption (including sinking fund
provisions), liquidation preferences and any other rights, preferences, powers
and restrictions. The number of shares constituting a series of Preferred Stock
and the designation thereof shall be stated in a resolution or resolutions
providing for the issuance of such series of Preferred Stock all in accordance
with the laws of the State of Delaware.
The issuance of Preferred Stock may have the effect of delaying, deferring
or preventing a change in control of the Company, making removal of the present
management of the Company more difficult, restricting the payment of dividends
and other distributions to the holders of Common Stock, diluting the voting
power of the Common Stock to the extent that the Preferred Stock has voting
rights or diluting the equity interests of the Common Stock to the extent that
the Preferred Stock is convertible into Common Stock. In addition, issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could make it more difficult
for a third party to acquire a majority of the outstanding shares of voting
stock. Accordingly, the issuance of Preferred Stock may be used as an
"anti-takeover" device without further action on the part of the stockholders of
SCPIE Holdings.
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<PAGE> 55
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The following is a description of certain provisions of the DGCL and the
Restated Certificate and the Bylaws. This summary does not purport to be
complete and is qualified in its entirety by reference to the DGCL, the Restated
Certificate and the Bylaws.
SCPIE Holdings is subject to the provisions of Section 203 of the DGCL.
Section 203 of the DGCL prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an "interested stockholder," unless the business combination is approved
in a prescribed manner. A "business combination" includes certain mergers, asset
sales and other transactions resulting in a financial benefit to the "interested
stockholder." Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within the past
three years did own, 15% of the corporation's voting stock.
Certain provisions of the Restated Certificate and the Bylaws could have
anti-takeover effects. These provisions are intended to enhance the likelihood
of continuity and stability in the composition of the policies formulated by the
SCPIE Holdings Board. In addition, these provisions also are intended to ensure
that the SCPIE Holdings Board will have sufficient time to act in what the Board
of Directors believes to be in the best interests of the Company and its
stockholders. These provisions also are designed to reduce the vulnerability of
SCPIE Holdings to an unsolicited proposal for a takeover of SCPIE Holdings that
does not contemplate the acquisition of all of its outstanding shares or an
unsolicited proposal for the restructuring or sale of all or part of SCPIE
Holdings. The provisions are also intended to discourage certain tactics that
may be used in proxy fights. However, these provisions could delay or frustrate
the removal of incumbent directors or the assumption of control of SCPIE
Holdings by the holder of a large block of Common Stock, and could also
discourage or make more difficult a merger, tender offer or proxy contest, even
if such event would be favorable to the interest of stockholders.
Classified Board of Directors. The Restated Certificate provides for the
SCPIE Holdings Board to be divided into three classes of directors, with each
class as nearly equal in number as possible, serving staggered three-year terms
(other than directors which may be elected by holders of Preferred Stock). As a
result, approximately one-third of the SCPIE Holdings Board will be elected each
year. The classified board provision will help to assure the continuity and
stability of the SCPIE Holdings Board and the business strategies and policies
of SCPIE Holdings as determined by the SCPIE Holdings Board. The classified
board provision could have the effect of discouraging a third party from making
an unsolicited tender offer or otherwise attempting to obtain control of SCPIE
Holdings without the approval of the Board. In addition, the classified board
provision could delay stockholders who do not like the policies of the SCPIE
Holdings Board from electing a majority of the SCPIE Holdings Board for two
years.
No Stockholder Action by Written Consent; Special Meetings. The Restated
Certificate provides that stockholder action can only be taken at an annual or
special meeting of stockholders and prohibits stockholder action by written
consent in lieu of a meeting. The Bylaws provide that special meetings of
stockholders may be called only by the SCPIE Holdings Board, or the Chairman or
President of SCPIE Holdings. Stockholders are not permitted to call a special
meeting of stockholders or to require that the SCPIE Holdings Board call a
special meeting.
Advance Notice Requirements for Stockholder Proposals and Director
Nominees. The Bylaws establish an advance notice procedure for stockholders to
make nominations of candidates for election as directors or to bring other
business before an annual meeting of stockholders of SCPIE Holdings (the
"Stockholder Notice Procedure"). The Stockholder Notice Procedure provides that
only persons who are nominated by, or at the direction of, the SCPIE Holdings
Board or its Chairman, or by a stockholder who has given timely written notice
to the Secretary of SCPIE Holdings prior to the meeting at which directors are
to be elected, will be eligible for election as directors of SCPIE Holdings. The
Stockholder Notice Procedure also provides that at an annual meeting only such
business may be conducted as has been brought before the meeting by, or at the
direction of, the SCPIE Holdings Board or its Chairman or by a stockholder who
has given timely written notice to the Secretary of SCPIE Holdings of such
stockholder's
54
<PAGE> 56
intention to bring such business before such meeting. Under the Stockholder
Notice Procedure, if a stockholder desires to submit a proposal or nominate
persons for election as directors at an annual meeting, the stockholder must
submit written notice to SCPIE Holdings not less than 60 days nor more than 90
days prior to the first anniversary of the previous year's annual meeting. In
addition, under the Stockholder Notice Procedure, a stockholder's notice to
SCPIE Holdings proposing to nominate a person for election as a director or
relating to the conduct of business other than the nomination of directors must
contain certain specified information. If the chairman of a meeting determines
that business was not properly brought before the meeting, in accordance with
the Stockholder Notice Procedure, such business shall not be discussed or
transacted.
Number of Directors; Removal; Filling Vacancies. The Restated Certificate
and the Bylaws provide that the SCPIE Holdings Board will consist of between
seven and thirteen members (other than directors elected by holders of Preferred
Stock), the exact number to be fixed from time to time by resolution adopted by
the directors of SCPIE Holdings. The SCPIE Holdings Board currently consists of
twelve directors. Further, subject to the rights of the holders of any series of
Preferred Stock then outstanding, the Restated Certificate authorizes the SCPIE
Holdings Board to fill newly created directorships. If a number of vacancies
existed in the SCPIE Holdings Board, this provision could delay the ability of a
stockholder from obtaining majority representation on the SCPIE Holdings Board
by permitting the SCPIE Holdings Board to enlarge the SCPIE Holdings Board in
certain circumstances and fill the new directorships with its own nominees. A
director so elected by the SCPIE Holdings Board holds office until the next
election of the class for which such director has been chosen and until his
successor is elected and qualified. Subject to the rights of the holders of any
series of Preferred Stock then outstanding, the Restated Certificate and the
Bylaws also provide that directors may be removed only for cause and only by the
affirmative vote of holders of two-thirds (66 2/3%) of the outstanding shares of
voting securities. The effect of these provisions is to preclude a stockholder
from removing incumbent directors without cause and simultaneously gaining
control of the SCPIE Holdings Board by filling the vacancies created by such
removal with its own nominees.
Indemnification. The Company has included in its Restated Certificate and
Bylaws provisions to (i) eliminate the personal liability of its directors for
monetary damages resulting from breaches of their fiduciary duty to the extent
permitted by the DGCL and (ii) indemnify its directors and officers to the
fullest extent permitted by Section 145 of the DGCL, including circumstances in
which indemnification is otherwise discretionary. The Company believes that
these provisions are necessary to attract and retain qualified persons as
directors and officers.
Bylaws. The Restated Certificate provides that the Bylaws are subject to
adoption, amendment, alteration, repeal or rescission either by (i) a majority
of the authorized number of directors or (ii) the affirmative vote of the
holders of not less than two-thirds (66 2/3%) of the outstanding shares of
voting securities. This provision makes it more difficult for stockholders to
make changes in the Bylaws by allowing the holders of a minority of the voting
securities to prevent the holders of a majority of voting securities from
amending the Bylaws.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services L.L.C. has been appointed as the transfer
agent and registrar for the Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Reorganization and the Offering, the Company will
have 11,994,491 shares (12,294,491 shares if the Underwriters' over-allotment
option is exercised in full) of Common Stock issued and outstanding. The
9,994,491 shares distributed to members of the Exchange in the Reorganization,
and the 2,000,000 shares to be sold in the Offering (2,300,000 shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restriction or further registration under the Securities Act,
except to the extent that such shares are held by an affiliate of the
55
<PAGE> 57
Company. The Company has entered into an agreement with the Underwriters not to
offer, sell or otherwise dispose of any equity securities of the Company for 180
days after the date of this Prospectus without the prior written consent of
Salomon Brothers Inc.
In general, Rule 144 of the Securities Act ("Rule 144"), as currently in
effect, provides that an "affiliate" (as defined in Rule 144) is entitled to
sell, within any three-month period, a number of shares that does not exceed the
greater of (i) the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the sale or (ii) 1% of the shares of Common Stock
then outstanding. Sales under Rule 144 are subject to certain manner of sale
restrictions, notice requirements and availability of current public information
concerning the Company.
Prior to the Reorganization and the Offering, there has been no public
market for the Common Stock and no prediction can be made as to the effect, if
any, that the sale or availability for sale of shares of Common Stock will have
on the market price of the Common Stock. Sales of substantial amounts of such
shares in the public market could adversely affect the market price of the
Common Stock.
56
<PAGE> 58
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom Salomon Brothers Inc is acting as representative (the "Representative"),
has severally agreed to purchase from the Company, the respective number of
shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
------------------------------------------------------------ ----------------
<S> <C>
Salomon Brothers Inc........................................
---------
Total............................................. 2,000,000
=========
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed,
subject to certain conditions precedent set forth therein, to purchase all of
the shares of Common Stock offered hereby (other than the shares of Common Stock
covered by the Underwriters' over-allotment option described below) if any such
shares are purchased. In the event of a default by any Underwriter, the
Underwriting Agreement provides that, in certain circumstances, the purchase
commitments of the non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated. The Company has been advised by the
Representative that the several Underwriters propose initially to offer such
shares to the public at the public offering price set forth on the cover page of
this Prospectus, and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to other dealers.
After the shares are released for sale to the public, the offering price and
other selling terms may be changed.
The Company has granted to the Underwriters an option to purchase up to an
additional 300,000 shares of Common Stock at the public offering price less the
aggregate underwriting discount, solely to cover over-allotments. The option may
be exercised at any time up to 30 days after the date of this Prospectus. To the
extent that the Underwriters exercise such option, each of the several
Underwriters will be obligated, subject to certain conditions, to purchase such
additional shares of Common Stock in approximately the same proportion as the
number of shares to be purchased by such Underwriter in the above table bears to
the total number of shares initially offered by the Underwriters hereby.
The Underwriting Agreement provides that SCPIE Holdings will indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, or contribute to payments the Underwriters may be required
to make in respect thereof.
Subject to certain exceptions, the Company has agreed that it will not,
without prior consent of the Representative, sell, offer or contract to sell, or
otherwise dispose of, directly or indirectly, any shares of Common Stock or
options or other rights to acquire, or any securities convertible into or
exchangeable for Common Stock, for a period of 180 days after the date of this
Offering.
The Common Stock has been approved for listing, subject to official notice
of issuance, on the New York Stock Exchange.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the shares of Common Stock will be
determined by negotiation between the Company and the Representative. Among the
factors to be considered in determining the initial public offering price, in
addition to prevailing market conditions, will be the historical performance of
the Company,
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<PAGE> 59
estimates of the business potential and earning prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuations of other insurance companies. There
can, however, be no assurances that the prices at which the Common Stock will
sell in the public market after the Reorganization and the Offering will not be
lower than the price at which they are sold by the Underwriters.
The Representative is also acting as financial advisor to the Exchange in
connection with the Reorganization and has received fees for performing this
service.
LEGAL MATTERS
The validity of the Common Stock to be offered hereby will be passed upon
for the Company by Latham & Watkins, San Diego, California, counsel for the
Company. Certain legal matters will be passed upon for the Underwriters by
LeBoeuf, Lamb, Greene & MacRae, L.L.P., a limited liability partnership
including professional corporations, New York, New York. LeBoeuf, Lamb, Greene &
MacRae, L.L.P. represents the Company from time to time in connection with
certain other legal matters.
EXPERTS
The combined financial statements of Southern California Physicians
Insurance Exchange and Subsidiaries and Organization of Southern California
Physicians, Inc. and Subsidiary at December 31, 1995 and 1994, and for each of
the three years in the period ended December 31, 1995, and the balance sheet of
SCPIE Holdings Inc. at February 29, 1996, appearing in this Prospectus and
Registration Statement are included and have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon, appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
reports given the authority of such firm as experts in accounting and auditing.
58
<PAGE> 60
GLOSSARY OF SELECTED INSURANCE TERMS
Accident year.............. The annual accounting period in which loss events
occurred, regardless of when the losses are
actually reported, booked or paid.
Calendar year basis........ The matching of all losses incurred within a given
period of time as reported in an income statement
including estimated losses and LAE, IBNR and
changes in estimates of losses and LAE incurred in
prior periods, with premiums earned during that
same period of time. Once calculated for a given
time period, calendar year experience never
changes.
Cede....................... To transfer risk and related premium in connection
with a reinsurance transaction.
Claims made and reported
basis.................... A liability insurance policy written on a basis
that generally insures only claims that are
reported to the insurer during the policy period,
or reported during any extended reporting period
provided in the policy or any endorsement thereto,
but only if the claims arise from incidents that
occurred after a retroactive date stated in the
policy. A claims made and reported policy is to be
distinguished from an "occurrence policy."
Combined ratio............. The sum of the loss ratio and the expense ratio
expressed as a percentage. Generally, a combined
ratio below 100% indicates an underwriting profit
and a combined ratio above 100% indicates an
underwriting loss.
Direct premiums written.... Total premiums written by an insurer other than
premiums for reinsurance assumed by an insurer.
Excess insurance........... Insurance which covers the insured only for losses
in excess of a stated amount or a specific primary
policy.
Excess of loss
reinsurance................ A generic term describing reinsurance that
indemnifies the reinsured against all or a
specified portion of losses on underlying insurance
policies in excess of a specified dollar amount,
called a "layer" or "retention."
Expense ratio.............. Policy acquisition costs and other underwriting
expenses, divided by net premiums earned under GAAP
accounting or by net premiums written under
statutory accounting, expressed as a percentage.
Frequency.................. Refers to the rate of occurrence. The number of
times a claim or a loss by a specific peril occurs
to a given body of exposures or insureds during a
particular time period.
GAAP....................... Generally accepted accounting principles in use
throughout the United States in the preparation of
financial statements, including the financial
statements presented in this Prospectus.
Gross premiums written..... Total of (i) direct premiums written, plus (ii)
reinsurance assumed premiums.
Incurred but not reported
("IBNR") reserves........ The estimated liabilities for future payments of
losses and LAE that have occurred but have not yet
been reported to the insurer.
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<PAGE> 61
Loss adjustment expenses
("LAE").................. Expenses incurred in the settlement of claims,
including outside adjustment expenses, legal fees
and internal administration costs associated with
the claims adjustment process, but not including
general overhead expenses.
Loss adjustment expense
("LAE") reserves......... Liabilities established for LAE. LAE includes an
estimated provision for IBNR.
Loss ratio................. The ratio of net incurred losses and LAE to net
premiums earned. Net incurred losses include an
estimated provision for IBNR.
Net premiums written....... Gross premiums written less premiums ceded.
Occurrence basis........... A liability insurance policy written on a basis
that generally insures claims that arise from
incidents that occurred during the policy period
irrespective of when the claims are reported.
Premiums ceded............. The consideration paid to reinsurers in connection
with reinsurance transactions.
Premiums earned............ The portion of premiums written applicable to the
expired period of policies and, accordingly,
recognized as revenue during a given period.
Primary insurance.......... Insurance which covers an insured from the first
dollar of loss, after any deductible or
self-insured retention, as distinguished from
umbrella or excess insurance.
Quota share basis.......... Reinsurance wherein the insurer cedes an agreed
fixed percentage of liabilities, premiums and
losses for each policy covered on a pro rata basis.
Redundancy (deficiency).... Estimates in reserves change as more information
becomes known about the frequency and severity of
claims for each year. A redundancy (deficiency)
exists when the original liability estimate is
greater (less) than the reestimated liability. The
cumulative redundancy (deficiency) is the aggregate
net change in estimates over time subsequent to
establishing the original liability estimate.
Reinsurance................ A procedure whereby an original insurer cedes a
portion of the premium to a reinsurer as payment
for the reinsurer's assumption of a portion of the
risk; referred to as reinsurance ceded by the
original insurer and as reinsurance assumed by the
reinsurer.
Reserves................... Liabilities established by insurers to reflect the
estimated cost of claims and the related LAE that
the insurer will ultimately be required to pay in
respect of insurance it has written.
Retention.................. The amount or portion of risk that an insurer
retains for its own account. Losses in excess of
the retention level are paid by the reinsurer. In
quota share treaties, the retention may be a
percentage of the original policy's limit. In
excess of loss reinsurance, the retention is a
dollar amount of loss, a loss ratio or a percentage
of loss.
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<PAGE> 62
Risk-based capital
requirements ("RBC")....... Regulatory and rating agency targeted surplus based
on the relationship of statutory surplus, with
certain adjustments, to the sum of slated
percentages of each element of a specified list of
company risk exposures.
Severity................... The average claim cost, statistically determined by
dividing dollars of losses by the number of claims.
Statutory accounting
practices ("SAP").......... The accounting rules and procedures promulgated or
permitted by the National Association of Insurance
Commissioners ("NAIC") for financial reporting by
insurers licensed in one or more states of the
United States.
Statutory surplus.......... Total assets less total liabilities as determined
in accordance with SAP.
Underwriting............... The process whereby an insurer, directly or through
its agent, reviews applications submitted for
insurance coverage and determines whether it will
accept all or part of the coverage being requested,
and the applicable premium.
61
<PAGE> 63
INDEX TO FINANCIAL STATEMENTS
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
AND
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Balance Sheets as of December 31, 1995 and 1994 and as of September 30, 1996.......... F-3
Statements of Income for the years ended December 31, 1995, 1994 and 1993 and for the
nine months ended September 30, 1996 and 1995....................................... F-4
Statements of Policyholders' Equity for the years ended December 31, 1995, 1994, and
1993 and for the nine months ended September 30, 1996............................... F-5
Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 and for
the nine months ended September 30, 1996 and 1995................................... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
SCPIE HOLDINGS INC.
<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-20
Balance Sheets as of February 29, 1996 and September 30, 1996......................... F-21
Statement of Income for the seven months ended September 30, 1996..................... F-21
Statement of Cash Flows for the seven months ended September 30, 1996................. F-21
Note to Financial Statements.......................................................... F-22
</TABLE>
F-1
<PAGE> 64
REPORT OF INDEPENDENT AUDITORS
Board of Governors
Southern California Physicians Insurance Exchange
Board of Trustees
Organization of Southern California Physicians, Inc.
We have audited the accompanying combined balance sheets as of December 31,
1995 and 1994, of Southern California Physicians Insurance Exchange and
Organization of Southern California Physicians, Inc. and the related combined
statements of income, policyholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Companies' 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.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position at December 31, 1995
and 1994, of Southern California Physicians Insurance Exchange and Organization
of Southern California Physicians, Inc. and the combined results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
At December 31, 1993, Southern California Physicians Insurance Exchange and
Organization of Southern California Physicians, Inc. adopted Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, as described in Note 1.
ERNST & YOUNG LLP
Los Angeles, California
March 5, 1996, except
for Note 9, as to which
the date is November 5, 1996
F-2
<PAGE> 65
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------
1996 1995 1994
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Securities available-for-sale (Note 2):
Fixed maturity investments, at fair value (amortized
cost: 1996 -- $659,092, 1995 -- $582,115,
1994 -- $587,744)................................ $657,595 $606,155 $558,914
Equity investments, at fair value (cost:
1996 -- $14,964, 1995 -- $49,396,
1994 -- $43,289)................................. 18,754 61,083 46,440
-------- -------- --------
Total securities available-for-sale......... 676,349 667,238 605,354
Short-term investments................................ 15,647 27,783 31,555
-------- -------- --------
Total investments........................... 691,996 695,021 636,909
Cash.................................................. 8,144 3,053 5,180
Accrued investment income............................. 9,881 9,835 11,136
Reinsurance recoverable on paid losses (Note 4)....... 4 27 170
Reinsurance recoverable on unpaid losses (Note 4)..... 21,778 19,560 19,177
Federal income taxes recoverable (Note 5)............. -- 20,363 23,941
Deferred Federal income taxes (Note 5)................ 24,258 11,992 33,635
Deferred policy acquisition costs..................... 544 468 515
Property and equipment, net........................... 19,005 19,145 19,648
Other assets.......................................... 14,806 1,894 1,294
-------- -------- --------
Total assets................................ $790,416 $781,358 $751,605
======== ======== ========
LIABILITIES
Reserves:
Losses and loss adjustment expenses (Note 3)........ $472,836 $466,187 $468,743
Unearned premiums................................... 23,158 19,916 21,928
-------- -------- --------
Total reserves.............................. 495,994 486,103 490,671
Policyholders' dividends payable...................... 10,586 8,646 18,147
Other liabilities..................................... 11,901 12,790 33,251
-------- -------- --------
Total liabilities........................... 518,481 507,539 542,069
Commitments and contingencies (Note 8)
POLICYHOLDERS' EQUITY
Surplus............................................... 270,445 250,596 226,227
Unrealized appreciation (depreciation) on
available-for-sale securities, net of deferred
taxes............................................... 1,490 23,223 (16,691)
-------- -------- --------
Total policyholders' equity................. 271,935 273,819 209,536
-------- -------- --------
Total liabilities and policyholders'
equity.................................... $790,416 $781,358 $751,605
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 66
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- ----------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Premiums earned (Note 4)...... $ 90,144 $ 88,097 $116,354 $111,659 $113,194
Net investment income (Note
2)......................... 31,184 29,921 40,424 39,663 39,738
Realized investment gains
(Note 2)................... 11,554 6,857 7,950 548 15,987
Other revenue................. 179 186 281 207 267
------- ------- -------- -------- --------
Total revenues........ 133,061 125,061 165,009 152,077 169,186
Expenses:
Losses and loss adjustment
expenses (Note 3).......... 86,554 91,827 118,023 108,720 125,354
Other operating expenses...... 10,164 9,580 12,561 11,844 9,734
------- ------- -------- -------- --------
Total expenses........ 96,718 101,407 130,584 120,564 135,088
------- ------- -------- -------- --------
Income before policyholder
dividends and Federal income
taxes......................... 36,343 23,654 34,425 31,513 34,098
Policyholder dividends.......... 9,000 0 0 0 0
Federal income taxes (Note 5)... 7,494 6,849 10,056 9,212 8,618
------- ------- -------- -------- --------
Net income............ $ 19,849 $ 16,805 $ 24,369 $ 22,301 $ 25,480
======= ======= ======== ======== ========
Pro forma net income per share
of common stock (Note 9)...... $ 1.98 $ 1.68 $ 2.44 $ 2.23 $ 2.55
======= ======= ======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 67
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
STATEMENTS OF POLICYHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION TOTAL
(DEPRECIATION) OF POLICYHOLDERS'
INVESTMENTS SURPLUS EQUITY
----------------- -------- --------------
<S> <C> <C> <C>
Balance at January 1, 1993....................... $ 3,197 $178,446 $181,643
Cumulative effect of change in accounting for
investments at December 31.................. 19,555 -- 19,555
Net income..................................... -- 25,480 25,480
Net unrealized appreciation.................... 721 -- 721
-------- -------- --------
Balance at December 31, 1993..................... 23,473 203,926 227,399
Net income..................................... -- 22,301 22,301
Net unrealized depreciation.................... (40,164) -- (40,164)
-------- -------- --------
Balance at December 31, 1994..................... (16,691) 226,227 209,536
Net income..................................... -- 24,369 24,369
Net unrealized appreciation.................... 39,914 -- 39,914
-------- -------- --------
Balance at December 31, 1995..................... $ 23,223 $250,596 $273,819
-------- -------- --------
Net income (unaudited)......................... -- 19,849 19,849
Net unrealized depreciation (unaudited)........ (21,733) -- (21,733)
-------- -------- --------
Balance at September 30, 1996 (unaudited)........ $ 1,490 $270,445 $271,935
======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 68
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- -------------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................... $ 19,849 $ 16,805 $ 24,369 $ 22,301 $ 25,480
Adjustments to reconcile net income
to net cash provided by operating
activities:
Unpaid losses and loss adjustment
expenses, and reinsurance
recoverables................... 4,454 466 (2,796) (21,402) 5,609
Accrued investment income......... (46) 997 1,301 (98) 645
Provision for deferred Federal
income taxes................... (711) 2,052 158 6,050 4,777
Unearned premiums................. 3,242 (3,172) (2,012) 1,398 614
Policyholders' dividends
payable........................ 1,940 (7,055) (9,501) (11,179) (18,588)
Realized investments gains........ (11,554) (6,857) (7,950) (548) (15,987)
Provisions for amortization and
depreciation................... 2,298 3,967 4,504 4,940 4,542
Accrued expenses and other
liabilities.................... (889) 1,592 430 4,717 (23)
Changes in other assets........... 7,375 (125) 3,029 (2,496) (1,278)
--------- -------- --------- --------- ---------
Net cash provided by
operating activities.... 25,958 8,670 11,532 3,683 5,791
INVESTING ACTIVITIES
Purchases -- fixed maturities....... (377,026) (166,468) (269,149) (193,618) (353,972)
Sales -- fixed maturities........... 284,484 150,710 235,332 174,705 321,699
Maturities -- fixed maturities...... 14,211 16,345 15,909 15,211 30,200
Purchases -- equities............... (3,639) (30,061) (37,033) (42,581) (38,812)
Sales -- equities................... 48,895 29,791 37,510 35,901 49,993
Change in short-term investments,
net............................... 12,136 (9,966) 3,772 8,230 (15,940)
--------- -------- --------- --------- ---------
Net cash used in investing
activities.............. (20,939) (9,649) (13,659) (2,152) (6,832)
--------- -------- --------- --------- ---------
Increase (decrease) in cash......... 5,091 (979) (2,127) 1,531 (1,041)
Cash at beginning of period......... 3,053 5,180 5,180 3,649 4,690
--------- -------- --------- --------- ---------
Cash at end of period..... $ 8,144 $ 4,201 $ 3,053 $ 5,180 $ 3,649
========= ======== ========= ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 69
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The 1993, 1994 and 1995 financial statements have been combined using the
consolidated balance sheets and results of operations of the Southern California
Physicians Insurance Exchange (the Exchange) and the Organization of Southern
California Physicians, Inc. (OSCAP), collectively the "Company." The Exchange
formed two wholly owned subsidiaries in 1995, SCPIE Indemnity Company (SCPIE
Indemnity) and SCPIE Holdings Inc. (SCPIE Holdings). Neither subsidiary had any
operations since its formation. OSCAP is the holding company of SCPIE Management
Company (SMC), the Exchange's attorney-in-fact, and is indirectly controlled by
the Exchange. SMC has two wholly owned subsidiaries, SCPIE Insurance Services,
Inc. (SIS) and SCPIE Management Services, Inc. (SMS). All transactions between
the Exchange and OSCAP have been eliminated in the preparation of the combined
financial statements.
Financial statements for 1996 are presented on a consolidated basis with
elimination of all material intercompany transactions (see Note 9).
The Company writes professional liability insurance for physicians, oral
and maxillofacial surgeons, hospitals and other healthcare providers.
Substantially all of the Company's coverage is written on a "claims made and
reported" basis. Generally, coverage is provided only for claims which are first
reported to the Company during the insured's coverage period and which arise
from occurrences during the insured's coverage period. The Company also makes
"tail" coverage available for purchase by members in order to cover claims which
arise from occurrences during the insured's coverage period, but which are first
reported to the Company after the insured's coverage period and during the term
of the applicable tail coverage.
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known which could impact
the amounts reported and disclosed herein.
The accompanying combined financial statements have been prepared in
conformity with generally accepted accounting principles which differ from
statutory accounting practices prescribed or permitted by regulatory
authorities. The significant accounting policies followed by the Company that
materially affect financial reporting are summarized below:
Investments
In 1993, the Financial Accounting Standards Board (FASB) issued Statement
115 (Statement 115), Accounting for Certain Investments in Debt and Equity
Securities. Statement 115 requires that fixed maturity securities are to be
classified as either held-to-maturity, available-for-sale, or trading. The
Company adopted Statement 115 as of December 31, 1993, which had no effect on
net income and increased policyholders' surplus by $19,555,000 (net of deferred
income taxes of $10,500,000) to reflect the net unrealized holding gains on
securities previously carried at amortized cost; there was no effect on net
income.
Recognizing the need for the ability to respond to changes in market
conditions and in tax positions, the Company has designated its entire
investment portfolio as available-for-sale. As required by Statement 115, the
Company adjusted the carrying value of its fixed maturity investments that are
classified as investments available-for-sale to fair value at December 31, 1993.
The Company has no
F-7
<PAGE> 70
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
securities classified as "trading" or "held-to-maturity." Transfers between
categories are severely restricted.
Changes in fair values of available-for-sale securities, after adjustment
of deferred income taxes, are reported as unrealized appreciation or
depreciation directly in policyholders' equity and, accordingly, have no effect
on net income.
Prior to the adoption of Statement 115, the Company carried all of its
equity securities, including non-redeemable preferred stock, at fair value with
the unrealized gains and losses reported as a separate component of
policyholders' equity. Fixed maturity securities, including redeemable preferred
stock, were previously carried at amortized cost.
For the mortgage-back bond portion of the fixed maturity securities
portfolio, the Company recognizes income using a constant effective yield based
on anticipated prepayments and the estimated economic life of securities.
Prepayment assumptions are obtained from dealer surveys or internal estimates
and are based on the current interest rate and economic environment. When actual
prepayments differ significantly from anticipated prepayments, the effective
yield is recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the security is adjusted to the amount that
would have existed had the new effective yield been applied since the
acquisition of the security. That adjustment is included in net investment
income.
In October 1994, the FASB issued Statement 119 (Statement 119), Derivative
Financial Instruments and Fair Value of Financial Instruments. The Company
currently holds no derivative financial instruments subject to Statement 119
disclosure requirements.
Premiums and discounts on investments are amortized to investment income
using the interest method over the contractual lives of the investments.
Short-term investments are carried at cost, which approximates market value.
Realized investment gains and losses are included as a component of revenues
based on specific identification of the investment sold.
Premiums
Premiums are earned on a pro rata basis over the terms of the respective
policies. The reserve for unearned premiums is determined on a monthly pro rata
basis.
Deferred Policy Acquisition Costs
Premium taxes are capitalized and amortized as premiums are earned over the
terms of the related policies. The deferred policy acquisition costs are
amortized over the effective period of the related policies. Anticipated
investment income is considered in determining if premium deficiencies exist.
Reserves for Losses and Loss Adjustment Expenses
Reserves for losses and loss adjustment expenses represent the estimated
liability for reported claims plus those incurred but not yet reported and the
related estimated adjustment expenses. The reserve for unpaid claims and related
adjustment expenses is determined using case-basis evaluations and statistical
analyses and represents estimates of the ultimate cost of all unpaid losses
incurred through December 31 of each year. Although considerable variability is
inherent in such estimates, management believes that the reserve for unpaid
losses and related loss adjustment expenses (LAE) is adequate. The estimates are
continually reviewed and adjusted as necessary; such adjustments are included in
current operations and are accounted for as changes in estimates.
F-8
<PAGE> 71
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Reinsurance
Reinsurance premiums, losses and loss adjustment expenses are accounted for
on bases consistent with those used in accounting for the original policies
issued and the terms of the reinsurance contracts.
On January 1, 1993, the Company adopted the provisions of FASB Statement
113 (Statement 113), Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts. At that date, the only effect of adopting Statement
113 was to reclassify as assets those reinsurance ceded amounts that previously
had been reported as reductions of loss and LAE reserves.
Dividends to Policyholders
Dividends to policyholders are accrued during the period in which the
related premiums are earned. Estimates of policyholder dividends are reviewed
and adjusted as necessary; such adjustments are included in current operations
and accounted for as changes in estimates. In the second quarter of 1996, the
Company estimated an additional $9,000,000 of policyholder dividends would be
paid due to favorable loss experience related to policy years 1987 through 1993.
Except for this final dividend, after the Reorganization, the Company will cease
paying such dividends to its policyholders.
Property and Equipment
Property and equipment, principally the Company's home office building and
land, are recorded at cost and depreciated principally under the straight-line
method over the useful life of the assets.
Income Taxes
Effective January 1, 1993, the Company changed its method of accounting for
income taxes to the liability method prescribed in FASB Statement 109 (Statement
109), Accounting for Income Taxes. Under that method, deferred tax assets and
liabilities are determined based on differences among financial reporting and
tax basis of assets and liabilities and are measured using the enacted tax rates
and laws. The provisions of Statement 109 have been retroactively applied to the
financial statements of the Company for all years beginning in 1990.
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments,
fixed maturities and reinsurance recoverables. The Company places its temporary
cash investments with high credit quality financial institutions and limits the
amounts of credit exposure to any one financial institution. Concentrations of
credit risk with respect to fixed maturities are limited due to the large number
of such investments and their distributions across many different industries and
geographics.
Reinsurance is placed with a number of individual companies and syndicates
at Lloyd's of London to avoid concentration of credit risk. For the year ended
December 31, 1995, approximately 59.4%, of total reinsurance premiums ceded were
placed with reinsurance companies with an A.M. Best rating of A or better and
26.5%, of total reinsurance premiums ceded were ceded to Lloyd's of London
syndicates. No other single reinsurer's percentage participation in 1995
exceeded 5.3%.
Segment Information
The Company operates in the United States of America and in only one
reportable industry segment which provides professional liability insurance for
physicians, oral and maxillofacial surgeons, hospitals and other health care
providers principally in California.
F-9
<PAGE> 72
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS
The Company's investments in available-for-sale securities are summarized
as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1996 (UNAUDITED)
Fixed maturity securities:
Bonds:
U.S. Government and Agencies............ $ 341,405 $ 3,807 $ 5,770 $339,442
State, municipalities and political
subdivisions.......................... 222,367 3,219 2,136 223,450
Mortgage-backed securities, U.S.
Government............................ 85,084 434 1,015 84,503
Corporate............................... 10,131 0 36 10,095
Other................................... 105 -- -- 105
-------- ------- ------- --------
Total fixed maturity securities.............. 659,092 7,460 8,957 657,595
Common stock................................. 14,964 4,324 534 18,754
-------- ------- ------- --------
Total.............................. $ 674,056 $ 11,784 $ 9,491 $676,349
======== ======= ======= ========
DECEMBER 31, 1995
Fixed maturity securities:
Bonds:
U.S. Government and Agencies............ $ 304,091 $ 15,458 $ 430 $319,119
State, municipalities and political
subdivisions.......................... 149,693 5,569 144 155,118
Mortgage-backed securities, U.S.
Government............................ 80,279 1,896 277 81,898
Corporate............................... 46,951 2,035 97 48,889
Other................................... 105 -- -- 105
Redeemable preferred stock................. 996 30 -- 1,026
-------- ------- ------- --------
Total fixed maturity securities.............. 582,115 24,988 948 606,155
Common stock................................. 49,396 13,530 1,843 61,083
-------- ------- ------- --------
Total.............................. $ 631,511 $ 38,518 $ 2,791 $667,238
======== ======= ======= ========
</TABLE>
F-10
<PAGE> 73
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
Fixed maturity securities:
Bonds:
U.S. Government and Agencies............ $ 300,131 $ 512 $ 18,712 $281,931
State, municipalities and political
subdivisions.......................... 110,423 767 1,798 109,392
Mortgage-backed securities, U.S.
Government............................ 51,175 153 4,295 47,033
Corporate............................... 120,353 358 5,455 115,256
Other................................... 2,644 109 469 2,284
Redeemable preferred stock................. 3,018 -- -- 3,018
-------- ------- ------- --------
Total fixed maturity securities.............. 587,744 1,899 30,729 558,914
Non-redeemable preferred stock............... 1,061 17 42 1,036
Common stock................................. 42,228 5,563 2,387 45,404
-------- ------- ------- --------
Total.............................. $ 631,033 $ 7,479 $ 33,158 $605,354
======== ======= ======= ========
</TABLE>
The fair values for fixed maturity securities are based on quoted market
prices, where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing services.
The fair values for equity securities are based on quoted market prices.
The amortized cost and estimated fair value of the Company's investments in
fixed maturity securities, are summarized by stated maturities as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
--------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------- -------- -------- --------
(UNAUDITED)(IN THOUSANDS)
<S> <C> <C> <C> <C>
Years to maturity:
One or less............... $ 4,958 $ 4,964 $ 168 $ 172
After one through five.... 93,878 93,942 111,332 114,096
After five through ten.... 234,399 236,130 167,105 177,626
After ten................. 240,773 238,056 223,231 232,363
Mortgage-backed
securities................ 85,084 84,503 80,279 81,898
-------- -------- -------- --------
Totals...................... $659,092 $657,595 $582,115 $606,155
======== ======== ======== ========
</TABLE>
The foregoing data is based on the stated maturities of the securities.
Actual maturities will differ for some securities because borrowers may have the
right to call or prepay obligations.
F-11
<PAGE> 74
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The ratings of the Company's fixed maturity securities, using Moody's
Investors Services, Inc. or Standard & Poor's Corporation rating service, are
summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
AAA............. 79% 79%
AA.............. 14 12
A............... 6 8
Not rated....... 1 1
--- ---
100% 100%
=== ===
</TABLE>
Major categories of the Company's investment income are summarized as
follows:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED SEPTEMBER 30, -------------------------------
1996 1995 1994 1993
------------------- ------- ------- -------
<S> <C> <C> <C> <C>
(UNAUDITED) (IN THOUSANDS)
Fixed maturities............. $30,538 $36,987 $37,968 $38,620
Equities..................... 757 1,627 1,148 1,126
Other........................ 1,335 4,250 2,862 2,178
------- ------- ------- -------
Total investment income...... 32,630 42,864 41,978 41,924
Investment expenses.......... 1,446 2,440 2,315 2,186
------- ------- ------- -------
Net investment income........ $31,184 $40,424 $39,663 $39,738
======= ======= ======= =======
</TABLE>
Realized gains and losses from sales of investments are summarized as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
1996 1995 1994 1993
------------------- ------- ------- -------
<S> <C> <C> <C> <C>
(UNAUDITED) (IN THOUSANDS)
Fixed maturities:
Gross realized gains......... $ 5,719 $ 4,946 $ 3,440 $13,520
Gross realized losses........ 4,915 1,558 3,186 321
-------- -------- -------- -------
Net realized gains........... $ 804 $ 3,388 $ 254 $13,199
======== ======== ======== =======
Equities:
Gross realized gains......... $12,530 $ 6,649 $ 2,430 $ 5,337
Gross realized losses........ 1,780 2,087 2,136 2,549
-------- -------- -------- -------
Net realized gains........... $10,750 $ 4,562 $ 294 $ 2,788
======== ======== ======== =======
</TABLE>
The change in the Company's unrealized appreciation (depreciation) on fixed
maturity securities was $52,870,000, ($58,915,000) and $12,615,000 for the years
ended December 31, 1995, 1994 and 1993, respectively; the corresponding amounts
for equity securities were $8,536,000, ($2,877,000) and $1,521,000.
At December 31, 1995, the Company's investments in fixed maturity
securities with a carrying amount of $533,000 were on deposit with state
insurance departments to satisfy regulatory requirements.
No investment in any person or its affiliates exceeded 10% of the Company's
policyholders' equity at December 31, 1995.
F-12
<PAGE> 75
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and ending
reserve balances, net of reinsurance recoverable.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Reserve for losses and LAE, net of
related reinsurance recoverable, at
beginning of period................... $446,627 $449,566 $449,566 $472,129 $465,424
Provision for losses and LAE for claims
occurring in the current period, net
of reinsurance........................ 125,160 134,392 175,856 169,143 168,784
Decrease in estimated losses and LAE for
claims occurring in prior periods, net
of reinsurance........................ (38,606) (42,565) (57,833) (60,423) (43,430)
-------- -------- -------- -------- --------
Incurred losses during the period, net
of reinsurance........................ 86,554 91,827 118,023 108,720 125,354
-------- -------- -------- -------- --------
Deduct losses and LAE payments for
claims, net of reinsurance, occurring
during:
Current period........................ 3,413 3,848 11,481 10,178 12,971
Prior periods......................... 78,710 87,580 109,481 121,105 105,678
-------- -------- -------- -------- --------
82,123 91,428 120,962 131,283 118,649
-------- -------- -------- -------- --------
Reserve for losses and LAE, net of
related reinsurance recoverable, at
end of period......................... 451,058 449,965 446,627 449,566 472,129
Reinsurance recoverable for losses and
LAE, at end of period................. 21,778 15,975 19,560 19,177 18,644
-------- -------- -------- -------- --------
Reserves for losses and LAE, gross of
reinsurance recoverable, at end of
period................................ $472,836 $465,940 $466,187 $468,743 $490,773
======== ======== ======== ======== ========
</TABLE>
The Company's reserves for unpaid losses and LAE, net of related
reinsurance recoverable, at December 31, 1994, 1993 and 1992 were decreased in
the following year by $57,833,000, $60,423,000 and $43,430,000, respectively,
for claims that had occurred on or prior to those balance sheet dates. Those
redundancies resulted primarily from settling case basis reserves established in
prior years for amounts that were less than expected. The 1995 redundancies were
offset, in part, by a $23.9 million increase in the loss reserves carried for
physicians who receive free tail coverage in the event of death, disability or
retirement from the medical profession. The increase was the result of a
refinement in the actuarial methodology used to calculate the reserve for this
tail coverage.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and LAE. While anticipated price increases due
to inflation are considered in estimating the ultimate claim costs, the increase
in average severities of claims is caused by a number of factors that vary with
the individual type of insurance written. Future average severities are
projected based on historical trends adjusted for implemented changes in
underwriting standards, policy provisions and general economic trends. Those
anticipated trends are monitored based on actual development and are modified if
necessary.
F-13
<PAGE> 76
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. REINSURANCE
Certain premiums and benefits are ceded to other insurance companies under
various reinsurance agreements. These reinsurance agreements provide the Company
with increased capacity to write additional risks and maintain its exposure to
loss within its capital resources. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured policy.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. The failure of reinsurers to honor their obligations could result
in losses to the Company; consequently, allowances are established for amounts
deemed uncollectible. The Company evaluates the financial condition and economic
characteristics of its reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies.
The effect of assumed and ceded reinsurance on premiums is summarized in
the following tables.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1996 1995
------------------ ------------------
WRITTEN EARNED WRITTEN EARNED
------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Direct................................................ $93,147 $93,749 $91,273 $93,899
Assumed............................................... 6,618 2,473 507 507
Ceded................................................. 5,925 6,078 6,230 6,309
-------- -------- -------- --------
Net premiums.......................................... $93,840 $90,144 $85,550 $88,097
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- --------------------
(IN THOUSANDS)
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Direct...................... $122,277 $124,118 $120,024 $118,449 $112,459 $112,428
Assumed..................... 780 780 736 736 782 782
Ceded....................... 8,544 8,544 7,526 7,526 16 16
-------- -------- -------- -------- -------- --------
Net premiums................ $114,513 $116,354 $113,234 $111,659 $113,225 $113,194
======== ======== ======== ======== ======== ========
</TABLE>
Reinsurance premiums ceded reduced loss and loss adjustment expenses by
$1,019,000 in 1995, $2,685,000 in 1994 and $2,501,000 in 1993.
5. FEDERAL INCOME TAXES
The components of the Federal income tax provision in the accompanying
statements of income are summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- -----------------------------
1996 1995 1995 1994 1993
------ ------ ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Current........................... $8,205 $4,797 $ 9,898 $3,162 $3,841
Deferred.......................... (711) 2,052 158 6,050 4,777
------ ------ ------- ------ ------
Total................... $7,494 $6,849 $10,056 $9,212 $8,618
====== ====== ======= ====== ======
</TABLE>
F-14
<PAGE> 77
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of income tax computed at the U.S. Federal statutory tax
rates to total income tax expense is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Federal income tax at 35%............ $ 9,570 $ 8,279 $12,049 $11,029 $11,934
Increase (decrease) in taxes
resulting from:
Tax-exempt interest.................. (2,135) (1,398) (2,125) (1,825) (1,986)
Dividends received deduction......... (106) (172) (216) (290) (323)
Tax rate change...................... -- -- -- -- (1,021)
Other................................ 165 140 348 298 14
------- ------- ------- ------- -------
Total Federal income tax
expense.................. $ 7,494 $ 6,849 $10,056 $ 9,212 $ 8,618
======= ======= ======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -------------------
1996 1995 1994
------------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Discounting of loss reserves.................. $25,017 $24,771 $25,557
Policyholder dividends........................ 138 138 3,500
Unrealized investment losses.................. -- -- 8,987
Other......................................... 96
------- ------- -------
Total deferred tax assets............. 25,251 24,909 38,044
Deferred tax liabilities:
Deferred policy acquisition costs............. 190 164 180
Unrealized investment gains................... 803 12,498 --
Interest receivable -- IRS audit.............. -- -- 3,953
Other......................................... -- 255 276
------- ------- -------
Total deferred tax liabilities........ 993 12,917 4,409
======= ======= =======
Net deferred tax assets............... $24,258 $11,992 $33,635
======= ======= =======
</TABLE>
Federal income taxes paid during 1995, 1994 and 1993 were $9,900,000,
$3,250,000 and $3,816,000, respectively.
The Internal Revenue Service (IRS) had proposed adjustments to increase the
Company's tax liability for 1986 and 1987 by $60,815,000 as a result of its
examinations. The Company's management disagreed with the deficiencies proposed
by the IRS and worked with the IRS Appeals Office. The Appeals Office reversed
the $60,815,000 proposed adjustment and concluded that there would be no change
in the 1986 or 1987 tax amounts. The Appeals Office has allowed the Company's
refund claim for $9,120,000 in tax which arose from issues in the 1985 IRS
examination which the IRS previously disallowed. The Appeals Office has also
approved an outstanding claim for refund of $3,563,000 in tax resulting from an
amended filing of the 1988 return. Both the 1985 and 1988 refunds were paid by
the
F-15
<PAGE> 78
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
IRS with interest of $13,220,000 in January 1996. At December 31, 1995 the
Company has recorded these refunds totaling $25,903,000 in Federal income taxes
recoverable.
In November 1995, the IRS proposed a $13,023,000 adjustment to increase the
Company's 1991 tax liability and in June 1996, proposed a $3,673,000 adjustment
to increase the Company's 1992 tax liability for the same issue asserted in the
1986 and 1987 examinations. The Company's management disagrees with the proposed
adjustment and intends to pursue all administrative and judicial remedies
available to satisfactorily settle this dispute. The Company filed a petition in
Tax Court to contest the 1991 tax deficiency in February 1996, and will file a
similar petition related to the 1992 deficiency. Based on the results of the
1986 and 1987 IRS examinations, the Company's management believes that the
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations and no accrual has been
recorded in the accompanying financial statements. Because this matter may have
to be appealed or litigated, the Company's management believes that it is
unlikely that this issue will be resolved in the foreseeable future.
6. STATUTORY ACCOUNTING PRACTICES
The Company is domiciled in California and prepares its statutory-basis
financial statements in accordance with accounting practices prescribed or
permitted by the California Department of Insurance. "Prescribed" statutory
accounting practices include state laws, regulations and general administrative
rules, as well as a variety of publications of the National Association of
Insurance Commissioners (NAIC). "Permitted" statutory accounting practices
encompass all accounting practices that are not prescribed; such practices may
differ from state to state, may differ from company to company within a state,
and may change in the future. The NAIC currently is in the process of codifying
statutory accounting practices, the result of which is expected to constitute
the only source of "prescribed" statutory accounting practices. Policyholders'
surplus and net income, as reported to the domiciliary state insurance
department in accordance with its prescribed or permitted statutory accounting
practices, for the Company are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory net income for the year............... $ 24,393 $ 17,730 $ 16,886
Statutory surplus at year end................... 235,352 187,299 171,589
</TABLE>
The Company offers its insureds free tail coverage in the event of death,
total and permanent disability and complete and permanent retirement. In 1993,
the NAIC published guidelines for establishing a reserve for future free tail
policies when the claims-made policy includes a provision for waiving a premium
charge in the event of death, disability or retirement of the insured. Based on
the NAIC guidelines, this reserve should be recorded as an unearned premium
reserve. Alternatively, it can be considered an unpaid loss with the permission
of the insurance entity's state insurance department. In 1995, the Company
received written approval from the California Department of Insurance to record
this reserve as an unpaid loss. The Company's statutory surplus would be
unaffected if the California Department of Insurance were to rescind its
permission for this treatment.
7. BENEFIT PLANS
The Company has a 401(k) defined contribution plan and a non-contributory
defined benefit plan which provide retirement benefits to all its employees.
Under the 401(k) plan, the Company presently matches the employees'
contribution. The contribution expense for the 401(k) plan was $436,000,
$350,000 and $304,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. An
F-16
<PAGE> 79
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
additional defined contribution plan that no longer accepts contributions will
remain with the trustee as funded at December 31, 1989 until retirement or
termination of all employees vested in the plan.
SMC also maintains a defined benefit pension plan whose benefits are based
on years of service and salary levels. The Company's policy is to fund the
pension plan up to the maximum deductible contributions the Federal laws and
regulations permit. Plan assets consist of investment funds and cash held in a
bank money market account.
Net pension expense consists of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
----- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the year............... $ 223 $252 $191
Interest on projected benefit obligation................... 73 55 44
Actual return on plan assets............................... (282) (60) (51)
Net amortization and deferral.............................. 201 1 25
----- ---- ----
Net pension expense........................................ $ 215 $248 $209
===== ==== ====
</TABLE>
The following table sets forth the funding status of the plan:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits of
$759,000 in 1995 and $489,000 in 1994........................ $(1,078) $ (694)
======= =======
Projected benefit obligation................................... $(1,370) $ (910)
Plan assets.................................................... 1,423 863
------- -------
Plan assets in excess of (less than) projected benefit
obligations.................................................. 53 (47)
Unrecognized net loss from past experience different from that
assumed...................................................... 31 48
Unrecognized past service cost................................. (15) (16)
Unrecognized net asset at January 1............................ (35) (39)
------- -------
Prepaid (accrued) pension expense.............................. $ 34 $ (54)
======= =======
</TABLE>
The projected benefit obligation for 1995, 1994 and 1993 was determined
using an assumed discount rate of 7%, 8% and 7%, respectively, and an assumed
rate of compensation increase of 5% for 1995, 1994 and 1993. The expected
long-term rate of return on plan assets was 8% in 1995, 1994 and 1993.
The Company also has enacted a non-qualified supplemental employee
retirement agreement for selected employees which provides benefits
retroactively from January 1, 1990. At December 31, 1995, the projected benefit
obligation for this plan was $1,891,000 of which the accumulated benefit
obligation of $1,101,000 is accrued as a liability in the combined balance
sheet. Pension expense for this plan was approximately $258,000 in 1995,
$291,000 in 1994 and $19,000 in 1993.
F-17
<PAGE> 80
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities under lease agreements expiring from
1996 to 2001. Future minimum payments under noncancellable operating leases at
December 31, 1995 consisted of the following (in thousands):
<TABLE>
<S> <C>
1996................................. $195
1997................................. 195
1998................................. 185
1999................................. 175
2000................................. 175
Thereafter........................... 9
----
Total minimum payments
due...................... $934
====
</TABLE>
Rent expense for the years ended December 31, 1995, 1994 and 1993 was
$46,000, $42,000 and $39,000, respectively.
The Company is a defendant in an action brought by the bankruptcy estate of
an uninsured physician. The bankruptcy estate alleged that the Company had an
undisclosed conflict of interest when it provided the physician with a free
courtesy defense by an attorney who had represented the interests of the
Company's insureds in other cases. The punitive damages rendered by the jury
were reduced to $14,000,000 by the trial judge. The Company believes that the
action is entirely without merit and plans to aggressively pursue its rights on
appeal. However, the ultimate resolution of this matter cannot be determined at
this time and could result in a loss to the Company.
The Company is named as defendant in various legal actions primarily
arising from claims made under insurance policies and contracts. These actions
are considered by the Company in estimating the loss and loss adjustment expense
reserves. The Company's management believes that the resolution of these actions
will not have a material adverse effect on the Company's financial position or
results of operations.
Since 1981, the Company has purchased annuities from life insurance
companies to fund obligations under structured settlement agreements with
certain medical malpractice claimants. Annuities having an aggregate purchase
price of $12,294,000 were purchased from Executive Life Insurance Company (ELIC)
which was placed in conservatorship during 1991 by the California Insurance
Commissioner. On August 13, 1993, the California Superior Court for Los Angeles
County approved a Rehabilitation Plan (the Plan) under which the annuities were
restructured to reduce their account values and amounts payable to
beneficiaries. Under the Plan, substantially all of the assets of ELIC have been
transferred to another insurer, which has assumed the restructured annuities and
is obligated to pay varying percentages of the original annuity benefits as they
become due. Certain state insurance guaranty associations have agreed to enhance
the annuity benefits up to the monetary limits permitted by applicable state
laws. Under many of the annuities purchased by the Company, there remains a
significant shortfall from the benefits provided in the original contracts.
Certain creditors of ELIC have appealed the court's decision approving the Plan
and the Plan was upheld in all material respects by the Court of Appeals. The
Company has determined that it is contractually obligated for the shortfall
amounts under certain of these annuities and at December 31, 1995, included in
losses incurred a reserve in the amount of $7,036,000 and included in
reinsurance recoverables expected recoverables of $3,036,000 related to these
expected shortfall payments. During 1995, the Company made shortfall payments
totaling $93,000 ($260,000 in 1994). The shortfall amounts paid by the Company
in 1995 were reduced by a distribution to all annuitants of certain ELIC assets
held in trust, pending the completion of various
F-18
<PAGE> 81
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
transactions and claims. The Company has been advised that there will be at
least two additional distributions of assets from the ELIC Trusts, which will
further reduce the shortfall under the ELIC annuities. The extent of the
Company's obligations with respect to these and other ELIC annuities purchased
by the Company cannot be determined until various transactions under the Plan
are completed and claims with respect to the annuities and the pending appeal
are resolved including claims on the remaining assets held in the ELIC Trusts.
The Company believes that the amount of its obligations in excess of the
existing reserves, if any, is not material to its financial position or results
of operations.
9. REORGANIZATION
On March 21, 1996, the Board of Governors of the Exchange adopted a Plan
and Agreement of Merger (the Merger Agreement) whereby the Exchange will
reorganize from a reciprocal insurer to a stock insurance company and become a
wholly owned subsidiary of SCPIE Holdings (the Reorganization). Pursuant to the
Reorganization, the Exchange will merge with and into SCPIE Indemnity, a newly
organized California stock insurer and a wholly owned subsidiary of SCPIE
Holdings that will be the surviving corporation of the Reorganization. The
assets and liabilities of the Exchange that will be merged into SCPIE Indemnity
will be accounted for at a historical cost in a manner similar to that in a
pooling of interests. SCPIE Indemnity is licensed to write property and casualty
insurance lines in the state of California, but has not conducted business prior
to the Reorganization. Prior to the Reorganization, OSCAP will be liquidated
into the Exchange, so that SCPIE Management Company will become a subsidiary of
SCPIE Indemnity after the Reorganization. The Reorganization also involves the
consolidation of certain other affiliated entities and SCPIE Holdings.
The principal purpose of the Reorganization is to improve SCPIE's access to
the capital markets and to raise capital to permit the growth of existing
business and develop new business opportunities in the professional liability
insurance industry. The Reorganization will also provide members of the Exchange
with shares of Common Stock in exchange for their membership interests in the
Exchange.
On July 12, 1996, OSCAP was liquidated into the Exchange and SMC and its
subsidiaries became subsidiaries of the Exchange.
On November 5, 1996, the Merger Agreement was approved at a special meeting
of SCPIE Members.
Unaudited pro forma net income per share generated in the Statements of
Income gives effect in all periods to the Reorganization and the allocation of
10,000,000 shares of Common Stock to eligible members of the Exchange.
F-19
<PAGE> 82
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SCPIE Holdings Inc.
We have audited the accompanying balance sheet of SCPIE Holdings Inc. as of
February 29, 1996. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of SCPIE Holdings Inc. as of February
29, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
May 1, 1996
F-20
<PAGE> 83
SCPIE HOLDINGS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 29,
1996
SEPTEMBER 30, ------------
1996
-------------
(UNAUDITED)
<S> <C> <C>
Assets
Cash........................................................... $ 414,233 $ 600,010
Deposit........................................................ -- 400,000
Investment in subsidiaries..................................... 13,569,300 --
Other.......................................................... 448,838 --
------------- ------------
Total assets................................................ $ 14,432,371 $ 1,000,010
============ ============
Liabilities
Due to affiliates.............................................. $ 419,588 --
Other.......................................................... 3,591 --
------------- ------------
Total liabilities........................................... 423,179 --
Stockholder's equity
Common stock -- $.01 par value, 1,000 shares authorized,
500 shares issued and outstanding........................... $ 5 $ 5
Additional paid-in capital....................................... 13,999,995 999,995
Retained earnings................................................ 9,192 10
------------- ------------
Total stockholder's equity.................................. 14,009,192 1,000,010
------------- ------------
Total liabilities and stockholder's equity.................. $ 14,432,371 $ 1,000,010
============ ============
</TABLE>
STATEMENT OF INCOME
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
SEPTEMBER 30, 1996
------------------
(UNAUDITED)
<S> <C>
Net investment income.................................................... $ 13,546
Other expenses........................................................... 672
Federal income taxes..................................................... 3,692
-----------------
Net income............................................................. $ 9,182
=================
</TABLE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
SEPTEMBER 30, 1996
------------------
(UNAUDITED)
<S> <C>
Net income............................................................... $ 9,182
Adjustments to reconcile net income to net cash provided
by operating activities:
Deposits............................................................... 400,000
Due to affiliates...................................................... 419,588
Changes in other assets and liabilities................................ (445,247)
Net cash provided from operating activities............................ 383,523
Financing activities -- capital contribution from parent................. 13,000,000
Investing activities -- purchase of subsidiaries......................... (13,569,300)
------------------
Decrease in cash......................................................... (185,777)
Cash at beginning of period.............................................. 600,010
------------------
Cash at end of period.................................................... 414,233
=================
</TABLE>
See accompanying note.
F-21
<PAGE> 84
SCPIE HOLDINGS INC.
NOTE TO FINANCIAL STATEMENTS
1. ORGANIZATION
SCPIE Holdings Inc. (SCPIE Holdings) is a Delaware corporation which is a
wholly owned subsidiary of Southern California Physicians Insurance Exchange
(the Exchange). SCPIE Holdings has no historic operations and was organized in
February 1996, as part of the Exchange's plan to reorganize its corporate
structure.
In March 1996, SCPIE Holdings acquired the outstanding stock of two
inactive property and casualty insurance companies, FG Insurance Corporation and
FG Casualty Company for $12.5 million, and an additional contribution of $1.05
million was made during the second quarter of 1996. The transaction will be
accounted for as a purchase and the excess of the purchase price over the net
book value of the underlying assets will be recorded as goodwill and amortized
over a period of 10 years. SCPIE Holdings plans to utilize these companies to
enter geographic markets outside California.
F-22
<PAGE> 85
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Prospectus Summary.................... 3
Risk Factors.......................... 7
The Company........................... 13
The Reorganization.................... 13
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Selected Financial and Operating
Data................................ 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 25
Management............................ 46
Ownership of Common Stock............. 52
Description of Capital Stock.......... 53
Shares Eligible for Future Sale....... 55
Underwriting.......................... 57
Legal Matters......................... 58
Experts............................... 58
Glossary of Selected Insurance Terms.. 59
Index to Financial Statements......... F-1
------------------------
UNTIL , 1996, ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
</TABLE>
2,000,000 SHARES
SCPIE HOLDINGS INC.
COMMON STOCK
($.0001 PAR VALUE)
(LOGO)
- ------------------------------------------
SALOMON BROTHERS INC
- -------------------------------------------------------------
PROSPECTUS
DATED , 1996
<PAGE> 86
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemized statement of the expenses to be incurred by
the Company in connection with the issuance and distribution of the Common Stock
being registered. Each amount, except for the SEC registration fee, the NASD
filing fee and the NYSE listing fee, is estimated.
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
SEC registration fee........................................... $ 20,777
NASD filing fee................................................ 5,330
New York Stock Exchange listing fee............................ 10,500
Printing and engraving costs................................... 190,000
Legal fees and expenses........................................ 285,000
Accounting fees and expenses................................... 130,000
Blue Sky fees and expenses..................................... 20,000
Transfer agent and registrar fees.............................. 20,000
Miscellaneous.................................................. 18,393
--------
TOTAL................................................ $700,000
========
</TABLE>
- ---------------
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Article Seventh of the Restated Certificate of Incorporation of SCPIE
Holdings Inc. (the "Registrant") provides with respect to the indemnification of
directors that no director shall be liable to Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent that such exemption from liability or limitation thereof is not permitted
under the DGCL. Article V of Registrant's Bylaws provides that Registrant shall
indemnify every person who was or is a party or is or was threatened to be made
a party to any action, suit, or proceeding, whether civil, criminal,
administrative or investigative, (an "Action") by reason of the fact that he is
or was a director or officer of Registrant or, while a director or officer of
Registrant, is or was serving at the request of Registrant as a director or
officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses (including counsel fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding, to the full extent
permitted by applicable law. Article V further provides that Registrant shall be
required to indemnify a person in connection with a proceeding (or part thereof)
initiated by such person only if the proceeding (or part thereof) was authorized
by the Board of Directors of Registrant. Article VI of Registrant's Bylaws
provides that Registrant may, at its option, indemnify every person who was or
is a party or is or was threatened to be made a party to any Action, by reason
of the fact that he is or was an employee or agent of Registrant or, while an
employee or agent of Registrant, is or was serving at the request of Registrant
as an employee or agent or trustee of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, against expenses
(including counsel fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding, to the extent permitted by applicable law. In addition to the
foregoing, Registrant intends to enter into indemnification agreements with each
of its directors and certain of its executive officers. The information
contained in the Prospectus under the caption "Description of Capital
Stock -- Delaware Law and Certain Charter and Bylaw Provisions" is incorporated
by reference herein. It is the position of the Commission that indemnification
of officers and directors of liabilities arising under the Securities Act is
against public policy and is unenforceable pursuant to Section 14 of the
Securities Act.
II-1
<PAGE> 87
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) Securities sold.
<TABLE>
<CAPTION>
DATE OF SALE TITLE AMOUNT
---------------------------------------------- ------------- ------------
<S> <C> <C>
February, 1996................................ Common Stock 500 shares
</TABLE>
(b) Underwriters and other purchasers.
Underwriters were not retained in connection with the sale of any of the
Company's currently outstanding securities.
(c) Consideration.
As part of the Company's formation, 500 shares of Common Stock were issued
to the Exchange for cash in the amount of $2,000 per share.
(d) Exemption from registration claimed.
The transaction is exempt from registration pursuant to Section 4(2) of the
Securities Act.
II-2
<PAGE> 88
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A. EXHIBITS
<TABLE>
<CAPTION>
NUMBER DOCUMENT
----------- ----------------------------------------------------------------------------
<S> <C>
1. Form of Underwriting Agreement.
2. Amended and Restated Plan and Agreement of Merger by and among SCPIE
Holdings Inc., SCPIE Indemnity Company and Southern California Physicians
Insurance Exchange dated August 8, 1996.
3.1 Form of Amended and Restated Certificate of Incorporation.**
3.2 Form of Amended and Restated Bylaws.**
5. Opinion of Latham & Watkins.
10.1 Amended and Restated Employment Agreement dated January 2, 1996, between
SCPIE Management Company and Donald J. Zuk.**
10.2 Operational Agreement between Southern California Physicians Insurance
Exchange and Sullivan, Kelly and Associates, Inc. dated August 25, 1995.**
10.2.1 Amendment to Operational Agreement between Southern California Physicians
Insurance Exchange and Sullivan, Kelly and Associates, Inc. dated August 1,
1996.**
10.3 Letter of Credit Agreement dated January 11, 1995 between First Interstate
Bank and Southern California Physicians Insurance Exchange in the amount of
$27,368,087.**
10.4 Letter of Credit Agreement dated January 26, 1995 between First Interstate
Bank and Southern California Physicians Insurance Exchange for a $5,000,000
Secured Standby Letter of Credit Facility.**
10.5 First Excess of Loss Treaty No. 01-95-0020 with various subscribing
reinsurers.**
10.6 Second Excess of Loss Treaty No. 01-95-0021 with various subscribing
reinsurers.**
10.7 Third Excess of Loss Treaty No. 01-95-0022 with various subscribing
reinsurers.**
10.8 Fourth Excess of Loss Treaty No. 01-95-0599 with various subscribing
reinsurers.**
10.9 Per Policy Excess of Loss Treaty No. 01-94-0365 with various subscribing
reinsurers.**
10.10 Reinstatement/Retroactive/Aggregate Extension Excess of Loss Treaty No.
01-95-0879 with various subscribing reinsurers.**
10.11 Medical Malpractice Surplus Reinsurance Treaty between SCPIE and Lloyd's
Syndicate No. 1010 and Syndicates Comprising 1007 Group underwritten for by
CW Spreckley, Esq. and others, effective date January 1, 1996, Treaty No.
01-95-0374.**
10.12 Physician Medical Malpractice/Hospital Professional Liability Quota Share
Reinsurance Agreement between Hannover Ruckversicherungs-
Aktiengesellschaft/Eisen Und Stahl Ruckversicherungs-Aktiengesellschaft,
Hannover, Germany, and various subscribing reinsurers, effective date
January 1, 1995, Treaty No. 01-95-0694.
10.13 First Excess of Loss Treaty No. 01-96-0020 with various subscribing
reinsurers.
10.14 Second Excess of Loss Treaty No. 01-96-0021 with various subscribing
reinsurers.
10.15 Third Excess of Loss Treaty No. 01-96-0022 with various subscribing
reinsurers.
10.16 Fourth Excess of Loss Treaty No. 01-96-0599 with various subscribing
reinsurers.
10.17 Per Policy Excess of Loss Treaty No. 01-96-0365 with various subscribing
reinsurers, reference is made to Exhibit 10.9.**
10.18 Reinstatement/Retroactive/Aggregate Extension Excess of Loss Treaty No.
01-96-0879 with various subscribing reinsurers, reference is made to Exhibit
10.10.**
10.19 Quota Share Reinsurance Agreement, Treaty No. 01-96-0922.
10.20 SCPIE Management Company Retirement Income Plan, as amended and restated,
effective January 1, 1989.**
10.21 Supplemental Employee Retirement Plan for Selected Employees of SCPIE
Management Company dated January 1, 1995.**
10.22 Retirement Plan for Outside Governors and Affiliated Directors, effective
January 1, 1994 as amended.**
10.23 The SMC Cash Accumulation Plan, dated July 1, 1991, as amended.**
10.24 Inter-Company Pooling Agreement as of April 1, 1996.**
</TABLE>
II-3
<PAGE> 89
<TABLE>
<CAPTION>
NUMBER DOCUMENT
----------- ------------------------------------------------------------------------------
<S> <C>
10.25 Form of Indemnification Agreement.**
11. Statement re computation of per share earnings, reference is made to page F-4.
21. Subsidiaries of the registrant.**
24.1 Consent of Ernst & Young LLP, reference is made to page S-1.
24.2 Consent of Latham & Watkins, reference is made to Exhibit 5.
25. Power of Attorney, reference is made to page II-4.
27. Financial Data Schedule.
</TABLE>
- ---------------
(**) Previously filed.
B. FINANCIAL STATEMENT SCHEDULES
Schedules I, II, III, IV and VI have been omitted as all required data is
included in the financial statements and corresponding footnotes.
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 not applicable and therefore have
been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment to Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Beverly Hills, State of California, on November 13, 1996.
SCPIE HOLDINGS INC.
By: /s/ DONALD J. ZUK
-----------------------------
Donald J. Zuk
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ---------------------- ------------------
<S> <C> <C>
* Chairman of the Board November 13, 1996
-------------------------------------
Mitchell S. Karlan, M.D.
/s/ DONALD J. ZUK President, Principal November 13, 1996
------------------------------------- Executive Officer,
Donald J. Zuk Director
* Vice President, Chief November 13, 1996
------------------------------------- Financial Officer,
Patrick T. Lo (Principal Financial
Officer and
Principal Accounting
Officer)
* Director November 13, 1996
-------------------------------------
Allan K. Briney, M.D.
* Director November 13, 1996
-------------------------------------
Willis T. King, Jr.
* Treasurer and Director November 13, 1996
-------------------------------------
Jack E. McCleary, M.D.
* Director November 13, 1996
-------------------------------------
Charles B. McElwee, M.D.
</TABLE>
II-5
<PAGE> 91
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ---------------------- ------------------
<S> <C> <C>
* Secretary and Director November 13, 1996
-------------------------------------
Wendell L. Moseley, M.D.
* Director November 13, 1996
-------------------------------------
Donald P. Newell
* Director November 13, 1996
-------------------------------------
Harriet M. Opfell, M.D.
* Director November 13, 1996
-------------------------------------
William A. Renert, M.D.
* Director November 13, 1996
-------------------------------------
Henry L. Stoutz, M.D.
* Director November 13, 1996
-------------------------------------
Reinhold A. Ullrich, M.D.
*By /s/ DONALD J. ZUK
-------------------------------------
Donald J. Zuk
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 92
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated March 5, 1996, except for Note 9, as to which the date
is November 5, 1996, and May 1, 1996, in Amendment No. 3 to Registration
Statement (Form S-1 No. 333-4450) and related Prospectus of SCPIE Holdings Inc.
for the registration of 2,300,000 shares of its common stock.
ERNST & YOUNG LLP
Los Angeles, California
November 13, 1996
S-1
<PAGE> 93
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------------
<S> <C> <C>
1. Form of Underwriting Agreement.............................................
2. Amended and Restated Plan and Agreement of Merger by and among SCPIE
Holdings Inc., SCPIE Indemnity Company and Southern California Physicians
Insurance Exchange dated August 8, 1996....................................
3.1 Form of Amended and Restated Certificate of Incorporation**................
3.2 Form of Amended and Restated Bylaws**......................................
5. Opinion of Latham & Watkins................................................
10.1 Amended and Restated Employment Agreement dated January 2, 1996, between
SCPIE Management Company and Donald J. Zuk**...............................
10.2 Operational Agreement between Southern California Physicians Insurance
Exchange and Sullivan, Kelly and Associates, Inc. dated August 25,
1995**.....................................................................
10.2.1 Amendment to Operational Agreement between Southern California Physicians
Insurance Exchange and Sullivan, Kelly and Associates, Inc. dated August 1,
1996**.....................................................................
10.3 Letter of Credit Agreement dated January 11, 1995 between First Interstate
Bank and Southern California Physicians Insurance Exchange in the amount of
$27,368,087**..............................................................
10.4 Letter of Credit Agreement dated January 26, 1995 between First Interstate
Bank and Southern California Physicians Insurance Exchange for a $5,000,000
Secured Standby Letter of Credit Facility**................................
10.5 First Excess of Loss Treaty No. 01-95-0020 with various subscribing
reinsurers**...............................................................
10.6 Second Excess of Loss Treaty No. 01-95-0021 with various subscribing
reinsurers**...............................................................
10.7 Third Excess of Loss Treaty No. 01-95-0022 with various subscribing
reinsurers**...............................................................
10.8 Fourth Excess of Loss Treaty No. 01-95-0599 with various subscribing
reinsurers**...............................................................
10.9 Per Policy Excess of Loss Treaty No. 01-94-0365 with various subscribing
reinsurers**...............................................................
10.10 Reinstatement/Retroactive/Aggregate Extension Excess of Loss Treaty No.
01-95-0879 with various subscribing reinsurers**...........................
10.11 Medical Malpractice Surplus Reinsurance Treaty between SCPIE and Lloyd's
Syndicate No. 1010 and Syndicates Comprising 1007 Group underwritten for by
CW Spreckley, Esq. and others, effective date January 1, 1996, Treaty No.
01-95-0374**...............................................................
10.12 Physician Medical Malpractice/Hospital Professional Liability Quota Share
Reinsurance Agreement between Hannover
Ruckversicherungs-Aktiengesellschaft/Eisen Und Stahl
Ruckversicherungs-Aktiengesellschaft, Hannover, Germany, and various
subscribing reinsurers, effective date January 1, 1995, Treaty No.
01-95-0694.................................................................
10.13 First Excess of Loss Treaty No. 01-96-0020 with various subscribing
reinsurers.................................................................
10.14 Second Excess of Loss Treaty No. 01-96-0021 with various subscribing
reinsurers.................................................................
10.15 Third Excess of Loss Treaty No. 01-96-0022 with various subscribing
reinsurers.................................................................
10.16 Fourth Excess of Loss Treaty No. 01-96-0599 with various subscribing
reinsurers.................................................................
10.17 Per Policy Excess of Loss Treaty No. 01-96-0365 with various subscribing
reinsurers, reference is made to Exhibit 10.9**............................
10.18 Reinstatement/Retroactive/Aggregate Extension Excess of Loss Treaty No.
01-96-0879 with various subscribing reinsurers, reference is made to
Exhibit 10.10**............................................................
10.19 Quota Share Reinsurance Agreement, Treaty No. 01-96-0922...................
10.20 SCPIE Management Company Retirement Income Plan, as amended and restated,
effective January 1, 1989**................................................
10.21 Supplemental Employee Retirement Plan for Selected Employees of SCPIE
Management Company dated January 1, 1995**.................................
10.22 Retirement Plan for Outside Governors and Affiliated Directors, effective
January 1, 1994 as amended**...............................................
10.23 The SMC Cash Accumulation Plan, dated July 1, 1991, as amended**...........
10.24 Inter-Company Pooling Agreement as of April 1, 1996**......................
10.25 Form of Indemnification Agreement**........................................
11. Statement re computation of per share earnings, reference is made to page
F-4........................................................................
21. Subsidiaries of the registrant**...........................................
</TABLE>
<PAGE> 94
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<S> <C> <C>
24.1 Consent of Ernst & Young LLP, reference is made to page S-1................
24.2 Consent of Latham & Watkins, reference is made to Exhibit 5................
25. Power of Attorney, reference is made to page II-4..........................
27. Financial Data Schedule....................................................
</TABLE>
- ---------------
(**) Previously filed.
<PAGE> 1
[LLG&M DRAFT - 11/12/96]
EXHIBIT A
[ ], 1996
Salomon Brothers Inc
As Representative of the
several Underwriters
Seven World Trade Center
New York, New York 10048
Dear Sirs:
This letter is being delivered to you in connection with the
proposed Underwriting Agreement (the "Underwriting Agreement") between SCPIE
Holdings Inc., a Delaware corporation (the "Company") and you as representative
of a group of Underwriters named therein, relating to an underwritten public
offering of Common Stock, $.0001 par value (the "Common Stock"), of the Company.
In order to induce you and the other Underwriters to enter into
the Underwriting Agreement, the undersigned agrees not to offer, sell or
contract to sell, or otherwise dispose of, directly or indirectly, or announce
an offering of, any shares of Common Stock beneficially owned by the undersigned
or any securities convertible into, or exchangeable for, shares of Common Stock
for a period of 180 days following the day on which the Underwriting Agreement
is executed without your prior written consent, other than shares of Common
Stock disposed of as bona fide gifts.
If for any reason the Underwriting Agreement shall be
terminated prior to the Closing Date (as defined in the Underwriting Agreement),
the agreement set forth above shall likewise be terminated.
Very truly yours,
<PAGE> 2
[LLG&M DRAFT - 11/12/96]
SCPIE HOLDINGS INC.
2,000,000 Shares1
Common Stock
($.0001 par value)
Underwriting Agreement
[ ], 1996
Salomon Brothers Inc
As Representative of the
several Underwriters
Seven World Trade Center
New York, New York 10048
Dear Sirs:
SCPIE Holdings Inc., a Delaware corporation (the "Company"),
proposes to issue shares of its common stock, par value $.0001 per share (the
"Common Stock"), in connection with the reorganization (the "Reorganization")
of Southern California Physicians Insurance Exchange, a California reciprocal
insurance exchange ("SCPIE"), into a California stock insurance company. As
part of the Reorganization, SCPIE will be merged (the "Merger") with and into
SCPIE Indemnity Company, a California stock insurance company and wholly owned
subsidiary of the Company that will be the surviving corporation of the Merger
("SCPIE Indemnity"), pursuant to a Plan and Agreement of Merger, dated as of
March 21, 1996 as amended by the Amended and Restated Plan and Agreement of
Merger, dated August 8, 1996 (as so amended, the "Plan"), by and among the
Company, SCPIE Indemnity and SCPIE. Under the Plan, the Company proposes to
issue to Eligible Members (as defined in the Plan) shares of Common Stock (the
"Merger Shares") and cash in lieu of fractional shares in exchange for their
Membership Interests (as defined in the Plan). In addition, as part of the
Reorganization, the Company proposes to issue and sell to the underwriters
named in Schedule I hereto (the "Underwriters"), for whom Salomon Brothers Inc
is acting as representative (the "Representative"), 2,000,000 shares of Common
Stock (the "Underwritten Securities"). The Company also proposes to grant to
the Underwriters an option to purchase from the Company up to 300,000
additional shares of Common Stock to cover over-allotments (the "Option
Securities"; the Option Securities, together with the Underwritten Securities,
being hereinafter called the "Securities"). Upon the
____________________
1 Plus an option to purchase from the Company up to 300,000 additional
shares to cover over-allotments.
<PAGE> 3
effectiveness of the Merger, the Eligible Members' Membership Interests will be
extinguished.
1. REPRESENTATIONS AND WARRANTIES. The Company
represents and warrants to, and agrees with, each Underwriter as set forth
below in this Section 1.
(a) The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration statement (file
number 333-4450) on Form S-1, including a related preliminary
prospectus, for the registration under the Securities Act of 1933, as
amended (the "Act") of the offering and sale of the Securities. The
Company has filed one or more amendments thereto, including the
related preliminary prospectus, each of which has previously been
furnished to you. The Company will next file with the Commission
either (i) prior to effectiveness of such registration statement, a
further amendment to such registration statement (including the form
of final prospectus) or (ii) after effectiveness of such registration
statement, a final prospectus in accordance with Rules 430A and
424(b)(1) or (4). In the case of clause (ii), the Company has
included in such registration statement, as amended at the Effective
Date, all information (other than Rule 430A Information) required by
the Act and the rules thereunder to be included in the Prospectus with
respect to the Securities and the offering thereof. As filed, such
amendment and form of final prospectus, or such final prospectus,
shall contain all Rule 430A Information, together with all other such
required information, with respect to the Securities and the offering
thereof and, except to the extent the Representative shall agree in
writing to a modification, shall be in all substantive respects in the
form furnished to you prior to the Execution Time or, to the extent
not completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company has advised you, prior
to the Execution Time, will be included or made therein.
The terms which follow, when used in this Agreement, shall
have the meanings indicated. The term "the Effective Date" shall mean each
date that the Registration Statement and any post-effective amendment or
amendments thereto became or become effective. "Execution Time" shall mean the
date and time that this Agreement is executed and delivered by the parties
hereto. "Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph (a) above and any preliminary prospectus included in
the Registration Statement at the Effective Date that omits Rule 430A
Information. "Prospectus" shall mean the prospectus relating to the Securities
that is first filed pursuant to Rule 424(b) after the Execution Time or, if no
filing
-2-
<PAGE> 4
pursuant to Rule 424(b) is required, shall mean the form of final prospectus
relating to the Securities included in the Registration Statement at the
Effective Date. "Registration Statement" shall mean the registration statement
referred to in paragraph (a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at the
Execution Time, in the form in which it shall become effective) and, in the
event any post-effective amendment thereto becomes effective prior to the
Closing Date (as hereinafter defined), shall also mean such registration
statement as so amended. Such term shall include any Rule 430A Information
deemed to be included therein at the Effective Date as provided by Rule 430A.
"Rule 424" and "Rule 430A" refer to such rules under the Act. "Rule 430A
Information" means information with respect to the Securities and the offering
thereof permitted to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A.
(b) On the Effective Date, the Registration Statement did
or will, and when the Prospectus is first filed (if required) in
accordance with Rule 424(b) and on the Closing Date, the Prospectus
(and any supplements thereto) will, comply in all material respects
with the applicable requirements of the Act and the rules thereunder;
on the Effective Date, the Registration Statement did not or will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein not misleading; and, on the Effective Date,
the Prospectus, if not filed pursuant to Rule 424(b), did not or will
not, and on the date of any filing pursuant to Rule 424(b) and on the
Closing Date, the Prospectus (together with any supplement thereto)
will not, include any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that the Company does not make
any representations or warranties as to the information contained in or
omitted from the Registration Statement or the Prospectus (or any
supplement thereto) in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of any Underwriter
through the Representative specifically for inclusion in the
Registration Statement or the Prospectus (or any supplement thereto).
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with full corporate power and authority to own its
properties and conduct its business as described in the Prospectus.
Prior to the Effective Time (as defined in the Plan), American
Healthcare Insurance Company, a Delaware corporation ("AHIC"), FG
Casualty Company, an Arkansas corporation ("FGCC") and SCPIE
-3-
<PAGE> 5
Indemnity are the only subsidiaries of the Company. Immediately after
the Effective Time, SCPIE Indemnity, AHIC, FGCC, SCPIE Management
Company, a California corporation ("SCPIE Management"), SCPIE
Insurance Services, Inc., a California corporation ("Insurance
Services"), and SCPIE Management Services, Inc., a California
corporation ("Management Services"), will be the only direct and
indirect subsidiaries of the Company. (SCPIE Indemnity, AHIC, FGCC,
SCPIE Management, Insurance Services and Management Services are
hereinafter sometimes referred to individually as a "Post-Effective
Subsidiary" and collectively as the "Post-Effective Subsidiaries";
SCPIE (until immediately prior to the Effective Time), SCPIE
Indemnity, AHIC and FGCC are hereinafter sometimes referred to
individually as an "Insurance Subsidiary" and collectively as the
"Insurance Subsidiaries"). SCPIE has been and, until immediately
prior to the Effective Time, will be a reciprocal insurance exchange
duly organized under the laws of the State of California and has been
and will be in compliance in all material respects with the
requirements of the insurance laws of the State of California
providing for the organization and regulation of reciprocal insurance
exchanges; and, through its attorney-in-fact SCPIE Management, has
full power and authority to own its properties and conduct its
business as described in the Prospectus. Each of the Post-Effective
Subsidiaries has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction in
which it is chartered or organized, with full corporate power and
authority to own its properties and conduct its business as described
in the Prospectus. Each of the Company, SCPIE and each Post-Effective
Subsidiary is duly qualified to do business as a foreign corporation
and is in good standing under the laws of each jurisdiction which
requires such qualification or wherein it owns or leases material
properties or conducts material business.
(d) All the outstanding shares of capital stock of each
Post-Effective Subsidiary have been duly and validly authorized and
issued and are fully paid and nonassessable, and, immediately after
the Effective Time, all outstanding shares of capital stock of the
Post-Effective Subsidiaries will be owned by the Company, either
directly or through Post-Effective Subsidiaries, free and clear of any
security interest, claims, liens or encumbrances.
(e) The Company's authorized capitalization is as set
forth in the Prospectus; the capital stock of the Company conforms to
the description thereof contained in the Prospectus; the outstanding
shares of Common Stock have been duly and validly authorized and
issued and are fully paid and nonassessable; the Securities have been
duly and validly authorized, and, when issued and delivered to and
paid for by the Underwriters pursuant to this Agreement, will be
-4-
<PAGE> 6
fully paid and nonassessable; the Merger Shares have been duly and
validly authorized, and, when issued and delivered to Eligible Members
in exchange for their Membership Interests as provided in the Plan,
will be fully paid and nonassessable; the Securities and the Merger
Shares have been duly authorized for listing, subject to official
notice of issuance, on the New York Stock Exchange; the certificates
for the Securities and the Merger Shares conform to the requirements
of the Delaware General Corporation Law and the New York Stock
Exchange; and neither the holders of outstanding shares of capital
stock of the Company, the Eligible Members nor the other policyholders
of SCPIE are entitled to preemptive or other rights to subscribe for
the Securities.
(f) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and legally binding
obligation of the Company, enforceable against the Company in
accordance with its terms.
(g) No consent, approval, authorization or order of any
court or governmental agency or body is required for the consummation
of the transactions contemplated herein, except such as have been
obtained under the Act and such as may be required under the blue sky
laws or insurance securities laws of any jurisdiction in connection
with the purchase and distribution of the Securities by the
Underwriters; and no consent, approval, authorization or order of any
court or governmental agency or body is required for the consummation
of the transactions contemplated by the Plan, except such as have been
obtained and are in full force and effect under the Act, the insurance
laws of the State of California (the "California Insurance Law"), the
General Corporation Law of the State of California (the "California
Corporations Law") and the blue sky laws and insurance securities laws
of various jurisdictions in connection with the issuance of the Merger
Shares to the Eligible Members.
(h) Neither the issue and sale of the Securities, nor the
consummation of any other of the transactions herein contemplated nor
the fulfillment of the terms hereof will conflict with, result in a
breach or violation of, or constitute a default under, any law or the
bylaws or any other organizational document of SCPIE or the charter,
by-laws or other organizational document of the Company, or any of the
Post-Effective Subsidiaries or the terms of any material indenture or
other material agreement or material instrument to which the Company,
SCPIE or any of the Post-Effective Subsidiaries is a party or any
material judgment, order or decree that is applicable to the Company,
SCPIE or any of the Post-Effective Subsidiaries of any court,
regulatory body, administrative agency, governmental body or
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<PAGE> 7
arbitrator having jurisdiction over the Company, SCPIE or any of the
Post-Effective Subsidiaries.
(i) No holders of securities of the Company have rights
to the registration of such securities under the Registration
Statement.
(j) Except as set forth in the Prospectus, there are no
outstanding options, warrants or other rights calling for the issuance
of, and there are no commitments, plans or arrangements to issue, any
shares of capital stock of the Company or any Post- Effective
Subsidiary or any security convertible into or exchangeable for any
shares of capital stock of the Company or any Post- Effective
Subsidiary.
(k) The Company has delivered to you a true, complete and
correct copy of the Plan, with all amendments thereof; the
representations and warranties of the Company, SCPIE Indemnity and
SCPIE contained in Article IV and Article V of the Plan are, and at
the Effective Time and the Closing Date will be, true and correct; the
Plan conforms in all material respects to the requirements of the
California Insurance Law applicable to the merger of reciprocal
insurance exchanges into stock insurance companies; by letter, dated
September 16, 1996, the Commissioner of Insurance of the State of
California (the "Commissioner") approved the Merger for submission to
a vote of the Eligible Members; on November 5, 1996 (the "Special
Meeting Date"), the Plan was duly approved by the affirmative vote of
at least two-thirds of the Eligible Members and such approval has not
been rescinded or otherwise withdrawn; on [ ], 1996, the
Commissioner issued a final order approving the Plan in accordance
with the requirements of the California Insurance Law (the
"Commissioner's Order"); no other approvals are required to be
obtained under the California Insurance Law for the consummation of
the transactions contemplated by the Plan; prior to or
contemporaneously with the Closing Date, each of the actions required
to occur and conditions required to be satisfied at or prior to the
Effective Time pursuant to the Commissioner's Order or the Plan will
have occurred or been satisfied; and at the Effective Time, the
Reorganization and the Merger will be completed in accordance with the
Plan, the Commissioner's Order and the California Insurance Law, and
all the rights and properties of SCPIE shall accrue to, and become the
rights and properties of, SCPIE Indemnity, and all the rights of
creditors and liens of SCPIE shall become the rights of creditors and
liens of SCPIE Indemnity.
(l) The Company has filed with the Commission a
registration statement (file number 333-4454) on Form S-4 (such
registration statement, including exhibits and financial statements,
in the form in which it became effective being hereinafter referred to
as the "Merger
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<PAGE> 8
Registration Statement"), including a related proxy
statement/prospectus (the final form of such proxy
statement/prospectus included in the Merger Registration Statement
being hereinafter referred to as the "Proxy Statement/Prospectus"),
for the registration under the Act of the exchange of the Membership
Interests for the Merger Shares and cash in lieu of fractional shares.
The Merger Registration Statement has become effective and no stop
order suspending the effectiveness of the Merger Registration
Statement has been issued and no proceedings for that purpose have
been instituted or to the knowledge of the Company threatened. The
Company has included in the Merger Registration Statement all
information required by the Act and the rules thereunder to be
included in the Proxy Statement/Prospectus with respect to the Merger
Shares and the offering thereof. On the effective date of the Merger
Registration Statement and on the Special Meeting Date, the Merger
Registration Statement and the Proxy Statement/ Prospectus complied in
all material respects with the applicable requirements of the Act and
the rules thereunder. On the effective date of the Merger
Registration Statement, the Merger Registration Statement did not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein not misleading. On the Special Meeting
Date, the Proxy Statement/Prospectus did not include any untrue
statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(m) Each of the Company, SCPIE (either directly or
through its attorney-in-fact SCPIE Management) and the Post-Effective
Subsidiaries owns, possesses or has obtained all material governmental
licenses, permits, certificates, consents, orders, approvals and other
authorizations necessary to own or lease, as the case may be, and to
operate its properties and to carry on its business as currently
conducted, and neither the Company, SCPIE nor any of the
Post-Effective Subsidiaries has received any notice of proceedings
relating to revocation or modification of any such licenses, permits,
certificates, consents, orders, approvals or authorizations which
revocation or modification would result in a material adverse effect
upon the condition, financial or otherwise, earnings, business,
prospects or results of operations of the Company, SCPIE and
Post-Effective Subsidiaries, taken as a whole.
(n) Each of the Insurance Subsidiaries is duly licensed
or authorized to conduct its insurance business under the insurance
laws of each jurisdiction in which it conducts such business so as to
require such licensing or authorization; all such licenses or
authorizations are in full force and effect and neither the Company
nor any
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<PAGE> 9
Insurance Subsidiary has received any notice of any event, inquiry,
investigation or proceeding that would reasonably be expected to
result in the suspension, revocation or limitation of any such
licenses or authorizations or otherwise impose any limitation on the
conduct of the business of the Company or any Insurance Subsidiary
which suspension, revocation or limitation would result in a material
adverse effect upon the condition, financial or otherwise, earnings,
business, prospects or results of operations of the Company, SCPIE and
Post-Effective Subsidiaries, taken as a whole, and there is no
sustainable basis for any such suspension, revocation or limitation;
each of the Insurance Subsidiaries is in compliance with, and conducts
its businesses in conformity with, all applicable insurance laws and
regulations, except where the failure to so comply or conform would
not have a material adverse effect on the condition, financial or
otherwise, earnings, business, prospects or results of operations of
the Company, SCPIE and the Post-Effective Subsidiaries, taken as a
whole; and the Company has disclosed in writing to you all pending
significant examinations, and all significant examinations that have
been completed since December 31, 1990 by any governmental authority
having jurisdiction to regulate the insurance operations of any
Insurance Subsidiary.
(o) All reinsurance treaties and arrangements to which
any of the Insurance Subsidiaries is a party are in full force and
effect and none of the Insurance Subsidiaries is in violation of or in
default in the performance, observance or fulfillment of, any material
obligation, agreement, covenant or condition contained therein; upon
the effectiveness of the Merger, all such treaties and arrangements to
which SCPIE is a party shall remain in full force and effect and inure
to the benefit of, and be enforceable by, SCPIE Indemnity; neither the
Company nor any of the Insurance Subsidiaries has received notice from
any of the other parties to such treaties, contracts or agreements
that such other party intends not to perform such treaty and, to the
best knowledge of the Company and the Insurance Subsidiaries, the
Company and the Insurance Subsidiaries have no reason to believe that
any of the other parties to such treaties or arrangements will be
unable to perform any such treaties or arrangements except to the
extent adequately and properly reserved for in the combined financial
statements of SCPIE and Organization of Southern California
Physicians, Inc., a California corporation ("OSCAP"), included in the
Prospectus.
(p) Except as disclosed in the Prospectus, no change in
any insurance laws, rules or regulations in California has been
introduced that would reasonably be expected to be adopted and if
adopted, would reasonably be expected to have, individually or in the
aggregate with all such
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<PAGE> 10
changes, a material adverse effect upon the condition, financial or
otherwise, earnings, business, prospects or results of operations of
the Company and the Post-Effective Subsidiaries, taken as a whole.
(q) Ernst & Young LLP, who have certified the combined
financial statements of SCPIE and OSCAP and the balance sheets of the
Company included in the Registration Statement and the Prospectus, are
independent public accountants required by the Act and the rules and
regulations thereunder.
(r) The balance sheet of the Company, including the note
thereto, included in the Registration Statement and Prospectus
complies as to form in all material respects with the requirements of
the Act and the rules and regulations thereunder and presents fairly
the financial position of the Company as at the dates indicated; the
combined financial statements of SCPIE and OSCAP, including the
schedules and notes thereto, included in the Registration Statement
and Prospectus comply as to form in all material respects with the
requirements of the Act and the rules and regulations thereunder and
present fairly the combined financial position of SCPIE and OSCAP as
at the dates indicated and the combined results of operations and the
combined cash flows of SCPIE and OSCAP for the periods specified.
Such balance sheets and financial statements have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved, except as may
otherwise be indicated therein or in the notes thereto. The financial
statement schedules, if any, included in the Registration Statement
and the Prospectus present fairly the information required to be
stated therein. The selected financial data included in the
Prospectus present fairly the information shown therein and have been
compiled on a basis consistent with that of the audited combined
financial statements included in the Registration Statement.
(s) The statutory financial statements of SCPIE, from
which certain ratios and other statistical data filed as part of the
Registration Statement or included or incorporated in the Prospectus
have been derived: (i) have for each relevant period been prepared in
conformity with statutory accounting practices required or permitted
by the National Association of Insurance Commissioners and by the
California Department of Insurance, and such statutory accounting
practices have been applied on a consistent basis throughout the
periods involved, except as may otherwise be indicated therein or in
the notes thereto; and (ii) present fairly the statutory financial
position of SCPIE as at the dates thereof, and the statutory basis
results of operations of SCPIE for the periods covered thereby.
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<PAGE> 11
(t) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
otherwise stated therein: (i) there has been no material adverse
change in the condition, financial or otherwise, earnings, business,
prospects, properties or results of operations of the Company, SCPIE
and the Post-Effective Subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business; (ii)
there have been no material transactions entered into by the Company,
SCPIE or any of the Post-Effective Subsidiaries other than those in
the ordinary course of business; (iii) neither the Company, SCPIE nor
any of the Post-Effective Subsidiaries has incurred any liability or
obligation, direct or contingent, that is material to the Company,
SCPIE and the Post-Effective Subsidiaries, taken as a whole, and there
has not been any change in the capital stock of the Company or any
payment of or declaration to pay any dividends or any other
distributions with respect to the Company's capital stock, except as
set forth in the Prospectus; and (iv) there has not been any material
change in the combined policyholders' equity, statutory surplus or
reserves (including any such change in the loss adjustment and loss
expense reserves or its reserving practices) of SCPIE and OSCAP since
December 31, 1995.
(u) Each of the Company, SCPIE and OSCAP maintains a
system of internal accounting controls sufficient to provide
reasonable assurance that: (i) transactions are executed in accordance
with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals
and appropriate action is taken with respect to any differences. On
and after the Effective Time, each of the Company and each of the
Post-Effective Subsidiaries will continue to maintain such a system.
(v) The Company, SCPIE (either directly or through SCPIE
Management) and the Post-Effective Subsidiaries have good and
marketable title in fee simple to all real property and good and
marketable title to all personal property owned by them, in each case
free and clear of all liens, encumbrances and defects except such as
do not materially affect the value of such property and do not
materially interfere with the use made by the Company, SCPIE and the
Post-Effective Subsidiaries and proposed to be made of such property
by the Company and the Post-Effective Subsidiaries; all real property
and buildings held under lease by the Company, SCPIE and the
Post-Effective Subsidiaries are held
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<PAGE> 12
by them under valid, subsisting and enforceable leases, with such
exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company
and the Post-Effective Subsidiaries; and at the Effective Time, all of
SCPIE's rights in respect of such properties and leases shall inure to
the benefit of, and be enforceable by, SCPIE Indemnity.
(w) Except as disclosed in the Prospectus, the Company,
SCPIE (either directly or through SCPIE Management), OSCAP and the
Post-Effective Subsidiaries have filed all federal, state and local
income and franchise tax returns required to be filed through the date
hereof and have paid all taxes due thereon, and no tax deficiency has
been determined adversely to the Company, SCPIE, OSCAP or any of the
Post-Effective Subsidiaries.
(x) There is no pending or, to the best knowledge of the
Company, SCPIE and the Post-Effective Subsidiaries, threatened action,
suit or proceeding before any court or governmental agency, authority
or body or any arbitrator involving the Company, SCPIE or any of the
Post-Effective Subsidiaries of a character required to be disclosed in
the Registration Statement which is not adequately disclosed in the
Prospectus or challenging the Reorganization, the Merger or the Plan
or the consummation of the transactions contemplated thereby or the
offering of the Securities by the Underwriters; and there is no
franchise, contract or other document of a character required to be
described in the Registration Statement or Prospectus, or to be filed
as an exhibit, which is not described or filed as required.
(y) Neither the Company, SCPIE nor any of the
Post-Effective Subsidiaries (i) is in violation of its charter,
by-laws or other organizational documents, (ii) is in default in any
material respect, and no event has occurred that, with notice or lapse
of time or both, would constitute such a default, in the due
performance or observance of any term, covenant or condition contained
in any material indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument to which it is a party or by which it is
bound or to which any of its properties or assets is subject, or (iii)
is in violation in any material respect of any law, ordinance,
governmental rule, regulation or court decree to which it or its
property or assets may be subject or has failed to obtain any material
license, permit, certificate, franchise or other governmental
authorization or permit necessary to the ownership of its property or
to the conduct of its business.
(z) Neither the Company, SCPIE nor any of the
Post-Effective Subsidiaries has taken or will take, directly or
indirectly, any action designed to, or that might reasonably
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<PAGE> 13
be expected to, cause or result in the stabilization or manipulation
of the price of the Common Stock.
(aa) Neither the Company nor any of the Post-Effective
Subsidiaries is and, after giving effect to the offering and sale of
the Securities, neither the Company nor any of the Post-Effective
Subsidiaries will be, an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in
the Investment Company Act of 1940 (the "Investment Company Act").
(bb) Each of the Company, SCPIE (either directly or
through its attorney-in-fact SCPIE Management) and the Post-Effective
Subsidiaries owns or has valid and adequate rights to use all patents,
trademarks, trademark registration, service marks, service mark
registrations, trade names, copyrights, licenses, inventions, trade
secrets and rights owned by it or necessary for the conduct of its
business, free and clear of any pledges, security interests, claims,
charges, liens or encumbrances and restrictions that may materially
interfere with the conduct of its business; neither the Company,
SCPIE, nor any of the Post-Effective Subsidiaries is aware of any
claim to the contrary or any challenge by any other person to the
rights of the Company, SCPIE or the Post-Effective Subsidiaries with
respect to the foregoing; and at the Effective Time, all of SCPIE's
rights in respect of the foregoing shall inure to the benefit of, and
be enforceable by, SCPIE Indemnity.
(cc) All liability, property and casualty, workers'
compensation, directors and officers liability, surety and other
similar insurance contracts that insure the business, properties,
operations or affairs of the Company, SCPIE and the Post-Effective
Subsidiaries or relate to or affect the ownership, use or operations
of the Company's, SCPIE's or the Post-Effective Subsidiaries' assets
or properties are in full force and effect and, to the best knowledge
of the Company, SCPIE and the Post-Effective Subsidiaries, are with
financially sound and reputable insurers and provide coverage that is
reasonable and customary for persons in similar businesses or for
similar property. At the Effective Time, all of SCPIE's rights in
respect of such contracts (excluding the directors and officers
liability contract in existence [prior to the Effective Time]) shall
inure to the benefit of, and be enforceable by, SCPIE Indemnity. At
the Effective Time the Company shall have obtained a directors and
officers liability contract in full force and effect with a
financially sound and reputable insurer with coverage that is
reasonable and customary for persons in similar businesses.
2. PURCHASE AND SALE. (a) Subject to the terms and
conditions and in reliance upon the representations and warranties herein set
forth, the Company agrees to sell to each
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<PAGE> 14
Underwriter, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $[ ] per share, the
amount of the Underwritten Securities set forth opposite such Underwriter's
name in Schedule I hereto.
(b) Subject to the terms and conditions and in reliance
upon the representations and warranties herein set forth, the Company hereby
grants an option to the Underwriters to purchase, severally and not jointly, up
to 300,000 shares of the Option Securities at the same purchase price per share
as the Underwriters shall pay for the Underwritten Securities. Said option may
be exercised only to cover over-allotments in the sale of the Underwritten
Securities by the Underwriters. Said option may be exercised in whole or in
part at any time (but not more than once) on or before the 30th day after the
date of the Prospectus upon written or telegraphic notice by the Representative
to the Company setting forth the number of shares of the Option Securities as
to which the several Underwriters are exercising the option and the settlement
date. Delivery of certificates for the shares of Option Securities by the
Company, and payment therefor to the Company, shall be made as provided in
Section 3 hereof. The number of shares of the Option Securities to be
purchased by each Underwriter shall be the same percentage of the total number
of shares of the Option Securities to be purchased by the several Underwriters
as such Underwriter is purchasing of the Underwritten Securities, subject to
such adjustments as you in your absolute discretion shall make to eliminate any
fractional shares.
3. DELIVERY AND PAYMENT. Delivery of and payment for
the Underwritten Securities and the Option Securities (if the option provided
for in Section 2(b) hereof shall have been exercised on or before the third
business day prior to the Closing Date) shall be made at the office of LeBoeuf,
Lamb, Greene & MacRae, L.L.P., 125 West 55th Street, New York, New York, at
10:00 AM, New York City time, on [ ], 1996, or such later date (not later than
[ ], 1996) as the Representative shall designate, which date and time
may be postponed by agreement between the Representative and the Company or as
provided in Section 9 hereof (such date and time of delivery and payment for
the Securities being herein called the "Closing Date"). Delivery of the
Securities shall be made to the Representative for the respective accounts of
the several Underwriters against payment by the several Underwriters through
the Representative of the aggregate purchase price of the Securities being sold
to or upon the order of the Company by certified or official bank check or
checks drawn on or by a New York Clearing House bank and payable in next day
funds. Delivery of the Underwritten Securities and the Option Securities shall
be made at such location as the Representative shall reasonably designate at
least one business day in advance of the Closing Date and payment for the
Securities shall be made at the office of LeBoeuf, Lamb, Greene & MacRae,
L.L.P., 125 West 55th Street, New York, New York. Certificates for the
Securities shall be
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<PAGE> 15
registered in such names and in such denominations as the Representative may
request not less than three full business days in advance of the Closing Date.
The Company agrees to have the Securities available for
inspection, checking and packaging by the Representative in New York, New York,
not later than 1:00 PM on the business day prior to the Closing Date.
If the option provided for in Section 2(b) hereof is exercised
after the third business day prior to the Closing Date, the Company will
deliver (at the expense of the Company) to the Representative, at Seven World
Trade Center, New York, New York, on the date specified by the Representative
(which shall be within three business days after exercise of said option),
certificates for the Option Securities in such names and denominations as the
Representative shall have requested against payment of the purchase price
thereof to or upon the order of the Company by certified or official bank check
or checks drawn on or by a New York Clearing House bank and payable in next day
funds. If settlement for the Option Securities occurs after the Closing Date,
the Company will deliver to the Representative on the settlement date for the
Option Securities, and the obligation of the Underwriters to purchase the
Option Securities, shall be conditioned upon receipt of, supplemental opinions,
certificates and letters confirming as of such date the opinions, certificates
and letters delivered on the Closing Date pursuant to Section 6 hereof.
4. OFFERING BY UNDERWRITERS. It is understood that the
several Underwriters propose to offer the Securities for sale to the public as
set forth in the Prospectus.
5. AGREEMENTS. The Company agrees with the several
Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and
any amendment thereof, to become effective. Prior to the termination
of the offering of the Securities, the Company will not file any
amendment of the Registration Statement or supplement to the
Prospectus without your prior consent. Subject to the foregoing
sentence, if the Registration Statement has become or becomes
effective pursuant to Rule 430A, or filing of the Prospectus is
otherwise required under Rule 424(b), the Company will cause the
Prospectus, properly completed, and any supplement thereto to be filed
with the Commission pursuant to the applicable paragraph of Rule
424(b) within the time period prescribed and will provide evidence
satisfactory to the Representative of such timely filing. The Company
will promptly advise the Representative (i) when the Registration
Statement, if not effective at the Execution Time, and any amendment
thereto, shall have become effective, (ii) when
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<PAGE> 16
the Prospectus, and any supplement thereto, shall have been filed (if
required) with the Commission pursuant to Rule 424(b), (iii) when,
prior to termination of the offering of the Securities, any amendment
to the Registration Statement shall have been filed or become
effective, (iv) of any request by the Commission for any amendment of
the Registration Statement or supplement to the Prospectus or for any
additional information, (v) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement
or the institution or threatening of any proceeding for that purpose
and (vi) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Securities for
sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose. The Company will use its best efforts to
prevent the issuance of any such stop order and, if issued, to obtain
as soon as possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs
as a result of which the Prospectus as then supplemented would include
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it
shall be necessary to amend the Registration Statement or supplement
the Prospectus to comply with the Act or the rules thereunder, the
Company promptly will prepare and file with the Commission, subject to
the second sentence of paragraph (a) of this Section 5, an amendment
or supplement which will correct such statement or omission or effect
such compliance.
(c) As soon as practicable, the Company will make
generally available to its security holders and to the Representative
an earnings statement or statements of the Company and its
subsidiaries which will satisfy the provisions of Section 11(a) of the
Act and Rule 158 under the Act.
(d) The Company will furnish to the Representative and
counsel for the Underwriters, without charge, signed copies of the
Registration Statement (including exhibits thereto) and to each other
Underwriter a copy of the Registration Statement (without exhibits
thereto) and, so long as delivery of a prospectus by an Underwriter or
dealer may be required by the Act, as many copies of each Preliminary
Prospectus and the Prospectus and any supplement thereto as the
Representative may reasonably request. The Company will file or
caused to be filed with Commission such reports on Form SR as may be
required by Rule 463 under the Act. The Company will pay the expenses
of printing or other production of all documents relating to the
offering.
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<PAGE> 17
(e) The Company will arrange for the qualification of the
Securities for sale under the laws of such jurisdictions as the
Representative may designate and will maintain such qualifications in
effect so long as required for the distribution of the Securities and
will pay the fee of the National Association of Securities Dealers,
Inc., in connection with its review of the offering.
(f) The Company will not, for a period of 180 days
following the Execution Time, without the prior written consent of the
Representative, offer, sell or contract to sell, or otherwise dispose
of, directly or indirectly, or announce the offering of, any other
shares of Common Stock or any securities convertible into, or
exchangeable for, shares of Common Stock other than Merger Shares
issued to Eligible Members in exchange for their Membership Interests
pursuant to the Plan.
(g) The Company will use its best efforts to effect the
listing of the Securities and the Merger Shares on the New York Stock
Exchange.
(h) The Company confirms as of the date hereof that it
is in compliance with all provisions of Section 1 of Laws of Florida,
Chapter 92-198, An Act Relating to Disclosure of Doing Business with
Cuba, and the Company further agrees that if it commences engaging in
business with the government of Cuba or with any person or affiliate
located in Cuba after the date the Registration Statement becomes or
has become effective with the Commission or with the Florida
Department of Banking and Finance (the "Department"), whichever date
is later, or if the information reported in the Prospectus, if any,
concerning the Company's business with Cuba or with any person or
affiliate located in Cuba changes in any material way, the Company
will provide the Department notice of such business or change, as
appropriate, in a form acceptable to the Department.
(i) Prior to or contemporaneously with the Closing Date,
the Company, SCPIE and the Post-Effective Subsidiaries will take all
actions reasonably necessary in order to consummate the Plan and the
transactions contemplated thereby.
6. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the Underwriters to purchase the Underwritten Securities and the
Option Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company contained herein as of
the Execution Time, the Closing Date and any settlement date pursuant to Section
3 hereof, to the accuracy of the statements of the Company made in any
certificates pursuant to the provisions hereof, to the performance by the
Company and of its
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<PAGE> 18
obligations hereunder and to the following additional conditions:
(a) If the Registration Statement has not become
effective prior to the Execution Time, unless the Representative
agrees in writing to a later time, the Registration Statement will
become effective not later than (i) 6:00 PM, New York City time on the
date of determination of the public offering price, if such
determination occurred at or prior to 3:00 PM, New York City time on
such date or (ii) 12:00 Noon on the business day following the day on
which the public offering price was determined, if such determination
occurred after 3:00 PM, New York City time on such date; if filing of
the Prospectus, or any supplement thereto, is required pursuant to
Rule 424(b), the Prospectus, and any such supplement, will be filed in
the manner and within the time period required by Rule 424(b); and no
stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have
been instituted or threatened.
(b) The Company shall have furnished to the
Representative the opinion of Latham & Watkins, counsel for the
Company, dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Delaware with full corporate power and
authority to own its properties and conduct its business as
described in the Prospectus. Prior to the Effective Time,
AHIC and FGCC are the only subsidiaries of the Company.
Immediately after the Effective Time, the Post-Effective
Subsidiaries will be the only subsidiaries of the Company.
SCPIE has been and, until immediately prior to the Effective
Time, will be a reciprocal insurance exchange duly organized
under the laws of the State of California and has been and
will be in compliance in all material respects with the
requirements of the State of California providing for the
organization and regulation of reciprocal insurance exchanges;
and, through SCPIE Management has full power and authority to
own its properties and conduct its business as described in
the Prospectus. Each of the Post-Effective Subsidiaries has
been duly incorporated and is validly existing as a
corporation in good standing under the laws of the
jurisdiction in which it is chartered or organized, with full
corporate power and authority to own its properties and
conduct its business as described in the Prospectus. Each of
the Company, SCPIE and each Post-Effective Subsidiary is duly
qualified to do business as a foreign corporation and is in
good standing under the laws of each
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<PAGE> 19
jurisdiction which requires such qualification or wherein it
owns or leases material properties or conducts material
business;
(ii) all the outstanding shares of capital stock
of each Post-Effective Subsidiary have been duly and validly
authorized and issued and are fully paid and nonassessable
and, immediately after the Effective Time, all outstanding
shares of capital stock of the Post-Effective Subsidiaries
will be owned by the Company, either directly or through
Post-Effective Subsidiaries, free and clear of any perfected
security interest and, to the knowledge of such counsel, after
due inquiry, any other security interest, claims, liens or
encumbrances;
(iii) the Company's authorized capitalization is as
set forth in the Prospectus; the capital stock of the Company
conforms to the description thereof contained in the
Prospectus; the outstanding shares of Common Stock have been
duly and validly authorized and issued and are fully paid and
nonassessable; the Securities have been duly and validly
authorized, and, when issued and delivered to and paid for by
the Underwriters pursuant to this Agreement, will be fully
paid and nonassessable; the Merger Shares have been duly and
validly authorized, and, when issued and delivered to Eligible
Members in exchange for their Membership Interests as provided
in the Plan, will be fully paid and nonassessable; the
Securities and the Merger Shares have been duly authorized for
listing, subject to official notice of issuance, on the New
York Stock Exchange; the certificates for the Securities and
the Merger Shares conform to the requirements of the Delaware
General Corporation Law and the New York Stock Exchange; and
neither the holders of outstanding shares of capital stock of
the Company, the Eligible Members nor the other policyholders
of SCPIE are entitled to preemptive or other rights to
subscribe for the Securities;
(iv) to the best knowledge of such counsel, there
is no pending or threatened action, suit or proceeding before
any court or governmental agency, authority or body or any
arbitrator involving the Company, SCPIE or any of the Post-
Effective Subsidiaries of a character required to be disclosed
in the Registration Statement which is not adequately
disclosed in the Prospectus, and there is no franchise,
contract or other document of a character required to be
described in the Registration Statement or Prospectus, or to
be filed as an exhibit, which is not described or filed as
required; and the statements in the Prospectus under the
headings, "The Reorganization",
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<PAGE> 20
"Business--Regulation", "Business--Litigation" and
"Description of Capital Stock" have been reviewed by such
counsel and fairly summarize the matters therein described;
(v) the Registration Statement has become
effective under the Act; any required filing of the
Prospectus, and any supplements thereto, pursuant to Rule
424(b) has been made in the manner and within the time period
required by Rule 424(b); to the best knowledge of such
counsel, no stop order suspending the effectiveness of the
Registration Statement has been issued, no proceedings for
that purpose have been instituted or threatened and the
Registration Statement and the Prospectus (other than the
financial statements and other financial and statistical
information contained therein as to which such counsel need
express no opinion) comply as to form in all material respects
with the applicable requirements of the Act and the rules
thereunder; and such counsel has no reason to believe that at
the Effective Date the Registration Statement contained any
untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading or that the
Prospectus includes any untrue statement of a material fact or
omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under
which they were made, not misleading;
(vi) this Agreement has been duly authorized,
executed and delivered by the Company;
(vii) no consent, approval, authorization or order
of any court or governmental agency or body is required for
the consummation of the transactions contemplated herein,
except such as have been obtained under the Act and such as
may be required under the blue sky laws or insurance
securities laws of any jurisdiction in connection with the
purchase and distribution of the Securities by the
Underwriters; and no consent, approval, authorization or order
of any court or governmental agency or body is required for
the consummation of the transactions contemplated by the Plan,
except such as have been obtained and are in full force and
effect under the Act, the California Insurance Law, the
California Corporations Law and the blue sky laws and
insurance securities laws of various jurisdictions in
connection with the issuance of the Merger Shares to the
Eligible Members;
(viii) neither the issue and sale of the Securities,
nor the issue and delivery of the Merger Shares, nor
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<PAGE> 21
the consummation of any other of the transactions contemplated
herein or in the Plan nor the fulfillment of the terms hereof
or of the Plan will conflict with, result in a breach or
violation or constitute a default under any law or the
charter, by-laws or other organizational document of the
Company, SCPIE or any of the Post-Effective Subsidiaries or
the terms of any [material] indenture or material other
agreement or material instrument to which the Company, SCPIE
or any of the Post-Effective Subsidiaries is a party or any
judgment, order or decree known to such counsel to be
applicable to the Company, SCPIE or any of the Post-Effective
Subsidiaries of any court, regulatory body, administrative
agency, governmental body or arbitrator having jurisdiction
over the Company, SCPIE or any of the Post-Effective
Subsidiaries;
(ix) no holders of securities of the Company have
rights to the registration of such securities under the
Registration Statement;
(x) each of the Company and SCPIE Indemnity has
full corporate power and authority to execute and deliver the
Plan and to perform its respective obligations thereunder;
SCPIE (either directly or through SCPIE Management) has full
power and authority to execute and deliver the Plan and to
perform its obligations thereunder; the execution and delivery
of the Plan by the Company, SCPIE and SCPIE Indemnity have
been duly and validly authorized and approved by all required
action on the part of the Company, SCPIE and SCPIE Indemnity;
the Plan has been duly executed and delivered by the Company,
SCPIE and SCPIE Indemnity and constitutes a valid and legally
binding obligation of the Company, SCPIE and SCPIE Indemnity,
enforceable against each of them in accordance with its terms,
except as enforcement may be limited by bankruptcy, insolvency
or other similar laws affecting the enforcement of creditors'
rights generally and except that the availability of equitable
remedies, including specific performance, is subject to the
discretion of the court before which any proceeding therefor
may be brought; the Plan conforms in all material respects to
the requirements of the California Insurance Law applicable to
the reorganization of reciprocal insurance exchanges into
stock insurance companies; all necessary approvals under the
California Insurance Law for the consummation of the
transactions contemplated by the Plan have been obtained; the
Reorganization and the Merger have been completed in
accordance with the Plan, the Commissioner's Order and the
California Insurance Law, and all the rights (including,
without limitation, rights in respect of contracts,
reinsurance treaties, leases, licenses and trademarks) and
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<PAGE> 22
properties of SCPIE have accrued to, and become the rights and
properties of, SCPIE Indemnity, and all the rights of
creditors and liens of SCPIE have become the rights of
creditors and liens of SCPIE Indemnity;
(xi) the Merger Registration Statement has become
effective under the Act; any required filing of the Proxy
Statement/Prospectus, and any supplement thereto, pursuant to
Rule 424(b) has been made in the manner and within the time
period required by Rule 424(b); to the best knowledge of such
counsel, no stop order suspending the effectiveness of the
Merger Registration Statement has been issued, no proceedings
for that purpose have been instituted or threatened and the
Merger Registration Statement and the Proxy
Statement/Prospectus (other than the financial statements and
other financial and statistical information contained therein
as to which such counsel need express no opinion) comply as to
form in all material respects with the applicable requirements
of the Act and the rules thereunder; and such counsel has no
reason to believe that at the effective date of the Merger
Registration Statement and on the Special Meeting Date, the
Merger Registration Statement contained any untrue statement
of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the
statements therein not misleading or that the Proxy
Statement/Prospectus included any untrue statement of a
material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(xii) each of the Company and the Post-Effective
Subsidiaries owns, possesses or has obtained all material
governmental licenses, permits, certificates, consents,
orders, approvals and other authorizations necessary to own or
lease, as the case may be, and to operate its properties and
to carry on its business as currently conducted;
(xiii) each of the Insurance Subsidiaries is duly
licensed or authorized to conduct its insurance business under
the insurance laws of each jurisdiction in which it conducts
such business so as to require such licensing or
authorization; all such licenses or authorizations are in full
force and effect and such counsel is not aware of any event,
inquiry, investigation or proceeding that would reasonably be
expected to result in the suspension, revocation or limitation
of any such licenses or authorizations or otherwise impose any
limitation on the conduct of the business of the Company or
any Insurance Subsidiary,
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<PAGE> 23
and to the best of such counsel's knowledge, there is no
sustainable basis for any such suspension, revocation or
limitation; to the best of such counsel's knowledge, each of
the Insurance Subsidiaries is in compliance with, and conducts
its businesses in conformity with, all applicable insurance
laws and regulations, except where the failure to so comply or
conform would not have a material adverse effect on the
condition, financial or otherwise, earnings, business,
prospects or results of operations of the Company, SCPIE and
the Post-Effective Subsidiaries, taken as a whole;
(xiv) to the best knowledge of such counsel, all
reinsurance treaties and arrangements to which any of the
Insurance Subsidiaries is a party are in full force and effect
and none of the Insurance Subsidiaries is in violation of or
in default in the performance, observance or fulfillment of,
any obligation, agreement, covenant or condition contained
therein and upon the effectiveness of the Merger, all such
treaties and arrangements to which SCPIE is a party shall
remain in full force and effect and inure to the benefit of,
and be enforceable by, SCPIE Indemnity;
(xv) neither the Company nor any of the
Post-Effective Subsidiaries is and, after giving effect to the
offering and sale of the Securities, neither the Company nor
any of the Post-Effective Subsidiaries will be, an "investment
company" or an entity "controlled" by an "investment company"
as such terms are defined in the Investment Company Act.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
State of California [and the General Corporation Law of the State of
Delaware] or the United States, to the extent they deem proper and
specified in such opinion, upon the opinion of other counsel of good
standing whom they believe to be reliable and who are satisfactory to
counsel for the Underwriters and (B) as to matters of fact, to the
extent they deem proper, on certificates of responsible officers of
the Company and public officials. References to the Prospectus in
this paragraph (b) include any supplements thereto at the Closing
Date.
(c) The Representative shall have received from LeBoeuf,
Lamb, Greene & MacRae, L.L.P., counsel for the Underwriters, such
opinion or opinions, dated the Closing Date, with respect to the
issuance and sale of the Securities, the Registration Statement, the
Prospectus (together with any supplement thereto) and other related
matters as the Representative may reasonably require, and
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<PAGE> 24
the Company shall have furnished to such counsel such documents as
they reasonably request for the purpose of enabling them to pass upon
such matters.
(d) The Company shall have furnished to the
Representative a certificate of the Company, signed by the Chairman of
the Board or the President and the principal financial or accounting
officer of the Company, dated the Closing Date, to the effect that the
signers of such certificate have carefully examined the Registration
Statement, the Prospectus, any supplement to the Prospectus and this
Agreement and that:
(i) the representations and warranties of the
Company in this Agreement are true and correct in all material
respects on and as of the Closing Date with the same effect as
if made on the Closing Date and the Company has complied with
all the agreements and satisfied all the conditions on its part
to be performed or satisfied at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of
the Registration Statement or the Merger Registration
Statement has been issued and no proceedings for that purpose
have been instituted or, to the Company's knowledge,
threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectus (exclusive of any
supplement thereto), there has been no material adverse change
in the condition, financial or other, earnings, business,
prospects, properties or results of operations of the Company,
SCPIE and the Post-Effective Subsidiaries considered as a
whole, whether or not arising from transactions in the
ordinary course of business, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement
thereto).
(e) At the Execution Time and at the Closing Date, Ernst
& Young LLP shall have furnished to the Representative a letter or
letters, dated respectively as of the Execution Time and as of the
Closing Date, in form and substance satisfactory to the
Representative, confirming that they are independent accountants
within the meaning of the Act and the applicable published rules and
regulations thereunder and stating in effect that:
(i) in their opinion the audited combined financial
statements and financial statement schedules of SCPIE and
OSCAP and the audited balance sheet of the Company included in
the Registration Statement and the Prospectus and reported on
by them comply in form in all material respects with the
applicable accounting
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<PAGE> 25
requirements of the Act and the related published rules and
regulations thereunder;
(ii) on the basis of a reading of the latest unaudited
financial statements made available by SCPIE, OSCAP and the
Company; carrying out certain specified procedures (but not an
examination in accordance with generally accepted auditing
standards) which would not necessarily reveal matters of
significance with respect to the comments set forth in such
letter; a reading of the minutes of the meetings of the Board
of Governors, Board of Trustees, Board of Directors, Members,
shareholders, directors and committees of SCPIE, OSCAP and the
Company and its subsidiaries, [as applicable]; and inquiries
of certain officials of SCPIE, OSCAP and the Company who have
responsibility for financial and accounting matters of SCPIE,
OSCAP and the Company as to transactions and events subsequent
to December 31, 1995, nothing came to their attention which
caused them to believe that:
(A) any unaudited financial statements
included in the Registration Statement and the
Prospectus do not comply in form in all material
respects with applicable accounting requirements of
the Act and with the published rules and regulations
of the Commission with respect to registration
statements on Form S-1; and said unaudited financial
statements are not in conformity with generally
accepted accounting principles applied on a basis
substantially consistent with that of the audited
financial statements included in the Registration
Statement and the Prospectus; and
(B) with respect to the period subsequent to
[ ], 1996, there were any changes, at a specified
date not more than five business days prior to the
date of the letter, in the long-term debt of SCPIE
and OSCAP or the Company and its subsidiaries or the
capital stock of the Company or decreases in the
policyholders' equity and [ ] of SCPIE and OSCAP or
the stockholder's equity of the Company as compared
with the amounts shown on the combined balance sheet
of SCPIE and OSCAP and the balance sheet of the
Company included in the Registration Statement and
the Prospectus, or for the period from [ ],
1996 to such specified date there were any decreases,
as compared with the corresponding period in the
preceding year in premiums earned, net investment
income, income before policyholder dividends and
Federal income taxes of SCPIE and OSCAP and net
income, except in all instances for changes or
decreases set forth
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<PAGE> 26
in such letter, in which case the letter shall be
accompanied by an explanation by the Company as to
the significance thereof unless said explanation is
not deemed necessary by the Representative;
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical
information derived from the general accounting records of
SCPIE, OSCAP and the Company and its subsidiaries) set forth
in the Registration Statement and the Prospectus, including
the information set forth under the captions "Summary
Financial and Operating Data" and "Selected Financial and
Operating Data" in the Prospectus, agrees with the accounting
records of SCPIE and OSCAP, excluding any questions of legal
interpretation.
References to the Prospectus in this paragraph (e) include any
supplement thereto at the date of the letter.
The Representative shall have also received from Ernst & Young
LLP a letter stating that the Company's, SCPIE's, OSCAP's and their
subsidiaries' system of internal accounting controls taken as a whole
is sufficient to meet the broad objectives of internal accounting
control insofar as those objectives pertain to the prevention or
detection of errors or irregularities in amounts that would be
material in relation to the combined financial statements of SCPIE and
OSCAP and the balance sheet of the Company and its subsidiaries.
(f) Subsequent to the Execution Time or, if earlier, the
dates as of which information is given in the Registration Statement
(exclusive of any amendment thereof) and the Prospectus (exclusive of
any supplement thereto), there shall not have been (i) any change or
decrease specified in the letter or letters referred to in paragraph
(e) of this Section 6 or (ii) any change, or any development involving
a prospective change, in or affecting the business or properties of
the Company and its subsidiaries the effect of which, in any case
referred to in clause (i) or (ii) above, is, in the judgment of the
Representative, so material and adverse as to make it impractical or
inadvisable to proceed with the offering or delivery of the Securities
as contemplated by the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement
thereto).
(g) At the Execution Time, the Company shall have
furnished to the Representative a letter substantially in the form of
Exhibit A hereto from the Company addressed to the Representative, in
which each such person agrees not
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<PAGE> 27
to offer, sell or contract to sell, or otherwise dispose of, directly
or indirectly, or announce an offering of, any shares of Common Stock
beneficially owned by such person or any securities convertible into,
or exchangeable for, shares of Common Stock for a period of 180 days
following the Execution Time without the prior written consent of the
Representative, other than shares of Common Stock disposed of as bona
fide gifts.
(h) Subsequent to the Execution Time, there shall not
have been any decrease in the rating of any of the Insurance
Subsidiaries by A.M. Best Company, Inc. or any notice given of any
intended or potential decrease in any such rating or of a possible
change in any such rating that does not indicate the direction of the
possible change.
(i) Prior to or contemporaneously with the Closing Date,
each of the actions required to occur and conditions required to be
satisfied on or prior to the Effective Time pursuant to the Plan or
the Commissioner's Order shall have occurred or been satisfied and the
transactions contemplated by the Plan shall have been consummated in
accordance with the Plan, the Commissioner's Order and the California
Insurance Law.
(j) On or prior to the Execution Time, the Securities and
the Merger Shares shall have been duly authorized for listing on the
New York Stock Exchange, subject only to official notice of issuance.
(k) Prior to the Closing Date, the Company shall have
furnished to the Representative such further information, certificates
and documents as the Representative may reasonably request.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Representative and counsel for the
Underwriters, this Agreement and all obligations of the Underwriters hereunder
may be canceled at, or at any time prior to, the Closing Date by the
Representative. Notice of such cancellation shall be given to the Company in
writing or by telephone or telegraph confirmed in writing.
The documents required to be delivered by this Section 6 shall
be delivered at the office of LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel
for the Underwriters, at 125 West 55th Street, New York, New York, on the
Closing Date.
7. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the sale
of the Securities provided for herein is not consummated
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<PAGE> 28
because any condition to the obligations of the Underwriters set forth in
Section 6 hereof is not satisfied, because of any termination pursuant to
Section 10 hereof or because of any refusal, inability or failure on the part
of the Company or SCPIE Indemnity to perform any agreement herein or comply
with any provision hereof other than by reason of a default by any of the
Underwriters, the Company will reimburse the Underwriters severally upon demand
for all out-of-pocket expenses (including reasonable fees and disbursements of
counsel) that shall have been incurred by them in connection with the proposed
purchase and sale of the Securities.
8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company
agrees to indemnify and hold harmless each Underwriter, the directors, officers,
employees and agents of each Underwriter and each person who controls any
Underwriter within the meaning of either the Act or the Exchange Act against any
and all losses, claims, damages or liabilities, joint or several, to which they
or any of them may become subject under the Act, the Exchange Act or other
Federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the registration statement for the
registration of the Securities as originally filed or in any amendment thereof,
or in any Preliminary Prospectus or the Prospectus, or in any amendment thereof
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and agrees to reimburse
each such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter through the Representative
specifically for inclusion therein. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.
(b) Each Underwriter severally agrees to indemnify and
hold harmless the Company, each of its directors, each officer of the
Company who signs the Registration Statement, and each person who controls the
Company within the meaning of either the Act or the Exchange Act, to the same
extent as the foregoing indemnity to each Underwriter, but only with reference
to written information relating to such Underwriter furnished to the Company by
or on behalf of such Underwriter
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<PAGE> 29
through the Representative specifically for inclusion in the documents referred
to in the foregoing indemnity. This indemnity agreement will be in addition to
any liability which any Underwriter may otherwise have. The Company
acknowledges that the statements set forth in the last paragraph of the cover
page and in the first, second, third, fourth, seventh and ninth paragraphs under
the heading "Underwriting" in any Preliminary Prospectus and the Prospectus
constitute the only information furnished in writing by or on behalf of the
several Underwriters for inclusion in any Preliminary Prospectus or the
Prospectus, and you, as the Representative, confirm that such statements are
correct.
(c) Promptly after receipt by an indemnified party under
this Section 8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the commencement thereof; but the failure so to notify the
indemnifying party (i) will not relieve it from liability under paragraph (a)
or (b) above unless and to the extent it did not otherwise learn of such action
and such failure results in the forfeiture by the indemnifying party of
substantial rights and defenses and (ii) will not, in any event, relieve the
indemnifying party from any obligations to any indemnified party other than the
indemnification obligation provided in paragraph (a) or (b) above. The
indemnifying party shall be entitled to appoint counsel of the indemnifying
party's choice at the indemnifying party's expense to represent the indemnified
party in any action for which indemnification is sought (in which case the
indemnifying party shall not thereafter be responsible for the fees and
expenses of any separate counsel retained by the indemnified party or parties
except as set forth below); provided, however, that such counsel shall be
satisfactory to the indemnified party. Notwithstanding the indemnifying
party's election to appoint counsel to represent the indemnified party in an
action, the indemnified party shall have the right to employ separate counsel
(including local counsel), and the indemnifying party shall bear the reasonable
fees, costs and expenses of such separate counsel if (i) the use of counsel
chosen by the indemnifying party to represent the indemnified party would
present such counsel with a conflict of interest, (ii) the actual or potential
defendants in, or targets of, any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have
reasonably concluded that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, (iii) the indemnifying party shall not
have employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of the institution of
such action or (iv) the indemnifying party shall authorize the indemnified
party to employ separate counsel at the expense of the indemnifying party. An
indemnifying party will not, without the prior written consent of
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<PAGE> 30
the indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph
(a) or (b) of this Section 8 is unavailable to or insufficient to hold harmless
an indemnified party for any reason, the Company and the Underwriters agree to
contribute to the aggregate losses, claims, damages and liabilities (including
legal or other expenses reasonably incurred in connection with investigating or
defending same) (collectively, "Losses") to which the Company and one or more of
the Underwriters may be subject in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and by the
Underwriters on the other from the offering of the Securities; provided,
however, that in no case shall any Underwriter (except as may be provided in any
agreement among underwriters relating to the offering of the Securities) be
responsible for any amount in excess of the underwriting discount or commission
applicable to the Securities purchased by such Underwriter hereunder. If the
allocation provided by the immediately preceding sentence is unavailable for any
reason, the Company and the Underwriters shall contribute in such proportion as
is appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and of the Underwriters on the other in
connection with the statements or omissions which resulted in such Losses as
well as any other relevant equitable considerations. Benefits received by the
Company shall be deemed to be equal to the total net proceeds from the offering
(before deducting expenses), and benefits received by the Underwriters shall be
deemed to be equal to the total underwriting discounts and commissions, in each
case as set forth on the cover page of the Prospectus. Relative fault shall be
determined by reference to whether any alleged untrue statement or omission
relates to information provided by the Company or the Underwriters. The Company
and the Underwriters agree that it would not be just and equitable if
contribution were determined by pro rata allocation or any other method of
allocation which does not take account of the equitable considerations referred
to above. Notwithstanding the provisions of this paragraph (d), no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 8, each person who
controls an Underwriter within the meaning of either the Act
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<PAGE> 31
or the Exchange Act and each director, officer, employee and agent of an
Underwriter shall have the same rights to contribution as such Underwriter, and
each person who controls the Company within the meaning of either the Act or the
Exchange Act, each officer of the Company who shall have signed the Registration
Statement and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to the applicable terms and
conditions of this paragraph (d).
9. DEFAULT BY AN UNDERWRITER. If any one or more
Underwriters shall fail to purchase and pay for any of the Securities agreed to
be purchased by such Underwriter or Underwriters hereunder and such failure to
purchase shall constitute a default in the performance of its or their
obligations under this Agreement, the remaining Underwriters shall be obligated
severally to take up and pay for (in the respective proportions which the amount
of Securities set forth opposite their names in Schedule I hereto bears to the
aggregate amount of Securities set forth opposite the names of all the remaining
Underwriters) the Securities which the defaulting Underwriter or Underwriters
agreed but failed to purchase; provided, however, that in the event that the
aggregate amount of Securities which the defaulting Underwriter or Underwriters
agreed but failed to purchase shall exceed 10% of the aggregate amount of
Securities set forth in Schedule I hereto, the remaining Underwriters shall have
the right to purchase all, but shall not be under any obligation to purchase
any, of the Securities, and if such nondefaulting Underwriters do not purchase
all the Securities, this Agreement will terminate without liability to any
nondefaulting Underwriter or the Company. In the event of a default by any
Underwriter as set forth in this Section 9, the Closing Date shall be postponed
for such period, not exceeding seven days, as the Representative shall determine
in order that the required changes in the Registration Statement and the
Prospectus or in any other documents or arrangements may be effected. Nothing
contained in this Agreement shall relieve any defaulting Underwriter of its
liability, if any, to the Company and any nondefaulting Underwriter for damages
occasioned by its default hereunder.
10. TERMINATION. This Agreement shall be subject to
termination in the absolute discretion of the Representative, by notice given
to the Company prior to delivery of and payment for the Securities, if prior to
such time (i) trading in the Company's Common Stock shall have been suspended
by the Commission or the New York Stock Exchange or trading in securities
generally on the New York Stock Exchange shall have been suspended or limited
or minimum prices shall have been established on such Exchange, (ii) a banking
moratorium shall have been declared either by Federal or New York State
authorities or (iii) there shall have occurred any outbreak or
-30-
<PAGE> 32
escalation of hostilities, declaration by the United States of a national
emergency or war or other calamity or crisis the effect of which on financial
markets is such as to make it, in the judgment of the Representative,
impracticable or inadvisable to proceed with the offering or delivery of the
Securities as contemplated by the Prospectus (exclusive of any supplement
thereto).
11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE. The
respective agreements, representations, warranties, indemnities and other
statements of the Company or its officers and of the Underwriters set forth in
or made pursuant to this Agreement will remain in full force and effect,
regardless of any investigation made by or on behalf of any Underwriter or the
Company or any of their officers, directors or controlling persons referred to
in Section 8 hereof, and will survive delivery of and payment for the
Securities. The provisions of Section 7 and 8 hereof shall survive the
termination or cancellation of this Agreement.
12. NOTICES. All communications hereunder will be in
writing and effective only on receipt, and, if sent to the Representative, will
be mailed, delivered or telegraphed and confirmed to Salomon Brothers Inc at
Seven World Trade Center, New York, New York, 10048; or, if sent to the
Company, will be mailed, delivered or telegraphed and confirmed to it at 9441
West Olympic Boulevard, Beverly Hills, California 90213; Attention: Donald J.
Zuk; President.
13. SUCCESSORS. This Agreement will inure to the benefit
of and be binding upon the parties hereto and their respective successors and
the officers and directors and controlling persons referred to in Section 8
hereof, and no other person will have any right or obligation hereunder.
14. APPLICABLE LAW. This Agreement will be governed by
and construed in accordance with the laws of the State of New York.
-31-
<PAGE> 33
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding agreement
among the Company and the several Underwriters.
Very truly yours,
SCPIE HOLDINGS INC.
By:____________________________
Name:
Title:
The foregoing Agreement is
hereby confirmed and accepted
as of the date first above
written.
Salomon Brothers Inc
By:
----------------------
Vice President
For itself and the other
several Underwriters named in
Schedule I to the foregoing
Agreement.
-32-
<PAGE> 34
SCHEDULE I
<TABLE>
<CAPTION>
Number of Shares
Underwriters to be Purchased
------------ ----------------
<S> <C>
Salomon Brothers Inc . . . . . . . . . . . . . . . . .
---------
Total . . . . . . . . . . . . . . . . . . . . . . 2,000,000
=========
</TABLE>
-33-
<PAGE> 1
EXHIBIT 2
AMENDED AND RESTATED
PLAN AND AGREEMENT OF MERGER
<PAGE> 2
AMENDED AND RESTATED
PLAN AND AGREEMENT OF MERGER
BY AND AMONG
SCPIE HOLDINGS INC.
A DELAWARE CORPORATION,
AND
SCPIE INDEMNITY COMPANY
A CALIFORNIA CORPORATION,
AND
SOUTHERN CALIFORNIA PHYSICIANS
INSURANCE EXCHANGE
A CALIFORNIA INTER-INSURANCE EXCHANGE
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
I THE MERGER...................................................................... 1
1.1 The Merger................................................................. 1
1.2 Effective Time of the Merger............................................... 2
1.3 Effect of the Merger....................................................... 2
1.4 Subsequent Actions......................................................... 2
1.5 Governing Documents........................................................ 2
1.6 Directors and Officers..................................................... 2
II CONVERSION OF MEMBERSHIP INTERESTS, ALLOCATION AND PAYMENT OF MERGER
CONSIDERATION................................................................... 3
2.1 Certain Definitions........................................................ 3
2.2 Conversion of Membership Interests......................................... 4
2.3 Allocation of Merger Shares................................................ 4
2.4 Adjustment of Share Numbers................................................ 5
2.5 Fractional Shares.......................................................... 5
2.6 Cancellation and Issuance of Holdings Stock................................ 5
2.7 Issuance of Consideration.................................................. 5
2.8 No Further Interest in the Company......................................... 5
III APPROVAL BY THE COMMISSIONER.................................................... 5
3.1 Commissioner's Approval.................................................... 5
IV REPRESENTATIONS AND WARRANTIES BY THE COMPANY................................... 5
4.1 Organization and Qualification............................................. 5
4.2 Authority Relative to this Plan; Recommendation to Eligible Members........ 5
4.3 Compliance................................................................. 6
V REPRESENTATIONS AND WARRANTIES OF HOLDINGS AND NEW INSURER...................... 6
5.1 Organization and Qualification............................................. 6
5.2 Capitalization............................................................. 7
5.3 Authority Relative to this Plan............................................ 7
5.4 Compliance................................................................. 7
VI ADDITIONAL AGREEMENTS........................................................... 7
6.1 Cooperation................................................................ 7
6.2 Special Meeting of Eligible Members of the Company......................... 8
6.3 Officers' and Directors' Insurance; Indemnification........................ 9
6.4 Continuity of Obligations Regarding Policyholders.......................... 9
VII CONDITIONS PRECEDENT............................................................ 10
7.1 Conditions to Obligations of Each Party to Effect the Merger............... 10
VIII TERMINATION..................................................................... 10
8.1 Termination................................................................ 10
8.2 Effect of Termination...................................................... 11
</TABLE>
i
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
IX GENERAL PROVISIONS.............................................................. 11
9.1 Amendment.................................................................. 11
9.2 Extension; Waiver.......................................................... 11
9.3 Nonsurvival of Representations and Warranties.............................. 11
9.4 Entire Plan................................................................ 11
9.5 Counterparts............................................................... 11
9.6 Severability............................................................... 11
9.7 Notices.................................................................... 12
9.8 Public Announcements....................................................... 12
9.9 Section Headings........................................................... 12
9.10 Benefits and Assignment.................................................... 12
9.11 Applicable Law............................................................. 12
</TABLE>
ii
<PAGE> 5
THIS AMENDED AND RESTATED PLAN AND AGREEMENT OF MERGER (the "Plan"), dated
as of August 8, 1996, is among SCPIE HOLDINGS INC., a Delaware corporation
("Holdings"), SCPIE INDEMNITY COMPANY, a California corporation and a wholly
owned subsidiary of Holdings ("New Insurer"), and SOUTHERN CALIFORNIA PHYSICIANS
INSURANCE EXCHANGE, a California inter-insurance exchange (the "Company").
RECITALS
WHEREAS, the Company is a California reciprocal or inter-insurance exchange
organized pursuant to the provisions of Division I, Part 2, Chapter 3
(commencing with Section 1280) of the Insurance Code of the State of California
(the "California Insurance Law").
WHEREAS, New Insurer is a corporation of the State of California authorized
to transact insurance under the California Insurance Law.
WHEREAS, Holdings is a corporation of the State of Delaware and a wholly
owned subsidiary of the Company.
WHEREAS, the General Corporations Law of the State of California (the
"California Corporations Law") and the California Insurance Law permit a merger
of a California reciprocal or inter-insurance exchange with and into a
corporation authorized to transact insurance in California.
WHEREAS, in furtherance of such merger, it is contemplated that the
Membership Interests (as hereinafter defined) of Eligible Members (as
hereinafter defined) of the Company will be exchanged for the consideration
described herein.
WHEREAS, the Board of Governors of the Company (the "Board of Governors")
and the respective Boards of Directors of New Insurer and Holdings have each
duly approved the merger contemplated by this Plan (the "Merger") upon the terms
and subject to the conditions set forth in this Plan and in accordance with
California Corporations Law and the California Insurance Law, with the result
that the Company shall be merged with and into New Insurer and the Eligible
Members of the Company shall receive, pursuant to the Merger, shares of the
Common Stock, par value $.0001 per share, of Holdings (the "Common Stock").
WHEREAS, the Company intends to prepare and mail to all Eligible Members of
the Company a proxy statement with respect to a special meeting (the "Special
Meeting") of Members of the Company at which Eligible Members will be asked to
approve this Plan.
WHEREAS, the parties entered into a plan and agreement of merger, dated
March 21, 1996, relating to the Merger (the "Original Plan"); and
WHEREAS, the parties desire to amend and restate the Original Plan by
entering into this Plan, and the parties intend for the terms and conditions of
this Plan to supersede all terms and conditions of the Original Plan.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, Holdings, New Insurer and the Company
hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Subject to the conditions of Article VII being satisfied
or duly waived, and in accordance with and subject to (i) the provisions of this
Plan, (ii) the California Corporations Law and
1
<PAGE> 6
(iii) the California Insurance Law, the Company shall be merged with and into
New Insurer in the Merger. At and after the Effective Time, the separate
existence of the Company (except as may be continued by operation of law) shall
cease, and the New Insurer shall continue as the surviving corporation under the
corporate name it possesses immediately prior to the Effective Time. The Company
and the New Insurer are sometimes hereinafter referred to as the "Constituent
Entities" and New Insurer is sometimes hereinafter referred to as the "Surviving
Corporation."
1.2 Effective Time of the Merger. The Merger shall become effective at the
time (herein called the "Effective Time") this Plan is filed with the Secretary
of State of the State of California in the manner provided under Section 1113(g)
of the California Corporations Law and Section 1556(a) of the California
Insurance Law. The day on which the Effective Time occurs is hereinafter called
the "Effective Date." The Effective Date shall be such date as the Board of
Governors and the Boards of Directors of Holdings and New Insurer determine is
appropriate after the conditions set forth herein have been satisfied or waived.
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of the California Corporations
Law and the California Insurance Law, including, without limitation, Section
1107 of California Corporations Law and Section 1557 of the California Insurance
Law. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time all the rights and property of the Company shall accrue to,
and become the rights and properties of, the Surviving Corporation, which shall
succeed to and assume all the obligations and liabilities (including
policyholder obligations and liabilities) of the Company; and all rights of
creditors (including policyholders) and liens of the Company shall become the
rights of creditors (including policyholders) and liens of the Surviving
Corporation. After the Effective Time, any reference to the Company in any
writing, including but not limited to any power or powers of attorney or agency
agreement or agreements authorizing the execution of any surety bonds or
contracts or policies of insurance, or authorizing the acceptance of service of
process or any other act on behalf of the Constituent Entities and any and all
other contracts, policies, agreements, instruments and documents to which either
Constituent Entity is a party, whether executed or taking effect before or after
the Merger, shall be deemed a reference to the Surviving Corporation if not
inconsistent with the other provisions of such writing, and all such writings
are hereby ratified, confirmed and approved by the Surviving Corporation, and
the Surviving Corporation shall be deemed to be substituted in the place and
stead of either Constituent Entity as a party thereto.
1.4 Subsequent Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of the Company acquired or to be acquired by the Surviving
Corporation as a result of, or in connection with, the Merger or otherwise to
carry out this Plan, the officers and directors of the Surviving Corporation
shall be authorized to execute and deliver, in the name and on behalf of the
Company, all such deeds, bill of sale, assignments and assurances and to take
and do, in the name and on behalf of such corporation or otherwise, all such
other actions and things as may be necessary or desirable to vest, perfect or
confirm any and all right, title and interest in, to and under such rights,
properties or assets in the Surviving Corporation or otherwise to carry out this
Plan.
1.5 Governing Documents. The Articles of Incorporation and Bylaws of New
Insurer shall be the Articles of Incorporation and Bylaws of the Surviving
Corporation, as in effect immediately prior to the Effective Time, until
thereafter amended as provided therein and under California Corporations Law.
1.6 Directors and Officers. The members of the Board of Directors of the
New Insurer immediately prior to the Effective Time will be the initial
directors of the Surviving Corporation, and the officers of the New Insurer
immediately prior to the Effective Time will be the initial officers of the
Surviving Corporation, in each case until their successors are duly elected and
qualified.
2
<PAGE> 7
ARTICLE II
CONVERSION OF MEMBERSHIP INTERESTS,
ALLOCATION AND PAYMENT OF MERGER CONSIDERATION
2.1 Certain Definitions. As used in this Article II and elsewhere in this
Plan, the terms listed below shall have the following meanings:
"Approval Date" means the date that the Commissioner, pursuant to Section
1552 of the California Insurance Law, approves this Plan for submission to the
Eligible Members for approval.
"Attorney-in-Fact" means SCPIE Management Company, a California corporation
that is the Company's attorney-in-fact.
"California Department" means the Department of Insurance of the State of
California.
"Commissioner" means the Commissioner of Insurance of the California
Department, or such governmental officer, body or authority as may succeed such
Commissioner as the primary regulator of the Company's insurance business under
applicable law.
"Earned Premiums" means, for the applicable period, earned premiums in
respect of a Policy.
"Eligible Member" means a Person who is a Member of the Company on the
Approval Date.
"Eligible Policy" means a Policy issued to an Eligible Member on which
premiums were earned at any time, provided, however, that with respect to a
Policy issued to an Eligible Member who was not a Member on March 21, 1996,
Earned Premiums for such a Policy shall consist only of earned premiums
following March 21, 1996, and not earned premiums at any point prior to such
date.
"Fair Market Value" means (i) the average closing price of a share of the
Common Stock on the principal exchange on which the Common Stock is then
trading, if any, on the first five trading days following the Effective Date; or
(ii) if the Common Stock is not traded on an exchange but is quoted on Nasdaq or
a successor quotation system, (1) the average last sales price (if the Common
Stock is then listed as a National Market Issue under the NASD National Market
System) or (2) the average of the mean between the closing representative bid
and asked prices (in all other cases) for the Common Stock on the first five
trading days following the Effective Date as reported by Nasdaq or such
successor quotation system.
"Initial Public Offering" means the initial public offering by Holdings of
shares of Common Stock pursuant to an effective registration statement on Form
S-1.
"Initial Stock Price" means the price per share to the public at which the
Common Stock is sold in the Initial Public Offering.
"Member," "subscriber" and "insured person." A Person is a Member of the
Company if such Person is a subscriber who is an "insured person" under the name
of the Company through the facilities of the Attorney-in-Fact acting on behalf
of the several subscribers. The term "subscriber" shall include those Persons
who have executed a Subscription Agreement and Power of Attorney or any like
agreement of the Company. The term "insured person" shall include (a) each
individual physician, surgeon, nurse anesthetist, professional medical
partnership, professional medical corporation or other health care provider to
whom or which a policy of insurance has been issued by the Company as "named
insured," and (b) each physician, surgeon, nurse anesthetist or other health
care provider to whom a certificate insert (naming such person as a "physician
member" or "certificate holder") has been issued as part of a policy of
insurance issued by the Company to a professional medical partnership,
professional medical corporation or other health care provider. A "named
insured" under a policy of insurance ceases to be an insured person, subscriber
and Member when the "policy period" of such policy terminates by expiration of
time, cancellation or any other reason and a "physician member" or "certificate
holder" ceases to be an insured person, subscriber and Member when the "coverage
period" or "certificate period" under the applicable policy terminates by
expiration of time cancellation, or any other reason.
3
<PAGE> 8
"Merger Shares" means the shares of Common Stock to be delivered (i) to
Members upon conversion of their Membership Interests by virtue of the Merger
and (ii) to New Insurer as consideration for the cancellation of the shares of
Common Stock held by the Company, which cancellation shall occur immediately
prior to the Merger as set forth in Section 2.5.
"Person" means an individual, corporation, joint venture, limited liability
company, partnership, association, trust, trustee, unincorporated entity,
organization or government or any department or agency thereof.
"Policy" means an insurance policy issued by the Company but does not
include (i) any agreement pursuant to which the Company has ceded or assumed
insurance or (ii) a reporting endorsement.
2.2 Conversion of Membership Interests. At the Effective Time, by virtue
of the Merger and without any action on the part of the Company, New Insurer,
Holdings, the Surviving Corporation or the holder of any of the following
securities:
(a) The rights of Members of the Company arising under the
subscription agreements between Members and the Company (the "Subscription
Agreements"), the Company's Bylaws, the California Insurance Law and
otherwise, including, without limitation, the right to vote for members of
the Board of Governors and on other matters and to participate in any
distribution of surplus on liquidation of the Company (but not including
contractual rights arising under Policies (the "Membership Interests"), in
existence immediately prior to the Effective Time shall be cancelled and
extinguished and be converted into the right to receive shares of Common
Stock as set forth in this Agreement.
(b) The Members entitled to receive Merger Shares shall be the
Eligible Members. The Merger Shares shall be allocated among the Eligible
Members as described in this Article II.
(c) Each share of common stock of New Insurer issued and outstanding
immediately prior to the Effective Time shall be converted into and become
one validly issued, fully paid and nonassessable share of common stock of
the Surviving Corporation.
2.3 Allocation of Merger Shares.
(a) The number of Merger Shares allocable to each Eligible Member
shall be determined as follows:
(i) Each Eligible Member shall be allocated a number of shares of
Common Stock equal to the product of x and y, where
"x" equals 9,000,000 shares of Common Stock and
"y" equals the ratio of the Earned Premiums of such Eligible Member
on Eligible Policies to the total Earned Premiums of all Eligible
Members on Eligible Policies during the period beginning on January 1,
1993 and ending on but including the Approval Date,
plus
(ii) Each Eligible Member who was also a Member on March 21, 1996
shall be allocated a number of shares of Common Stock equal to 1,000,000
shares of Common Stock divided by the total number of Eligible Members who
were also Members on March 21, 1996.
(b) The number of Merger Shares allocable to New Insurer shall be (i)
500,000 or (ii) such other number as the Board of Directors of Holdings and
the Board of Governors of the Company determine is appropriate in order to
insure that the Merger Shares issued to New Insurer pursuant to the Merger
have a fair market value equivalent to the fair market value of the shares
of Common Stock held by the Company which are to be cancelled in the Merger
pursuant to Section 2.5 hereof.
4
<PAGE> 9
2.4 Fractional Shares. No fractional shares of Common Stock shall be
issued to any Eligible Member upon surrender of Membership Interests. In lieu of
any fractional shares, each Eligible Member shall be paid an amount in cash
(without interest) rounded to the nearest cent, determined (i) by multiplying
(a) the Initial Stock Price by (b) the fractional interest to which such
Eligible Member would otherwise be entitled or (ii) in the event that the
Initial Public Offering does not occur on the Effective Date, by multiplying (a)
the Fair Market Value by (b) the fractional interest to which such Eligible
Member would otherwise be entitled.
2.5 Cancellation and Issuance of Holdings Stock. At the Effective Time, by
virtue of the Merger and without any action on the part of the Company, New
Insurer, Holdings or the Surviving Corporation:
(a) the Common Stock of Holdings held by the Company shall be
cancelled; and
(b) the Merger Shares allocable to New Insurer pursuant to Section
2.3(b) shall be issued.
2.6 Issuance of Consideration. As soon as reasonably practicable after the
Effective Date, Holdings shall prepare and issue (i) stock certificates
representing the Merger Shares allocated to each Eligible Member and to New
Insurer, and (ii) checks representing the cash paid in lieu of fractional
shares, as calculated pursuant to Section 2.4 hereof.
2.7 No Further Interest in the Company. As of the Effective Time, each
Member of the Company shall cease to be a Member, and shall have no further
interest in the Company or the Surviving Corporation, except for such interest
that each such Member may have as a holder of Common Stock.
ARTICLE III
APPROVAL BY THE COMMISSIONER
3.1 Commissioner's Approval. This Plan is subject to the approval of the
Commissioner pursuant to Sections 1552 et. seq. of the California Insurance Law.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES BY THE COMPANY
The Company represents and warrants to Holdings that, as of the date of
this Plan and as of the Effective Time:
4.1 Organization and Qualification. The Company is a reciprocal or
inter-insurance exchange duly organized, validly existing and in good standing
under the laws of the State of California. The Company has all requisite power
and authority required for it to own (or lease) and use its properties and carry
on its business as presently conducted. The Company is duly qualified or
licensed to do business, and is in good standing, in each jurisdiction where the
nature of business or the character of its properties makes necessary such
qualifications or licensing, except where the failure to so qualify would not
materially adversely affect the condition (financial or otherwise), results of
operations, business, properties or prospects of the Company taken as a whole.
5
<PAGE> 10
4.2 Authority Relative to this Plan; Recommendation to Eligible
Members. The Company has full right, power, and authority to execute, deliver
and perform the terms of this Plan. Subject only to favorable action by the
Company's Eligible Members at the Special Meeting referred to in Section 6.2,
the execution, delivery and performance of this Plan by the Company have been
duly and validly authorized and approved by all required action on the part of
the Company. The Company's Board of Governors has unanimously approved the
execution, delivery and performance of this Plan. Subject only to approval of
the Company's Eligible Members as described above, this Plan constitutes the
valid and binding agreement of the Company and is enforceable in accordance with
its terms.
4.3 Compliance. Neither the execution and delivery of this Plan by the
Company nor the consummation of the transactions contemplated hereby nor
compliance by the Company with any of the provisions hereof will (i) violate,
conflict with, or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of the Company under any of the
terms, conditions or provisions of (a) the management agreement between the
Company and the Attorney-in-Fact, or the Company's Bylaws or (b) any material
note, bond, mortgage, indenture, deed of trust, license, lease, agreement or
other instrument or obligation to which the Company or any direct or indirect
subsidiary of the Company is a party, or to which any of them, or any of their
respective properties or assets, may be subject, or (ii) subject to compliance
with the statutes and regulations referred to in the next paragraph, violate any
judgment, ruling, order, writ, injunction, decree, statute, rule or regulation
applicable to the Company or any direct or indirect subsidiary of the Company or
any of their respective properties or assets, except, in the case of each of
clauses (i) and (ii) above, for such violations, conflicts, breaches, defaults,
terminations, accelerations or creations of liens, security interests, charges
or encumbrances, which, in the aggregate, would not have a material adverse
effect on the transactions contemplated hereby or on the condition (financial or
other), business or operations of the Company and its subsidiaries taken as a
whole.
Other than in connection with or in compliance with the provisions of the
California Corporations Law, the California Insurance Law, the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act of
1933, as amended (the "Securities Act"), and the "takeover" or "blue sky" laws
of various states, no notice to, filing with, or authorization, consent or
approval of, any domestic or foreign public body or authority is necessary for
the consummation the Company of the transactions contemplated by this Plan,
except where failure to give such notice, make such filings, or obtain
authorizations, consents or approvals would, in the aggregate, not have a
material adverse effect on the transactions contemplated hereby or on the
condition (financial or other), business or operations of the Company taken as a
whole.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF HOLDINGS AND NEW INSURER
Each of Holdings and New Insurer each, jointly and severally, represents
and warrants to the Company as follows:
5.1 Organization and Qualification. Holdings is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. New Insurer is a corporation duly organized, validly existing and in
good standing under the laws of the State of California. Each of Holdings and
New Insurer is duly qualified or licensed to do business, and is in good
standing, in each jurisdiction where the nature of their respective businesses
or the character of their respective properties makes necessary such
qualifications or licensing, except where the failure to so qualify would not
materially adversely affect the condition (financial or otherwise), results of
operations, business, properties or prospects of Holdings and New Insurer, taken
as a whole. New Insurer holds a certificate of authority from the
6
<PAGE> 11
Commissioner to transact specified classes of insurance in the State of
California, and such certificate of authority is in full force and effect.
5.2 Capitalization. As of the date of this Plan, Holdings has an
authorized capital stock of 1,000 shares of Common Stock, par value $.0001 per
share, of which 500 shares are duly and validly issued and outstanding, fully
paid and nonassessable, all of which are held by the Company. As of the date of
this Plan, New Insurer has an authorized capital stock of 100,000 shares of
common stock, par value $260.00 per share, of which 10,000 shares are duly and
validly issued and outstanding, fully paid, nonassessable, all of which are held
by the Company.
5.3 Authority Relative to this Plan. Each of Holdings and New Insurer has
full corporate power and authority to execute and deliver this Plan and to
perform its respective obligations hereunder. All corporate action required on
the part of Holdings and New Insurer in order to authorize such execution,
delivery and performance has been taken. This Plan constitutes the valid and
binding obligation of each of Holdings and New Insurer, enforceable against each
in accordance with its terms.
5.4 Compliance. Neither the execution and delivery of this Plan by
Holdings and New Insurer nor the consummation of the transactions contemplated
hereby nor compliance by Holdings and New Insurer with any of the provisions
hereof will (i) violate, conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of Holdings or New
Insurer or any other direct or indirect subsidiary under any of the terms,
conditions or provisions of (a) the respective charters or bylaws of Holdings or
New Insurer or (b) any material note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which Holdings or
New Insurer is a party, or to which either of them, or any of their respective
properties or assets, may be subject, or (ii) subject to compliance with the
statutes and regulations referred to in the next paragraph, violate any
judgment, ruling, order, writ, injunction, decree, statute, rule or regulation
applicable to Holdings or New Insurer or any of their respective properties or
assets, except, in the case of each of clauses (i) and (ii) above, for such
violations, conflicts, breaches, defaults, terminations, accelerations or
creations of liens, security interests, charges or encumbrances, which, in the
aggregate, would not have a material adverse effect on the transactions
contemplated hereby or on the condition (financial or other), business or
operations of Holdings and its subsidiaries taken as a whole.
Other than in connection with or in compliance with the provisions of the
California Corporations Law, the California Insurance Law, the Exchange Act, the
Securities Act, and the "takeover" or "blue sky" laws of various states, no
notice to, filing with, or authorization, consent or approval of, any domestic
or foreign public body or authority is necessary for the consummation by
Holdings or New Insurer of the transactions contemplated by this Plan, except
where failure to give such notice, make such filings, or obtain authorizations,
consents or approvals would, in the aggregate, not have a material adverse
effect on the transactions contemplated hereby or on the condition (financial or
other), business or operations of Holdings and New Insurer taken as a whole.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Cooperation. Subject to the terms and conditions herein provided, each
of the parties hereto agrees to use all reasonable efforts to take, or cause to
be taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable to consummate and make effective as promptly as practicable
the transactions contemplated by this Plan and to cooperate with each other in
connection with the foregoing, including using its best efforts to:
(a) prepare and file with the California Department as soon as is
reasonably practicable all necessary permit applications and other
necessary registrations and filings, including, but not limited
7
<PAGE> 12
to, all filings and other submissions of information to governmental
authorities with respect to the transactions contemplated by this Plan, and
use its best efforts to obtain such permits and approvals as promptly as
possible;
(b) prepare and file with the SEC as soon as is reasonably practicable
a Registration Statement, including a proxy statement/prospectus (the
"Registration Statement") with respect to the transactions contemplated by
this Plan, and use its best efforts to have such Registration Statement
declared effective by the SEC under the Securities Act as promptly as
possible;
(c) mail, as soon as is reasonably practicable after receiving any
required regulatory approvals, a proxy statement, together with a form of
proxy, with respect to the meeting of the Company's Eligible Members at
which the Eligible Members of the Company will vote upon this Plan and the
Merger (the "Proxy Statement"). The term "Proxy Statement" shall mean such
proxy or information statement at the time it initially is mailed to the
Company's Eligible Members and all amendments or supplements thereto, if
any, similarly filed and mailed. The information provided and to be
provided by the Company, Holdings and New Insurer, respectively, for use in
the Proxy Statement shall, on the date the Proxy Statement is first mailed
to the Company's Eligible Members and on the date of the meeting of the
Company's Eligible Members referred to in Section 6.2, be true and correct
in all material respects and shall not omit to state any material fact
necessary in order to make such information not misleading, and each of the
Company, Holdings and New Insurer agrees to correct any information
provided by it for use in the Proxy Statement that shall have become false
or misleading;
(d) take all such actions as may be required under state blue sky or
securities laws in connection with the transactions contemplated by this
Plan;
(e) arrange for the listing of the Common Stock on a national
securities exchange;
(f) obtain all necessary waivers, consents and approvals from other
parties to material loan agreements, leases and other contracts;
(g) obtain all necessary consents, approvals and authorizations as are
required to be obtained under any Federal, state or foreign law or
regulations;
(h) defend all lawsuits or other legal proceedings, formal or
informal, challenging this Plan or the consummation of the transactions
contemplated hereby; and
(i) lift, rescind or mitigate the effect of any injunction or
restraining order or other order adversely affecting the ability of the
parties to consummate the transactions contemplated hereby.
6.2 Special Meeting of Eligible Members of the Company. (a) After approval
by the Commissioner of this Plan pursuant to Section 1552 of the California
Insurance Law, the Company shall take all action necessary, in accordance with
California Corporations Law, the California Insurance Law, the Subscription
Agreements and the Company's Bylaws, to convene the Special Meeting of the
Eligible Members as promptly as practicable to consider and vote upon this Plan
and the Merger.
(b) The record date for the Special Meeting shall be the Approval Date.
(c) Each Eligible Member shall be entitled to vote in person or by proxy in
a manner to be prescribed by the Commissioner and the Company's Bylaws;
provided, however, that any vote cast shall be by ballot and not viva voce.
(d) The Proxy Statement shall contain the recommendation of the Board of
Governors that the Eligible Members of the Company vote to adopt and approve the
Merger and this Plan.
(e) The Company shall use its best efforts to solicit from Eligible Members
proxies in favor of such adoption and approval and to take all other action
necessary or, in the reasonable judgment of the Company, helpful to secure the
vote or consent of the Eligible Members.
8
<PAGE> 13
(f) The Company shall mail notice of the Special Meeting to all Eligible
Members. Such notice shall set forth the reasons for the Special Meeting and the
time and place of the Special Meeting, and shall enclose a proxy for each
Eligible Member. Such notice and proxy shall be mailed by first class mail to
the address of each Eligible Member, as such address appears on the records of
the Company, at least 35 days prior to the Special Meeting, and such notice and
proxy shall be in a form satisfactory to the Commissioner. Notice of the Special
Meeting shall be accompanied by information relevant to the Special Meeting.
(g) Notice of the Special Meeting also shall be given by the Company
through publication in a newspaper of general circulation in Los Angeles County,
State of California, the county of the Company's principal place of business.
Such publication shall be made at least twice and shall be published in a
business day edition of the newspaper. Such publication shall be made at least
30 days prior to the Special Meeting.
(h) The affirmative vote of the Eligible Members required for adoption and
approval of this Plan and the Merger shall be 66 2/3% of the Eligible Members.
6.3 Officers' and Directors' Insurance; Indemnification. It is understood
and agreed that the Company shall indemnify and hold harmless and, after the
Effective Time, the Surviving Corporation will indemnify and hold harmless, each
present and former member of the Board of Governors and officer of the Company,
and each director and officer of the Attorney-in-Fact (the "Indemnified
Parties") to the full extent permitted by applicable law against any losses,
claims, damages, liabilities, costs, expenses, judgments and amounts paid in
settlement in connection with any claim, action, suit, proceeding or
investigation arising out of or pertaining to any action or omission which
arises out of or relates to the transactions contemplated by this Plan, and the
Company and the Surviving Corporation, as the case may be, will advance expenses
to each such person upon receipt of an undertaking to: (i) repay such amount if
it shall be determined ultimately that such person is not entitled to
indemnification under the applicable law; and (ii) reasonably cooperate with the
Company (of, after the Effective Time, the Surviving Corporation) concerning the
action, suit, proceeding or investigation. In the event any such claim, action,
suit, proceeding or investigation is brought against any Indemnified Party
(whether arising before or after the Effective Time), (a) the Indemnified
Parties may retain counsel satisfactory to them and the Company (or them and the
Surviving Corporation after the Effective Time), (b) the Company (or after the
Effective Time, the Surviving Corporation) shall pay all reasonable fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received, and (c) the Company (or after the Effective Time, the
Surviving Corporation) will use its best efforts to assist in the vigorous
defense of any such matter, provided, that neither the Company nor the Surviving
Corporation shall be liable for any such settlement effected without their
written consent, which consent, however, shall not be unreasonably withheld. Any
Indemnified Party wishing to claim indemnification under this Section 6.3, upon
learning of any such claim, action, suit, proceeding or investigation, shall
notify the Company or the Surviving Corporation thereof and shall deliver to the
Company or the Surviving Corporation an undertaking to repay any amounts
advanced pursuant hereto when and if a court of competent jurisdiction shall
ultimately determine, after exhaustion of all avenues of appeal, that such
Indemnified Party was not entitled to indemnification under this Section. In
addition, upon the occurrence of the Effective Time, New Insurer shall be deemed
expressly to have assumed any obligations of the Company to its directors and
officers for indemnification, whether under the Company's Bylaws or the
Subscription Agreements, or otherwise, for acts or occurrences prior to the
Effective Time. This Section 6.3 shall survive the consummation of the Merger.
6.4 Continuity of Obligations Regarding Policyholders. It is understood
and agreed that after the Effective Time: (i) the Surviving Corporation shall be
a corporation of the State of California authorized to transact insurance under
the California Insurance Law, (ii) the policyholders of the Company prior to the
Effective Time shall become policyholders of the Surviving Corporation; (iii)
the Surviving Corporation shall, as required by Section 1070.6(b) of the
California Insurance Law, be available to such policyholders to obtain policy
changes and endorsements, to receive payment of premiums and refund unearned
premiums, to serve notice of claim, proof of loss, summons, process and other
papers, and for purposes
9
<PAGE> 14
of suit; and (iv) the Surviving Corporation shall timely file with the
Commissioner the financial statements and tax returns required by Section
1070.6(c) of the California Insurance Law, and shall timely pay all taxes found
to be due relating to the business of the Company in the State of California
during the calendar year of the Merger, in accordance with said Section
1070.6(c).
ARTICLE VII
CONDITIONS PRECEDENT
7.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
(a) the Registration Statement shall have become effective under the
Securities Act and no stop order with respect to the Registration Statement
shall have been issued;
(b) all consents, authorizations, orders or approvals of the
California Department and any other governmental commission, board or other
regulatory body that the parties mutually agree are essential to effect the
Merger and for New Insurer to conduct the business of New Insurer and the
Company in substantially the same matter as now conducted shall have been
received;
(c) this Plan and the Merger shall have been approved and adopted by
the requisite vote or consent of the Eligible Members of the Company
required by California Corporations Law and California Insurance Law, by
the requisite vote or consent of the shareholders of New Insurer required
by California Corporations Law; and by the requisite vote or consent of the
stockholder of Holdings;
(d) the Company shall have received either a private letter ruling
from the Internal Revenue Service, or an opinion from a law firm of
recognized standing, to the effect that for Federal income tax purposes,
the Eligible Members generally will recognize no gain or loss on the
exchange of their Membership Interests for shares of Common Stock pursuant
to the Merger;
(e) the Company shall have contributed, for no consideration, all of
the outstanding shares of Common Stock of New Insurer to Holdings;
(f) no preliminary or permanent injunction or other order, decree or
ruling issued by a court of competent jurisdiction or by a governmental,
regulatory or administrative agency or commission nor any statute, rule,
regulation or executive order promulgated or enacted by any governmental
authority shall be in effect, which would prevent the consummation of the
Merger or make the consummation of the Merger illegal; and
(g) prior to the Effective Time, the Company and Holdings shall have
received from an investment banking firm of recognized standing an opinion
that the exchange of the aggregate Membership Interests for the Merger
Shares and the cash in lieu of fractional shares to be paid to the Eligible
Members in the Merger in the aggregate is fair, from a financial point of
view, to the Eligible Members as a group.
ARTICLE VIII
TERMINATION
8.1 Termination. This Plan may be terminated, and the Merger contemplated
herein may be abandoned, at any time prior to the Effective Time, whether prior
to or after approval of the Merger by the Eligible Members:
(a) by mutual written consent of the Board of Directors of Holdings,
the Board of Directors of New Insurer and the Board of Governors of the
Company; or
10
<PAGE> 15
(b) by the Company, if New Insurer or Holdings breaches in any
material respect any of its covenants or agreements contained in this Plan;
or
(c) by Holdings, if the Company breaches in any material respect any
of its covenants or agreements contained in this Plan; or
(d) by either Holdings or the Company:
(i) if the Merger has not been consummated prior to December 31,
1996; or
(ii) if any court of competent jurisdiction or other governmental
body shall have issued an order, decree or ruling, or taken any other
action restraining, enjoining or otherwise prohibiting the Merger and
such order, decree, ruling or other action shall have become final and
non-appealable.
8.2 Effect of Termination. In the event of the termination of this Plan as
provided in Section 7.1, this Plan shall forthwith become void, and there shall
be no liability on the part of the Company, Holdings or New Insurer, except as
described in Section 6.3 and as set forth in the last sentence of this Section
8.2. Nothing contained in this Section 8.2 shall relieve the Company, Holdings
or New Insurer from liability for any breach of this Plan.
ARTICLE IX
GENERAL PROVISIONS
9.1 Amendment. This Plan may be amended by an instrument in writing signed
on behalf of each of the parties hereto; provided, however, that after approval
of the Merger by the Eligible Members, no amendment may be made which under
applicable law requires further approval of Eligible Members without such
further approval of Eligible Members.
9.2 Extension; Waiver. At any time prior to the Effective Time any party
hereto may (i) extend the time for the performance of any of the obligations or
other acts of any other party hereto; (ii) waive any inaccuracies in the
representations and warranties contained in this Plan and (iii) waive compliance
with any of the agreements of the other parties or conditions to its own
obligations contained in this Plan. Any agreement on the part of a party hereto
to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party by a duly authorized
officer.
9.3 Nonsurvival of Representations and Warranties. The respective
representations and warranties of the Company, New Insurer and Holdings
contained herein shall expire with, and be terminated and extinguished upon,
consummation of the Merger, and thereafter none of the Company, New Insurer and
Holdings or any officer, director or principal thereof shall be under any
liability whatsoever with respect to any such representation or warranty. This
Section 9.3 shall have no effect upon any other obligation of the parties
hereto, whether to be performed before or after the consummation of the Merger.
9.4 Entire Plan. This Plan contains the entire agreement among the
Company, New Insurer and Holdings with respect to the subject matter hereof and
supersedes all prior arrangements and understandings, both written and oral,
among such parties with respect thereto.
9.5 Counterparts. This Plan may be executed in one or more counterparts,
all of which shall be considered one and same agreement and shall become binding
when one or more counterparts have been signed by each of the parties and
delivered to the other parties, it being understood that all parties need not
sign the same counterpart.
9.6 Severability. It is the desire and intent of the parties that the
provisions of this Plan be enforced to the fullest extent permissible under the
law and public policies applied in each jurisdiction in which enforcement is
sought. Accordingly, in the event that any provision of this Plan would be held
in any jurisdiction to be invalid, prohibited or unenforceable for any reason,
such provision, as to such jurisdiction, shall be ineffective, without
invalidating the remaining provisions of this Plan or affecting the
11
<PAGE> 16
validity or enforceability of such provision in any other jurisdiction.
Notwithstanding the foregoing, if such provision could be more narrowly drawn so
as not to be invalid, prohibited or unenforceable in such jurisdiction, it
shall, as to such jurisdiction, be so narrowly drawn, without invalidating the
remaining provisions of this Plan or affecting the validity or enforceability of
such provision in any other jurisdiction.
9.7 Notices. Any notice given by any party under this Plan (each, a
"notice") shall be in writing and shall be deemed duly given (i) when personally
delivered, or (ii) when five days have elapsed after its transmittal by
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party to whom directed at that party's address as it appears
below or another address of which that party has given notice as provided
herein, or (iii) when transmitted by telex or telecopy (or equivalent service),
the sender's receiving apparatus having printed the answerback (if any) of the
addressee on a copy of the telex or telecopy message. Notices of address change
shall be effective only upon receipt notwithstanding the previous sentence.
If to the Company, to:
Southern California Physicians Insurance Exchange
9441 W. Olympic Boulevard
P.O. Box 4015
Beverly Hills, California 90213-4015
Telecopy No.: (310) 551-5924
If to Holdings to:
SCPIE Holdings Inc.
9441 W. Olympic Boulevard
P.O. Box 4015
Beverly Hills, California 90213-4015
Telecopy No.: (310) 551-5924
If to New Insurer, to:
SCPIE Indemnity Company
9441 W. Olympic Boulevard
P.O. Box 4015
Beverly Hills, California 90213-4015
Telecopy No.: (310) 551-5924
In each case, with copy to:
Latham & Watkins
701 "B" Street, Suite 2100
San Diego, California 92101
Attention: Donald P. Newell, Esq.
Telecopy No.: (619) 696-7419
9.8 Public Announcements. Unless otherwise required by law, prior to the
Effective Time, no news release or other public announcement pertaining to the
transactions contemplated by this Plan will be made by any party without the
prior written consent of the other party hereto.
9.9 Section Headings. The section headings contained in this Plan are
inserted for reference purposes only and shall not affect the meaning or
interpretation of this Plan.
9.10 Benefits and Assignment. This Plan is not intended to convey upon any
person other than the parties any rights or remedies hereunder. This Plan shall
not be assigned by operation of law or otherwise.
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<PAGE> 17
9.11 Applicable Law. This Plan and the legal relations between the parties
hereto shall be governed by and construed in accordance with the laws of the
State of California applicable to contracts made and to be performed therein.
IN WITNESS WHEREOF, each of the parties has caused this Plan to be executed
as of the date first above written, which is sometimes referred to herein as
"the date of this Plan."
SOUTHERN CALIFORNIA PHYSICIANS
INSURANCE EXCHANGE, by SCPIE
Management Company, its
Attorney-in-Fact
By /s/ DONALD J. ZUK
------------------------------------
Donald J. Zuk
President and Chief Executive
Officer
By /s/ WENDELL L. MOSELEY, M.D.
------------------------------------
Wendell L. Moseley, M.D.
Secretary
SCPIE INDEMNITY COMPANY
By /s/ DONALD J. ZUK
------------------------------------
Donald J. Zuk
President and Chief Executive
Officer
By /s/ WENDELL L. MOSELEY, M.D.
------------------------------------
Wendell L. Moseley, M.D.
Secretary
SCPIE HOLDINGS INC.
By /s/ DONALD J. ZUK
------------------------------------
Donald J. Zuk
President and Chief Executive
Officer
By /s/ WENDELL L. MOSELEY, M.D.
------------------------------------
Wendell L. Moseley, M.D.
Secretary
13
<PAGE> 1
EXHIBIT 5
November 13, 1996
SCPIE Holdings Inc.
9441 West Olympic Boulevard
Beverly Hills, California 90213-4015
Re: Registration Statement No. 333-4450
2,300,000 Shares of Common Stock, par value $.0001 per share
Ladies and Gentlemen:
In connection with the registration of 2,300,000 shares of common stock of
the Company, par value $.0001 per share (the "Shares"), under the Securities Act
of 1933, as amended (the "Act"), by SCPIE Holdings Inc., a Delaware corporation
(the "Company"), on Form S-1 filed with the Securities and Exchange Commission
(the "Commission") on May 3, 1996 (File No. 333-4450), as amended by Amendment
No. 1 filed with the Commission on August 8, 1996, Amendment No. 2 filed with
the Commission on August 28, 1996 and Amendment No. 3 filed with the Commission
on November 13, 1996 (collectively, the "Registration Statement"), you have
requested our opinion with respect to the matters set forth below.
In our capacity as your counsel in connection with such registration, we
are familiar with the proceedings taken and proposed to be taken by the Company
in connection with the authorization, issuance and sale of the Shares, and for
the purposes of this opinion, have assumed such proceedings will be timely
completed in the manner presently proposed. In addition, we have made such legal
and factual examinations and inquiries, including an examination of originals or
copies certified or otherwise identified to our satisfaction of such documents,
corporate records and instruments, as we have deemed necessary or appropriate
for purposes of this opinion.
In our examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, and the conformity
to authentic original documents of all documents submitted to us as copies.
We are opining herein as to the effect on the subject transaction only of
the internal laws of the State of California and the General Corporation Law of
the State of Delaware, and we express no opinion with respect to the
applicability thereto, or the effect thereon, of the laws of any other
jurisdiction or, in the case of Delaware, any other laws, or as to any matters
of municipal law or the laws of any other local agencies within the state.
Subject to the foregoing, it is our opinion that the Shares have been duly
authorized, and, upon issuance, delivery and payment therefor in the manner
contemplated by the Registration Statement, will be validly issued, fully paid
and nonassessable.
We consent to your filing this opinion as an exhibit to the Registration
Statement and to the reference to our firm contained under the heading "Legal
Matters."
Very truly yours,
/s/ LATHAM & WATKINS
<PAGE> 1
01-95-0694
EXHIBIT 10.12
PHYSICIAN MEDICAL MALPRACTICE/HOSPITAL PROFESSIONAL LIABILITY
QUOTA SHARE REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
HANNOVER RUCKVERSICHERUNGS - AKTIENGESELLSCHAFT
EISEN UND STAHL RUCKVERSICHERUNGS - AKTIENGESELLSCHAFT
Hannover, Germany
(hereinafter referred to as the "Company")
and
The Subscribing Reinsurer(s) executing the
Interests and Liabilities Contract(s)
attaching to and forming a part
of this Agreement
(each hereinafter referred to as the "Reinsurer")
WITNESSETH:
The Reinsurer hereby reinsures the Company to the extent and on the
terms and conditions and subject to the exceptions, exclusions and limitations
hereinafter set forth and nothing hereinafter shall in any manner create any
obligations or establish any rights against the Reinsurer in favor of any third
parties or any persons not parties to this Agreement.
ARTICLE I
BUSINESS COVERED:
A. The Company shall cede to the Reinsurer and the Reinsurer shall accept
from the Company a variable excess quota share participation of the net
retained liability of the Company on each risk insured under new and renewal
policies becoming effective at and after Local Standard Time, January 1, 1995,
as respects Claims Made or Losses Reported at and after said date, covering
business classified by the Company as Physician Medical Malpractice and
Hospital Professional Liability, including Comprehensive Liability, written on
a Claims Made or Losses Reported basis, except as excluded in the Exclusions
Article, subject to the limits set forth in the Limits of Cover Article.
B. The term "policies" as used herein means the Company's binders,
policies and contracts providing Claims Made or Losses Reported reinsurance on
the business covered under this Agreement. Original Policies not to exceed
eighteen (18) months other than by Special Acceptance.
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01-95-0694
ARTICLE II
TERM:
A. This Agreement will apply to Claims Made or Losses Reported under new
and renewal policies incepting during the period January 1, 1995 through
December 31, 1995, both days inclusive.
B. Notwithstanding the termination of this Agreement as hereinabove
provided, the provisions of this Agreement shall continue to apply to all
unfinished business hereunder to the end that all obligations and liabilities
incurred by each party hereunder prior to such termination shall be fully
performed and discharged.
ARTICLE III
TERRITORY:
This Agreement shall be worldwide in its geographical scope.
ARTICLE IV
EXCLUSIONS:
This Agreement does not apply to and specifically excludes the
following:
1. Insolvency Funds, per the attached "Insolvency Fund Exclusion
Clause".
2. Loss or liability excluded by the attached "Nuclear Incident
Exclusion Clause -Liability - Reinsurance", U.S.A. and Canada.
3. Primary Insurance Business, Facultative Reinsurance and
Retrocessional Reinsurance, when written as such, unless
mutually agreed upon by the Reinsurer. This Exclusion shall
not apply to "Pure" Fronting Agreements and Reinsurance of
Captives.
4. Hospital Professional Liability, including Comprehensive
General Liability Business Excess of Shared Aggregate
Retentions other than business written with aggregate
underlying amounts (potential drop down exposures) which shall
require that these underlying amounts shall apply on a per
location (as defined) basis. Minimum aggregate underlying
amounts shall be three times the primary per occurrence amount
or $10,000,000 whichever is the greater.
ARTICLE V
LIMITS OF COVER:
A. The reinsurance provided hereunder is in two sections as follows:
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<PAGE> 3
01-95-0694
Section I. With respect to business classified as Physician Medical
Malpractice Liability:
The liability of the Reinsurer shall not exceed $500,000 each and every
Claim and/or Loss any one section any one original placement for one
(1) line.
Section II. With respect to business classified as Hospital
Professional, including Comprehensive General Liability:
The liability of the Reinsurer shall not exceed $750,000 each and every
Claim and/or Loss any one section any one original placement for one
(1) line.
B. The term "placement" as used herein shall be defined as one or more
layers of coverage to the same Original Insured or Original Reinsured.
C. No cession(s) to be made hereunder unless the Original Policy or
Contract Limits are excess of at least $2,000,000.
D. This Agreement is extended to protect the Company for 100% of any loss
in Excess of Original Policy Limits and/or any Extra Contractual Obligations as
defined in the respectively titled Articles herein; provided, however, the
contractual loss and the Excess of Original Policy Limits and Extra Contractual
Obligations loss(es) combined shall not exceed the limit set forth above, each
and every Claim and/or Loss any one Section any one Original Placement per unit
accepted.
ARTICLE VI
COMPANY RETENTION:
(The following shall apply only to Section II - Hospital Professional
Liability, including Comprehensive Liability policies ceded hereunder.)
A. The Company will always retain a Minimum Involvement of $1,000,000 net
and unreinsured in any program on which cessions are made hereunder. It is
specially agreed that this net amount will be retained either in the Layer
ceded or any underlying Layers, if applicable, or the combination thereof.
B. Irrespective of the above, the Company is not permitted to make 100%
cessions hereunder and the Company's net retention will not be less than 20%,
subject to a minimum of $1,000,000.
ARTICLE VII
DEFINITIONS:
A. The term "net retained liability" as used herein means the remaining
portion of the Company's gross liability on each risk reinsured under this
Agreement after deducting recoveries from all inuring reinsurance.
B. The term "claims made" as used herein shall follow the definition set
forth in the Company's original policies.
ED 1/10/96 Page 3 of 10
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<PAGE> 4
01-95-0694
ARTICLE VIII
ORIGINAL CONDITIONS:
All amounts ceded hereunder shall be subject to the same gross rates
and to the same clauses, conditions, and modifications of the Company's
policies, subject to the limits, terms and conditions of this Agreement.
ARTICLE IX
FOLLOW THE FORTUNES:
The Reinsurer shall follow the fortunes of the Company in all matters
falling under this Agreement.
ARTICLE X
EXCESS OF ORIGINAL POLICY LIMITS:
A. This Agreement shall protect the Company, within the limits hereof, in
connection with loss in excess of the limit of its original policy, such loss
in excess of the limit having been incurred because of failure by it 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.
B. However, this Article shall not apply where the loss has been incurred
due to fraud by 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.
C. For the purpose of this Article, 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 original policy.
ARTICLE XI
EXTRA CONTRACTUAL OBLIGATIONS:
A. This Agreement shall protect the Company for any Extra Contractual
Obligations within the limits hereof. The term "Extra Contractual Obligations"
is 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 against its insured or reinsured or in the preparation or prosecution of
an appeal consequent upon such action.
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01-95-0694
B. 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.
C. However, this Article shall not apply where the loss has been incurred
due to fraud by 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
LOSSES, LOSS ADJUSTMENT EXPENSES AND SALVAGES:
A. The Company shall settle all loss claims under its policies and the
Reinsurer shall pay to the Company its pro rata share of such loss claims as
payable by the Company.
B. The Reinsurer shall also bear its pro rata share of expenses incurred
by the Company in the investigation, adjustment and litigation of all claims
under its policies, including those of salaried adjusters, but excluding the
office expenses of the Company and the salaries and expenses of its other
employees.
C. The Reinsurer shall benefit pro rata in all salvages, discounts and
other recoveries.
ARTICLE XIII
REINSURANCE PREMIUM:
A. The Company shall pay to the Reinsurer on each amount ceded under this
Agreement a pro rata share of the Company's Original Net Premiums received by
the Company on the business covered hereunder less 6.50% Overriding Commission
allowed to the Company.
B. The term "Original Net Premiums" shall mean Gross Premiums received by
the Company less the Company's Original Brokerage Acquisition Costs, Ceding
Commissions, Taxes, etc.
ARTICLE XIV
REPORTS AND REMITTANCES:
A. The Company will provide the Reinsurer with all necessary data
respecting premiums and losses, including reserves thereon, as at dates and on
forms mutually acceptable to the Company and the Reinsurer.
B. Within sixty (60) days following the end of each calendar quarter, the
Company shall furnish to the Reinsurer a bordereau indicating, as respects each
policy declared hereunder the name of the Insured, the policy number, term,
limit of liability and original premium, plus any additional or return premiums
as respects each cession and the reinsurance premiums thereon.
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01-95-0694
C. The Company shall render a quarterly account within sixty (60) days
after the end of each calendar quarter summarizing the following information
relating to reinsurance covered under this Agreement during the said calendar
quarter:
1. Statement of premiums;
2. Statement of losses and loss expenses paid and salvages
recovered;
3. Account Current summarizing premiums, commissions, losses and
loss expenses paid and salvages recovered;
and the balance if any, due the Reinsurer as indicated by the aforesaid Account
Current, shall be remitted by the Company to the Reinsurer along with the
monthly account. Any balance due to the Company shall be remitted by the
Reinsurer within fifteen (15) days upon receipt of the monthly account.
D. The Company shall promptly report to the Reinsurer any individual loss
wherein the Reinsurer's share of such loss is $100,000 or more. At the request
of the Company, the Reinsurer shall reimburse the Company, as soon as possible
but not later than 60 days after proof of payment by the Company is received by
the Reinsurer for the Reinsurer's share of any such loss, provided that the
Reinsurer shall be entitled, at its option, to offset the amount of such loss
against any balance or balances past due. Cash calls paid by the Reinsurer
during the period shall be deducted from the next report.
ARTICLE XV
OFFSET:
The Company and the Reinsurer shall have the right to offset any
balance or amounts due from one party to the other under the terms of this
Agreement. The party asserting the right of offset may exercise such right any
time whether the balances due are on account of premiums or losses or
otherwise.
ARTICLE XVI
CONFIDENTIALITY AND NON-DIVULGENCE CLAUSE:
A. The parties hereto acknowledge there may be portions of this Agreement,
the treaty prospectus or the marketing package that contain confidential,
proprietary information of the Company. The Reinsurer shall maintain the
confidentiality of these statements and representations, either oral or
written, concerning the Company and its business, and shall not disclose these
to any third person without the Company's prior approval.
B. Nevertheless, the Reinsurer may disclose such information without
further approval from the Company in answer to interrogatories, subpoenas or
other legal/arbitration processes, in response to requests by governmental and
regulatory agencies, and as required for the customary needs of the Reinsurer's
applicable retrocessionaires and/or intermediaries. In addition the Reinsurer
may disclose such information, as be necessary in the conduct of its business
operations, to its accountants and its outside legal counsel.
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01-95-0694
ARTICLE XVII
ACCESS TO RECORDS:
The Company shall place at the disposal of the Reinsurer at all
reasonable times, and the Reinsurer shall have the right to inspect through its
designated representatives, during the term of this Agreement and thereafter,
all books, records and papers of the Company in connection with any reinsurance
hereunder, or the subject matter hereof.
ARTICLE XVIII
ERRORS AND OMISSIONS:
Any inadvertent delay, omission or error shall not be held to relieve
either party hereto from any liability which would attach to it hereunder if
such delay, omission or error had not been made, providing such neglect, delay,
omission or error is rectified as soon as possible after discovery.
ARTICLE XIX
CURRENCY:
A. Whenever the word "Dollars" or the "$" sign appears in this Agreement,
they shall be construed to mean United States Dollars and all transactions
under this Agreement shall be in United States Dollars.
B. Amounts paid or received by the Company in any other currency shall be
converted to United States Dollars at the rate of exchange at the date such
transaction is entered on the books of the Company.
ARTICLE XX
UNAUTHORIZED REINSURANCE:
(Applies only to a Reinsurer who does not qualify for full credit with any
insurance regulatory authority having jurisdiction over the Company's
reserves.)
A. As regards policies or bonds issued by the Company coming within the
scope of this Agreement, the Company agrees that when it shall file with the
insurance regulatory authority or set up on its books reserves for unearned
premium and losses covered hereunder which it shall be required by law to set
up, it will forward to the Reinsurer a statement showing the proportion of such
reserves which is applicable to the Reinsurer. The Reinsurer hereby agrees to
fund such reserves in respect of unearned premium, known outstanding losses
that have been reported to the Reinsurer and allocated loss adjustment expense
relating thereto, and losses and allocated loss adjustment expense paid by the
Company but not recovered from the Reinsurer, as shown in the statement
prepared by the Company (hereinafter referred to as "Reinsurer's Obligations")
by funds withheld, cash advances or a Letter of Credit. The Reinsurer shall
have the option of determining the method of funding provided it is acceptable
to the insurance regulatory authorities having jurisdiction over the Company's
reserves.
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01-95-0694
B. When funding by a Letter of Credit, the Reinsurer agrees to apply for
and secure timely delivery to the Company of a clean, irrevocable and
unconditional Letter of Credit issued by a bank and containing provisions
acceptable to the insurance regulatory authorities having jurisdiction over the
Company's reserves in an amount equal to the Reinsurer's proportion of said
reserves. Such Letter of Credit shall be issued for a period of not less than
one year, and shall be automatically extended for one year from its date of
expiration or any future expiration date unless thirty (30) days (sixty (60)
days where required by insurance regulatory authorities) prior to any
expiration date the issuing bank shall notify the Company by certified or
registered mail that the issuing bank elects not to consider the Letter of
Credit extended for any additional period.
C. The Reinsurer and Company agree that the Letters of Credit provided by
the Reinsurer pursuant to the provisions of this Agreement may be drawn upon at
any time, notwithstanding any other provision of this Agreement, and be
utilized by the Company or any successor, by operation of law, of the Company
including, without limitation, any liquidator, rehabilitator, receiver or
conservator of the Company for the following purposes, unless otherwise
provided for in a separate Trust Agreement:
1. to reimburse the Company for the Reinsurer's Obligations, the
payment of which is due under the terms of this Agreement and
which has not been otherwise paid;
2. to make refund of any sum which is in excess of the actual
amount required to pay the Reinsurer's Obligations under this
Agreement;
3. to fund an account with the Company for the Reinsurer's
Obligations. Such cash deposit shall be held in an interest
bearing account separate from the Company's other assets, and
interest thereon not in excess of the prime rate shall accrue
to the benefit of the Reinsurer;
4. to pay the Reinsurer's share of any other amounts the Company
claims are due under this Agreement.
D. In the event the amount drawn by the Company on any Letter of Credit is
in excess of the actual amount required for 1. or 3., or in the case of 4., the
actual amount determined to be due, the Company shall promptly return to the
Reinsurer the excess amount so drawn. All of the foregoing shall be applied
without diminution because of insolvency on the part of the Company or the
Reinsurer.
E. The issuing bank shall have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition of
funds withdrawn, except to ensure that withdrawals are made only upon the order
of properly authorized representatives of the Company.
F. At annual intervals, or more frequently as agreed but never more
frequently than quarterly, the Company shall prepare a specific statement of
the Reinsurer's Obligations, for the sole purpose of amending the Letter of
Credit, in the following manner:
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01-95-0694
1. If the statement shows that the Reinsurer's Obligations exceed
the balance of credit as of the statement date, the Reinsurer shall,
within thirty (30) days after receipt of notice of such excess, secure
delivery to the Company of an amendment to the Letter of Credit
increasing the amount of credit by the amount of such difference.
2. If, however, the statement shows that the Reinsurer's
Obligations are less than the balance of credit as of the statement
date, the Company shall, within thirty (30) days after receipt of
written request from the Reinsurer, release such excess credit by
agreeing to secure an amendment to the Letter of Credit reducing the
amount of credit available by the amount of such excess credit.
ARTICLE XXI
ARBITRATION:
A. As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Agreement,
including the formation or validity thereof, shall be submitted for decision to
a panel of three arbitrators. Notice requesting arbitration will be in writing
and sent certified or registered mail, return receipt requested.
B. One arbitrator shall be chosen by each party and the two arbitrators
shall, before instituting the hearing, choose an impartial third arbitrator who
shall preside at the hearing. If either party fails to appoint its arbitrator
within thirty (30) days after being requested to do so by the other party, the
latter, after ten (10) days notice by certified or registered mail of its
intention to do so, may appoint the second arbitrator.
C. If the two arbitrators are unable to agree upon the third arbitrator
within thirty (30) days of their appointment, the third arbitrator shall be
selected from a list of six individuals (three named by each arbitrator) by a
judge of the federal district court having jurisdiction over the geographical
area in which the arbitration is to take place, or if the federal court
declines to act, the state court having general jurisdiction in such area.
D. All arbitrators shall be disinterested active or former executive
officers of insurance or reinsurance companies or Underwriters at Lloyd's,
London.
E. Within thirty (30) days after notice of appointment of all arbitrators,
the panel shall meet and determine timely periods for briefs, discovery
procedures and schedules for hearings.
F. The panel shall be relieved of all judicial formality and shall not be
bound by the strict rules of procedure and evidence. Unless the panel agrees
otherwise, arbitration shall take place in Hannover, Germany, but the venue may
be changed when deemed by the panel to be in the best interest of the
arbitration proceeding. Insofar as the arbitration panel looks to substantive
law, it shall consider the law of Germany. The decision of any two arbitrators
when rendered in writing shall be final and binding. The panel is empowered to
grant interim relief as it may deem appropriate.
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01-95-0694
G. The panel shall make its decision considering the custom and practice
of the applicable insurance and reinsurance business sixty (60) days following
the termination of the hearings. Judgment upon the award may be entered in any
court having jurisdiction thereof.
H. Each party shall bear the expense of its own arbitrator and shall
jointly and equally bear with the other party the cost of the third arbitrator.
The remaining costs of the arbitration shall be allocated by the panel. The
panel may, at its discretion, award such further costs and expenses as it
considers appropriate, including but not limited to attorneys fees, to the
extent permitted by law.
ARTICLE XXII
INTERMEDIARY:
Willcox Incorporated Reinsurance Intermediaries is hereby recognized as
the Intermediary negotiating this Agreement for all business hereunder. All
communications (including but not limited to notices, statements, premium,
return premium, commissions, taxes, losses, loss adjustment expense, salvages
and loss settlements) relating thereto shall be transmitted to the Company or
the Reinsurer through Willcox Incorporated Reinsurance Intermediaries, 180
Maiden Lane, New York, New York 10038-4993. 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.
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01-95-0694
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
PHYSICIAN MEDICAL MALPRACTICE/HOSPITAL PROFESSIONAL LIABILITY
QUOTA SHARE REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
HANNOVER RUCKVERSICHERUNGS - AKTIENGESELLSCHAFT
EISEN UND STAHL RUCKVERSICHERUNGS - AKTIENGESELLSCHAFT
Hannover, Germany
(hereinafter referred to as the "Company")
and
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
Beverly Hills, California
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 100% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Physician Medical Malpractice/Hospital Professional Liability Quota
Share Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 100% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach at Local Standard Time, January 1, 1995 and
is subject to the provisions contained in the Term Article of the attached
Agreement, which are hereby incorporated by reference into this Contract and
which shall apply as though they had been specifically provided for herein.
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
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01-95-0694
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Hannover, Germany
this day of , 199
HANNOVER RUCKVERSICHERUNGS - AKTIENGESELLSCHAFT
EISEN UND STAHL RUCKVERSICHERUNGS - AKTIENGESELLSCHAFT
By:_________________________________
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
By:_________________________________
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<PAGE> 13
INSOLVENCY FUND EXCLUSION CLAUSE
This Agreement excludes 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 payments 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.
NOTES: Wherever used herein the term:
"Company" shall be understood to mean "Reassured", "Reinsured" or whatever
other term is used in the attached reinsurance Agreement to designate the
reinsured company.
"Agreement" shall be understood to mean "Contract",
"Policy" or whatever other term is used to designate the attached
reinsurance document.
May 1983 WILLCOX INCORPORATED REINSURANCE INTERMEDIARIES Page 1 of 1
<PAGE> 14
NUCLEAR INCIDENT EXCLUSION CLAUSE --
LIABILITY -- REINSURANCE U.S.A.
(Wherever the word "Reassured" appears in this clause, it shall be deemed to
read "Reassured," "Reinsured," "Company," or whatever other word is employed
throughout the text of the reinsurance agreement to which this clause is
attached to designate the company or companies reinsured.)
(1) This reinsurance does not cover any loss or liability accruing
to the Reassured as a member of, or subscriber to, any association of insurers
or reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.
(2) Without in any way restricting the operation of paragraph
(1) of this Clause it is understood and agreed that for all purposes of this
reinsurance all the original policies of the Reassured (new, renewal and
replacement) of the classes specified in Clause II of this paragraph
(2) from the time specified in Clause III in this paragraph (2) shall be
deemed to include the following provision (specified as the Limited Exclusion
Provision);
LIMITED EXCLUSION PROVISION.*
I. It is agreed that the policy does not apply under any liability
coverage.
( injury, sickness, disease, death or destruction
to ( with respect to which an insured
( under the policy is also an insured
( bodily injury or property damage
under a nuclear energy liability policy issued by Nuclear Energy
Liability Insurance Association. Mutual Atomic Energy Liability
Underwriters or Nuclear Insurance Association of Canada, or
would be an insured under any such policy but for its
termination upon exhaustion of its limit of liability.
II. Family Automobile Policies (liability only). Special Automobile
Policies (private passenger automobiles, liability only).
Farmers Comprehensive Personal Liability Policies (liability
only). Comprehensive Personal Liability Policies (liability
only) or policies of a similar nature; and the liability portion
of combination forms related to the four classes of policies
stated above, such as the Comprehensive Dwelling Policy and the
applicable types of Homeowners Policies.
III. The inception dates and thereafter of all original policies as
described in II above, whether new, renewal or replacement,
being policies which either
(a) become effective on or after 1st May, 1960 or
(b) become effective before that date and contain the Limited
Exclusion Provision set out above; provided this paragraph
(2) shall not be applicable to Family Automobile Policies.
Special Automobile Policies, or policies or combination
policies of a similar nature, issued by the Reassured on
New York risks, until 90 days following approval of the
Limited Exclusion Provision by the Governmental Authority
have jurisdiction thereof.
(3) Except for those classes of policies specified in Clause II of
paragraph (2) and without in any way restricting the operation of paragraph
(1) of this Clause, it is understood and agreed that for all purposes of this
reinsurance the original liability policies of the Reassured (new, renewal and
replacement) affording the following coverages:
Owners, Landlords and Tenants Liability, Contractual Liability, Elevator
Liability, Owners or Contractors (including railroad) Protective
Liability, Manufacturers and Contractors Liability, Product Liability,
Professional and Malpractice Liability, Storekeepers Liability, Garage
Liability, Automobile Liability (including Massachusetts Motor Vehicle
or Garage Liability)
shall be deemed to include, with respect to such coverages, from the time
specified in Clause V of this paragraph (3), the following provision (specified
as the Broad Exclusion Provision):
BROAD EXCLUSION PROVISION.*
It is agreed that the policy does not apply:
1. Under any Liability Coverage to (injury, sickness, disease, death
(or destruction
(bodily injury or property damage
(a) with respect to which an insured under the policy is also
an insured under a nuclear energy liability policy issued
by Nuclear Energy Liability Insurance Association. Mutual
Atomic Energy Liability Underwriters or Nuclear Insurance
Association of Canada, or would be an insured under any
such policy but for its termination upon exhaustion of its
limit of liability; or
(b) resulting from the hazardous properties of nuclear material
and with respect to which (1) any person or organization is
required to maintain financial protection pursuant to the
Atomic Energy Act of 1954, or any law amendatory thereof,
or (2) the insured is, or had this policy not been issued
would be, entitled to indemnity from the United States of
America, or any agency thereof, under any agreement entered
into by the United State of America, or any agency thereof,
with any person or organization.
WILLCOX INCORPORATED REINSURANCE INTERMEDIARIES
Page 1 of 2
<PAGE> 15
II. Under any Medical Payments Coverage, or under any Supplementary
Payments Provision relating
( immediate medical or surgical death
to ( to expenses incurred with respect
( first aid.
( bodily injury, sickness, disease or death
to ( resulting from the hazardous
( properties of nuclear material and bodily injury
arising out of the operation of a nuclear facility by any person or
organization.
( injury, sickness, disease, death or
III. Under any Liability Coverage to ( destruction
( bodily injury or property damage
resulting from the hazardous properties of nuclear material, if
(a) the nuclear material (1) is at any nuclear facility owned by, or
operated by or on behalf of, an insured or (2) has been discharged
or dispersed therefrom:
(b) the nuclear material is contained in spent fuel or waste at any
time possessed, handled, used, processed, stored, transported or
disposed of by or on behalf of an insured; or
( injury, sickness, disease, death or destruction
(c) ( arises out of the furnishing by an insured
( of services, bodily injury or property damage
materials, parts or equipment in connection with the planning,
construction, maintenance, operation or use of any nuclear
facility, but if such facility is located within the United States
of America, its territories or possessions or Canada, this
exclusion (c) applies only
( injury to or destruction of property at such nuclear facility.
to (
( property damage to such nuclear facility and any property
thereat.
IV. As used in this endorsement:
"HAZARDOUS PROPERTIES" include radioactive, toxic or explosive
properties; "NUCLEAR MATERIAL" means source material, special nuclear
material or by-product material; "SOURCE MATERIAL," "SPECIAL NUCLEAR
MATERIAL," and "BY-PRODUCT MATERIAL" have the meanings given them in
the Atomic Energy Act of 1954 or in any law amendatory thereof; "SPENT
FUEL" means any fuel element or fuel component, solid or liquid, which
has been used or exposed to radiation in a nuclear reactor; "WASTE"
means any waste material (1) containing by-product material other than
tailings or wastes produced by the extraction or concentration of
uranium or thorium from any ore processed primarily for its source
material content, and (2) resulting from the operation by any person or
organization of any nuclear facility included under the first two
paragraphs of the definition of nuclear facility; "NUCLEAR FACILITY"
means
(a) any nuclear reactor,
(b) any equipment or device designed or used for (1) separating the
isotopes of uranium or plutonium, (2) processing or utilizing
spent fuel, or (3) handling, processing or packaging waste;
(c) any equipment or device used for the processing, fabricating or
alloying of special nuclear material if at any time the total
amount of such material in the custody of the insured at the
premises where such equipment or device is located consists of or
contains more than 25 grams of plutonium or uranium 233 or any
combination thereof, or more than 250 grams of uranium 235;
(d) any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste;
and includes the site on which any of the foregoing is located, all
operations conducted on such site and all premises used for such
operations; "NUCLEAR REACTOR" means any apparatus designed or used to
sustain nuclear fission in a self-supporting chain reaction or to
contain a critical mass of fissionable material;
With respect to injury to or destruction of property, the word "injury"
or "destruction"
"property damage" includes all forms of radioactive contamination of
property;
includes all forms of radioactive contamination of property.
V. The inception dates and thereafter of all original policies affording
coverages specified in this paragraph (3), whether new, renewal or
replacement, being policies which become effective on or after 1st May,
1960, provided this paragraph (3) shall not be applicable to
(i) Garage and Automobile Policies issued by the Reassured on New
York risks, or
(ii) statutory liability insurance required under Chapter 90, General
Laws of Massachusetts,
until 90 days following approval of the Broad Exclusion Provision by
the Governmental Authority having jurisdiction thereof.
(4) Without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3) above are not
applicable to original liability policies of the Reassured in Canada and that
with respect to such policies this Clause shall be deemed to include the
Nuclear Energy Liability Exclusion Provisions adopted by the Canadian
Underwriters' Association or the Independent Insurance Conference of Canada.
- -------------------------------------------------------------------------------
*NOTE: The words printed in italics in the Limited Exclusion Provision in
the Broad Exclusion Provision shall apply only in relation to original
liability policies which include a Limited Exclusion Provision or a Broad
Exclusion Provision containing those words.
- -------------------------------------------------------------------------------
Page 2 of 2
<PAGE> 16
NUCLEAR INCIDENT EXCLUSION CLAUSE-
LIABILITY-REINSURANCE
CANADA
1. This Agreement does not cover any loss or liability accruing to the
Company as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or
association.
2. Without in any way restricting the operation of paragraph 1. of this
clause it is agreed that for all purposes of this Agreement all the
original liability contracts of the Company, whether new, renewal or
replacement, of the following classes, namely,
Personal Liability,
Farmers Liability,
Storekeepers Liability,
which become effective on or after 31st December 1984, shall be deemed to
include, from their inception dates and thereafter, the following
provision:-
LIMITED EXCLUSION PROVISION.
This Policy does not apply to bodily injury or property damage with
respect to which the Insured is also insured under a contract of
nuclear energy liability insurance (whether the Insured is unnamed in
such contract and whether or not it is legally enforceable by the
Insured) issued by the Nuclear Insurance Association of Canada or any
other group or pool of insurers or would be an Insured under any such
policy but for its termination upon exhaustion of its limits of
liability.
With respect to property, loss of use of such property shall be deemed
to be property damage.
3. Without in any way restricting the operation of paragraph 1. of this clause
it is agreed that for all purposes of this Agreement all the original
liability contracts of the Company, whether new, renewal or replacement, of
any class whatsoever (other than Personal Liability, Farmers Liability,
Storekeepers Liability or Automobile Liability contracts), which become
effective on or after 31st December 1984, shall be deemed to include, from
their inception dates and thereafter, the following provision: -
BROAD EXCLUSION PROVISION.
It is agreed that this Policy does not apply:
(a) to liability imposed by or arising under the Nuclear Liability Act;
nor
(b) to bodily injury or property damage with respect to which an Insured
under this policy is also insured under a contract of nuclear energy
liability insurance (whether the Insured is unnamed in such contract
and whether or not it is legally enforceable by the Insured) issued
by the Nuclear Insurance Association of Canada or any other insurer
or group or pool of insurers or would be an Insured under any such
policy but for its termination upon exhaustion of its limit of
liability; nor
(c) to bodily injury or property damage resulting directly or indirectly
from the nuclear energy hazard arising from:
(1) the ownership, maintenance, operation or use of a nuclear
facility by or on behalf of an Insured;
(2) the furnishing by an Insured of services, materials, parts or
equipment in connection with the planning, construction,
maintenance, operation or use of any nuclear facility; and
(3) the possession, consumption, use, handling, disposal or
transportation of fissionable substances, or of other
radioactive material (except radioactive isotopes, away from a
nuclear facility, which have reached the final stage of
fabrication so as to be useable for any scientific, medical,
agricultural, commercial or industrial purpose) used,
distributed, handled or sold by an Insured.
As used in this Policy:
(i) The term "nuclear energy hazard" means the radioactive, toxic,
explosive, or other hazardous properties or radioactive material;
(ii) The term "radioactive material" means uranium, thorium, plutonium,
neptunium, their respective derivatives and compounds, radioactive
isotopes of other elements and any other substances that the
Atomic Energy Control Board may, by regulation, designate as being
prescribed substances capable of releasing atomic energy, or as
being requisite for the production, use or application of atomic
energy;
WILLCOX INCORPORATED REINSURANCE INTERMEDIARIES Page 1 of 2
<PAGE> 17
(iii) The term "nuclear facility" means:
(a) any apparatus designed or used to sustain nuclear fission in a
self-supporting chain reaction or to contain a critical mass of
plutonium, thorium and uranium or any one or more of them;
(b) any equipment or device designed or used for (i) separating the
isotopes of plutonium, thorium and uranium or any one or more of
them, (ii) processing or utilizing spent fuel, or (iii)
handling, processing or packaging waste;
(c) any equipment or device used for the processing, fabricating or
alloying of plutonium, thorium or uranium enriched in the
isotope uranium 233 or in the isotope uranium 235, or any one or
more of them if at any time the total amount of such material in
the custody of the insured at the premises where such equipment
or device is located consists of or contains more than 25 grams
of plutonium or uranium 233 or any combination thereof, or more
than 250 grams of uranium 235;
(d) any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste radioactive
material;
and includes the site on which any of the foregoing is located,
together with all operations conducted thereon and all premises used
for such operations
(iv) The term "fissionable substance" means any prescribed substance that is,
or from which can be obtained, a substance capable of releasing atomic
energy by nuclear fission
(v) With respect to property, loss of use of such property shall be deemed
to be property damage.
NOTES: Wherever used herein the term:
"Company" shall be understood to mean "Reassured", "Reinsured" or whatever
other term is used in the attached reinsurance Agreement to designate the
reinsured company.
"Agreement" shall be understood to mean "Contract", "Policy" or whatever
other term is used to designate the attached reinsurance document.
April 1985
Page 2 of 2
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01-96-0020
EXHIBIT 10.13
FIRST EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
The Subscribing Reinsurer(s) executing the
Interests and Liabilities Contract(s)
attached to and forming a part
of this Agreement
(hereinafter referred to as the "Reinsurer")
WITNESSETH:
The Reinsurer hereby reinsures the Company to the extent and the terms
and conditions subject to the exceptions, exclusions and limitations
hereinafter set forth and nothing hereinafter shall in any manner create any
obligations or establish any rights against the Reinsurer in favor of any third
parties or any persons not parties to this Agreement.
ARTICLE I
BUSINESS COVERED:
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amount of ultimate net loss which the Company may pay as the
result of claims made during the term of this Agreement under the Company's
Physicians and Surgeons Comprehensive Professional and Business Liability
policies, including Clinics and Clinical Laboratories, Professional and
Business Liability policies for Hospitals and Errors and Omissions Liability
policies for Managed Care Organizations which are in force or may hereinafter
come into force during the term of this Agreement, except as excluded under the
Exclusions Article subject to the limitations set forth in the Limits of Cover
Article.
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ARTICLE II
EXCLUSIONS:
This Agreement specifically excludes:
1. 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, 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.
2. Loss or Liability excluded by the provisions of the attached
"Nuclear Incident Exclusion Clause - Liability - Reinsurance".
3. All Assumed Reinsurance.
ARTICLE III
TERM:
A. Except as provided in paragraph C. below, this Agreement shall apply
to claims made during the twelve month period beginning January 1, 1996. In
the event a loss, as defined in Article VI, involves a loss or losses covered
under the current Agreement Year and a prior Agreement Year(s) no recovery
shall be made hereunder in respect of any loss which occurred prior to:
1. January 1, 1979 as regards Extra Contractual Obligation (as
provided for in Article XI hereof)
2. January 1, 1976 as regards all other business.
B. It is understood however, that in respect of Personal Liability and
Discovery Period coverage for Deceased, Disabled, Retired and Withdrawing
Physicians and for Physicians ceasing Medical Practice within the State, this
Agreement covers claims made during the period of this Reinsurance Agreement.
In the event this Agreement is not renewed, all such liability shall be assumed
by the Company with effect from the date of cancellation.
C. The provisions of paragraphs A. and B. notwithstanding, the Company
may, at its option, elect to continue to cover the in force portfolio of
liability on the date of expiration for a further period of twelve months.
Should the Company exercise this option, the Company shall give the Reinsurer
notice prior to expiration that they wish to exercise this option. The Company
shall pay to the Reinsurer an additional premium as set forth in the Premium
Article.
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D. If any law or regulation of the Federal, State or Local Government or
any jurisdiction in which the Company is doing business shall render illegal
the arrangements made herein, this Agreement can be terminated immediately
insofar as it applies to such jurisdiction by the Company giving notice to the
Reinsurer to such effect.
E. Notwithstanding the expiration of this Agreement as hereinabove
provided, the provisions of this Agreement shall continue to apply to all
unfinished business hereunder to the end that all obligations and liabilities
incurred by each party hereunder prior to such termination shall be fully
performed and discharged.
ARTICLE IV
ATTACHMENT OF LIABILITY:
A. For purposes of determining the attachment of the Reinsurer's
liability hereunder as respects any one loss, all losses (including Discovery
Period Losses) involving one or more Original Insureds, arising from the same
medical incident, and in which First Notice of Claim or Circumstance is
notified to the Company during the term of this Agreement shall be covered
hereunder. Where First Notice falls in Agreement Years prior to January 1,
1992 paragraph D. (Interlocking Clause) of Article V below, shall apply hereon
for Physicians and Surgeons Comprehensive Professional Liability policies only.
B. The date of loss hereunder shall be the earliest date, within the term
of this Agreement, that the Company has received First Notice of Claim or
Circumstance.
ARTICLE V
LIMITS OF COVER:
A. The Company shall retain for its own account and pay under one or more
of the Company's policies the first $1,000,000 ultimate net loss, each and
every loss and the Reinsurer agrees to reimburse the Company for the amount of
ultimate net loss paid in excess of $1,000,000, each and every loss, but the
Reinsurer's maximum liability shall not exceed $1,000,000 resulting from each
and every loss.
B. Notwithstanding the foregoing, it is a condition hereto that an Annual
Aggregate Deductible of losses otherwise recoverable hereunder equal to 1% of
GNEPI shall first be deducted before any liability attaches to the Reinsurer
hereon.
C. The Reinsurer's maximum liability from all losses during the term of
this Agreement shall not exceed $8,500,000 or 182.5% of the Company's
Reinsurance Premiums Earned during the period, whichever is greater. It is
further agreed that the Reinsurer's maximum liability, as respects any elected
run off period, shall be limited to $8,500,000 or 182.5% of the Company's
Reinsurance Premiums Earned, whichever is greater, for said run-off period.
D. (This paragraph shall apply only to those claims where first notice of
claim or circumstance falls in Agreement Years prior to January 1, 1992.) As
respects each and every loss where this Agreement responds on a claims made
basis, and more than one insured or policy
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is covered under this Agreement period with claims made dates falling in more
than one reinsurance agreement period, the limit and retention as respects
claims covered under this Agreement shall be the percentage of the Limit and
Retention under this Agreement that the amount of covered claim or claims
hereunder bears to the total of all covered claims from the same loss.
ARTICLE VI
WARRANTY:
A. The Company warrants that as respects Professional and Business
Liability policies for Hospitals written on or after January 1, 1996, policy
limits greater than $500,000 reinsured elsewhere on an Excess of Loss basis or
so deemed.
B. The Company further warrants that as respects Professional and Business
Liability policies for Hospitals written prior to January 1, 1996, policy limits
greater than $500,000 reinsured elsewhere on an Excess of Loss basis or so
deemed.
ARTICLE VII
DEFINITIONS:
A. The term "each and every loss" shall mean the happening of one or a
series of related acts, errors, or omissions to act, accidents or occurrences
arising out of one event.
B. The term "Gross Net Earned Premium Income" shall mean the gross earned
premium on business the subject matter hereof less cancellations and return
premiums and less premiums paid for reinsurance recoveries under which would
inure to the benefit of the Reinsurer. Such Premium Income shall be understood
to include:
1. that content of pre-paid premiums under policies in respect of
Deceased, Disabled and Retired Insureds, the coverage for
which becomes effective during the Agreement period.
2. the premium transferred internally by the Company from a prior
Agreement year or years, in respect of Deceased, Disabled and
Retired Insureds and in respect of other withdrawing Insureds
who have purchased extended coverage under Reporting
Endorsements.
C. The term "claims made" as used herein shall mean (A) In respect of
Claims Made Policies, claims first notified to the Company during the term of
this Agreement on any in force policy or reporting endorsement arising out of
incidents subsequent to the retroactive date of said policy as the result of
the rendering of or failure to render a professional service or the reporting
of losses which arise from the insured premises and operations incidental to
the practice of a physician, hospital or managed care organization and/or (B)
In respect of Occurrence Policies, claims or losses first notified to the
Company during the term of this Agreement.
ARTICLE VIII
NET RETAINED LINES:
A. This Agreement applies to only that portion of any insurance which the
Company retains net for its own account; and 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 which the Company retains net for its own account shall be included.
B. 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 underwriters, whether specific or general, any amount
which may become due from them, whether such inability arises from the
insolvency of such other underwriters or otherwise.
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ARTICLE IX
ULTIMATE NET LOSS:
A. The term "ultimate net loss" as used herein shall be understood to
mean the sum actually paid by the Company in settlement of losses for which it
is held liable, including pre judgment interest when made part of the award or
judgment, 80% of Extra Contractual Obligations in accordance with the
provisions of Article XI and Excess of Original Policy Limits in accordance
with the provisions of Article X, after making proper deductions for all
recoveries, salvages, and claims upon other reinsurances and insurances which
inure to the benefit of the Reinsurer under this Agreement, whether collectible
or not, and shall exclude all loss adjustment expenses (which shall be
separately allocated and paid as provided in paragraph B. below); provided,
however, that in the event of the insolvency of the Company, "ultimate net
loss" shall mean the amount of loss which the Company has incurred or for which
it is liable, and payment by the Reinsurer shall be made to the liquidator,
receiver or statutory successor of the Company in accordance with the
provisions of the Insolvency Article in this Agreement. Nothing in this
clause, however, shall be construed to mean that losses under this Agreement
are not recoverable until the ultimate net loss of the Company has been
ascertained.
B. All loss adjustment expenses incurred in investigation, adjustment and
litigation, defense and settlement of claims made against the Company under its
original policies reinsured hereunder, including pre judgment interest when not
part of an award or judgment and post judgment interest, shall be apportioned
in proportion to the respective interests of the parties hereto in the ultimate
net loss. Office expenses and salaries of officials and employees not
classified as loss adjusters are not chargeable as expenses for the purpose of
this paragraph.
C. In the event a verdict or judgment is reduced by an appeal or a
settlement, subsequent to the entry of a judgment, resulting in an ultimate
saving on such verdict or judgment, or a judgment is reversed outright, the
expense incurred in securing such final reduction or reversal shall (1) be
prorated between the Reinsurer and the Company in proportion that each benefits
from such reduction or reversal and the expense incurred up to the time of the
original verdict or judgment shall be prorated in proportion to each party's
interest in such verdict or judgment; or (2) when the terms and conditions of
the Company's original policies reinsured hereunder include expenses as part of
the policy limit, be added to the Company's ultimate net loss.
ARTICLE X
PROFIT COMMISSION:
A. The Reinsurer shall make a Profit Commission allowance of 90% to the
Company on the net profits accruing to the Reinsurer under this Agreement
period (January 1, 1995 through December 31, 1995), computed as follows.
INCOME
1. Premiums earned by the Reinsurer during the Agreement period.
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OUTGO
1. Losses and loss adjustment expenses incurred by the Reinsurer
during the Agreement period.
2. Allowance for Reinsurer's management expenses during the
Agreement period of 25% on the reinsurance premiums earned
during the Agreement period.
3. Deficit or underwriting loss, if any, brought forward from the
preceding Agreement period.
The amount by which INCOME exceeds OUTGO is profit.
The amount by which OUTGO exceeds INCOME is deficit.
B. The first calculation of Profit Commission shall be computed as of
December 31, 1995, and annually thereafter, and the first and final payment of
any Profit Commission shall be made by the Reinsurers to the Company as of
December 31, 1999. The Company agrees that Payment of any Profit Commission
shall be subject to complete commutation as respects all losses known and
unknown within the Profit Commission period. Payment of any Profit Commission
by the Reinsurers shall constitute full and final release from all further loss
development.
C. For the purposes of this Article the phrase "losses incurred" means
losses paid plus loss adjustment expenses paid less salvages recovered in
respect of claims made during the period for which computation is being made,
plus the reserve for unpaid outstanding losses and loss adjustment expenses at
the close of the period, in respect of claims made during the period.
ARTICLE XI
EXCESS OF ORIGINAL POLICY LIMITS:
A. This Agreement shall protect the Company, within the limits hereof, in
connection with any loss in excess of the limit of its original policy, such
loss in excess of the limit having been incurred because of failure by it 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 in the
preparation or prosecution of an appeal consequent upon such action.
B. However, this Article shall not apply where the loss has been incurred
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.
C. For the purposes of this Article, 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 original policy.
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ARTICLE XII
EXTRA CONTRACTUAL OBLIGATIONS CLAUSE:
A. This Agreement shall protect the Company within the limits hereof,
where the ultimate net loss includes Extra Contractual Obligations. "Extra
Contractual Obligations" are defined as those liabilities not covered under any
other provision of this Agreement and which arise from 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 against its insured or reinsured or in the preparation or
prosecution of an appeal consequent upon such action.
B. The date on which an Extra Contractual Obligation is incurred by the
Company shall be deemed, in all circumstances, to be the date of the original
accident, casualty, disaster or loss and furthermore, for the purposes hereof
be deemed to follow the claims made provisions of this Agreement, subject
always to the provisions of the Term Article.
C. However, this Article shall not apply where the loss has been incurred
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 XIII
CLAIMS:
A. In the event of a claim arising hereunder which either results in or
appears to be of serious enough nature as probably to result in a loss
involving this Agreement, the Company shall give notice as soon as reasonably
practicable to Reinsurers and the Company shall keep the Reinsurer advised of
all subsequent developments in connection therewith.
B. The Company shall also promptly notify the Reinsurers of all incidents
involving the following injuries for which the Company has established an
indemnity reserve of $550,000 or greater and with policy limits to affect
Reinsurers:-
1. Death of high wage earner with two or more dependents.
2. Brain Injury.
3. Nerve Injury.
4. Paralysis - cord injury.
5. Amputations.
6. Internal injuries which require continuous treatment (e.g.
Dialysis, Hyperalimentation, failure to diagnose).
7. Blindness.
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C. All loss settlements made by the Company provided they are within the
terms of the Company's original policies and of this Agreement, shall be
unconditionally binding upon Reinsurer and amounts falling to the share of the
Reinsurer shall be payable to the Company in accordance with the provisions set
forth in paragraph C. of Article XV.
ARTICLE XIV
COMMUTATION CLAUSE:
The Company or the Reinsurer may, at any time express their desire to
the other party to commute all losses which are applicable to any Agreement
year and which are still unsettled. In such event the Company and the
Reinsurer shall mutually determine and evaluate such losses and the payment by
the Reinsurer of their proportion of the amount so ascertained and mutually
agreed to be the value of such losses shall relieve them of all further
liability, in respect of that Agreement year both in respect of known or
unknown losses.
ARTICLE XV
PREMIUM:
A. The Company shall pay to the Reinsurer a deposit premium of $3,780,000
payable in equal quarterly installments of $937,500 on January 1st, April 1st,
July 1st and October 1st, 1995. In the event the Company elects to run off its
policies in force until natural expiration, not to exceed 12 months from the
expiration date hereon, the Company shall pay to the Reinsurer a run-off
premium equal to 50% of the Actual Earned Reinsurance Premium, as set forth in
paragraph B. on such policies. The run-off premium shall be paid in equal
quarterly installments on January 1st, April 1st, July 1st and October 1st,
1996.
B. As soon as practicable after expiration of this Agreement, the Company
shall calculate the premium due the Reinsurer based on a rate of 3.15% of the
Gross Net Earned Premium Income accounted for by the Company during the term of
this Agreement on all business subject matter of the Agreement, subject to a
minimum premium of [3,024,000]. In the event the premium due hereunder is
greater than the deposit premium paid, the difference shall be paid to the
Reinsurer forthwith. If the actual premium is less than the deposit premium
paid, the difference shall be refunded to the Company, subject to the minimum
premium.
ARTICLE XVI
REPORTS AND REMITTANCES:
A. The Company will provide the Reinsurer within forty-five (45) days at
the end of each quarter, all necessary data respecting premiums and losses,
including reserves thereon, as at dates and on forms mutually acceptable to the
Company and the Reinsurer.
B. Payments of deposit premium, provisional premium and adjusted premium
shall be made in accordance with the provisions of the Premium Article.
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C. Payment by the Reinsurer of its portion of loss and loss expenses paid
by the Company will be made by the Reinsurer to the Company as soon as
possible, but not later than 60 days after proof of payment by the Company is
received by the Reinsurer.
ARTICLE XVII
OFFSET:
The Company and the Reinsurer shall have the right to offset any balance
or amounts due from one party to the other under the terms of this Agreement.
The party asserting the right of offset may exercise such right any time whether
the balances due are on account of premiums or losses or otherwise.
ARTICLE XVIII
CONFIDENTIALITY CLAUSE:
A. This Agreement and the pre Agreement documentation may contain
confidential or proprietary information of either party to this Agreement. All
parties shall maintain the confidentiality of this information and shall not
disclose these to any third party without both parties approval.
B. Notwithstanding the above, any party may disclose such information
without further approval from the other party in answer to interrogations,
subpoenas or other legal/arbitration process as well as to the Company's
reinsurance intermediary hereon, the Reinsurer's retrocessionaires or in
response to requests by governmental and regulatory agencies. In addition the
parties may disclose such information to their accountants and outside legal
counsel as may be necessary.
ARTICLE XIX
CURRENCY:
Premiums shall be payable by the Company and losses shall be paid to
the Company in United States currency.
ARTICLE XX
FEDERAL EXCISE TAX:
(Applicable to those Reinsurers, excepting Underwriters at Lloyd's, London and
other Reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow, for the purpose of paying the
Federal Excise Tax, the applicable percentage of the premium payable hereon (as
imposed under Section 4371 of the Internal Revenue Service Code) to the extent
such premium is subject to the Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the
Reinsurer will deduct the aforesaid percentage from the return premium payable
hereon and the Company or its agent should take steps to recover the tax from
the United States government.
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ARTICLE XXI
ERRORS AND OMISSIONS:
Any inadvertent delay, omission or error shall not be held to 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; provided, however, this
Article is not to override retroactive dates specified in the Term Article.
ARTICLE XXII
ACCESS TO RECORDS:
A. The Company shall place at the disposal of the Reinsurer at all
reasonable times, and the Reinsurer shall have the right to inspect, through
its authorized representatives, all books, records and papers of the Company in
connection with this reinsurance hereunder or the subject matter thereof.
B. The Reinsurer shall be afforded the opportunity, at its own expense to
appoint an attorney of its own choice to assess the Company's claims procedures
who shall report to the Reinsurer the results of such.
ARTICLE XXIII
FUNDING:
(This clause is only applicable to those Reinsurer(s) who cannot qualify for
credit by the State having jurisdiction over the Company's loss reserves.)
A. As regards policies or bonds issued by the Company coming within the
scope of this Agreement, the Company agrees that, when it shall file with the
Insurance Department or set up on its books reserves for losses covered
hereunder which it shall be required by law to set up, it will forward to the
Reinsurer a statement showing the proportion of such loss reserves which is
applicable to the Reinsurer. The Reinsurer hereby agrees that it will apply
for and secure delivery to the Company of a clean, irrevocable and
unconditional Letter of Credit, issued by a bank which is acceptable to the
regulatory authority(ies) having jurisdiction over the Company's loss reserves
in an amount equal to the Reinsurer's proportion of reserves in respect of
known outstanding losses that have been reported to the Reinsurer and allocated
loss expenses relating thereto, plus reserves for losses incurred but not
reported, as shown in the statement prepared by the Company.
B. The Letter of Credit shall be issued for a period of not less than one
year, and shall be automatically extended for one year from its date of
expiration or any future expiration date unless thirty (30) days prior to any
expiration date the issuing bank shall notify the Company by registered mail
that the bank elects not to consider the Letter of Credit extended for any
additional period. An issuing bank, not a member of the Federal Reserve System
or not chartered in New York State shall provide sixty (60) days notice to the
Company prior to any expiration in the event of non-extension.
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C. Notwithstanding any other provision of this Agreement, the Company or
its successors in interest may draw upon such credit at any time without
diminution because of the insolvency of the Company or of the Reinsurer for one
or more of the following purposes only:
1. To pay the Reinsurer's share or to reimburse the Company for
the Reinsurer's share of any loss reinsured by this Agreement,
the payment of which has been agreed by the Reinsurer and
which has not been otherwise paid.
2. To make refund of any sum which is in excess of the actual
amount required to pay the Reinsurer's share of any liability
reinsured by this Agreement.
3. In the event of expiration of the Letter of Credit as provided
for above, to establish deposit of the Reinsurer's share of
known and reported outstanding losses and allocated expenses
relating thereto under this Agreement. Such cash deposit
shall be held in an interest bearing account separate from the
Company's other assets, and interest thereon shall accrue to
the benefit of the Reinsurer.
D. The issuing bank shall have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition of
funds withdrawn, except to ensure that withdrawals are made only upon the order
of properly authorized representatives of the Company.
E. At annual intervals, or more frequently as agreed but never more
frequently than quarterly, the Company shall prepare a specific statement, for
the sole purpose of amending the Letter of Credit, of the Reinsurer's share of
known and reported outstanding losses and allocated expenses relating thereto,
plus reserves for losses incurred but not reported. If the statement shows
that Reinsurer's share of such losses and allocated loss expenses exceeds the
balance of credit as of the statement date, the Reinsurer shall, within thirty
(30) days after receipt of notice of such excess, secure delivery to the
Company of an amendment of the Letter of Credit increasing the amount of credit
by the amount of such difference. If, however, the statement shows that the
Reinsurer's share of known and reported outstanding losses plus allocated loss
expenses relating thereto, plus reserves for losses incurred but not reported
is less than the balance of credit as of the statement date, the Company shall,
within thirty (30) days after receipt of written request from the Reinsurer,
release such excess credit by agreeing to secure an amendment to the Letter of
Credit reducing the amount of credit available by the amount of such excess
credit.
ARTICLE XXIV
SPECIAL FUNDING CLAUSE:
A. If, during the period of this Agreement and thereafter, as respects
any outstanding liabilities hereunder, the Reinsurer shall fail to pay any loss
payable hereunder within the time prescribed, the Reinsurer agrees that it will
fund uncollected paid losses and loss adjustment expenses within 30 days from
the date of written demand by the Company to so fund. Such demand shall not be
made unless balances are 60 days or more past the due date of payment specified
in this Agreement.
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B. The Reinsurer shall have the sole option of determining the method of
funding referred to above, provided it is acceptable to the insurance
regulatory authorities involved. If the Reinsurer elects to fund the aforesaid
loss by a Letter of Credit, the procedures set forth in the Funding Article in
respect of Letters of Credit shall apply. If the Reinsurer has already funded
obligations hereunder in accordance with the Funding Article in this Agreement,
it agrees that such funds as are required to pay overdue losses may immediately
be drawn down by the Company.
C. The phrase "any loss payable" as used in paragraph A. above shall mean
any ultimate net loss subject to recovery under this Agreement wherein the
Reinsurer has not disputed said loss in writing within the due date for
payment.
D. The Company will provide the Reinsurer with a reinsurance proof of
loss and such other substantive loss material reflecting the nature of the
settlement (i.e., applicable Proofs of Loss, Releases, adjuster's reports,
etc.). If, subsequent to receipt of this material, the information supplied is
insufficient or not in accordance with the contractual conditions, then the
payment due date as defined in the Reports and Remittances Article, will be
deemed to be the date upon which the Reinsurer received such additional
substantive material necessary to approve payment of the claim, or the date the
claim is presented in a manner acceptable to the Reinsurer.
ARTICLE XXV
ARBITRATION:
A. As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Agreement,
including the formation or validity thereof, shall be submitted for decision to
a panel of three arbitrators. Notice requesting arbitration will be in writing
and sent certified or registered mail, return receipt requested.
B. One arbitrator shall be chosen by each party and the two arbitrators
shall, before instituting the hearing, choose an impartial third arbitrator who
shall preside at the hearing. If either party fails to appoint its arbitrator
within thirty (30) days after being requested to do so by the other party, the
latter, after ten (10) days notice by certified or registered mail of its
intention to do so, may appoint the second arbitrator.
C. If the two arbitrators are unable to agree upon the third arbitrator
within thirty (30) days of their appointment, the deficiency shall be supplied
on the application of the party requesting arbitration by an appointment made
by the American Arbitration Association. Notwithstanding the appointment of
any third Arbitrator by the American Arbitration Association, the arbitration
proceedings shall not be governed by the American Arbitration Association's
commercial arbitration rules.
D. All arbitrators shall be disinterested active or former executive
officers of insurance or reinsurance companies or Underwriters at Lloyd's,
London.
ED 4/5/96 Page 12 of 15
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<PAGE> 13
01-96-0020
E. Within thirty (30) days after notice of appointment of all
arbitrators, the panel shall meet and determine timely periods for briefs,
discovery procedures and schedules for hearings.
F. The panel shall be relieved of all judicial formality and shall not be
bound by the strict rules of procedure and evidence. Unless the panel agrees
otherwise, arbitration shall take place in Beverly Hills, California, but the
venue may be changed when deemed by the panel to be in the best interest of the
arbitration proceeding. Insofar as the arbitration panel looks to substantive
law, it shall consider the law of the State of California. The decision of any
two arbitrators when rendered in writing shall be final and binding. The panel
is empowered to grant interim relief as it may deem appropriate.
G. The panel shall interpret this Agreement as if it were an honorable
engagement rather than as merely a legal obligation and shall make its decision
considering the custom and practice of the applicable insurance and reinsurance
business within sixty (60) days following the termination of the hearings.
Judgment upon the award may be entered in any court having jurisdiction
thereof.
H. Each party shall bear the expense of its own arbitrator and shall
jointly and equally bear with the other party the cost of the third arbitrator.
The remaining costs of the arbitration shall be allocated by the panel. The
panel may, at its discretion, award such further costs and expenses as it
considers appropriate, including but not limited to attorneys fees, to the
extent permitted by law.
ARTICLE XXVI
SERVICE OF SUIT CLAUSE (U.S.A.):
A. It is agreed that in the event of the failure of the Reinsurer hereon
to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the
request of the Company, will submit to the jurisdiction of a Court of competent
jurisdiction within the United States. Nothing in this Clause 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. It is further agreed that service of process in
such suit may be made upon Messrs. Mendes & Mount, 725 South Figueroa, Suite
1990, Los Angeles, CA 90017, and that in any suit instituted, the Reinsurer
will abide by the final decision of such Court or of any Appellate Court in the
event of an appeal.
B. 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 request of
the Company to give 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.
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<PAGE> 14
01-96-0020
C. Further, pursuant to any statute of any state, territory or district
of the United States which makes provision therefor, the Reinsurer hereon
hereby designates the Superintendent, Commissioner or Director of Insurance or
other officer specified for that 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 action, suit or proceeding instituted by or on behalf of
the Company or any beneficiary hereunder arising out of this Agreement, and
hereby designate the above-named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE XXVII
INSOLVENCY:
A. 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 policy or policies reinsured without diminution because
of the insolvency of the Company.
B. In the event of the insolvency of one or more than one of the
Companies, reinsurance under this Agreement shall be payable immediately on
demand, with reasonable provision for verification, on the basis of claims
allowed against the insolvent Company(ies) by any court of competent
jurisdiction or by any liquidator, receiver, or statutory successor of the
Company(ies) having authority to allow such claims, without diminution because
of such insolvency or because such liquidator, receiver, or statutory successor
has failed to pay all or a portion of any claims. Such payments by the
Reinsurer shall be made directly to the Company or its liquidator, receiver or
statutory successor, except where the contract of insurance or reinsurance
provides another payee of such reinsurance in the event of the insolvency of
the Company(ies).
C. It is agreed, however, that the liquidator or receiver or statutory
successor of the insolvent Company(ies) will give written notice to the
Reinsurer of the pendency of a claim against the insolvent Company(ies) on the
policy or policies reinsured within a reasonable time after such claim is filed
in the insolvency proceeding 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 which
it may deem available to the Company(ies) or its liquidator or receiver or
statutory successor. The expense thus incurred by the Reinsurer will be
chargeable, subject to court approval, against the insolvent Company(ies) as
part of the expense of liquidation to the extent of a proportionate share of
the benefit which may accrue to the Company(ies) solely as a result of the
defense undertaken by the Reinsurer.
D. Where two or more reinsurers are involved in the same claim and a
majority in interest elect to interpose defense to such claim, the expense will
be apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the insolvent Company(ies).
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<PAGE> 15
01-96-0020
ARTICLE XXVIII
INTERMEDIARY:
Willcox Incorporated Reinsurance Intermediaries is hereby recognized
as the Intermediary negotiating this Agreement for all business hereunder. All
communications (including but not limited to notices, statements, premium,
return premium, commissions, taxes, losses, loss adjustment expense, salvages
and loss settlements) relating thereto shall be transmitted to the Company or
the Reinsurer through Willcox Incorporated Reinsurance Intermediaries, 180
Maiden Lane, New York, New York 10038-4993. 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 XXIX
GOVERNING LAW:
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of California, U.S.A.
ARTICLE XXX
SEVERAL LIABILITY NOTICE:
The subscribing reinsurers' obligations under contracts of reinsurance
to which they subscribe are several and not joint and are limited solely to the
extent of their individual subscriptions. The subscribing reinsurers are not
responsible for the subscription of any co-subscribing reinsurer who for any
reason does not satisfy all or part of its obligations.
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<PAGE> 16
01-96-0020
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
FIRST EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
TRANSATLANTIC REINSURANCE COMPANY
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 17.50% participation in the
Interests and Liabilities of the Reinsurer as set forth in the Agreement
attached hereto entitled First Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 17.50% of all
premiums due or which may become due the Reinsurer in accordance with the
provisions of the Agreement attached.
This Contract shall attach on January 1, 1996 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
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<PAGE> 17
01-96-0020
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of 199
TRANSATLANTIC REINSURANCE COMPANY
By: /s/
- ------------------------------------
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<PAGE> 18
01-96-0020
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
FIRST EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
HANNOVER RUCKVERSICHERVNGS-AKTIENGESELLSCHAFT
EISEN UND STAHL RUCKVERSICHERVNGS-AKTIENGESELLSCHAFT
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 22.50% participation in the
Interests and Liabilities of the Reinsurer as set forth in the Agreement
attached hereto entitled First Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 22.50% of all
premiums due or which may become due the Reinsurer in accordance with the
provisions of the Agreement attached.
This Contract shall attach on January 1, 1996 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
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<PAGE> 19
01-96-0020
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of 199
On behalf of each of the following Companies, whose liability shall be
several and not joint, for their respective shares of the percentage shown on
page one of this Contract.
HANNOVER RUCKVERSICHERVNGS-AKTIENGESELLSCHAFT - 80%
EISEN UND STAHL RUCKVERSICHERVNGS-AKTIENGESELLSCHAFT - 20%
By: /s/
---------------------------------------------------------
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<PAGE> 20
01-96-0020
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
FIRST EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
UNDERWRITERS REINSURANCE COMPANY
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 5.00% participation in the
Interests and Liabilities of the Reinsurer as set forth in the Agreement
attached hereto entitled First Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 5.00% of all
premiums due or which may become due the Reinsurer in accordance with the
provisions of the Agreement attached.
This Contract shall attach on January 1, 1996 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
ED 4/5/96 Page 1 of 2
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<PAGE> 21
01-96-0020
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this of , 199
UNDERWRITERS REINSURANCE COMPANY
By: /s/
---------------------------------
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<PAGE> 22
01-96-0020
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
FIRST EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
SWISS REINSURANCE COMPANY
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 5.00% participation in the
Interests and Liabilities of the Reinsurer as set forth in the Agreement
attached hereto entitled First Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 5.00% of all
premiums due or which may become due the Reinsurer in accordance with the
provisions of the Agreement attached.
This Contract shall attach on January 1, 1996 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
ED 4/5/96 Page 1 of 2
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<PAGE> 23
01-96-0020
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of , 199
SWISS REINSURANCE COMPANY
By: /s/
---------------------------------
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<PAGE> 24
01-96-0020
WX 950126
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
FIRST EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
THE TRAVELERS INDEMNITY COMPANY
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 2.50% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled First Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 2.50% of all
premiums due or which may become due the Reinsurer in accordance with the
provisions of the Agreement attached.
This Contract shall attach on January 1, 1996 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
ED 4/5/96 Page 1 of 2
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<PAGE> 25
01-96-0020
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of , 199
THE TRAVELERS INDEMNITY COMPANY
By: /s/
---------------------------------
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<PAGE> 26
NUCLEAR INCIDENT EXCLUSION CLAUSE --
LIABILITY -- REINSURANCE U.S.A.
(Wherever the word "Reassured" appears in this clause, it shall be deemed to
read "Reassured," "Reinsured," "Company," or whatever other word is employed
throughout the text of the reinsurance agreement to which this clause is
attached to designate the company or companies reinsured.)
(1) This reinsurance does not cover any loss or liability accruing
to the Reassured as a member of, or subscriber to, any association of insurers
or reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.
(2) Without in any way restricting the operation of paragraph
(1) of this Clause it is understood and agreed that for all purposes of this
reinsurance all the original policies of the Reassured (new, renewal and
replacement) of the classes specified in Clause II of this paragraph
(2) from the time specified in Clause III in this paragraph (2) shall be
deemed to include the following provision (specified as the Limited Exclusion
Provision);
LIMITED EXCLUSION PROVISION.*
I. It is agreed that the policy does not apply under any liability
coverage.
( injury, sickness, disease, death or destruction
to ( with respect to which an insured
( under the policy is also an insured
( bodily injury or property damage
under a nuclear energy liability policy issued by Nuclear Energy
Liability Insurance Association. Mutual Atomic Energy Liability
Underwriters or Nuclear Insurance Association of Canada, or
would be an insured under any such policy but for its
termination upon exhaustion of its limit of liability.
II. Family Automobile Policies (liability only). Special Automobile
Policies (private passenger automobiles, liability only).
Farmers Comprehensive Personal Liability Policies (liability
only). Comprehensive Personal Liability Policies (liability
only) or policies of a similar nature; and the liability portion
of combination forms related to the four classes of policies
stated above, such as the Comprehensive Dwelling Policy and the
applicable types of Homeowners Policies.
III. The inception dates and thereafter of all original policies as
described in II above, whether new, renewal or replacement,
being policies which either
(a) become effective on or after 1st May, 1960 or
(b) become effective before that date and contain the Limited
Exclusion Provision set out above; provided this paragraph
(2) shall not be applicable to Family Automobile Policies.
Special Automobile Policies, or policies or combination
policies of a similar nature, issued by the Reassured on
New York risks, until 90 days following approval of the
Limited Exclusion Provision by the Governmental Authority
have jurisdiction thereof.
(3) Except for those classes of policies specified in Clause II of
paragraph (2) and without in any way restricting the operation of paragraph
(1) of this Clause, it is understood and agreed that for all purposes of this
reinsurance the original liability policies of the Reassured (new, renewal and
replacement) affording the following coverages:
Owners, Landlords and Tenants Liability, Contractual Liability, Elevator
Liability, Owners or Contractors (including railroad) Protective
Liability, Manufacturers and Contractors Liability, Product Liability,
Professional and Malpractice Liability, Storekeepers Liability, Garage
Liability, Automobile Liability (including Massachusetts Motor Vehicle
or Garage Liability)
shall be deemed to include, with respect to such coverages, from the time
specified in Clause V of this paragraph (3), the following provision (specified
as the Broad Exclusion Provision):
BROAD EXCLUSION PROVISION.*
It is agreed that the policy does not apply:
1. Under any Liability Coverage to (injury, sickness, disease, death
(or destruction
(bodily injury or property damage
(a) with respect to which an insured under the policy is also
an insured under a nuclear energy liability policy issued
by Nuclear Energy Liability Insurance Association. Mutual
Atomic Energy Liability Underwriters or Nuclear Insurance
Association of Canada, or would be an insured under any
such policy but for its termination upon exhaustion of its
limit of liability; or
(b) resulting from the hazardous properties of nuclear material
and with respect to which (1) any person or organization is
required to maintain financial protection pursuant to the
Atomic Energy Act of 1954, or any law amendatory thereof,
or (2) the insured is, or had this policy not been issued
would be, entitled to indemnity from the United States of
America, or any agency thereof, under any agreement entered
into by the United State of America, or any agency thereof,
with any person or organization.
WILLCOX INCORPORATED REINSURANCE INTERMEDIARIES
Page 1 of 2
<PAGE> 27
II. Under any Medical Payments Coverage, or under any Supplementary
Payments Provision relating
( immediate medical or surgical death
to ( to expenses incurred with respect
( first aid.
( bodily injury, sickness, disease or death
to ( resulting from the hazardous
( properties of nuclear material and bodily injury
arising out of the operation of a nuclear facility by any person or
organization.
( injury, sickness, disease, death or
III. Under any Liability Coverage to ( destruction
( bodily injury or property damage
resulting from the hazardous properties of nuclear material, if
(a) the nuclear material (1) is at any nuclear facility owned by, or
operated by or on behalf of, an insured or (2) has been discharged
or dispersed therefrom:
(b) the nuclear material is contained in spent fuel or waste at any
time possessed, handled, used, processed, stored, transported or
disposed of by or on behalf of an insured; or
( injury, sickness, disease, death or destruction
(c) ( arises out of the furnishing by an insured
( of services, bodily injury or property damage
materials, parts or equipment in connection with the planning,
construction, maintenance, operation or use of any nuclear
facility, but if such facility is located within the United States
of America, its territories or possessions or Canada, this
exclusion (c) applies only
( injury to or destruction of property at such nuclear facility.
to (
( property damage to such nuclear facility and any property
thereat.
IV. As used in this endorsement:
"HAZARDOUS PROPERTIES" include radioactive, toxic or explosive
properties; "NUCLEAR MATERIAL" means source material, special nuclear
material or by-product material; "SOURCE MATERIAL," "SPECIAL NUCLEAR
MATERIAL," and "BY-PRODUCT MATERIAL" have the meanings given them in
the Atomic Energy Act of 1954 or in any law amendatory thereof; "SPENT
FUEL" means any fuel element or fuel component, solid or liquid, which
has been used or exposed to radiation in a nuclear reactor; "WASTE"
means any waste material (1) containing by-product material other than
tailings or wastes produced by the extraction or concentration of
uranium or thorium from any ore processed primarily for its source
material content, and (2) resulting from the operation by any person or
organization of any nuclear facility included under the first two
paragraphs of the definition of nuclear facility; "NUCLEAR FACILITY"
means
(a) any nuclear reactor,
(b) any equipment or device designed or used for (1) separating the
isotopes of uranium or plutonium, (2) processing or utilizing
spent fuel, or (3) handling, processing or packaging waste;
(c) any equipment or device used for the processing, fabricating or
alloying of special nuclear material if at any time the total
amount of such material in the custody of the insured at the
premises where such equipment or device is located consists of or
contains more than 25 grams of plutonium or uranium 233 or any
combination thereof, or more than 250 grams of uranium 235;
(d) any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste;
and includes the site on which any of the foregoing is located, all
operations conducted on such site and all premises used for such
operations; "NUCLEAR REACTOR" means any apparatus designed or used to
sustain nuclear fission in a self-supporting chain reaction or to
contain a critical mass of fissionable material;
With respect to injury to or destruction of property, the word "injury"
or "destruction"
"property damage" includes all forms of radioactive contamination of
property;
includes all forms of radioactive contamination of property.
V. The inception dates and thereafter of all original policies affording
coverages specified in this paragraph (3), whether new, renewal or
replacement, being policies which become effective on or after 1st May,
1960, provided this paragraph (3) shall not be applicable to
(i) Garage and Automobile Policies issued by the Reassured on New
York risks, or
(ii) statutory liability insurance required under Chapter 90, General
Laws of Massachusetts,
until 90 days following approval of the Broad Exclusion Provision by
the Governmental Authority having jurisdiction thereof.
(4) Without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3) above are not
applicable to original liability policies of the Reassured in Canada and that
with respect to such policies this Clause shall be deemed to include the
Nuclear Energy Liability Exclusion Provisions adopted by the Canadian
Underwriters' Association or the Independent Insurance Conference of Canada.
- -------------------------------------------------------------------------------
*NOTE: The words printed in italics in the Limited Exclusion Provision in
the Broad Exclusion Provision shall apply only in relation to original
liability policies which include a Limited Exclusion Provision or a Broad
Exclusion Provision containing those words.
- -------------------------------------------------------------------------------
Page 2 of 2
<PAGE> 1
01-96-0021
EXHIBIT 10.14
SECOND EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
The Subscribing Reinsurer(s) executing the
Interests and Liabilities Contract(s)
attached to and forming a part
of this Agreement
(hereinafter referred to as the "Reinsurer")
WITNESSETH:
The Reinsurer hereby reinsures the Company to the extent and the terms
and conditions subject to the exceptions, exclusions and limitations
hereinafter set forth and nothing hereinafter shall in any manner create any
obligations or establish any rights against the Reinsurer in favor of any third
parties or any persons not parties to this Agreement.
ARTICLE I
BUSINESS COVERED:
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amount of ultimate net loss which the Company may pay as the
result of claims made during the term of this Agreement under the Company's
Physicians and Surgeons Comprehensive Professional and Business Liability
policies, including Clinics and Clinical Laboratories, Professional and
Business Liability policies for Hospitals and Errors and Omissions Liability
policies for Managed Care Organizations with respect to 1) claims
made during the term of this Agreement under subject policies which
are in force or may hereinafter come into force during the term of
this Agreement and are reported to the Reinsurer within 7 years from the
expiration hereof, and 2) losses which were first reported to the Company
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during the period January 1, 1986 to December 31, 1990 and are first reported
to the Reinsurer during the term of this Agreement, except as excluded under
the Exclusions Article subject to the limitations set forth in the Limits of
Cover Article.
ARTICLE II
EXCLUSIONS:
This Agreement specifically excludes:
1. 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, 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.
2. Loss or Liability excluded by the provisions of the attached
"Nuclear Incident Exclusion Clause - Liability - Reinsurance."
3. All Assumed Reinsurance.
ARTICLE III
TERM:
A. Except as provided in paragraph C. below, this Agreement shall apply to
claims made during the twelve month period beginning January 1, 1996. In the
event a loss, as defined in Article VI, involves a loss or losses covered under
the current Agreement Year and a prior Agreement Year(s) no recovery shall be
made hereunder in respect of any loss which occurred prior to:
1. January 1st, 1979 as regards Extra Contractual Obligation (as
provided for in Article X hereof)
2. January 1st, 1976 as regards all other business.
B. It is understood however that, in respect of Personal Liability and
Discovery Period coverage for Deceased, Disabled, Retired and Withdrawing
Physicians and for Physicians ceasing Medical Practice within the State, this
Agreement covers claims made during the period of this Reinsurance Agreement.
In the event this Agreement is not renewed, all such liability shall be assumed
by the Company with effect from the date of cancellation.
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C. The provisions of paragraphs A. and B. notwithstanding, the Company may,
at its option, elect to continue to cover the in force portfolio of liability
covered under Sections A.1. and A.3. of Article V of this Agreement on the date
of expiration for a further period of 12 months. Should the Company exercise
this option, the Company shall give the Reinsurer notice prior to expiration
that they wish to exercise this option. The Company shall pay to the Reinsurer
an additional premium thereon as set forth in the Premium Article.
D. As respects Sections A.1. and A.3. of Article V only, it is further
agreed that all claims hereunder shall be notified with full particulars by the
Company to the Reinsurer within 7 years from the expiration of this Agreement
(December 31, 1995) and no liability shall attach hereunder for any claim or
claims not notified within this period.
E. If any law or regulation of the Federal, State or Local Government or
any jurisdiction in which the Company is doing business shall render illegal
the arrangements made herein, this Agreement can be terminated immediately
insofar as it applies to such jurisdiction by the Company giving notice to the
Reinsurer to such effect.
F. Notwithstanding the expiration of this Agreement as hereinabove
provided, the provisions of this Agreement shall continue to apply to all
unfinished business hereunder to the end that all obligations and liabilities
incurred by each party hereunder prior to such termination shall be fully
performed and discharged.
ARTICLE IV
ATTACHMENT OF LIABILITY:
A. For purposes of determining the attachment of the Reinsurer's liability
hereunder as respects any one loss, all losses (including Discovery Period
Losses) involving one or more Original Insureds, arising from the same medical
incident, and in which First Notice of Claim or Circumstance is notified to the
Company during the term of this Agreement shall be covered hereunder. Where
First Notice falls in Agreement Years incepting prior to January 1, 1992
paragraph B. (Interlocking Clause) of Article V below, shall apply hereon for
Physicians and Surgeons Comprehensive Professional Liability policies only.
B. The date of a loss hereunder shall be the earliest date, within the
term of this Agreement, that the Company has received First Notice of Claim or
Circumstance.
ARTICLE V
LIMITS OF COVER:
A.1. As respects policies in force during the term of this Agreement, the
Company shall retain for its own account and pay under one or more of the
Company's policies the first $2,000,000 ultimate net loss, each and every loss
and the Reinsurer agrees to reimburse the Company for the amount of ultimate
net loss paid in excess of $2,000,000, each and every loss, but the Reinsurer's
maximum liability shall not exceed $3,000,000 resulting from each and every
loss.
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A.2. As respects losses which were first reported to the Company during the
period January 1, 1986 to December 31, 1989 and are first reported to the
Reinsurer during the term of this Agreement, the Company shall retain for its
own account and pay under one or more of the Company's policies the first
$2,000,000 ultimate net loss, each and every loss and the Reinsurer agrees to
reimburse the Company for the amount of ultimate net loss paid in excess of
$2,000,000, each and every loss, but the Reinsurer's maximum liability shall
not exceed $3,000,000 resulting from each and every loss. The coverage
provided hereunder shall be no narrower nor broader in scope than that which
was provided to the Company under their Second Excess of Loss Reinsurance
Agreement in force for the same period (see attached Cover Note Numbers
10710-003/86, 01-87-0021, 01-88-0021 and 01-89-0021).
A.3. As respects policies in force during the term of this Agreement
covering losses from Professional and Business Liability policies for Hospitals
and Errors and Omissions Liability policies for Managed Care Organizations, the
Company shall retain for its own account and pay under one or more of the
Company's policies the first $2,000,000 ultimate net loss, each and every loss
each policy and the Reinsurer agrees to reimburse the Company for the amount of
ultimate net loss paid in excess of $2,000,000, each and every loss each
policy, but the Reinsurer's maximum liability shall not exceed $3,000,000
resulting from each and every loss each policy.
It is understood that the Maximum Annual Aggregate Amount recoverable
under A.1., A.2. and A.3. combined is $9,000,000 in all during the period of
this Agreement.
B. (This paragraph shall apply only to those claims where first notice of
claim or circumstance falls in Agreement Years prior to January 1, 1992.) As
respects each and every loss where this Agreement responds on a claims made
basis, and more than one insured or policy is covered under this Agreement
period with claims made dates falling in more than one reinsurance agreement
period, the limit and retention as respects claims covered under this Agreement
shall be the percentage of the Limit and Retention under this Agreement that
the amount of covered claim or claims hereunder bears to the total of all
covered claims from the same loss.
C. With respect to Sections A.1. and A.2. the Company warrants that
maximum original policy limits shall not exceed $10,000,000 subject to inuring
protection of $8,000,000 excess of $2,000,000 or so deemed.
D. With respect to Section A.3. the Company warrants the following:
1. In respect of Professional and Business Liability policies for
Hospitals (written on or after January 1, 1996), policy limits greater
than $500,000 shall be reinsured elsewhere on an Excess of Loss basis or
so deemed.
2. In respect of Professional and Business Liability policies for
Hospitals written prior to January 1, 1996, policy limits greater than
5,000,000 shall be reinsured elsewhere on an Excess of Loss basis or so
deemed.
3. In respect of Errors and Omissions Liability policies for
Managed Care Organization, maximum original policy limit shall not
exceed $5,000,000.
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01-96-0021
ARTICLE VI
DEFINITIONS:
A. The term "each and every loss" shall mean the happening of one or a
series of related acts, errors, or omissions to act, accidents or occurrences
arising out of one event.
B. The term "Gross Net Earned Premium Income" shall mean the gross earned
premium on business the subject matter hereof less cancellations and return
premiums and less premiums paid for reinsurance recoveries under which would
inure to the benefit of the Reinsurer. Such Premium Income shall be understood
to include:
1. that content of pre-paid premiums under policies in respect of
Deceased, Disabled and Retired Insureds, the coverage for which
becomes effective during the Agreement period.
2. the premium transferred internally by the Company from a prior
Agreement year or years, in respect of Deceased, Disabled and
Retired Insureds and in respect of other withdrawing Insureds
who have purchased extended coverage under Reporting
Endorsements.
C.1. With respect to recoveries made under Sections A.1. and A.3. of Article
V, the term "claims made" as used herein shall mean (A) In respect of Claims
Made Policies, claims first notified to the Company during the term of this
Agreement on any in force policy or reporting endorsement arising out of
incidents subsequent to the retroactive date of said policy as the result of
the rendering of or failure to render a professional service or the reporting
of losses which arise from the insured premises and operations incidental to
the practice of a physician, hospital or managed care organization and/or (B)
In respect of Occurrence Policies, claims or losses first notified to the
Company during the term of this Agreement.
C.2. With respect to recoveries made under Section A.2. of Article V, the
term "claims made" as used herein shall mean claims first reported to the
Company during the period January 1, 1986 to December 31, 1989 and first
reported to the Reinsurer during the term of this Agreement.
ARTICLE VII
NET RETAINED LINES:
A. This Agreement applies to only that portion of any insurance which the
Company retains net for its own account; and 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 which the Company retains net for its own account shall be included.
B. 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 underwriters, whether specific or general, any amount
which may become due from them, whether such inability arises from the
insolvency of such other underwriters or otherwise.
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01-96-0021
ARTICLE VIII
ULTIMATE NET LOSS:
A. The term "ultimate net loss" as used herein shall be understood to mean
the sum actually paid by the Company in settlement of losses for which it is
held liable, including pre judgment interest when made part of the award or
judgment, 80% of Extra Contractual Obligations in accordance with the
provisions of Article X and Excess of Original Policy Limits in accordance with
the provisions of Article IX, after making proper deductions for all
recoveries, salvages, and claims upon other reinsurances and insurances which
inure to the benefit of the Reinsurer under this Agreement, whether collectible
or not, and shall exclude all loss adjustment expenses (which shall be
separately allocated and paid as provided in paragraph B. below); provided,
however, that in the event of the insolvency of the Company, "ultimate net
loss" shall mean the amount of loss which the Company has incurred or for which
it is liable, and payment by the Reinsurer shall be made to the liquidator,
receiver or statutory successor of the Company in accordance with the
provisions of the Insolvency Article in this Agreement. Nothing in this
clause, however, shall be construed to mean that losses under this Agreement
are not recoverable until the ultimate net loss of the Company has been
ascertained.
B. All loss adjustment expenses incurred in investigation, adjustment and
litigation, defense and settlement of claims made against the Company under its
original policies reinsured hereunder, including pre judgment interest when not
part of an award or judgment and post judgment interest, shall be apportioned
in proportion to the respective interests of the parties hereto in the ultimate
net loss. Office expenses and salaries of officials and employees not
classified as loss adjusters are not chargeable as expenses for the purpose of
this paragraph.
C. In the event a verdict or judgment is reduced by an appeal or a
settlement, subsequent to the entry of a judgment, resulting in an ultimate
saving on such verdict or judgment, or a judgment is reversed outright, the
expense incurred in securing such final reduction or reversal shall (1) be
prorated between the Reinsurer and the Company in proportion that each benefits
from such reduction or reversal and the expense incurred up to the time of the
original verdict or judgment shall be prorated in proportion to each party's
interest in such verdict or judgment; or (2) when the terms and conditions of
the Company's original policies reinsured hereunder include expenses as part of
the policy limit, be added to the Company's ultimate net loss.
D. It is understood that the Company has in effect a First Excess of Loss
Reinsurance Agreement and recoveries thereunder will be for the sole benefit of
the Company and will be disregarded when computing the ultimate net loss of the
Company.
ARTICLE IX
EXCESS OF ORIGINAL POLICY LIMITS:
A. This Agreement shall protect the Company, within the limits hereof, in
connection with any loss in excess of the limit of its original policy, such
loss in excess of the limit having been incurred because of failure by it 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 in the
preparation or prosecution of an appeal consequent upon such action.
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B. However, this Article shall not apply where the loss has been incurred
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.
C. For the purposes of this Article, 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 original policy.
ARTICLE X
EXTRA CONTRACTUAL OBLIGATIONS CLAUSE:
A. This Agreement shall protect the Company within the limits hereof,
where the ultimate net loss includes Extra Contractual Obligations. "Extra
Contractual Obligations" are defined as those liabilities not covered under any
other provision of this Agreement and which arise from 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 against its insured or reinsured or in the preparation or
prosecution of an appeal consequent upon such action.
B. The date on which an Extra Contractual Obligation is incurred by the
Company shall be deemed, in all circumstances, to be the date of the original
accident, casualty, disaster or loss and furthermore, for the purposes hereof
be deemed to follow the claims made provisions of this Agreement, subject
always to the provisions of the Term Article.
C. However, this Article shall not apply where the loss has been incurred
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 XI
CLAIMS:
A. In the event of a claim of $1,500,000 or greater arising hereunder
which either results in or appears to be of serious enough nature as probably
to result in a loss involving this Agreement, the Company shall give notice as
soon as reasonably practicable to Reinsurers and the Company shall keep the
Reinsurer advised of all subsequent developments in connection therewith.
B. All loss settlements made by the Company provided they are within the
terms of the Company's original policies and of this Agreement, shall be
unconditionally binding upon Reinsurer and amounts falling to the share of the
Reinsurer shall be payable to the Company in accordance with the provisions set
forth in paragraph C. of Article XV.
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ARTICLE XII
COMMUTATION CLAUSE:
The Company or the Reinsurer may, at any time express their desire to
the other party to commute all losses which are applicable to any Agreement
year and which are still unsettled. In such event the Company and the
Reinsurer shall mutually determine and evaluate such losses and the payment by
the Reinsurer of their proportion of the amount so ascertained and mutually
agreed to be the value of such losses shall relieve them of all further
liability, in respect of that Agreement year both in respect of known or
unknown losses.
ARTICLE XIII
PREMIUM:
A. The Company shall pay to the Reinsurer a deposit premium of $1,170,000
payable in equal quarterly installments of $310,000 on January 1st, April 1st,
July 1st and October 1st, 1995. In the event the Company elects to run off its
policies in force until natural expiration, not to exceed 12 months from the
expiration date hereon, the Company shall pay to the Reinsurer a run-off
premium equal to 50% of the Actual Earned Reinsurance Premium, as set forth in
paragraph B. on such policies. The run-off premium shall be paid in equal
quarterly installments on January 1st, April 1st, July 1st and October 1st,
1996.
B. As soon as practicable after expiration of this Agreement, the Company
shall calculate the premium due the Reinsurer based on a rate of .975% of the
Gross Net Earned Premium Income accounted for by the Company during the term of
this Agreement on all business subject matter of this Agreement, subject to a
minimum premium of $935,000. In the event the premium due hereunder is
greater than the deposit premium paid, the difference shall be paid to the
Reinsurer forthwith. If the actual premium is less then the deposit premium
paid, the difference shall be refunded to the Company, subject to the minimum
premium.
ARTICLE XIV
REINSTATEMENT:
A.1. As respects Sections A.1. and A.3. of Article V:
1. In the event of any portion of the coverage under this
Agreement being depleted or exhausted by loss, the amount so depleted
or exhausted may, at the option of the Company, be reinstated from the
time claim is first made and the Company will pay the Reinsurer for
such reinstatement an additional premium calculated as follows:
a. For the first reinstatement, 125% of the annual
reinsurance premium pro rated as to the amount so
reinstated;
b. For the second reinstatement, 200% of the annual
reinsurance premium pro rated as to the amount so
reinstated.
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2. All calculations of reinstatement premiums shall be based on
paid losses only. The decision of the Company to exercise its
reinstatement option must be relayed to Reinsurers within three (3)
months from the time any reserve invades this Agreement.
Plus,
A.2. As respects Section A.2. of Article V:
1. In the event of a paid loss arising under this Section,
additional to the reinstatement premium payable above, a further
reinstatement premium shall be payable to the Reinsurer, to be
calculated at pro rata as respects amount reinstated and 100% as
respects premium based on an annual premium of $450,000 if First
Reinstatement, and based on an annual premium of $675,000 if Second
Reinstatement.
2. It is understood and agreed that the payment of reinstatement
premiums arising from losses recoverable under Section A.2. above shall
be mandatory and not at the option of the Company.
B. Nevertheless, the Reinsurer's liability will never be more than
$3,000,000 in respect of any claim made nor more than the Maximum Annual
Aggregate Amount Recoverable under Sections A.1., A.2. and A.3. combined of
$9,000,000 in all during the term of the Agreement.
ARTICLE XV
REPORTS AND REMITTANCES:
A. The Company will provide the Reinsurer within forty-five (45) days at
the end of each quarter, all necessary data respecting premiums and losses,
including reserves thereon, as at dates and on forms mutually acceptable to the
Company and the Reinsurer.
B. Payments of deposit premium and annual adjustments shall be made in
accordance with the provisions of the Premium Article.
C. Payment by the Reinsurer of its portion of loss and loss expenses paid
by the Company will be made by the Reinsurer to the Company as soon as
possible, but not later than 60 days after proof of payment by the Company is
received by the Reinsurer.
ARTICLE XVI
OFFSET:
The Company and the Reinsurer shall have the right to offset any balance
or amounts due from one party to the other under the terms of this Agreement.
The party asserting the right of offset may exercise such right any time
whether the balances due are on account of premiums or losses or otherwise.
ARTICLE XVII
CONFIDENTIALITY:
A. This Agreement and the pre Agreement documentation may contain
confidential or proprietary information of either party to this Agreement. All
parties shall maintain the confidentiality of this information and shall not
disclose these to any third party without both parties approval.
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B. Notwithstanding the above, any party may disclose such information
without further approval from the other party in answer to interrogations,
subpoenas or other legal/arbitration process as well as to the Company's
reinsurance intermediary hereon, the Reinsurer's retrocessionaires or in
response to requests by governmental and regulatory agencies. In addition the
parties may disclose such information to their accountants and outside legal
counsel as may be necessary.
ARTICLE XVIII
CURRENCY:
Premiums shall be payable by the Company and losses shall be paid to
the Company in United States currency.
ARTICLE XIX
FEDERAL EXCISE TAX:
(Applicable to those Reinsurers, excepting Underwriters at Lloyd's, London and
other Reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow, for the purpose of paying the
Federal Excise Tax, the applicable percentage of the premium payable hereon (as
imposed under Section 4371 of the Internal Revenue Service Code) to the extent
such premium is subject to the Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the
Reinsurer will deduct the aforesaid percentage from the return premium payable
hereon and the Company or its agent should take steps to recover the tax from
the United States government.
ARTICLE XX
ERRORS AND OMISSIONS:
Any inadvertent delay, omission or error shall not be held to 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; provided, however, this
Article shall not invalidate the provisions of paragraph D. in Article III or
override the retroactive dates in Article III.
ARTICLE XXI
ACCESS TO RECORDS:
A. The Company shall place at the disposal of the Reinsurer at all
reasonable times, and the Reinsurer shall have the right to inspect, through
its authorized representatives, all books, records and papers of the Company in
connection with this reinsurance hereunder or the subject matter thereof.
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B. The Reinsurer shall be afforded the opportunity, at its own expense to
appoint an attorney of its own choice to assess the Company's claims procedures
who shall report to the Reinsurer the results of such.
ARTICLE XXII
FUNDING:
(This clause is only applicable to those Reinsurer(s) who cannot qualify for
credit by the State having jurisdiction over the Company's loss reserves.)
A. As regards policies or bonds issued by the Company coming within the
scope of this Agreement, the Company agrees that, when it shall file with the
Insurance Department or set up on its books reserves for losses covered
hereunder which it shall be required by law to set up, it will forward to the
Reinsurer a statement showing the proportion of such loss reserves which is
applicable to the Reinsurer. The Reinsurer hereby agrees that it will apply
for and secure delivery to the Company of a clean, irrevocable and
unconditional Letter of Credit, issued by a bank which is acceptable to the
regulatory authority(ies) having jurisdiction over the Company's loss reserves
in an amount equal to the Reinsurer's proportion of reserves in respect of
known outstanding losses that have been reported to the Reinsurer and allocated
loss expenses relating thereto, plus reserves for losses incurred but not
reported, as shown in the statement prepared by the Company.
B. The Letter of Credit shall be issued for a period of not less than one
year, and shall be automatically extended for one year from its date of
expiration or any future expiration date unless thirty (30) days prior to any
expiration date the issuing bank shall notify the Company by registered mail
that the bank elects not to consider the Letter of Credit extended for any
additional period. An issuing bank, not a member of the Federal Reserve System
or not chartered in New York State shall provide sixty (60) days notice to the
Company prior to any expiration in the event of non-extension.
C. Notwithstanding any other provision of this Agreement, the Company or
its successors in interest may draw upon such credit at any time without
diminution because of the insolvency of the Company or of the Reinsurer for one
or more of the following purposes only:
1. To pay the Reinsurer's share or to reimburse the Company for
the Reinsurer's share of any loss reinsured by this Agreement,
the payment of which has been agreed by the Reinsurer and which
has not been otherwise paid.
2. To make refund of any sum which is in excess of the actual
amount required to pay the Reinsurer's share of any liability
reinsured by this Agreement.
3. In the event of expiration of the Letter of Credit as provided
for above, to establish deposit of the Reinsurer's share of
known and reported outstanding losses and allocated expenses
relating thereto under this Agreement. Such cash deposit shall
be held in an interest bearing account separate from the
Company's other assets, and interest thereon shall accrue to
the benefit of the Reinsurer.
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D. The issuing bank shall have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition of
funds withdrawn, except to ensure that withdrawals are made only upon the order
of properly authorized representatives of the Company.
E. At annual intervals, or more frequently as agreed but never more
frequently than quarterly, the Company shall prepare a specific statement, for
the sole purpose of amending the Letter of Credit, of the Reinsurer's share of
known and reported outstanding losses and allocated expenses relating thereto,
plus reserves for losses incurred but not reported. If the statement shows
that Reinsurer's share of such losses and allocated loss expenses exceeds the
balance of credit as of the statement date, the Reinsurer shall, within thirty
(30) days after receipt of notice of such excess, secure delivery to the
Company of an amendment of the Letter of Credit increasing the amount of credit
by the amount of such difference. If, however, the statement shows that the
Reinsurer's share of known and reported outstanding losses plus allocated loss
expenses relating thereto, plus reserves for losses incurred but not reported
is less than the balance of credit as of the statement date, the Company shall,
within thirty (30) days after receipt of written request from the Reinsurer,
release such excess credit by agreeing to secure an amendment to the Letter of
Credit reducing the amount of credit available by the amount of such excess
credit.
ARTICLE XXIII
SPECIAL FUNDING CLAUSE:
A. If, during the period of this Agreement and thereafter, as respects any
outstanding liabilities hereunder, the Reinsurer shall fail to pay any loss
payable hereunder within the time prescribed, the Reinsurer agrees that it will
fund uncollected paid losses and loss adjustment expenses within 30 days from
the date of written demand by the Company to so fund. Such demand shall not be
made unless balances are 60 days or more past the due date of payment specified
in this Agreement.
B. The Reinsurer shall have the sole option of determining the method of
funding referred to above, provided it is acceptable to the insurance
regulatory authorities involved. If the Reinsurer elects to fund the aforesaid
loss by a Letter of Credit, the procedures set forth in the Funding Article in
respect of Letters of Credit shall apply. If the Reinsurer has already funded
obligations hereunder in accordance with the Funding Article in this Agreement,
it agrees that such funds as are required to pay overdue losses may immediately
be drawn down by the Company.
C. The phrase "any loss payable" as used in paragraph A. above shall mean
any ultimate net loss subject to recovery under this Agreement wherein the
Reinsurer has not disputed said loss in writing within the due date for
payment.
D. The Company will provide the Reinsurer with a reinsurance proof of loss
and such other substantive loss material reflecting the nature of the
settlement (i.e., applicable Proofs of Loss, Releases, adjuster's reports,
etc.). If, subsequent to receipt of this material, the information supplied is
insufficient or not in accordance with the contractual conditions, then the
payment due date as defined in the Reports and Remittances Article, will be
deemed to be the date upon which the Reinsurer received such additional
substantive material necessary to approve payment of the claim, or the date the
claim is presented in a manner acceptable to the Reinsurer.
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01-96-0021
ARTICLE XXIV
ARBITRATION:
A. As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Agreement,
including the formation or validity thereof, shall be submitted for decision to
a panel of three arbitrators. Notice requesting arbitration will be in writing
and sent certified or registered mail, return receipt requested.
B. One arbitrator shall be chosen by each party and the two arbitrators
shall, before instituting the hearing, choose an impartial third arbitrator who
shall preside at the hearing. If either party fails to appoint its arbitrator
within thirty (30) days after being requested to do so by the other party, the
latter, after ten (10) days notice by certified or registered mail of its
intention to do so, may appoint the second arbitrator.
C. If the two arbitrators are unable to agree upon the third arbitrator
within thirty (30) days of their appointment, the deficiency shall be supplied
on the application of the party requesting arbitration by an appointment made
by the American Arbitration Association. Notwithstanding the appointment of
any third Arbitrator by the American Arbitration Association, the arbitration
proceedings shall not be governed by the American Arbitration Association's
commercial arbitration rules.
D. All arbitrators shall be disinterested active or former executive
officers of insurance or reinsurance companies or Underwriters at Lloyd's,
London.
E. Within thirty (30) days after notice of appointment of all arbitrators,
the panel shall meet and determine timely periods for briefs, discovery
procedures and schedules for hearings.
F. The panel shall be relieved of all judicial formality and shall not be
bound by the strict rules of procedure and evidence. Unless the panel agrees
otherwise, arbitration shall take place in Beverly Hills, California, but the
venue may be changed when deemed by the panel to be in the best interest of the
arbitration proceeding. Insofar as the arbitration panel looks to substantive
law, it shall consider the law of the State of California. The decision of any
two arbitrators when rendered in writing shall be final and binding. The panel
is empowered to grant interim relief as it may deem appropriate.
G. The panel shall interpret this Agreement as if it were an honorable
engagement rather than as merely a legal obligation and shall make its decision
considering the custom and practice of the applicable insurance and reinsurance
business within sixty (60) days following the termination of the hearings.
Judgment upon the award may be entered in any court having jurisdiction
thereof.
H. Each party shall bear the expense of its own arbitrator and shall
jointly and equally bear with the other party the cost of the third arbitrator.
The remaining costs of the arbitration shall be allocated by the panel. The
panel may, at its discretion, award such further costs and expenses as it
considers appropriate, including but not limited to attorneys fees, to the
extent permitted by law.
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01-96-0021
ARTICLE XXV
SERVICE OF SUIT CLAUSE (U.S.A.):
A. It is agreed that in the event of the failure of the Reinsurer hereon
to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the
request of the Company, will submit to the jurisdiction of a Court of competent
jurisdiction within the United States. Nothing in this Clause 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. It is further agreed that service of process in
such suit may be made upon Messrs. Mendes & Mount, 725 South Figueroa, Suite
1990, Los Angeles, CA 90017, and that in any suit instituted, the Reinsurer
will abide by the final decision of such Court or of any Appellate Court in the
event of an appeal.
B. 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 request of
the Company to give 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.
C. Further, pursuant to any statute of any state, territory or district of
the United States which makes provision therefor, the Reinsurer hereon hereby
designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that 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 action, suit or proceeding instituted by or on behalf of
the Company or any beneficiary hereunder arising out of this Agreement, and
hereby designate the above-named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE XXVI
INSOLVENCY:
A. 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 policy or policies reinsured without diminution because
of the insolvency of the Company.
B. In the event of the insolvency of one or more than one of the
Companies, reinsurance under this Agreement shall be payable immediately on
demand, with reasonable provision for verification, on the basis of claims
allowed against the insolvent Company(ies) by any court of competent
jurisdiction or by any liquidator, receiver, or statutory successor of the
Company(ies) having authority to allow such claims, without diminution because
of such insolvency or because such liquidator, receiver, or statutory successor
has failed to pay all or a portion of any claims. Such payments by the
Reinsurer shall be made directly to the Company or its liquidator, receiver or
statutory successor, except where the contract of insurance or reinsurance
provides another payee of such reinsurance in the event of the insolvency of
the Company(ies).
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01-96-0021
C. It is agreed, however, that the liquidator or receiver or statutory
successor of the insolvent Company(ies) will give written notice to the
Reinsurer of the pendency of a claim against the insolvent Company(ies) on the
policy or policies reinsured within a reasonable time after such claim is filed
in the insolvency proceeding 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 which
it may deem available to the Company(ies) or its liquidator or receiver or
statutory successor. The expense thus incurred by the Reinsurer will be
chargeable, subject to court approval, against the insolvent Company(ies) as
part of the expense of liquidation to the extent of a proportionate share of
the benefit which may accrue to the Company(ies) solely as a result of the
defense undertaken by the Reinsurer.
D. Where two or more reinsurers are involved in the same claim and a
majority in interest elect to interpose defense to such claim, the expense will
be apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the insolvent Company(ies).
ARTICLE XXVII
INTERMEDIARY:
Willcox Incorporated Reinsurance Intermediaries is hereby recognized as
the Intermediary negotiating this Agreement for all business hereunder. All
communications (including but not limited to notices, statements, premium,
return premium, commissions, taxes, losses, loss adjustment expense, salvages
and loss settlements) relating thereto shall be transmitted to the Company or
the Reinsurer through Willcox Incorporated Reinsurance Intermediaries, 180
Maiden Lane, New York, New York 10038-4993. 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 XXVIII
GOVERNING LAW:
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of California, U.S.A.
ARTICLE XXIX
SEVERAL LIABILITY NOTICE:
The subscribing reinsurers' obligations under contracts of reinsurance
to which they subscribe are several and not joint and are limited solely to the
extent of their individual subscriptions. The subscribing reinsurers are not
responsible for the subscription of any co- subscribing reinsurer who for any
reason does not satisfy all or part of its obligations.
ED 4/5/96 Page 15 of 15
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01-96-0021
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
SECOND EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
NAVIGATORS INSURANCE COMPANY
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 2.5% participation in the
Interests and Liabilities of the Reinsurer as set forth in the Agreement
attached hereto entitled Second Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 2.5% of all
premiums due or which may become due the Reinsurer in accordance with the
provisions of the Agreement attached.
This Contract shall attach on January 1, 1996 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
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<PAGE> 17
01-96-0021
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of , 199
NAVIGATORS INSURANCE COMPANY
By: /s/
----------------------------------
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<PAGE> 18
01-96-0021
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
SECOND EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
HANNOVER RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT
EISEN UND STAHL RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 52.50% participation in the
Interests and Liabilities of the Reinsurer as set forth in the Agreement
attached hereto entitled Second Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 52.50% of all
premiums due or which may become due the Reinsurer in accordance with the
provisions of the Agreement attached.
This Contract shall attach on January 1, 1996 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
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01-96-0021
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of , 199
On behalf of each of the following companies, whose liability shall be several
and not joint, for their respective shares of the percentage shown on page one
of this Contract.
HANNOVER RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT - 80%
EISEN UND STAHL RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT - 20%
By: /s/
------------------------------------------------------
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<PAGE> 20
01-96-0021
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
SECOND EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
THE TRAVELERS INDEMNITY COMPANY
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 2.50% participation in the
Interests and Liabilities of the Reinsurer as set forth in the Agreement
attached hereto entitled Second Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 2.50% of all
premiums due or which may become due the Reinsurer in accordance with the
provisions of the Agreement attached.
This Contract shall attach on January 1, 1996 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
ED 4/5/96 Page 1 of 2
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<PAGE> 21
01-96-0021
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of , 199
THE TRAVELERS INDEMNITY COMPANY
By: /s/
------------------------------------
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<PAGE> 22
01-96-0021
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
SECOND EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
SWISS REINSURANCE COMPANY
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 5.00% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Second Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 5.00% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach on January 1, 1996 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
ED 4/5/96 Page 1 of 2
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<PAGE> 23
01-96-0021
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of , 1995
SWISS REINSURANCE COMPANY
By: /s/
-----------------------------
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<PAGE> 24
01-96-0021
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
SECOND EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
TRANSATLANTIC REINSURANCE COMPANY
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 5.00% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Second Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 5.00% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach on January 1, 1996 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
ED 4/5/96 Page 1 of 2
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<PAGE> 25
01-96-0021
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of , 199
TRANSATLANTIC REINSURANCE COMPANY
By: /s/
---------------------------------
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<PAGE> 26
01-96-0021
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
SECOND EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
GIO INSURANCE LIMITED
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 5.00% participation in the
Interests and Liabilities of the Reinsurer as set forth in the Agreement
attached hereto entitled Second Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 5.00% of all
premiums due or which may become due the Reinsurer in accordance with the
provisions of the Agreement attached.
This Contract shall attach on January 1, 1996 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
ED 4/5/96 Page 1 of 2
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<PAGE> 27
01-96-0021
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of , 199
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(Q)/pc/jk(17)
GIO Insurance Limited
through
Australian Independent Reinsurance Services.
By: /s/
---------------------------------
<PAGE> 28
NUCLEAR INCIDENT EXCLUSION CLAUSE --
LIABILITY -- REINSURANCE U.S.A.
(Wherever the word "Reassured" appears in this clause, it shall be deemed to
read "Reassured," "Reinsured," "Company," or whatever other word is employed
throughout the text of the reinsurance agreement to which this clause is
attached to designate the company or companies reinsured.)
(1) This reinsurance does not cover any loss or liability accruing
to the Reassured as a member of, or subscriber to, any association of insurers
or reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.
(2) Without in any way restricting the operation of paragraph
(1) of this Clause it is understood and agreed that for all purposes of this
reinsurance all the original policies of the Reassured (new, renewal and
replacement) of the classes specified in Clause II of this paragraph
(2) from the time specified in Clause III in this paragraph (2) shall be
deemed to include the following provision (specified as the Limited Exclusion
Provision);
LIMITED EXCLUSION PROVISION.*
I. It is agreed that the policy does not apply under any liability
coverage.
( injury, sickness, disease, death or destruction
to ( with respect to which an insured
( under the policy is also an insured
( bodily injury or property damage
under a nuclear energy liability policy issued by Nuclear Energy
Liability Insurance Association. Mutual Atomic Energy Liability
Underwriters or Nuclear Insurance Association of Canada, or
would be an insured under any such policy but for its
termination upon exhaustion of its limit of liability.
II. Family Automobile Policies (liability only). Special Automobile
Policies (private passenger automobiles, liability only).
Farmers Comprehensive Personal Liability Policies (liability
only). Comprehensive Personal Liability Policies (liability
only) or policies of a similar nature; and the liability portion
of combination forms related to the four classes of policies
stated above, such as the Comprehensive Dwelling Policy and the
applicable types of Homeowners Policies.
III. The inception dates and thereafter of all original policies as
described in II above, whether new, renewal or replacement,
being policies which either
(a) become effective on or after 1st May, 1960 or
(b) become effective before that date and contain the Limited
Exclusion Provision set out above; provided this paragraph
(2) shall not be applicable to Family Automobile Policies.
Special Automobile Policies, or policies or combination
policies of a similar nature, issued by the Reassured on
New York risks, until 90 days following approval of the
Limited Exclusion Provision by the Governmental Authority
have jurisdiction thereof.
(3) Except for those classes of policies specified in Clause II of
paragraph (2) and without in any way restricting the operation of paragraph
(1) of this Clause, it is understood and agreed that for all purposes of this
reinsurance the original liability policies of the Reassured (new, renewal and
replacement) affording the following coverages:
Owners, Landlords and Tenants Liability, Contractual Liability, Elevator
Liability, Owners or Contractors (including railroad) Protective
Liability, Manufacturers and Contractors Liability, Product Liability,
Professional and Malpractice Liability, Storekeepers Liability, Garage
Liability, Automobile Liability (including Massachusetts Motor Vehicle
or Garage Liability)
shall be deemed to include, with respect to such coverages, from the time
specified in Clause V of this paragraph (3), the following provision (specified
as the Broad Exclusion Provision):
BROAD EXCLUSION PROVISION.*
It is agreed that the policy does not apply:
1. Under any Liability Coverage to (injury, sickness, disease, death
(or destruction
(bodily injury or property damage
(a) with respect to which an insured under the policy is also
an insured under a nuclear energy liability policy issued
by Nuclear Energy Liability Insurance Association. Mutual
Atomic Energy Liability Underwriters or Nuclear Insurance
Association of Canada, or would be an insured under any
such policy but for its termination upon exhaustion of its
limit of liability; or
(b) resulting from the hazardous properties of nuclear material
and with respect to which (1) any person or organization is
required to maintain financial protection pursuant to the
Atomic Energy Act of 1954, or any law amendatory thereof,
or (2) the insured is, or had this policy not been issued
would be, entitled to indemnity from the United States of
America, or any agency thereof, under any agreement entered
into by the United State of America, or any agency thereof,
with any person or organization.
WILLCOX INCORPORATED REINSURANCE INTERMEDIARIES
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<PAGE> 29
II. Under any Medical Payments Coverage, or under any Supplementary
Payments Provision relating
( immediate medical or surgical death
to ( to expenses incurred with respect
( first aid.
( bodily injury, sickness, disease or death
to ( resulting from the hazardous
( properties of nuclear material and bodily injury
arising out of the operation of a nuclear facility by any person or
organization.
( injury, sickness, disease, death or
III. Under any Liability Coverage to ( destruction
( bodily injury or property damage
resulting from the hazardous properties of nuclear material, if
(a) the nuclear material (1) is at any nuclear facility owned by, or
operated by or on behalf of, an insured or (2) has been discharged
or dispersed therefrom:
(b) the nuclear material is contained in spent fuel or waste at any
time possessed, handled, used, processed, stored, transported or
disposed of by or on behalf of an insured; or
( injury, sickness, disease, death or destruction
(c) ( arises out of the furnishing by an insured
( of services, bodily injury or property damage
materials, parts or equipment in connection with the planning,
construction, maintenance, operation or use of any nuclear
facility, but if such facility is located within the United States
of America, its territories or possessions or Canada, this
exclusion (c) applies only
( injury to or destruction of property at such nuclear facility.
to (
( property damage to such nuclear facility and any property
thereat.
IV. As used in this endorsement:
"HAZARDOUS PROPERTIES" include radioactive, toxic or explosive
properties; "NUCLEAR MATERIAL" means source material, special nuclear
material or by-product material; "SOURCE MATERIAL," "SPECIAL NUCLEAR
MATERIAL," and "BY-PRODUCT MATERIAL" have the meanings given them in
the Atomic Energy Act of 1954 or in any law amendatory thereof; "SPENT
FUEL" means any fuel element or fuel component, solid or liquid, which
has been used or exposed to radiation in a nuclear reactor; "WASTE"
means any waste material (1) containing by-product material other than
tailings or wastes produced by the extraction or concentration of
uranium or thorium from any ore processed primarily for its source
material content, and (2) resulting from the operation by any person or
organization of any nuclear facility included under the first two
paragraphs of the definition of nuclear facility; "NUCLEAR FACILITY"
means
(a) any nuclear reactor,
(b) any equipment or device designed or used for (1) separating the
isotopes of uranium or plutonium, (2) processing or utilizing
spent fuel, or (3) handling, processing or packaging waste;
(c) any equipment or device used for the processing, fabricating or
alloying of special nuclear material if at any time the total
amount of such material in the custody of the insured at the
premises where such equipment or device is located consists of or
contains more than 25 grams of plutonium or uranium 233 or any
combination thereof, or more than 250 grams of uranium 235;
(d) any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste;
and includes the site on which any of the foregoing is located, all
operations conducted on such site and all premises used for such
operations; "NUCLEAR REACTOR" means any apparatus designed or used to
sustain nuclear fission in a self-supporting chain reaction or to
contain a critical mass of fissionable material;
With respect to injury to or destruction of property, the word "injury"
or "destruction"
"property damage" includes all forms of radioactive contamination of
property;
includes all forms of radioactive contamination of property.
V. The inception dates and thereafter of all original policies affording
coverages specified in this paragraph (3), whether new, renewal or
replacement, being policies which become effective on or after 1st May,
1960, provided this paragraph (3) shall not be applicable to
(i) Garage and Automobile Policies issued by the Reassured on New
York risks, or
(ii) statutory liability insurance required under Chapter 90, General
Laws of Massachusetts,
until 90 days following approval of the Broad Exclusion Provision by
the Governmental Authority having jurisdiction thereof.
(4) Without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3) above are not
applicable to original liability policies of the Reassured in Canada and that
with respect to such policies this Clause shall be deemed to include the
Nuclear Energy Liability Exclusion Provisions adopted by the Canadian
Underwriters' Association or the Independent Insurance Conference of Canada.
- -------------------------------------------------------------------------------
*NOTE: The words printed in italics in the Limited Exclusion Provision in
the Broad Exclusion Provision shall apply only in relation to original
liability policies which include a Limited Exclusion Provision or a Broad
Exclusion Provision containing those words.
- -------------------------------------------------------------------------------
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<PAGE> 1
01-96-0022
EXHIBIT 10.15
THIRD EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
The Subscribing Reinsurer(s) executing the
Interests and Liabilities Contract(s)
attached to and forming a part
of this Agreement
(hereinafter referred to as the "Reinsurer")
WITNESSETH:
The Reinsurer hereby reinsures the Company to the extent and the terms
and conditions subject to the exceptions, exclusions and limitations
hereinafter set forth and nothing hereinafter shall in any manner create any
obligations or establish any rights against the Reinsurer in favor of any third
parties or any persons not parties to this Agreement.
ARTICLE I
BUSINESS COVERED:
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amount of ultimate net loss which the Company may pay as the
result of claims made during the term of this Agreement under the Company's
Physicians and Surgeons Comprehensive Professional and Business Liability
policies, including Clinics and Clinical Laboratories, Professional and
Business Liability policies for Hospitals and Errors and Omissions Liability
policies for Managed Care Organizations with respect to 1) claims made during
the term of this Agreement under subject policies which are in force or may
hereinafter come into force during the term of this Agreement and are reported
to the Reinsurer within 7 years from the expiration hereof, and 2) losses which
were first reported to the Company
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01-96-0022
during the period January 1, 1986 to December 31, 1990 and are first reported
to the Reinsurer during the term of this Agreement, except as excluded under
the Exclusions Article subject to the limitations set forth in the Limits of
Cover Article.
ARTICLE II
EXCLUSIONS:
This Agreement specifically excludes:
1. 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, 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.
2. Loss or Liability excluded by the provisions of the attached
"Nuclear Incident Exclusion Clause - Liability - Reinsurance".
3. All Assumed Reinsurance.
ARTICLE III
TERM:
A. Except as provided in paragraph C. below, this Agreement shall apply to
claims made during the twelve month period beginning January 1, 1996. In the
event a loss, as defined in Article VI, involves a loss or losses covered under
the current Agreement Year and a prior Agreement Year(s) no recovery shall be
made hereunder in respect of any loss which occurred prior to:
1. January 1st, 1979 as regards Extra Contractual Obligation (as
provided for in Article X hereof)
2. January 1st, 1976 as regards all other business.
B. It is understood however, that in respect of Personal Liability and
Discovery Period coverage for Deceased, Disabled, Retired and Withdrawing
Physicians and for Physicians ceasing Medical Practice within the State, this
Agreement covers claims made during the period of this Reinsurance Agreement.
In the event this Agreement is not renewed, all such liability shall be assumed
by the Company with effect from the date of cancellation.
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01-96-0022
C. The provisions of paragraphs A. and B. notwithstanding, the Company
may, at its option, elect to continue to cover the in force portfolio of
liability covered under Section A.1. of Article V of this Agreement on the date
of expiration for a further period of 12 months. Should the Company exercise
this option, the Company shall give the Reinsurer notice prior to expiration
that they wish to exercise this option. The Company shall pay to the Reinsurer
an additional premium thereon as set forth in the Premium Article.
D. As respects Section A.1. of Article V only, it is further agreed that
all claims hereunder shall be notified with full particulars by the Company to
the Reinsurer within 7 years from the expiration of this Agreement (December
31, 1995) and no liability shall attach hereunder for any claim or claims not
notified within this period.
E. If any law or regulation of the Federal, State or Local Government or
any jurisdiction in which the Company is doing business shall render illegal
the arrangements made herein, this Agreement can be terminated immediately
insofar as it applies to such jurisdiction by the Company giving notice to the
Reinsurer to such effect.
F. Notwithstanding the expiration of this Agreement as hereinabove
provided, the provisions of this Agreement shall continue to apply to all
unfinished business hereunder to the end that all obligations and liabilities
incurred by each party hereunder prior to such termination shall be fully
performed and discharged.
ARTICLE IV
ATTACHMENT OF LIABILITY:
A. For purposes of determining the attachment of the Reinsurer's liability
hereunder as respects any one loss, all losses (including Discovery Period
Losses) involving one or more Original Insureds, arising from the same medical
incident, and in which First Notice of Claim or Circumstance is notified to the
Company during the term of this Agreement shall be covered hereunder. Where
First Notice falls in Agreement Years incepting prior to January 1, 1992
paragraph B. (Interlocking Clause) of Article V below, shall apply hereon for
Physicians and Surgeons Comprehensive Professional Liability policies only.
B. The date of a loss hereunder shall be the earliest date, within the
term of this Agreement, that the Company has received First Notice of Claim or
Circumstance.
ARTICLE V
LIMITS OF COVER:
A.1. As respects policies in force during the term of this Agreement, the
Company shall retain for its own account and pay under one or more of the
Company's policies the first $5,000,000 ultimate net loss, each and every loss
and the Reinsurer agrees to reimburse the Company for the amount of ultimate
net loss paid in excess of $5,000,000, each and every loss, but the Reinsurer's
maximum liability shall not exceed $5,000,000 resulting from each and every
loss.
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01-96-0022
A.2. As respects losses which were first reported to the Company during the
period January 1, 1986 to December 31, 1989 and are first reported to the
Reinsurer during the term of this Agreement, the Company shall retain for its
own account and pay under one or more of the Company's policies the first
$5,000,000 ultimate net loss, each and every loss and the Reinsurer agrees to
reimburse the Company for the amount of ultimate net loss paid in excess of
$5,000,000, each and every loss, but the Reinsurer's maximum liability shall
not exceed $5,000,000 resulting from each and every loss. The coverage
provided hereunder shall be no narrower nor broader in scope than that which
was provided to the Company under their Third Excess of Loss Reinsurance
Agreement in force for the same period (see attached Cover Note Numbers
10710-004/86, 01-87-0022, 01-88-0022 and 01-89-0022).
It is understood that the Maximum Annual Aggregate Amount recoverable
under A.1. and A.2. combined is $10,000,000 in all during the period of this
Agreement.
B. (This paragraph shall apply only to those claims where first notice of
claim or circumstance falls in Agreement Years prior to January 1, 1992.) As
respects each and every loss where this Agreement responds on a claims made
basis, and more than one insured or policy is covered under this Agreement
period with claims made dates falling in more than one reinsurance agreement
period, the limit and retention as respects claims covered under this Agreement
shall be the percentage of the Limit and Retention under this Agreement that
the amount of covered claim or claims hereunder bears to the total of all
covered claims from the same loss.
C. The Company warrants the following in respect of the business covered
hereunder:
1. In respect of Physicians and Surgeons Comprehensive
Professional and Business Liability policies, including Clinics
and Clinical Laboratories, the Company warrants the maximum
original policy limits shall not exceed $10,000,000 subject to
inuring protection of $8,000,000 excess of $2,000,000 or so
deemed.
2. In respect of Professional and Business Liability policies for
Hospitals [written on or after January 1, 1996], policy limits
greater than $5,000,000 shall be reinsured elsewhere on an
excess of loss basis or so deemed.
3. In respect of Professional and Business Liability policies for
Hospitals written prior to January 1, 1996, policy limits
greater than $5,000,000 shall be reinsured elsewhere on an
excess of loss basis or so deemed.
4. In respect of Errors and Omissions Liability policies for
Managed Care Organizations, the maximum original policy limit
is $5,000,000.
ARTICLE VI
DEFINITIONS:
A. The term "each and every loss" shall mean the happening of one or a
series of related acts, errors, or omissions to act, accidents or occurrences
arising out of one event.
B. The term "Gross Net Earned Premium Income" shall mean the gross earned
premium on business the subject matter hereof less cancellations and return
premiums and less premiums paid for reinsurance recoveries under which would
inure to the benefit of the Reinsurer. Such Premium Income shall be understood
to include:
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01-96-0022
1. that content of pre-paid premiums under policies in respect of
Deceased, Disabled and Retired Insureds, the coverage for which
becomes effective during the Agreement period.
2. the premium transferred internally by the Company from a prior
Agreement year or years, in respect of Deceased, Disabled and
Retired Insureds and in respect of other withdrawing Insureds
who have purchased extended coverage under Reporting
Endorsements.
C.1. With respect to recoveries made under Section A.1. of Article V, the
term "claims made" as used herein shall mean (A) In respect of Claims Made
Policies, claims first notified to the Company during the term of this
Agreement on any in force policy or reporting endorsement arising out of
incidents subsequent to the retroactive date of said policy as the result of
the rendering of or failure to render a professional service or the reporting
of losses which arise from the insured premises and operations incidental to
the practice of a physician, hospital or managed care organization and/or (B)
In respect of Occurrence Policies, claims or losses first notified to the
Company during the term of this Agreement.
C.2. With respect to recoveries made under Section A.2. of Article V, the
term "claims made" as used herein shall mean claims first reported to the
Company during the period January 1, 1986 to December 31, 1989 and first
reported to the Reinsurer during the term of this Agreement.
ARTICLE VII
NET RETAINED LINES:
A. This Agreement applies to only that portion of any insurance which the
Company retains net for its own account; and 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 which the Company retains net for its own account shall be included.
B. 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 underwriters, whether specific or general, any amount
which may become due from them, whether such inability arises from the
insolvency of such other underwriters or otherwise.
ARTICLE VIII
ULTIMATE NET LOSS:
A. The term "ultimate net loss" as used herein shall be understood to mean
the sum actually paid by the Company in settlement of losses for which it is
held liable, including pre judgment interest when made part of the award or
judgment, 80% of Extra Contractual Obligations in accordance with the
provisions of Article X and Excess of Original Policy Limits in accordance
with the provisions of Article IX, after making proper deductions for all
recoveries, salvages, and claims upon other reinsurances and insurances which
inure to the benefit of the Reinsurer
ED 4/5/96 Page 5 of 15
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01-96-0022
under this Agreement, whether collectible or not, and shall exclude all loss
adjustment expenses (which shall be separately allocated and paid as provided
in paragraph B. below); provided, however, that in the event of the insolvency
of the Company, "ultimate net loss"shall mean the amount of loss which the
Company has incurred or for which it is liable, and payment by the Reinsurer
shall be made to the liquidator, receiver or statutory successor of the Company
in accordance with the provisions of the Insolvency Article in this Agreement.
Nothing in this clause, however, shall be construed to mean that losses under
this Agreement are not recoverable until the ultimate net loss of the Company
has been ascertained.
B. All loss adjustment expenses incurred in investigation, adjustment and
litigation, defense and settlement of claims made against the Company under its
original policies reinsured hereunder, including pre judgment interest when not
part of an award or judgment and post judgment interest, shall be apportioned
in proportion to the respective interests of the parties hereto in the ultimate
net loss. Office expenses and salaries of officials and employees not
classified as loss adjusters are not chargeable as expenses for the purpose of
this paragraph.
C. In the event a verdict or judgment is reduced by an appeal or a
settlement, subsequent to the entry of a judgment, resulting in an ultimate
saving on such verdict or judgment, or a judgment is reversed outright, the
expense incurred in securing such final reduction or reversal shall (1) be
prorated between the Reinsurer and the Company in proportion that each benefits
from such reduction or reversal and the expense incurred up to the time of the
original verdict or judgment shall be prorated in proportion to each party's
interest in such verdict or judgment; or (2) when the terms and conditions of
the Company's original policies reinsured hereunder include expenses as part of
the policy limit, be added to the Company's ultimate net loss.
D. It is understood that the Company has in effect First and Second Excess
of Loss Reinsurance Agreements and recoveries thereunder will be for the sole
benefit of the Company and will be disregarded when computing the ultimate net
loss of the Company.
ARTICLE IX
EXCESS OF ORIGINAL POLICY LIMITS:
A. This Agreement shall protect the Company, within the limits hereof, in
connection with any loss in excess of the limit of its original policy, such
loss in excess of the limit having been incurred because of failure by it 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 in the
preparation or prosecution of an appeal consequent upon such action.
B. However, this Article shall not apply where the loss has been incurred
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.
C. For the purposes of this Article, 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 original policy.
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01-96-0022
ARTICLE X
EXTRA CONTRACTUAL OBLIGATIONS CLAUSE:
A. This Agreement shall protect the Company within the limits hereof,
where the ultimate net loss includes Extra Contractual Obligations. "Extra
Contractual Obligations" are defined as those liabilities not covered under
any other provision of this Agreement and which arise from 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 against its insured or reinsured or in the preparation
or prosecution of an appeal consequent upon such action.
B. The date on which an Extra Contractual Obligation is incurred by the
Company shall be deemed, in all circumstances, to be the date of the original
accident, casualty, disaster or loss and furthermore, for the purposes hereof
be deemed to follow the claims made provisions of this Agreement, subject
always to the provisions of the Term Article.
C. However, this Article shall not apply where the loss has been incurred
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 XI
CLAIMS:
A. In the event of a claim of $3,000,000 or greater arising hereunder
which either results in or appears to be of serious enough nature as probably
to result in a loss involving this Agreement, the Company shall give notice as
soon as reasonably practicable to Reinsurers and the Company shall keep the
Reinsurer advised of all subsequent developments in connection therewith.
B. All loss settlements made by the Company provided they are within the
terms of the Company's original policies and of this Agreement, shall be
unconditionally binding upon Reinsurer and amounts falling to the share of the
Reinsurer shall be payable to the Company in accordance with the provisions set
forth in paragraph C. of Article XV.
ARTICLE XII
COMMUTATION CLAUSE:
The Company or the Reinsurer may, at any time express their desire to
the other party to commute all losses which are applicable to any Agreement
year and which are still unsettled. In such event the Company and the
Reinsurer shall mutually determine and evaluate such losses and the payment by
the Reinsurer of their proportion of the amount so ascertained and mutually
agreed to be the value of such losses shall relieve them of all further
liability, in respect of that Agreement year both in respect of known or
unknown losses.
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01-96-0022
ARTICLE XIII
PREMIUM:
A. The Company shall pay to the Reinsurer a minimum and deposit premium of
$440,000 payable in equal quarterly installments of $112,500 on January 1st,
April 1st, July 1st and October 1st, 1995. In the event the Company elects to
run off its policies in force until natural expiration, not to exceed 12 months
from the expiration date hereon, the Company shall pay to the Reinsurer a
run-off premium equal to 50% of the Actual Earned Reinsurance Premium, as set
forth in paragraph B. on such policies. The run-off premium shall be paid in
equal quarterly installments on January 1st, April 1st, July 1st and October
1st, 1996.
B. As soon as practicable after expiration of this Agreement, the Company
shall calculate the premium due the Reinsurer based on a rate of .357% of the
Gross Net Earned Premium Income accounted for by the Company during the term of
this Agreement on all business subject matter of the Agreement. In the event
the premium due hereunder is greater than the minimum and deposit premium
paid,the difference shall be paid to the Reinsurer forthwith.
ARTICLE XIV
REINSTATEMENT:
A.1. As respects Section A.1. of Article V:
1. In the event of any portion of the coverage under this
Agreement being depleted or exhausted by loss, the amount so depleted
or exhausted may, at the option of the Company, be reinstated from the
time claim is first made and the Company will pay to the Reinsurer for
such reinstatement an additional premium calculated at 100% of the
annual reinsurance premium pro rated as to the amount so reinstated.
2. All calculations of reinstatement premium shall be based on
paid losses only. The decision of the Company to exercise its
reinstatement option must be relayed to Reinsurers within three (3)
months from the time any reserve invades this Agreement.
Plus,
A.2. As respects Section A.2. of Article V:
1. In the event of a paid loss arising under this Section,
additional to the reinstatement premium payable above, a further
reinstatement premium shall be payable to the Reinsurer, to be
calculated at pro rata as respects amount reinstated and 100% as
respects premium based on an annual premium of $125,000.
2. It is understood and agreed that the payment of reinstatement
premiums arising from losses recoverable under Section A.2. above shall
be mandatory and not at the option of the Company.
B. Nevertheless, the Reinsurer's liability will never be more than
$5,000,000 in respect of any claim made nor more than the Maximum Annual
Aggregate Amount Recoverable under Sections A.1. and A.2. combined of
$10,000,000 in all during the term of the Agreement.
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01-96-0022
ARTICLE XV
REPORTS AND REMITTANCES:
A. The Company will provide the Reinsurer within forty-five (45) days at
the end of each quarter, all necessary data respecting premiums and losses,
including reserves thereon, as at dates and on forms mutually acceptable to the
Company and the Reinsurer.
B. Payments of deposit premium and annual adjustments shall be made in
accordance with the provisions of the Premium Article.
C. Payment by the Reinsurer of its portion of loss and loss expenses paid
by the Company will be made by the Reinsurer to the Company as soon as
possible, but not later than 60 days after proof of payment by the Company is
received by the Reinsurer.
ARTICLE XVI
OFFSET:
The Company and the Reinsurer shall have the right to offset any balance
or amounts due from one party to the other under the terms of this Agreement.
The party asserting the right of offset may exercise such right any time whether
the balances due are on account of premiums or losses or otherwise.
ARTICLE XVII
CONFIDENTIALITY:
A. This Agreement and the pre Agreement documentation may contain
confidential or proprietary information of either party to this Agreement. All
parties shall maintain the confidentiality of this information and shall not
disclose these to any third party without both parties approval.
B. Notwithstanding the above, any party may disclose such information
without further approval from the other party in answer to interrogations,
subpoenas or other legal/arbitration process as well as to the Company's
reinsurance intermediary hereon, the Reinsurer's retrocessionaires or in
response to requests by governmental and regulatory agencies. In addition the
parties may disclose such information to their accountants and outside legal
counsel as may be necessary.
ARTICLE XVIII
CURRENCY:
Premiums shall be payable by the Company and losses shall be paid to
the Company in United States currency.
ARTICLE XIX
FEDERAL EXCISE TAX:
(Applicable to those Reinsurers, excepting Underwriters at Lloyd's, London and
other Reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow, for the purpose of paying the
Federal Excise Tax, the applicable percentage of the premium payable hereon (as
imposed under Section 4371 of the Internal Revenue Service Code) to the extent
such premium is subject to the Federal Excise Tax.
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01-96-0022
B. In the event of any return of premium becoming due hereunder the
Reinsurer will deduct the aforesaid percentage from the return premium payable
hereon and the Company or its agent should take steps to recover the tax from
the United States government.
ARTICLE XX
ERRORS AND OMISSIONS:
Any inadvertent delay, omission or error shall not be held to 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; provided, however, this
Article shall not invalidate the provisions of paragraph D. in Article III or
override the retroactive dates specified in Article III.
ARTICLE XXI
ACCESS TO RECORDS:
A. The Company shall place at the disposal of the Reinsurer at all
reasonable times, and the Reinsurer shall have the right to inspect, through
its authorized representatives, all books, records and papers of the Company in
connection with this reinsurance hereunder or the subject matter thereof.
B. The Reinsurer shall be afforded the opportunity, at its own expense to
appoint an attorney of its own choice to assess the Company's claims procedures
who shall report to the Reinsurer the results of such.
ARTICLE XXII
FUNDING:
(This clause is only applicable to those Reinsurer(s) who cannot qualify for
credit by the State having jurisdiction over the Company's loss reserves.)
A. As regards policies or bonds issued by the Company coming within the
scope of this Agreement, the Company agrees that, when it shall file with the
Insurance Department or set up on its books reserves for losses covered
hereunder which it shall be required by law to set up, it will forward to the
Reinsurer a statement showing the proportion of such loss reserves which is
applicable to the Reinsurer. The Reinsurer hereby agrees that it will apply
for and secure delivery to the Company of a clean, irrevocable and
unconditional Letter of Credit, issued by a bank which is acceptable to the
regulatory authority(ies) having jurisdiction over the Company's loss reserves
in an amount equal to the Reinsurer's proportion of reserves in respect of
known outstanding losses that have been reported to the Reinsurer and allocated
loss expenses relating thereto, plus reserves for losses incurred but not
reported, as shown in the statement prepared by the Company.
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B. The Letter of Credit shall be issued for a period of not less than one
year, and shall be automatically extended for one year from its date of
expiration or any future expiration date unless thirty (30) days prior to any
expiration date the issuing bank shall notify the Company by registered mail
that the bank elects not to consider the Letter of Credit extended for any
additional period. An issuing bank, not a member of the Federal Reserve System
or not chartered in New York State shall provide sixty (60) days notice to the
Company prior to any expiration in the event of non-extension.
C. Notwithstanding any other provision of this Agreement, the Company or
its successors in interest may draw upon such credit at any time without
diminution because of the insolvency of the Company or of the Reinsurer for one
or more of the following purposes only:
1. To pay the Reinsurer's share or to reimburse the Company for
the Reinsurer's share of any loss reinsured by this Agreement,
the payment of which has been agreed by the Reinsurer and which
has not been otherwise paid.
2. To make refund of any sum which is in excess of the actual
amount required to pay the Reinsurer's share of any liability
reinsured by this Agreement.
3. In the event of expiration of the Letter of Credit as provided
for above, to establish deposit of the Reinsurer's share of
known and reported outstanding losses and allocated expenses
relating thereto under this Agreement. Such cash deposit shall
be held in an interest bearing account separate from the
Company's other assets, and interest thereon shall accrue to
the benefit of the Reinsurer.
D. The issuing bank shall have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition of
funds withdrawn, except to ensure that withdrawals are made only upon the order
of properly authorized representatives of the Company.
E. At annual intervals, or more frequently as agreed but never more
frequently than quarterly, the Company shall prepare a specific statement, for
the sole purpose of amending the Letter of Credit, of the Reinsurer's share of
known and reported outstanding losses and allocated expenses relating thereto,
plus reserves for losses incurred but not reported. If the statement shows
that Reinsurer's share of such losses and allocated loss expenses exceeds the
balance of credit as of the statement date, the Reinsurer shall, within thirty
(30) days after receipt of notice of such excess, secure delivery to the
Company of an amendment of the Letter of Credit increasing the amount of credit
by the amount of such difference. If, however, the statement shows that the
Reinsurer's share of known and reported outstanding losses plus allocated loss
expenses relating thereto, plus reserves for losses incurred but not reported
is less than the balance of credit as of the statement date, the Company shall,
within thirty (30) days after receipt of written request from the Reinsurer,
release such excess credit by agreeing to secure an amendment to the Letter of
Credit reducing the amount of credit available by the amount of such excess
credit.
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ARTICLE XXIII
SPECIAL FUNDING CLAUSE:
A. If, during the period of this Agreement and thereafter, as respects any
outstanding liabilities hereunder, the Reinsurer shall fail to pay any loss
payable hereunder within the time prescribed, the Reinsurer agrees that it will
fund uncollected paid losses and loss adjustment expenses within 30 days from
the date of written demand by the Company to so fund. Such demand shall not be
made unless balances are 60 days or more past the due date of payment specified
in this Agreement.
B. The Reinsurer shall have the sole option of determining the method of
funding referred to above, provided it is acceptable to the insurance
regulatory authorities involved. If the Reinsurer elects to fund the aforesaid
loss by a Letter of Credit, the procedures set forth in the Funding Article in
respect of Letters of Credit shall apply. If the Reinsurer has already funded
obligations hereunder in accordance with the Funding Article in this Agreement,
it agrees that such funds as are required to pay overdue losses may immediately
be drawn down by the Company.
C. The phrase "any loss payable" as used in paragraph A. above shall mean
any ultimate net loss subject to recovery under this Agreement wherein the
Reinsurer has not disputed said loss in writing within the due date for
payment.
D. The Company will provide the Reinsurer with a reinsurance proof of loss
and such other substantive loss material reflecting the nature of the
settlement (i.e., applicable Proofs of Loss, Releases, adjuster's reports,
etc.). If, subsequent to receipt of this material, the information supplied is
insufficient or not in accordance with the contractual conditions, then the
payment due date as defined in the Reports and Remittances Article, will be
deemed to be the date upon which the Reinsurer received such additional
substantive material necessary to approve payment of the claim, or the date the
claim is presented in a manner acceptable to the Reinsurer.
ARTICLE XXIV
ARBITRATION:
A. As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Agreement,
including the formation or validity thereof, shall be submitted for decision to
a panel of three arbitrators. Notice requesting arbitration will be in writing
and sent certified or registered mail, return receipt requested.
B. One arbitrator shall be chosen by each party and the two arbitrators
shall, before instituting the hearing, choose an impartial third arbitrator who
shall preside at the hearing. If either party fails to appoint its arbitrator
within thirty (30) days after being requested to do so by the other party, the
latter, after ten (10) days notice by certified or registered mail of its
intention to do so, may appoint the second arbitrator.
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C. If the two arbitrators are unable to agree upon the third arbitrator
within thirty (30) days of their appointment, the deficiency shall be supplied
on the application of the party requesting arbitration by an appointment made
by the American Arbitration Association. Notwithstanding the appointment of
any third Arbitrator by the American Arbitration Association, the arbitration
proceedings shall not be governed by the American Arbitration Association's
commercial arbitration rules.
D. All arbitrators shall be disinterested active or former executive
officers of insurance or reinsurance companies or Underwriters at Lloyd's,
London.
E. Within thirty (30) days after notice of appointment of all arbitrators,
the panel shall meet and determine timely periods for briefs, discovery
procedures and schedules for hearings.
F. The panel shall be relieved of all judicial formality and shall not be
bound by the strict rules of procedure and evidence. Unless the panel agrees
otherwise, arbitration shall take place in Beverly Hills, California, but the
venue may be changed when deemed by the panel to be in the best interest of the
arbitration proceeding. Insofar as the arbitration panel looks to substantive
law, it shall consider the law of the State of California. The decision of any
two arbitrators when rendered in writing shall be final and binding. The panel
is empowered to grant interim relief as it may deem appropriate.
G. The panel shall interpret this Agreement as if it were an honorable
engagement rather than as merely a legal obligation and shall make its decision
considering the custom and practice of the applicable insurance and reinsurance
business within sixty (60) days following the termination of the hearings.
Judgment upon the award may be entered in any court having jurisdiction
thereof.
H. Each party shall bear the expense of its own arbitrator and shall
jointly and equally bear with the other party the cost of the third arbitrator.
The remaining costs of the arbitration shall be allocated by the panel. The
panel may, at its discretion, award such further costs and expenses as it
considers appropriate, including but not limited to attorneys fees, to the
extent permitted by law.
ARTICLE XXV
SERVICE OF SUIT CLAUSE (U.S.A.):
A. It is agreed that in the event of the failure of the Reinsurer hereon
to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the
request of the Company, will submit to the jurisdiction of a Court of competent
jurisdiction within the United States. Nothing in this Clause 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. It is further agreed that service of process in
such suit may be made upon Messrs. Mendes & Mount, 725 South Figueroa, Suite
1990, Los Angeles, CA 90017, and that in any suit instituted, the Reinsurer
will abide by the final decision of such Court or of any Appellate Court in the
event of an appeal.
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01-96-0022
B. 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 request of
the Company to give 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.
C. Further, pursuant to any statute of any state, territory or district of
the United States which makes provision therefor, the Reinsurer hereon hereby
designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that 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 action, suit or proceeding instituted by or on behalf of
the Company or any beneficiary hereunder arising out of this Agreement, and
hereby designate the above-named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE XXVI
INSOLVENCY:
A. 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 policy or policies reinsured without diminution because
of the insolvency of the Company.
B. In the event of the insolvency of one or more than one of the
Companies, reinsurance under this Agreement shall be payable immediately on
demand, with reasonable provision for verification, on the basis of claims
allowed against the insolvent Company(ies) by any court of competent
jurisdiction or by any liquidator, receiver, or statutory successor of the
Company(ies) having authority to allow such claims, without diminution because
of such insolvency or because such liquidator, receiver, or statutory successor
has failed to pay all or a portion of any claims. Such payments by the
Reinsurer shall be made directly to the Company or its liquidator, receiver or
statutory successor, except where the contract of insurance or reinsurance
provides another payee of such reinsurance in the event of the insolvency of
the Company(ies).
C. It is agreed, however, that the liquidator or receiver or statutory
successor of the insolvent Company(ies) will give written notice to the
Reinsurer of the pendency of a claim against the insolvent Company(ies) on the
policy or policies reinsured within a reasonable time after such claim is filed
in the insolvency proceeding 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 which
it may deem available to the Company(ies) or its liquidator or receiver or
statutory successor. The expense thus incurred by the Reinsurer will be
chargeable, subject to court approval, against the insolvent Company(ies) as
part of the expense of liquidation to the extent of a proportionate share of
the benefit which may accrue to the Company(ies) solely as a result of the
defense undertaken by the Reinsurer.
D. Where two or more reinsurers are involved in the same claim and a
majority in interest elect to interpose defense to such claim, the expense will
be apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the insolvent Company(ies).
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01-96-0022
ARTICLE XXVII
INTERMEDIARY:
Willcox Incorporated Reinsurance Intermediaries is hereby recognized as
the Intermediary negotiating this Agreement for all business hereunder. All
communications (including but not limited to notices, statements, premium,
return premium, commissions, taxes, losses, loss adjustment expense, salvages
and loss settlements) relating thereto shall be transmitted to the Company or
the Reinsurer through Willcox Incorporated Reinsurance Intermediaries, 180
Maiden Lane, New York, New York 10038-4993. 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 XXVIII
GOVERNING LAW:
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of California, U.S.A.
ARTICLE XXIX
SEVERAL LIABILITY NOTICE:
The subscribing reinsurers' obligations under contracts of reinsurance
to which they subscribe are several and not joint and are limited solely to the
extent of their individual subscriptions. The subscribing reinsurers are not
responsible for the subscription of any co- subscribing reinsurer who for any
reason does not satisfy all or part of its obligations.
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01-96-0022
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
THIRD EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
AXA REASSURANCE
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 7.50% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Third Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 7.50% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach on January 1, 1996, and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
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The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in this day of , 199
AXA REASSURANCE THROUGH
COURTAGE DE REASSURANCE
H. DES COURTIS S.A.
By: /s/
----------------------------------
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<PAGE> 18
01-96-0022
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
THIRD EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
TRANSATLANTIC REINSURANCE COMPANY
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 5.00% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Third Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 5.00% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach on January 1, 1996, and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
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01-96-0022
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of 1996
TRANSATLANTIC REINSURANCE COMPANY
By: /s/
--------------------------------
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<PAGE> 20
01-96-0022
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
THIRD EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
NAVIGATORS INSURANCE COMPANY
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 2.50% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Third Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 2.50% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach on January 1, 1996, and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
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01-96-0022
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of , 199
NAVIGATORS INSURANCE COMPANY
By: /s/
------------------------------
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<PAGE> 22
01-96-0022
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
THIRD EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
HANNOVER RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT
EISEN UND STAHL RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 7.50% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Third Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 7.50% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach on January 1, 1996, and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
ED 4/5/96 Page 1 of 2
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01-96-0022
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of , 199
On behalf of each of the following companies, whose liability shall be several
and not joint, and for their respective shares of the percentage shown on page
one of this contract.
HANNOVER RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT - 80%
EISEN UND STAHL RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT - 20%
By: /s/
----------------------------------------------------------
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<PAGE> 24
01-96-0022
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
THIRD EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
SWISS REINSURANCE COMPANY
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 5.00% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Third Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 5.00% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach on January 1, 1996, and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
ED 4/5/96 Page 1 of 2
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<PAGE> 25
01-96-0022
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of , 199
SWISS REINSURANCE COMPANY
By: /s/
-----------------------------
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<PAGE> 26
01-96-0022
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
THIRD EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
THE TRAVELERS INDEMNITY COMPANY
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 5.00% participation in the
Interests and Liabilities of the Reinsurer as set forth in the Agreement
attached hereto entitled Third Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 5.00% of all
premiums due or which may become due the Reinsurer in accordance with the
provisions of the Agreement attached.
This Contract shall attach on January 1, 1996, and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
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01-96-0022
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of , 199
THE TRAVELERS INDEMNITY COMPANY
By: /s/
---------------------------------
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<PAGE> 28
01-96-0022
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
THIRD EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
GIO INSURANCE LIMITED
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 5.00% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Third Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 5.00% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach on January 1, 1996, and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
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01-96-0022
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of , 199
GIO INSURANCE LIMITED
By: /s/
-----------------------------
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<PAGE> 30
NUCLEAR INCIDENT EXCLUSION CLAUSE --
LIABILITY -- REINSURANCE U.S.A.
(Wherever the word "Reassured" appears in this clause, it shall be deemed to
read "Reassured," "Reinsured," "Company," or whatever other word is employed
throughout the text of the reinsurance agreement to which this clause is
attached to designate the company or companies reinsured.)
(1) This reinsurance does not cover any loss or liability accruing
to the Reassured as a member of, or subscriber to, any association of insurers
or reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.
(2) Without in any way restricting the operation of paragraph
(1) of this Clause it is understood and agreed that for all purposes of this
reinsurance all the original policies of the Reassured (new, renewal and
replacement) of the classes specified in Clause II of this paragraph
(2) from the time specified in Clause III in this paragraph (2) shall be
deemed to include the following provision (specified as the Limited Exclusion
Provision);
LIMITED EXCLUSION PROVISION.*
I. It is agreed that the policy does not apply under any liability
coverage.
( injury, sickness, disease, death or destruction
to ( with respect to which an insured
( under the policy is also an insured
( bodily injury or property damage
under a nuclear energy liability policy issued by Nuclear Energy
Liability Insurance Association. Mutual Atomic Energy Liability
Underwriters or Nuclear Insurance Association of Canada, or
would be an insured under any such policy but for its
termination upon exhaustion of its limit of liability.
II. Family Automobile Policies (liability only). Special Automobile
Policies (private passenger automobiles, liability only).
Farmers Comprehensive Personal Liability Policies (liability
only). Comprehensive Personal Liability Policies (liability
only) or policies of a similar nature; and the liability portion
of combination forms related to the four classes of policies
stated above, such as the Comprehensive Dwelling Policy and the
applicable types of Homeowners Policies.
III. The inception dates and thereafter of all original policies as
described in II above, whether new, renewal or replacement,
being policies which either
(a) become effective on or after 1st May, 1960 or
(b) become effective before that date and contain the Limited
Exclusion Provision set out above; provided this paragraph
(2) shall not be applicable to Family Automobile Policies.
Special Automobile Policies, or policies or combination
policies of a similar nature, issued by the Reassured on
New York risks, until 90 days following approval of the
Limited Exclusion Provision by the Governmental Authority
have jurisdiction thereof.
(3) Except for those classes of policies specified in Clause II of
paragraph (2) and without in any way restricting the operation of paragraph
(1) of this Clause, it is understood and agreed that for all purposes of this
reinsurance the original liability policies of the Reassured (new, renewal and
replacement) affording the following coverages:
Owners, Landlords and Tenants Liability, Contractual Liability, Elevator
Liability, Owners or Contractors (including railroad) Protective
Liability, Manufacturers and Contractors Liability, Product Liability,
Professional and Malpractice Liability, Storekeepers Liability, Garage
Liability, Automobile Liability (including Massachusetts Motor Vehicle
or Garage Liability)
shall be deemed to include, with respect to such coverages, from the time
specified in Clause V of this paragraph (3), the following provision (specified
as the Broad Exclusion Provision):
BROAD EXCLUSION PROVISION.*
It is agreed that the policy does not apply:
1. Under any Liability Coverage to (injury, sickness, disease, death
(or destruction
(bodily injury or property damage
(a) with respect to which an insured under the policy is also
an insured under a nuclear energy liability policy issued
by Nuclear Energy Liability Insurance Association. Mutual
Atomic Energy Liability Underwriters or Nuclear Insurance
Association of Canada, or would be an insured under any
such policy but for its termination upon exhaustion of its
limit of liability; or
(b) resulting from the hazardous properties of nuclear material
and with respect to which (1) any person or organization is
required to maintain financial protection pursuant to the
Atomic Energy Act of 1954, or any law amendatory thereof,
or (2) the insured is, or had this policy not been issued
would be, entitled to indemnity from the United States of
America, or any agency thereof, under any agreement entered
into by the United State of America, or any agency thereof,
with any person or organization.
WILLCOX INCORPORATED REINSURANCE INTERMEDIARIES
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<PAGE> 31
II. Under any Medical Payments Coverage, or under any Supplementary
Payments Provision relating
( immediate medical or surgical death
to ( to expenses incurred with respect
( first aid.
( bodily injury, sickness, disease or death
to ( resulting from the hazardous
( properties of nuclear material and bodily injury
arising out of the operation of a nuclear facility by any person or
organization.
( injury, sickness, disease, death or
III. Under any Liability Coverage to ( destruction
( bodily injury or property damage
resulting from the hazardous properties of nuclear material, if
(a) the nuclear material (1) is at any nuclear facility owned by, or
operated by or on behalf of, an insured or (2) has been discharged
or dispersed therefrom:
(b) the nuclear material is contained in spent fuel or waste at any
time possessed, handled, used, processed, stored, transported or
disposed of by or on behalf of an insured; or
( injury, sickness, disease, death or destruction
(c) ( arises out of the furnishing by an insured
( of services, bodily injury or property damage
materials, parts or equipment in connection with the planning,
construction, maintenance, operation or use of any nuclear
facility, but if such facility is located within the United States
of America, its territories or possessions or Canada, this
exclusion (c) applies only
( injury to or destruction of property at such nuclear facility.
to (
( property damage to such nuclear facility and any property
thereat.
IV. As used in this endorsement:
"HAZARDOUS PROPERTIES" include radioactive, toxic or explosive
properties; "NUCLEAR MATERIAL" means source material, special nuclear
material or by-product material; "SOURCE MATERIAL," "SPECIAL NUCLEAR
MATERIAL," and "BY-PRODUCT MATERIAL" have the meanings given them in
the Atomic Energy Act of 1954 or in any law amendatory thereof; "SPENT
FUEL" means any fuel element or fuel component, solid or liquid, which
has been used or exposed to radiation in a nuclear reactor; "WASTE"
means any waste material (1) containing by-product material other than
tailings or wastes produced by the extraction or concentration of
uranium or thorium from any ore processed primarily for its source
material content, and (2) resulting from the operation by any person or
organization of any nuclear facility included under the first two
paragraphs of the definition of nuclear facility; "NUCLEAR FACILITY"
means
(a) any nuclear reactor,
(b) any equipment or device designed or used for (1) separating the
isotopes of uranium or plutonium, (2) processing or utilizing
spent fuel, or (3) handling, processing or packaging waste;
(c) any equipment or device used for the processing, fabricating or
alloying of special nuclear material if at any time the total
amount of such material in the custody of the insured at the
premises where such equipment or device is located consists of or
contains more than 25 grams of plutonium or uranium 233 or any
combination thereof, or more than 250 grams of uranium 235;
(d) any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste;
and includes the site on which any of the foregoing is located, all
operations conducted on such site and all premises used for such
operations; "NUCLEAR REACTOR" means any apparatus designed or used to
sustain nuclear fission in a self-supporting chain reaction or to
contain a critical mass of fissionable material;
With respect to injury to or destruction of property, the word "injury"
or "destruction"
"property damage" includes all forms of radioactive contamination of
property;
includes all forms of radioactive contamination of property.
V. The inception dates and thereafter of all original policies affording
coverages specified in this paragraph (3), whether new, renewal or
replacement, being policies which become effective on or after 1st May,
1960, provided this paragraph (3) shall not be applicable to
(i) Garage and Automobile Policies issued by the Reassured on New
York risks, or
(ii) statutory liability insurance required under Chapter 90, General
Laws of Massachusetts,
until 90 days following approval of the Broad Exclusion Provision by
the Governmental Authority having jurisdiction thereof.
(4) Without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3) above are not
applicable to original liability policies of the Reassured in Canada and that
with respect to such policies this Clause shall be deemed to include the
Nuclear Energy Liability Exclusion Provisions adopted by the Canadian
Underwriters' Association or the Independent Insurance Conference of Canada.
- -------------------------------------------------------------------------------
*NOTE: The words printed in italics in the Limited Exclusion Provision in
the Broad Exclusion Provision shall apply only in relation to original
liability policies which include a Limited Exclusion Provision or a Broad
Exclusion Provision containing those words.
- -------------------------------------------------------------------------------
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<PAGE> 1
01-96-0599
EXHIBIT 10.16
FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
The Subscribing Reinsurer(s) executing the
Interests and Liabilities Contract(s)
attached to and forming a part
of this Agreement
(hereinafter referred to as the "Reinsurer")
WITNESSETH:
The Reinsurer hereby reinsures the Company to the extent and the terms
and conditions subject to the exceptions, exclusions and limitations
hereinafter set forth and nothing hereinafter shall in any manner create any
obligations or establish any rights against the Reinsurer in favor of any third
parties or any persons not parties to this Agreement.
ARTICLE I
BUSINESS COVERED:
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amount of ultimate net loss which the Company may pay as the
result of claims made during the term of this Agreement under the Company's
Physicians and Surgeons Comprehensive Professional and Business Liability
policies, including Clinics and Clinical Laboratories, Professional and
Business Liability policies for Hospitals and Errors and Omissions Liability
policies for Managed Care Organizations, which are in force or may hereinafter
come into force during the term of this Agreement, and are reported to the
Reinsurer within 7 years from the expiration hereof, except as excluded under
the Exclusions Article subject to the limitations set forth in the Limits of
Cover Article.
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01-96-0599
ARTICLE II
EXCLUSIONS:
This Agreement specifically excludes:
1. 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, 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.
2. Loss or Liability excluded by the provisions of the attached
"Nuclear Incident Exclusion Clause - Liability - Reinsurance".
3. All Assumed Reinsurance.
ARTICLE III
TERM:
A. Except as provided in paragraph C. below, this Agreement shall apply to
claims made during the twelve month period beginning January 1, 1995. In the
event a loss, as defined in Article VI, involves a loss or losses covered under
the current Agreement Year and a prior Agreement Year(s) no recovery shall be
made hereunder in respect of any loss which occurred prior to:
1. January 1st, 1979 as regards Extra Contractual Obligation (as
provided for in Article X hereof)
2. January 1st, 1976 as regards all other business.
B. It is understood however, that in respect of Personal Liability and
Discovery Period coverage for Deceased, Disabled, Retired and Withdrawing
Physicians and for Physicians ceasing Medical Practice within the State, this
Agreement covers claims made during the period of this Reinsurance Agreement.
In the event this Agreement is not renewed, all such liability shall be assumed
by the Company with effect from the date of cancellation.
C. The provisions of paragraphs A. and B. notwithstanding, the Company
may, at its option, elect to continue to cover the in force portfolio of
liability on the date of expiration for a further period of 12 months. Should
the Company exercise this option, the Company shall give the Reinsurer notice
prior to expiration that they wish to exercise this option. The Company shall
pay to the Reinsurer as set forth in the Premium Article.
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01-96-0599
D. It is further agreed that all claims hereunder shall be notified with
full particulars by the Company to the Reinsurer within 7 years from the
expiration of this Agreement (December 31, 1995) and no liability shall attach
hereunder for any claim or claims not notified within this period.
E. If any law or regulation of the Federal, State or Local Government or
any jurisdiction in which the Company is doing business shall render illegal
the arrangements made herein, this Agreement can be terminated immediately
insofar as it applies to such jurisdiction by the Company giving notice to the
Reinsurer to such effect.
F. Notwithstanding the expiration of this Agreement as hereinabove
provided, the provisions of this Agreement shall continue to apply to all
unfinished business hereunder to the end that all obligations and liabilities
incurred by each party hereunder prior to such termination shall be fully
performed and discharged.
ARTICLE IV
ATTACHMENT OF LIABILITY:
A. For purposes of determining the attachment of the Reinsurer's liability
hereunder as respects any one loss, all losses (including Discovery Period
Losses) involving one or more Original Insureds, arising from the same medical
incident, and in which First Notice of Claim or Circumstance is notified to the
Company during the term of this Agreement shall be covered hereunder. Where
first notice falls in Agreement Years incepting prior to January 1, 1992
paragraph B. (Interlocking Clause) of Article V below, shall apply hereon for
Physicians and Surgeons comprehensive Professional Liability policies only.
B. The date of a loss hereunder shall be the earliest date, within the
term of this Agreement, that the Company has received First Notice of Claim or
Circumstance.
ARTICLE V
LIMITS OF COVER:
A. The Company shall retain for its own account and pay under one or more
of the Company's policies the first $10,000,000 ultimate net loss, each and
every loss and the Reinsurer agrees to reimburse the Company for the amount of
ultimate net loss paid in excess of $10,000,000, each and every loss, but the
Reinsurer's maximum liability shall not exceed $10,000,000 resulting from each
and every loss; subject further to a maximum liability of the Reinsurer of
$20,000,000 in the aggregate for all losses during the period of this
Agreement.
B. (This paragraph shall apply only to those claims where first notice of
claim or circumstance falls in Agreement Years prior to January 1, 1992.) As
respects each and every loss where this Agreement responds on a claims made
basis, and more than one insured or policy is covered under this Agreement
period with claims made dates falling in more than one reinsurance agreement
period, the limit and retention as respects claims covered under this Agreement
shall be the percentage of the Limit and Retention under this Agreement that
the amount of covered claim or claims hereunder bears to the total of all
covered claims from the same loss.
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01-96-0599
C. The Company warrants the following in respect of the business covered
hereunder:
1. In respect of Physicians and Surgeons Comprehensive
Professional and Business Liability policies, including Clinics
and Clinical Laboratories, the Company warrants the maximum
original policy limits shall not exceed $10,000,000 subject to
inuring protection of $8,000,000 excess of $2,000,000 or so
deemed.
2. In respect of Professional and Business Liability policies for
Hospitals, policy limits greater than $5,000,000 shall be
reinsured elsewhere on an excess of loss basis or so deemed.
3. In respect of Professional and Business Liability policies for
Hospitals written prior to January 1, 1996, policy limits
greater than $5,000,000 shall be reinsured elsewhere on an
excess of loss basis or so deemed.
4. In respect of Errors and Omissions Liability policies for
Managed Care Organizations, the maximum original policy limit
is $5,000,000.
ARTICLE VI
DEFINITIONS:
A. The term "each and every loss" shall mean the happening of one or a
series of related acts, errors, or omissions to act, accidents or occurrences
arising out of one event.
B. The term "Gross Net Earned Premium Income" shall mean the gross earned
premium on business the subject matter hereof less cancellations and return
premiums and less premiums paid for reinsurance recoveries under which would
inure to the benefit of the Reinsurer. Such Premium Income shall be understood
to include:
1. that content of pre-paid premiums under policies in respect of
Deceased, Disabled and Retired Insureds, the coverage for which
becomes effective during the Agreement period.
2. the premium transferred internally by the Company from a prior
Agreement year or years, in respect of Deceased, Disabled and
Retired Insureds and in respect of other withdrawing Insureds
who have purchased extended coverage under Reporting
Endorsements.
C. The term "claims made" as used herein shall mean (A) In respect of
Claims Made Policies, claims first notified to the Company during the term of
this Agreement on any in force policy or reporting endorsement arising out of
incidents subsequent to the retroactive date of said policy as the result of
the rendering of or failure to render a professional service or the reporting
of losses which arise from the insured premises and operations incidental to
the practice of a physician, hospital or managed care organization and/or (B)
In respect of Occurrence Policies, claims or losses first notified to the
Company during the term of this Agreement.
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01-96-0599
ARTICLE VII
NET RETAINED LINES:
A. This Agreement applies to only that portion of any insurance which the
Company retains net for its own account; and 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 which the Company retains net for its own account shall be included.
B. 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 underwriters, whether specific or general, any amount
which may become due from them, whether such inability arises from the
insolvency of such other underwriters or otherwise.
ARTICLE VIII
ULTIMATE NET LOSS:
A. The term "ultimate net loss" as used herein shall be understood to mean
the sum actually paid by the Company in settlement of losses for which it is
held liable, including pre judgment interest when made part of the award or
judgment, 80% of Extra Contractual Obligations in accordance with the
provisions of Article X and Excess of Original Policy Limits in accordance
with the provisions of Article IX, after making proper deductions for all
recoveries, salvages, and claims upon other reinsurances and insurances which
inure to the benefit of the Reinsurer under this Agreement, whether collectible
or not, and shall exclude all loss adjustment expenses (which shall be
separately allocated and paid as provided in paragraph B. below); provided,
however, that in the event of the insolvency of the Company, "ultimate net
loss" shall mean the amount of loss which the Company has incurred or for which
it is liable, and payment by the Reinsurer shall be made to the liquidator,
receiver or statutory successor of the Company in accordance with the
provisions of the Insolvency Article in this Agreement. Nothing in this
clause, however, shall be construed to mean that losses under this Agreement
are not recoverable until the ultimate net loss of the Company has been
ascertained.
B. All loss adjustment expenses incurred in investigation, adjustment and
litigation, defense and settlement of claims made against the Company under its
original policies reinsured hereunder, including pre judgment interest when not
part of an award or judgment and post judgment interest, shall be apportioned
in proportion to the respective interests of the parties hereto in the ultimate
net loss. Office expenses and salaries of officials and employees not
classified as loss adjusters are not chargeable as expenses for the purpose of
this paragraph.
C. In the event a verdict or judgment is reduced by an appeal or a
settlement, subsequent to the entry of a judgment, resulting in an ultimate
saving on such verdict or judgment, or a judgment is reversed outright, the
expense incurred in securing such final reduction or reversal shall (1) be
prorated between the Reinsurer and the Company in proportion that each benefits
from such reduction or reversal and the expense incurred up to the time of the
original verdict or judgment shall be prorated in proportion to each party's
interest in such verdict or judgment; or (2) when the terms and conditions of
the Company's original policies reinsured hereunder include expenses as part of
the policy limit, be added to the Company's ultimate net loss.
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01-96-0599
D. It is understood that the Company has in effect First, Second and Third
Excess of Loss Reinsurance Agreements and recoveries thereunder will be for the
sole benefit of the Company and will be disregarded when computing the ultimate
net loss of the Company.
ARTICLE IX
EXCESS OF ORIGINAL POLICY LIMITS:
A. This Agreement shall protect the Company, within the limits hereof, in
connection with any loss in excess of the limit of its original policy, such
loss in excess of the limit having been incurred because of failure by it 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 in the
preparation or prosecution of an appeal consequent upon such action.
B. However, this Article shall not apply where the loss has been incurred
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.
C. For the purposes of this Article, 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 original policy.
ARTICLE X
EXTRA CONTRACTUAL OBLIGATIONS CLAUSE:
A. This Agreement shall protect the Company within the limits hereof,
where the ultimate net loss includes Extra Contractual Obligations. "Extra
Contractual Obligations" are defined as those liabilities not covered under
any other provision of this Agreement and which arise from 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 against its insured or reinsured or in the preparation
or prosecution of an appeal consequent upon such action.
B. The date on which an Extra Contractual Obligation is incurred by the
Company shall be deemed, in all circumstances, to be the date of the original
accident, casualty, disaster or loss and furthermore, for the purposes hereof
be deemed to follow the claims made provisions of this Agreement, subject
always to the provisions of the Term Article.
C. However, this Article shall not apply where the loss has been incurred
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.
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01-96-0599
ARTICLE XI
CLAIMS:
A. In the event of a claim of $3,000,000 or greater arising hereunder
which either results in or appears to be of serious enough nature as probably
to result in a loss involving this Agreement, the Company shall give notice as
soon as reasonably practicable to Reinsurers and the Company shall keep the
Reinsurer advised of all subsequent developments in connection therewith.
B. All loss settlements made by the Company provided they are within the
terms of the Company's original policies and of this Agreement, shall be
unconditionally binding upon Reinsurer and amounts falling to the share of the
Reinsurer shall be payable to the Company in accordance with the provisions set
forth in paragraph C. of Article XV.
ARTICLE XII
COMMUTATION CLAUSE:
The Company or the Reinsurer may, at any time express their desire to
the other party to commute all losses which are applicable to any Agreement
year and which are still unsettled. In such event the Company and the
Reinsurer shall mutually determine and evaluate such losses and the payment by
the Reinsurer of their proportion of the amount so ascertained and mutually
agreed to be the value of such losses shall relieve them of all further
liability, in respect of that Agreement year both in respect of known or
unknown losses.
ARTICLE XIII
PREMIUM:
A. The Company shall pay to the Reinsurer a minimum and deposit premium of
$500,000 payable in equal quarterly installments of $138,750 on January 1st,
April 1st, July 1st and October 1st, 1995. In the event the Company elects to
run off its policies in force until natural expiration, not to exceed 12 months
from the expiration date hereon, the Company shall pay to the Reinsurer a
run-off premium equal to 50% of the Actual Earned Reinsurance Premium, as set
forth in paragraph B. on such policies. The run-off premium shall be paid in
equal quarterly installments on January 1st, April 1st, July 1st and October
1st, 1996.
B. As soon as practicable after expiration of this Agreement, the Company
shall calculate the premium due the Reinsurer based on a rate of .48% of the
Gross Net Earned Premium Income accounted for by the Company during the term of
this Agreement on all business subject matter of the Agreement. In the event
the premium due hereunder is greater than the deposit premium paid, the
difference shall be paid to the Reinsurer forthwith. If the actual premium is
less then the deposit premium paid, the difference shall be refunded to the
Company, subject to the minimum premium.
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ARTICLE XIV
REINSTATEMENT:
A. In the event of any portion of the coverage under this Agreement being
depleted or exhausted by loss, the amount so depleted or exhausted may, at the
option of the Company, be reinstated from the time claim is first made and the
Company will pay to the Reinsurer for such reinstatement an additional premium
calculated at 100% of the annual reinsurance premium pro rated as to the amount
so reinstated. Nevertheless, the Reinsurer's liability will never be more than
$10,000,000 in respect of any one claim made nor more than $20,000,000 in all
during the term of this Agreement.
B. All calculations of reinstatement premium shall be based on paid losses
only. The decision of the Company to exercise its reinstatement option must be
relayed to Reinsurers within three (3) months from the time any reserve invades
this Agreement.
ARTICLE XV
REPORTS AND REMITTANCES:
A. The Company will provide the Reinsurer within forty-five (45) days at
the end of each quarter, all necessary data respecting premiums and losses,
including reserves thereon, as at dates and on forms mutually acceptable to the
Company and the Reinsurer.
B. Payments of deposit premium and annual adjustments shall be made in
accordance with the provisions of the Premium Article.
C. Payment by the Reinsurer of its portion of loss and loss expenses paid
by the Company will be made by the Reinsurer to the Company as soon as
possible, but not later than 60 days after proof of payment by the Company is
received by the Reinsurer.
ARTICLE XVI
OFFSET:
The Company and the Reinsurer shall have the right to offset any
balance or amounts due from one party to the other under terms of this
Agreement. The party asserting the right of offset may exercise such right any
time whether the balances due are on account of premiums or losses or otherwise.
ARTICLE XVII
CONFIDENTIALITY:
A. This Agreement and the pre Agreement documentation may contain
confidential or proprietary information of either party to this Agreement. All
parties shall maintain the confidentiality of this information and shall not
disclose these to any third party without both parties approval.
B. Notwithstanding the above, any party may disclose such information
without further approval from the other party in answer to interrogations,
subpoenas or other legal/arbitration process as well as to the Company's
reinsurance intermediary hereon, the Reinsurer's retrocessionaires or in
response to requests by governmental and regulatory agencies. In addition the
parties may disclose such information to their accountants and outside legal
counsel as may be necessary.
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ARTICLE XVIII
CURRENCY:
Premiums shall be payable by the Company and losses shall be paid to
the Company in United States currency.
ARTICLE XIX
FEDERAL EXCISE TAX:
(Applicable to those Reinsurers, excepting Underwriters at Lloyd's, London and
other Reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow, for the purpose of paying the
Federal Excise Tax, the applicable percentage of the premium payable hereon (as
imposed under Section 4371 of the Internal Revenue Service Code) to the extent
such premium is subject to the Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the
Reinsurer will deduct the aforesaid percentage from the return premium payable
hereon and the Company or its agent should take steps to recover the tax from
the United States government.
ARTICLE XX
ERRORS AND OMISSIONS:
Any inadvertent delay, omission or error shall not be held to 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; provided, however, this
Article shall not invalidate the provisions of paragraph D. in Article III or
override the retroactive dates specified in Article III.
ARTICLE XXI
ACCESS TO RECORDS:
A. The Company shall place at the disposal of the Reinsurer at all
reasonable times, and the Reinsurer shall have the right to inspect, through
its authorized representatives, all books, records and papers of the Company in
connection with this reinsurance hereunder or the subject matter thereof.
B. The Reinsurer shall be afforded the opportunity, at its own expense to
appoint an attorney of its own choice to assess the Company's claims procedures
who shall report to the Reinsurer the results of such.
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ARTICLE XXII
FUNDING:
(This clause is only applicable to those Reinsurer(s) who cannot qualify for
credit by the State having jurisdiction over the Company's loss reserves.)
A. As regards policies or bonds issued by the Company coming within the
scope of this Agreement, the Company agrees that, when it shall file with the
Insurance Department or set up on its books reserves for losses covered
hereunder which it shall be required by law to set up, it will forward to the
Reinsurer a statement showing the proportion of such loss reserves which is
applicable to the Reinsurer. The Reinsurer hereby agrees that it will apply
for and secure delivery to the Company of a clean, irrevocable and
unconditional Letter of Credit, issued by a bank which is acceptable to the
regulatory authority(ies) having jurisdiction over the Company's loss reserves
in an amount equal to the Reinsurer's proportion of reserves in respect of
known outstanding losses that have been reported to the Reinsurer and allocated
loss expenses relating thereto, plus reserves for losses incurred but not
reported, as shown in the statement prepared by the Company.
B. The Letter of Credit shall be issued for a period of not less than one
year, and shall be automatically extended for one year from its date of
expiration or any future expiration date unless thirty (30) days prior to any
expiration date the issuing bank shall notify the Company by registered mail
that the bank elects not to consider the Letter of Credit extended for any
additional period. An issuing bank, not a member of the Federal Reserve System
or not chartered in New York State shall provide sixty (60) days notice to the
Company prior to any expiration in the event of non-extension.
C. Notwithstanding any other provision of this Agreement, the Company or
its successors in interest may draw upon such credit at any time without
diminution because of the insolvency of the Company or of the Reinsurer for one
or more of the following purposes only:
1. To pay the Reinsurer's share or to reimburse the Company for
the Reinsurer's share of any loss reinsured by this Agreement,
the payment of which has been agreed by the Reinsurer and which
has not been otherwise paid.
2. To make refund of any sum which is in excess of the actual
amount required to pay the Reinsurer's share of any liability
reinsured by this Agreement.
3. In the event of expiration of the Letter of Credit as provided
for above, to establish deposit of the Reinsurer's share of
known and reported outstanding losses and allocated expenses
relating thereto under this Agreement. Such cash deposit shall
be held in an interest bearing account separate from the
Company's other assets, and interest thereon shall accrue to
the benefit of the Reinsurer.
D. The issuing bank shall have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition of
funds withdrawn, except to ensure that withdrawals are made only upon the order
of properly authorized representatives of the Company.
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E. At annual intervals, or more frequently as agreed but never more
frequently than quarterly, the Company shall prepare a specific statement, for
the sole purpose of amending the Letter of Credit, of the Reinsurer's share of
known and reported outstanding losses and allocated expenses relating thereto,
plus reserves for losses incurred but not reported. If the statement shows
that Reinsurer's share of such losses and allocated loss expenses exceeds the
balance of credit as of the statement date, the Reinsurer shall, within thirty
(30) days after receipt of notice of such excess, secure delivery to the
Company of an amendment of the Letter of Credit increasing the amount of credit
by the amount of such difference. If, however, the statement shows that the
Reinsurer's share of known and reported outstanding losses plus allocated loss
expenses relating thereto, plus reserves for losses incurred but not reported
is less than the balance of credit as of the statement date, the Company shall,
within thirty (30) days after receipt of written request from the Reinsurer,
release such excess credit by agreeing to secure an amendment to the Letter of
Credit reducing the amount of credit available by the amount of such excess
credit.
ARTICLE XXIII
SPECIAL FUNDING CLAUSE:
A. If, during the period of this Agreement and thereafter, as respects any
outstanding liabilities hereunder, the Reinsurer shall fail to pay any loss
payable hereunder within the time prescribed, the Reinsurer agrees that it will
fund uncollected paid losses and loss adjustment expenses within 30 days from
the date of written demand by the Company to so fund. Such demand shall not be
made unless balances are 60 days or more past the due date of payment specified
in this Agreement.
B. The Reinsurer shall have the sole option of determining the method of
funding referred to above, provided it is acceptable to the insurance
regulatory authorities involved. If the Reinsurer elects to fund the aforesaid
loss by a Letter of Credit, the procedures set forth in the Funding Article in
respect of Letters of Credit shall apply. If the Reinsurer has already funded
obligations hereunder in accordance with the Funding Article in this Agreement,
it agrees that such funds as are required to pay overdue losses may immediately
be drawn down by the Company.
C. The phrase "any loss payable" as used in paragraph A. above shall mean
any ultimate net loss subject to recovery under this Agreement wherein the
Reinsurer has not disputed said loss in writing within the due date for
payment.
D. The Company will provide the Reinsurer with a reinsurance proof of loss
and such other substantive loss material reflecting the nature of the
settlement (i.e., applicable Proofs of Loss, Releases, adjuster's reports,
etc.). If, subsequent to receipt of this material, the information supplied is
insufficient or not in accordance with the contractual conditions, then the
payment due date as defined in the Reports and Remittances Article, will be
deemed to be the date upon which the Reinsurer received such additional
substantive material necessary to approve payment of the claim, or the date the
claim is presented in a manner acceptable to the Reinsurer.
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ARTICLE XXIV
ARBITRATION:
A. As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Agreement,
including the formation or validity thereof, shall be submitted for decision to
a panel of three arbitrators. Notice requesting arbitration will be in writing
and sent certified or registered mail, return receipt requested.
B. One arbitrator shall be chosen by each party and the two arbitrators
shall, before instituting the hearing, choose an impartial third arbitrator who
shall preside at the hearing. If either party fails to appoint its arbitrator
within thirty (30) days after being requested to do so by the other party, the
latter, after ten (10) days notice by certified or registered mail of its
intention to do so, may appoint the second arbitrator.
C. If the two arbitrators are unable to agree upon the third arbitrator
within thirty (30) days of their appointment, the deficiency shall be supplied
on the application of the party requesting arbitration by an appointment made
by the American Arbitration Association. Notwithstanding the appointment of
any third Arbitrator by the American Arbitration Association, the arbitration
proceedings shall not be governed by the American Arbitration Association's
commercial arbitration rules.
D. All arbitrators shall be disinterested active or former executive
officers of insurance or reinsurance companies or Underwriters at Lloyd's,
London.
E. Within thirty (30) days after notice of appointment of all arbitrators,
the panel shall meet and determine timely periods for briefs, discovery
procedures and schedules for hearings.
F. The panel shall be relieved of all judicial formality and shall not be
bound by the strict rules of procedure and evidence. Unless the panel agrees
otherwise, arbitration shall take place in Beverly Hills, California, but the
venue may be changed when deemed by the panel to be in the best interest of the
arbitration proceeding. Insofar as the arbitration panel looks to substantive
law, it shall consider the law of the State of California. The decision of any
two arbitrators when rendered in writing shall be final and binding. The panel
is empowered to grant interim relief as it may deem appropriate.
G. The panel shall interpret this Agreement as if it were an honorable
engagement rather than as merely a legal obligation and shall make its decision
considering the custom and practice of the applicable insurance and reinsurance
business within sixty (60) days following the termination of the hearings.
Judgment upon the award may be entered in any court having jurisdiction
thereof.
H. Each party shall bear the expense of its own arbitrator and shall
jointly and equally bear with the other party the cost of the third arbitrator.
The remaining costs of the arbitration shall be allocated by the panel. The
panel may, at its discretion, award such further costs and expenses as it
considers appropriate, including but not limited to attorneys fees, to the
extent permitted by law.
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ARTICLE XXV
SERVICE OF SUIT CLAUSE (U.S.A.):
A. It is agreed that in the event of the failure of the Reinsurer hereon
to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the
request of the Company, will submit to the jurisdiction of a Court of competent
jurisdiction within the United States. Nothing in this Clause 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. It is further agreed that service of process in
such suit may be made upon Messrs. Mendes & Mount, 725 South Figueroa, Suite
1990, Los Angeles, CA 90017, and that in any suit instituted, the Reinsurer
will abide by the final decision of such Court or of any Appellate Court in the
event of an appeal.
B. 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 request of
the Company to give 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.
C. Further, pursuant to any statute of any state, territory or district of
the United States which makes provision therefor, the Reinsurer hereon hereby
designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that 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 action, suit or proceeding instituted by or on behalf of
the Company or any beneficiary hereunder arising out of this Agreement, and
hereby designate the above-named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE XXVI
INSOLVENCY:
A. 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 policy or policies reinsured without diminution because
of the insolvency of the Company.
B. In the event of the insolvency of one or more than one of the
Companies, reinsurance under this Agreement shall be payable immediately on
demand, with reasonable provision for verification, on the basis of claims
allowed against the insolvent Company(ies) by any court of competent
jurisdiction or by any liquidator, receiver, or statutory successor of the
Company(ies) having authority to allow such claims, without diminution because
of such insolvency or because such liquidator, receiver, or statutory successor
has failed to pay all or a portion of any claims. Such payments by the
Reinsurer shall be made directly to the Company or its liquidator, receiver or
statutory successor, except where the contract of insurance or reinsurance
provides another payee of such reinsurance in the event of the insolvency of
the Company(ies).
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C. It is agreed, however, that the liquidator or receiver or statutory
successor of the insolvent Company(ies) will give written notice to the
Reinsurer of the pendency of a claim against the insolvent Company(ies) on the
policy or policies reinsured within a reasonable time after such claim is filed
in the insolvency proceeding 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 which
it may deem available to the Company(ies) or its liquidator or receiver or
statutory successor. The expense thus incurred by the Reinsurer will be
chargeable, subject to court approval, against the insolvent Company(ies) as
part of the expense of liquidation to the extent of a proportionate share of
the benefit which may accrue to the Company(ies) solely as a result of the
defense undertaken by the Reinsurer.
D. Where two or more reinsurers are involved in the same claim and a
majority in interest elect to interpose defense to such claim, the expense will
be apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the insolvent Company(ies).
ARTICLE XXVII
INTERMEDIARY:
Willcox Incorporated Reinsurance Intermediaries is hereby recognized as
the Intermediary negotiating this Agreement for all business hereunder. All
communications (including but not limited to notices, statements, premium,
return premium, commissions, taxes, losses, loss adjustment expense, salvages
and loss settlements) relating thereto shall be transmitted to the Company or
the Reinsurer through Willcox Incorporated Reinsurance Intermediaries, 180
Maiden Lane, New York, New York 10038-4993. 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 XXVIII
GOVERNING LAW:
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of California, U.S.A.
ARTICLE XXIX
SEVERAL LIABILITY NOTICE:
The subscribing reinsurers' obligations under contracts of reinsurance
to which they subscribe are several and not joint and are limited solely to the
extent of their individual subscriptions. The subscribing reinsurers are not
responsible for the subscription of any co-subscribing reinsurer who for any
reason does not satisfy all or part of its obligations.
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01-96-0599
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
THE TRAVELERS INDEMNITY COMPANY
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 5.00% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Fourth Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 5.00% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach on January 1, 1996, and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
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01-96-0599
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:
---------------------------------
Signed in
this day of , 199
THE TRAVELERS INDEMNITY COMPANY
By: /s/
---------------------------------
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<PAGE> 17
01-96-0599
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
AXA REINSURANCE
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 5.00% participation in the
Interests and Liabilities of the Reinsurer as set forth in the Agreement
attached hereto entitled Fourth Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 5.00% of all
premiums due or which may become due the Reinsurer in accordance with the
provisions of the Agreement attached.
This Contract shall attach on January 1, 1996, and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
ED 4/5/96 Page 1 of 2
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01-96-0599
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of , 199
AXA REASSURANCE
Through
COURTAGE DE REASSURANCES
H. DES COURTIS S.A.
By: /s/
----------------------------------
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<PAGE> 19
01-96-0599
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
SWISS REINSURANCE COMPANY
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 5.00% participation in the
Interests and Liabilities of the Reinsurer as set forth in the Agreement
attached hereto entitled Fourth Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 5.00% of all
premiums due or which may become due the Reinsurer in accordance with the
provisions of the Agreement attached.
This Contract shall attach on January 1, 1996, and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
ED 4/5/96 Page 1 of 2
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<PAGE> 20
01-96-0599
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of , 199
SWISS REINSURANCE COMPANY
By: /s/
----------------------------------
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<PAGE> 21
01-96-0599
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
GIO INSURANCE LIMITED
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 10.00% participation in the
Interests and Liabilities of the Reinsurer as set forth in the Agreement
attached hereto entitled Fourth Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 10.00% of all
premiums due or which may become due the Reinsurer in accordance with the
provisions of the Agreement attached.
This Contract shall attach on January 1, 1996, and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
ED 4/5/96 Page 1 of 2
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<PAGE> 22
01-96-0599
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of , 199
GIO INSURANCE LIMITED
Through
AUSTRALIAN INDEPENDENT REINSURANCE SERVICES
By: /s/
---------------------------------
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<PAGE> 23
01-96-0599
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter referred to as the "Company")
and
HANNOVER RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT
EISEN UND STAHL RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 5.00% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Fourth Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 5.00% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach on January 1, 1996, and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
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<PAGE> 24
01-96-0599
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:_________________________________
Signed in
this day of , 199
On behalf of each of the following companies, whose liability shall be several
and not joint, for their respective shares of the percentage shown on page one
of this Contract.
HANNOVER RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT - 80%
EISEN UND STAHL RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT - 20%
By: /s/
--------------------------------
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<PAGE> 25
NUCLEAR INCIDENT EXCLUSION CLAUSE --
LIABILITY -- REINSURANCE U.S.A.
(Wherever the word "Reassured" appears in this clause, it shall be deemed to
read "Reassured," "Reinsured," "Company," or whatever other word is employed
throughout the text of the reinsurance agreement to which this clause is
attached to designate the company or companies reinsured.)
(1) This reinsurance does not cover any loss or liability accruing
to the Reassured as a member of, or subscriber to, any association of insurers
or reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.
(2) Without in any way restricting the operation of paragraph
(1) of this Clause it is understood and agreed that for all purposes of this
reinsurance all the original policies of the Reassured (new, renewal and
replacement) of the classes specified in Clause II of this paragraph
(2) from the time specified in Clause III in this paragraph (2) shall be
deemed to include the following provision (specified as the Limited Exclusion
Provision);
LIMITED EXCLUSION PROVISION.*
I. It is agreed that the policy does not apply under any liability
coverage.
( injury, sickness, disease, death or destruction
to ( with respect to which an insured
( under the policy is also an insured
( bodily injury or property damage
under a nuclear energy liability policy issued by Nuclear Energy
Liability Insurance Association. Mutual Atomic Energy Liability
Underwriters or Nuclear Insurance Association of Canada, or
would be an insured under any such policy but for its
termination upon exhaustion of its limit of liability.
II. Family Automobile Policies (liability only). Special Automobile
Policies (private passenger automobiles, liability only).
Farmers Comprehensive Personal Liability Policies (liability
only). Comprehensive Personal Liability Policies (liability
only) or policies of a similar nature; and the liability portion
of combination forms related to the four classes of policies
stated above, such as the Comprehensive Dwelling Policy and the
applicable types of Homeowners Policies.
III. The inception dates and thereafter of all original policies as
described in II above, whether new, renewal or replacement,
being policies which either
(a) become effective on or after 1st May, 1960 or
(b) become effective before that date and contain the Limited
Exclusion Provision set out above; provided this paragraph
(2) shall not be applicable to Family Automobile Policies.
Special Automobile Policies, or policies or combination
policies of a similar nature, issued by the Reassured on
New York risks, until 90 days following approval of the
Limited Exclusion Provision by the Governmental Authority
have jurisdiction thereof.
(3) Except for those classes of policies specified in Clause II of
paragraph (2) and without in any way restricting the operation of paragraph
(1) of this Clause, it is understood and agreed that for all purposes of this
reinsurance the original liability policies of the Reassured (new, renewal and
replacement) affording the following coverages:
Owners, Landlords and Tenants Liability, Contractual Liability, Elevator
Liability, Owners or Contractors (including railroad) Protective
Liability, Manufacturers and Contractors Liability, Product Liability,
Professional and Malpractice Liability, Storekeepers Liability, Garage
Liability, Automobile Liability (including Massachusetts Motor Vehicle
or Garage Liability)
shall be deemed to include, with respect to such coverages, from the time
specified in Clause V of this paragraph (3), the following provision (specified
as the Broad Exclusion Provision):
BROAD EXCLUSION PROVISION.*
It is agreed that the policy does not apply:
1. Under any Liability Coverage to (injury, sickness, disease, death
(or destruction
(bodily injury or property damage
(a) with respect to which an insured under the policy is also
an insured under a nuclear energy liability policy issued
by Nuclear Energy Liability Insurance Association. Mutual
Atomic Energy Liability Underwriters or Nuclear Insurance
Association of Canada, or would be an insured under any
such policy but for its termination upon exhaustion of its
limit of liability; or
(b) resulting from the hazardous properties of nuclear material
and with respect to which (1) any person or organization is
required to maintain financial protection pursuant to the
Atomic Energy Act of 1954, or any law amendatory thereof,
or (2) the insured is, or had this policy not been issued
would be, entitled to indemnity from the United States of
America, or any agency thereof, under any agreement entered
into by the United State of America, or any agency thereof,
with any person or organization.
WILLCOX INCORPORATED REINSURANCE INTERMEDIARIES
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<PAGE> 26
II. Under any Medical Payments Coverage, or under any Supplementary
Payments Provision relating
( immediate medical or surgical death
to ( to expenses incurred with respect
( first aid.
( bodily injury, sickness, disease or death
to ( resulting from the hazardous
( properties of nuclear material and bodily injury
arising out of the operation of a nuclear facility by any person or
organization.
( injury, sickness, disease, death or
III. Under any Liability Coverage to ( destruction
( bodily injury or property damage
resulting from the hazardous properties of nuclear material, if
(a) the nuclear material (1) is at any nuclear facility owned by, or
operated by or on behalf of, an insured or (2) has been discharged
or dispersed therefrom:
(b) the nuclear material is contained in spent fuel or waste at any
time possessed, handled, used, processed, stored, transported or
disposed of by or on behalf of an insured; or
( injury, sickness, disease, death or destruction
(c) ( arises out of the furnishing by an insured
( of services, bodily injury or property damage
materials, parts or equipment in connection with the planning,
construction, maintenance, operation or use of any nuclear
facility, but if such facility is located within the United States
of America, its territories or possessions or Canada, this
exclusion (c) applies only
( injury to or destruction of property at such nuclear facility.
to (
( property damage to such nuclear facility and any property
thereat.
IV. As used in this endorsement:
"HAZARDOUS PROPERTIES" include radioactive, toxic or explosive
properties; "NUCLEAR MATERIAL" means source material, special nuclear
material or by-product material; "SOURCE MATERIAL," "SPECIAL NUCLEAR
MATERIAL," and "BY-PRODUCT MATERIAL" have the meanings given them in
the Atomic Energy Act of 1954 or in any law amendatory thereof; "SPENT
FUEL" means any fuel element or fuel component, solid or liquid, which
has been used or exposed to radiation in a nuclear reactor; "WASTE"
means any waste material (1) containing by-product material other than
tailings or wastes produced by the extraction or concentration of
uranium or thorium from any ore processed primarily for its source
material content, and (2) resulting from the operation by any person or
organization of any nuclear facility included under the first two
paragraphs of the definition of nuclear facility; "NUCLEAR FACILITY"
means
(a) any nuclear reactor,
(b) any equipment or device designed or used for (1) separating the
isotopes of uranium or plutonium, (2) processing or utilizing
spent fuel, or (3) handling, processing or packaging waste;
(c) any equipment or device used for the processing, fabricating or
alloying of special nuclear material if at any time the total
amount of such material in the custody of the insured at the
premises where such equipment or device is located consists of or
contains more than 25 grams of plutonium or uranium 233 or any
combination thereof, or more than 250 grams of uranium 235;
(d) any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste;
and includes the site on which any of the foregoing is located, all
operations conducted on such site and all premises used for such
operations; "NUCLEAR REACTOR" means any apparatus designed or used to
sustain nuclear fission in a self-supporting chain reaction or to
contain a critical mass of fissionable material;
With respect to injury to or destruction of property, the word "injury"
or "destruction"
"property damage" includes all forms of radioactive contamination of
property;
includes all forms of radioactive contamination of property.
V. The inception dates and thereafter of all original policies affording
coverages specified in this paragraph (3), whether new, renewal or
replacement, being policies which become effective on or after 1st May,
1960, provided this paragraph (3) shall not be applicable to
(i) Garage and Automobile Policies issued by the Reassured on New
York risks, or
(ii) statutory liability insurance required under Chapter 90, General
Laws of Massachusetts,
until 90 days following approval of the Broad Exclusion Provision by
the Governmental Authority having jurisdiction thereof.
(4) Without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3) above are not
applicable to original liability policies of the Reassured in Canada and that
with respect to such policies this Clause shall be deemed to include the
Nuclear Energy Liability Exclusion Provisions adopted by the Canadian
Underwriters' Association or the Independent Insurance Conference of Canada.
- -------------------------------------------------------------------------------
*NOTE: The words printed in italics in the Limited Exclusion Provision in
the Broad Exclusion Provision shall apply only in relation to original
liability policies which include a Limited Exclusion Provision or a Broad
Exclusion Provision containing those words.
- -------------------------------------------------------------------------------
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<PAGE> 1
Exhibit 10.19
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
QUOTA SHARE REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
LONDON MARKET
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 30% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Quota Share Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 30% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach on January 1, 1996 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
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<PAGE> 2
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:
----------------------------------
Signed in
this day of , 199
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<PAGE> 3
01-96-0922
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
QUOTA SHARE REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
HANNOVER RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT
EISEN UND STAHL RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 50.00% participation in the
Interests and Liabilities of the Reinsurer as set forth in the Agreement
attached hereto entitled Quota Share Reinsurance Agreement.
Such participation shall be several and not joint with the
participation of other subscribing reinsurers, and the Subscribing Reinsurer
shall under no circumstances participate in the Interests and Liabilities, if
any, of the other subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 50.00% of all
premiums due or which may become due the Reinsurer in accordance with the
provisions of the Agreement attached.
This Contract shall attach on January 1, 1996 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
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<PAGE> 4
01-96-0922
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
By:
-------------------------------------
Signed in
this day of , 199
On behalf of each of the following Companies, whose liability shall be several
and not joint, for their respective shares of the percentage shown on page one
of this Contract.
HANNOVER RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT - 80%
EISEN UND STAHL RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT - 20%
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<PAGE> 5
01-96-0922
QUOTA SHARE REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
The Subscribing Reinsurer(s) executing the
Interests and Liabilities Contract(s)
attached to and forming a part
of this Agreement
(hereinafter referred to as the "Reinsurer")
WITNESSETH:
The Reinsurer hereby reinsures the Company to the extent and the terms
and conditions subject to the exceptions, exclusions and limitations hereinafter
set forth and nothing hereinafter shall in any manner create any obligations or
establish any rights against the Reinsurer in favor of any third parties or any
persons not parties to this Agreement.
ARTICLE I
BUSINESS COVERED:
A. The Company shall cede to the Reinsurer and the Reinsurer shall accept
from the Company an 80% quota share participation of the net retained insurance
liability of the Company on each risk insured under new and renewal policies
becoming effective on and after January 1, 1996, as respects losses occurring on
and after said date, covering business classified by the Company as:
1. Directors and Officers Liability for the following type(s) of
Original Insureds:
a. Physician Groups and/or Clinics.
b. Managed Care Organizations.
c. Association of California Hospital Districts - Program
Beta.
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<PAGE> 6
01-96-0922
2. Errors and Omissions Liability for the following type(s) of
Original Insureds:
Managed Care Organizations.
B. The term "policies" means the Company's binders, policies and contracts
providing insurance on the business covered under this Agreement.
ARTICLE II
EXCLUSIONS:
This Agreement specifically excludes:
1. 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, 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.
2. Loss or Liability excluded by the provisions of the attached
"Nuclear Incident Exclusion Clause - Liability - Reinsurance."
3. All Assumed Reinsurance.
4. As per the Company's original policies.
ARTICLE III
TERRITORY:
The territorial limits of this Agreement shall be identical with those
of the Company's policies.
ARTICLE IV
TERM:
A. This Agreement shall apply to claims made and first reported on risks
attaching during the twelve (12) month period from January 1, 1996 through
December 31, 1996, both days inclusive.
B. If any law or regulation of the Federal, State or Local Government or
any jurisdiction in which the Company is doing business shall render illegal the
arrangements made herein, this Agreement can be terminated immediately insofar
as it applies to such jurisdiction by the Company giving notice to the Reinsurer
to such effect.
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<PAGE> 7
01-96-0922
C. Notwithstanding the expiration of this Agreement as hereinabove
provided, the provisions of this Agreement shall continue to apply to all
unfinished business hereunder to the end that all obligations and liabilities
incurred by each party hereunder prior to such termination shall be fully
performed and discharged.
ARTICLE V
LIMITS OF COVER:
A. With respect to business classified as Directors and Officers Liability:
The liability of the Reinsurer shall not exceed $4,000,000 per policy in
the aggregate and/or coverage part (i.e., 80% of $5,000,000).
B. With respect to business classified as Errors and Omissions Liability:
The liability of the Reinsurer shall not exceed $800,000 per policy in
the aggregate and/or coverage part (i.e., 80% of $1,000,000).
C. This Agreement is extended to protect the Company for loss in Excess of
Original Policy Limits and 80% of any Extra Contractual Obligations as defined
in the Articles of that title herein; provided, however, the contractual loss
and the Excess of Original Policy Limits and Extra Contractual Obligations
loss(es) combined shall not exceed the limits in paragraphs A. and B. above.
ARTICLE VI
COMPANY RETENTION:
The Company shall retain net for its own account the remaining 20% of
its net retained insurance liability on each risk reinsured under this
Agreement.
ARTICLE VII
DEFINITIONS:
A. The term "net retained insurance liability" as used herein means the
remaining portion of the Company's gross liability on each risk reinsured under
this Agreement after deducting recoveries from all reinsurance, other than the
reinsurance provided.
B. The term "original gross premiums" as used herein means gross premiums
and additional premiums.
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01-96-0922
ARTICLE VIII
ORIGINAL CONDITIONS:
All reinsurance coming within the terms of this Agreement shall be
subject to the same terms, rates, conditions and waivers and to the same
modifications and alterations as the respective policies of the Company, except
as modified by the terms of this Agreement.
ARTICLE IX
EXCESS OF ORIGINAL POLICY LIMITS:
A. This Agreement shall protect the Company, within the limits hereof, in
connection with loss in excess of the limit of its original policy, such loss
in excess of the limit having been incurred because of failure by it 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 or 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.
B. However, this Article shall not apply where the loss has been incurred
due to fraud by 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.
C. For the purpose of this Article, 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 original policy.
ARTICLE X
EXTRA CONTRACTUAL OBLIGATIONS:
A. This Agreement shall protect the Company for any Extra Contractual
Obligations within the limits hereof. The term "Extra Contractual Obligations"
is 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 against its insured or reinsured or in the preparation or prosecution
of an appeal consequent upon such action.
B. 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.
C. However, this Article shall not apply where the loss has been incurred
due to fraud by 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.
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<PAGE> 9
01-96-0922
ARTICLE XI
LOSSES, LOSS ADJUSTMENT EXPENSES AND SALVAGES:
A. The Company shall settle all loss claims under its policies and the
Reinsurer shall pay to the Company its pro rata share of such loss claims as
payable by the Company.
B. The Reinsurer shall also bear its pro rata share of loss adjustment
expenses incurred by the Company under policies subject hereto, such loss
adjustment expenses being within the limit of the Company's original policies.
C. The Reinsurer shall benefit pro rata in all salvages, discounts and
other recoveries.
D. The term "loss adjustment expense" as used herein shall follow the
definitions contained in the Company's original policies.
ARTICLE XII
REINSURANCE PREMIUM:
The Company shall pay to the Reinsurer 80% of the Company's original
gross premiums received by the Company on business covered hereunder.
ARTICLE XIII
COMMISSION:
The Reinsurer shall make a commission allowance equal to the original
acquisition cost plus 15% not to exceed 25% in all to the Company on the
premiums ceded under this Agreement. On all return premiums the Company shall
return to the Reinsurer the commission allowed thereon.
ARTICLE XIV
REPORTS AND REMITTANCES:
A. The Company will provide the Reinsurer with all necessary data
respecting premiums and losses, including reserves thereon, as at dates and on
forms mutually acceptable to the Company and the Reinsurer.
B. The Company shall render a quarterly account within forty-five (45)
days after the end of each quarter summarizing the following information
relating to reinsurance covered under this Agreement during the said quarter:
1. Statement of premiums;
2. Statement of losses and loss expenses paid and salvages
recovered;
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<PAGE> 10
01-96-0922
3. Account Current summarizing premiums, commissions, losses and
loss expenses paid and salvages recovered;
and any balance due the Reinsurer from the Company, as indicated by the
aforesaid Account Current, shall be remitted to the Reinsurer with the
quarterly account. Any balance due the Company from the Reinsurer shall be
remitted to the Company within sixty (60) days after the close of said
quarterly account.
ARTICLE XV
COMMUTATION CLAUSE:
The Company or the Reinsurer may, at any time express their desire to
the other party to commute all losses which are applicable to any Agreement year
and which are still unsettled. In such event the Company and the Reinsurer
shall mutually determine and evaluate such losses and the payment by the
Reinsurer of their proportion of the amount so ascertained and mutually agreed
to be the value of such losses shall relieve them of all further liability, in
respect of that Agreement year both in respect of known or unknown losses.
ARTICLE XVI
OFFSET:
The Company and the Reinsurer shall have the right to offset any
balance or amounts due from one party to the other under the terms of this
Agreement. The party asserting the right of offset may exercise such right any
time whether the balances due are on account of premiums or losses or otherwise.
ARTICLE XVII
CONFIDENTIALITY CLAUSE:
A. This Agreement and the pre Agreement documentation may contain
confidential or proprietary information of either party to this Agreement. All
parties shall maintain the confidentiality of this information and shall not
disclose these to any third party without both parties approval.
B. Notwithstanding the above, any party may disclose such information
without further approval from the other party in answer to interrogations,
subpoenas or other legal/arbitration process as well as to the Company's
reinsurance intermediary hereon, the Reinsurer's retrocessionaires or in
response to requests by governmental and regulatory agencies. In addition the
parties may disclose such information to their accountants and outside legal
counsel as may be necessary.
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<PAGE> 11
01-96-0922
ARTICLE XVIII
CURRENCY:
Premiums shall be payable by the Company and losses shall be paid to
the Company in United States currency.
ARTICLE XIX
FEDERAL EXCISE TAX:
(Applicable to those Reinsurers, excepting Underwriters at Lloyd's, London and
other Reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow, for the purpose of paying the
Federal Excise Tax, the applicable percentage of the premium payable hereon (as
imposed under Section 4371 of the Internal Revenue Service Code) to the extent
such premium is subject to the Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the
Reinsurer will deduct the aforesaid percentage from the return premium payable
hereon and the Company or its agent should take steps to recover the tax from
the United States government.
ARTICLE XX
ERRORS AND OMISSIONS:
Any inadvertent delay, omission or error shall not be held to 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; provided, however, this
Article is not to override retroactive dates specified in the Term Article.
ARTICLE XXI
ACCESS TO RECORDS:
A. The Company shall place at the disposal of the Reinsurer at all
reasonable times, and the Reinsurer shall have the right to inspect, through
its authorized representatives, all books, records and papers of the Company in
connection with this reinsurance hereunder or the subject matter thereof.
B. The Reinsurer shall be afforded the opportunity, at its own expense to
appoint an attorney of its own choice to assess the Company's claims procedures
who shall report to the Reinsurer the results of such.
ED 5/21/96 WILLCOX INCORPORATED REINSURANCE INTERMEDIARIES Page 7 of 12
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<PAGE> 12
01-96-0922
ARTICLE XXII
FUNDING:
(This clause is only applicable to those Reinsurer(s) who cannot qualify for
credit by the State having jurisdiction over the Company's loss reserves.)
A. As regards policies or bonds issued by the Company coming within the
scope of this Agreement, the Company agrees that, when it shall file with the
Insurance Department or set up on its books reserves for losses covered
hereunder which it shall be required by law to set up, it will forward to the
Reinsurer a statement showing the proportion of such loss reserves which is
applicable to the Reinsurer. The Reinsurer hereby agrees that it will apply for
and secure delivery to the Company of a clean, irrevocable and unconditional
Letter of Credit, issued by a bank which is acceptable to the regulatory
authority(ies) having jurisdiction over the Company's loss reserves in an amount
equal to the Reinsurer's proportion of reserves in respect of known outstanding
losses that have been reported to the Reinsurer and allocated loss expenses
relating thereto, plus reserves for losses incurred but not reported, as shown
in the statement prepared by the Company.
B. The Letter of Credit shall be issued for a period of not less than one
(1) year, and shall be automatically extended for one (1) year from its date of
expiration or any future expiration date unless thirty (30) days prior to any
expiration date the issuing bank shall notify the Company by registered mail
that the bank elects not to consider the Letter of Credit extended for any
additional period. An issuing bank, not a member of the Federal Reserve System
or not chartered in New York State shall provide sixty (60) days notice to the
Company prior to any expiration in the event of non-extension.
C. Notwithstanding any other provision of this Agreement, the Company or
its successors in interest may draw upon such credit at any time without
diminution because of the insolvency of the Company or of the Reinsurer for one
or more of the following purposes only:
1. To pay the Reinsurer's share or to reimburse the Company for the
Reinsurer's share of any loss reinsured by this Agreement, the
payment of which has been agreed by the Reinsurer and which has
not been otherwise paid.
2. To make refund of any sum which is in excess of the actual
amount required to pay the Reinsurer's share of any liability
reinsured by this Agreement.
3. In the event of expiration of the Letter of Credit as provided
for above, to establish deposit of the Reinsurer's share of
known and reported outstanding losses and allocated expenses
relating thereto under this Agreement. Such cash deposit shall
be held in an interest bearing account separate from the
Company's other assets, and interest thereon shall accrue to
the benefit of the Reinsurer.
D. The issuing bank shall have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition of
funds withdrawn, except to ensure that withdrawals are made only upon the order
of properly authorized representatives of the Company.
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<PAGE> 13
01-96-0922
E. At annual intervals, or more frequently as agreed but never more
frequently than quarterly, the Company shall prepare a specific statement, for
the sole purpose of amending the Letter of Credit, of the Reinsurer's share of
known and reported outstanding losses and allocated expenses relating thereto,
plus reserves for losses incurred but not reported. If the statement shows that
Reinsurer's share of such losses and allocated loss expenses exceeds the balance
of credit as of the statement date, the Reinsurer shall, within thirty (30) days
after receipt of notice of such excess, secure delivery to the Company of an
amendment of the Letter of Credit increasing the amount of credit by the amount
of such difference. If, however, the statement shows that the Reinsurer's share
of known and reported outstanding losses plus allocated loss expenses relating
thereto, plus reserves for losses incurred but not reported is less than the
balance of credit as of the statement date, the Company shall, within thirty
(30) days after receipt of written request from the Reinsurer, release such
excess credit by agreeing to secure an amendment to the Letter of Credit
reducing the amount of credit available by the amount of such excess credit.
ARTICLE XXIII
SPECIAL FUNDING CLAUSE:
A. If, during the period of this Agreement and thereafter, as respects any
outstanding liabilities hereunder, the Reinsurer shall fail to pay any loss
payable hereunder within the time prescribed, the Reinsurer agrees that it will
fund uncollected paid losses and loss adjustment expenses within thirty (30)
days from the date of written demand by the Company to so fund. Such demand
shall not be made unless balances are sixty (60) days or more past the due date
of payment specified in this Agreement.
B. The Reinsurer shall have the sole option of determining the method of
funding referred to above, provided it is acceptable to the insurance regulatory
authorities involved. If the Reinsurer elects to fund the aforesaid loss by a
Letter of Credit, the procedures set forth in the Funding Article in respect of
Letters of Credit shall apply. If the Reinsurer has already funded obligations
hereunder in accordance with the Funding Article in this Agreement, it agrees
that such funds as are required to pay overdue losses may immediately be drawn
down by the Company.
C. The phrase "any loss payable" as used in paragraph A. above shall mean
any net loss subject to recovery under this Agreement wherein the Reinsurer has
not disputed said loss in writing within the due date for payment.
D. The Company will provide the Reinsurer with a reinsurance proof of loss
and such other substantive loss material reflecting the nature of the settlement
(i.e., applicable Proofs of Loss, Releases, adjuster's reports, etc.). If,
subsequent to receipt of this material, the information supplied is insufficient
or not in accordance with the contractual conditions, then the payment due date
as defined in the Reports and Remittances Article, will be deemed to be the date
upon which the Reinsurer received such additional substantive material necessary
to approve payment of the claim, or the date the claim is presented in a manner
acceptable to the Reinsurer.
ED 5/21/96 WILLCOX INCORPORATED REINSURANCE INTERMEDIARIES Page 9 of 12
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<PAGE> 14
01-96-0922
ARTICLE XXIV
ARBITRATION:
A. As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Agreement,
including the formation or validity thereof, shall be submitted for decision to
a panel of three arbitrators. Notice requesting arbitration will be in writing
and sent certified or registered mail, return receipt requested.
B. One arbitrator shall be chosen by each party and the two arbitrators
shall, before instituting the hearing, choose an impartial third arbitrator who
shall preside at the hearing. If either party fails to appoint its arbitrator
within thirty (30) days after being requested to do so by the other party, the
latter, after ten (10) days notice by certified or registered mail of its
intention to do so, may appoint the second arbitrator.
C. If the two arbitrators are unable to agree upon the third arbitrator
within thirty (30) days of their appointment, the deficiency shall be supplied
on the application of the party requesting arbitration by an appointment made by
the American Arbitration Association. Notwithstanding the appointment of any
third Arbitrator by the American Arbitration Association, the arbitration
proceedings shall not be governed by the American Arbitration Association's
commercial arbitration rules.
D. All arbitrators shall be disinterested active or former executive
officers of insurance or reinsurance companies or Underwriters at Lloyd's,
London.
E. Within thirty (30) days after notice of appointment of all arbitrators,
the panel shall meet and determine timely periods for briefs, discovery
procedures and schedules for hearings.
F. The panel shall be relieved of all judicial formality and shall not be
bound by the strict rules of procedure and evidence. Unless the panel agrees
otherwise, arbitration shall take place in Beverly Hills, California, but the
venue may be changed when deemed by the panel to be in the best interest of the
arbitration proceeding. Insofar as the arbitration panel looks to substantive
law, it shall consider the law of the State of California. The decision of any
two arbitrators when rendered in writing shall be final and binding. The panel
is empowered to grant interim relief as it may deem appropriate.
G. The panel shall interpret this Agreement as if it were an honorable
engagement rather than as merely a legal obligation and shall made its decision
considering the custom and practice of the applicable insurance and reinsurance
business within sixty (60) days following the termination of the hearings.
Judgment upon the award may be entered in any court having jurisdiction thereof.
H. Each party shall bear the expense of its own arbitrator and shall
jointly and equally bear with the other party the cost of the third arbitrator.
The remaining costs of the arbitration shall be allocated by the panel. The
panel may, at its discretion, award such further costs and expenses as it
considers appropriate, including but not limited to attorneys fees, to the
extent permitted by law.
ED 5/21/96 WILLCOX INCORPORATED REINSURANCE INTERMEDIARIES Page 10 of 12
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<PAGE> 15
01-96-0922
ARTICLE XXV
SERVICE OF SUIT CLAUSE (U.S.A.):
A. It is agreed that in the event of the failure of the Reinsurer hereon to
pay any amount claimed to be due hereunder, the Reinsurer hereon, at the request
of the Company, will submit to the jurisdiction of a Court of competent
jurisdiction within the United States. Nothing in this Clause 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. It is further agreed that service of process in
such suit may be made upon Messrs. Mendes & Mount, 725 South Figueroa, Suite
1990, Los Angeles, CA 90017, and that in any suit instituted, the Reinsurer will
abide by the final decision of such Court or of any Appellate Court in the event
of an appeal.
B. 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 request of the
Company to give 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.
C. Further, pursuant to any statute of any state, territory or district of
the United States which makes provision therefor, the Reinsurer hereon hereby
designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that 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 action, suit or proceeding instituted by or on behalf of
the Company or any beneficiary hereunder arising out of this Agreement, and
hereby designate the above-named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE XXVI
INSOLVENCY:
A. 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 policy or policies reinsured without diminution because of
the insolvency of the Company.
B. In the event of the insolvency of one or more than one of the Companies,
reinsurance under this Agreement shall be payable immediately on demand, with
reasonable provision for verification, on the basis of claims allowed against
the insolvent Company(ies) by any court of competent jurisdiction or by any
liquidator, receiver, or statutory successor of the Company(ies) having
authority to allow such claims, without diminution because of such insolvency or
because such liquidator, receiver, or statutory successor has failed to pay all
or a portion of any claims.
ED 5/21/96 WILLCOX INCORPORATED REINSURANCE INTERMEDIARIES Page 11 of 12
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<PAGE> 16
01-96-0922
Such payments by the Reinsurer shall be made directly to the Company or its
liquidator, receiver or statutory successor, except where the contract of
insurance or reinsurance provides another payee of such reinsurance in the
event of the insolvency of the Company(ies).
C. It is agreed, however, that the liquidator or receiver or statutory
successor of the insolvent Company(ies) will give written notice to the
Reinsurer of the pendency of a claim against the insolvent Company(ies) on the
policy or policies reinsured within a reasonable time after such claim is filed
in the insolvency proceeding 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 which
it may deem available to the Company(ies) or its liquidator or receiver or
statutory successor. The expense thus incurred by the Reinsurer will be
chargeable, subject to court approval, against the insolvent Company(ies) as
part of the expense of liquidation to the extent of a proportionate share of
the benefit which may accrue to the Company(ies) solely as a result of the
defense undertaken by the Reinsurer.
D. Where two or more reinsurers are involved in the same claim and a
majority in interest elect to interpose defense to such claim, the expense will
be apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the insolvent Company(ies).
ARTICLE XXVII
INTERMEDIARY:
Willcox Incorporated Reinsurance Intermediaries is hereby recognized as
the Intermediary negotiating this Agreement for all business hereunder. All
communications (including but not limited to notices, statements, premium,
return premium, commissions, taxes, losses, loss adjustment expense, salvages
and loss settlements) relating thereto shall be transmitted to the Company or
the Reinsurer through Willcox Incorporated Reinsurance Intermediaries, 180
Maiden Lane, New York, New York 10038-4993. 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 XXVIII
GOVERNING LAW:
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of California, U.S.A.
ARTICLE XXIX
SEVERAL LIABILITY NOTICE:
The subscribing reinsurers' obligations under contracts of reinsurance
to which they subscribe are several and not joint and are limited solely to the
extent of their individual subscriptions. The subscribing reinsurers are not
responsible for the subscription of any co-subscribing reinsurer who for any
reason does not satisfy all or part of its obligations.
ED 5/21/96 WILLCOX INCORPORATED REINSURANCE INTERMEDIARIES Page 12 of 12
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<PAGE> 17
NUCLEAR INCIDENT EXCLUSION CLAUSE -- LIABILITY --
REINSURANCE -- U.S.A.
[ITALICS] (Whenever the word "Reassured" appears in this clause, it shall be
deemed to read "Reassured," "Reinsured," "Company," or whatever other word is
employed throughout the text of the reinsurance agreement to which this clause
is attached to designate the company or companies reinsured.)
(1) This reinsurance does not cover any loss or liability accruing
to the Reassured as a member of, or subscriber to, any association of insurers
or reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.
(2) Without in any way restricting the operation of paragraph (1)
of this Clause it is understood and agreed that for all purposes of this
reinsurance all the original policies of the Reassured (new, renewal and
replacement) of the classes specified in Clause II of this paragraph (2) from
the time specified in Clause III in this paragraph (2) shall be deemed to
include the following provision (specified as the Limited Exclusion Provision).
LIMITED EXCLUSION PROVISION.
I. It is agreed that the policy does not apply under any liability
coverage.
([ITALICS] to injury, sickness, disease, death or
([ITALICS] destruction
to ( with respect to which an
( insured under the policy is also an
( insured
(bodily injury or property damage
under a nuclear energy liability policy issued by Nuclear Energy
Liability Insurance Association, Mutual Atomic Energy Liability
Underwriters or Nuclear Insurance Association of Canada, or
would be an insured under any such policy but for its
termination upon exhaustion of its limit of liability.
II. Family Automobile Policies (liability only). Special Automobile
Policies (private passenger automobiles liability only), Farmers
Comprehensive Personal Liability Policies (liability only),
Comprehensive Personal Liability Policies (liability only) or
policies of a similar nature; and the liability portion of
combination forms related to the four classes of policies stated
above, such as the Comprehensive Dwelling Policy and the
applicable types of Homeowners Policies.
III. The inception dates and thereafter of all original policies as
described in II above, whether new, renewal or replacement,
being policies which either
(a) become effective on or after 1st May, 1960, or
(b) become effective before that date and contain the
Limited Exclusion Provision set out above; provided this
paragraph (2) shall not be applicable to Family
Automobile Policies, Special Automobile Policies, or
policies or combination policies of a similar nature,
issued by the Reassured on New York risks, until 90 days
following approval of the Limited Exclusion Provision by
the Governmental Authority having jurisdiction thereof.
(3) Except for those classes of policies specified in Clause II of
paragraph (2) and without in any way restricting the operation of paragraph (1)
of this Clause, it is understood and agreed that for all purposes of this
reinsurance the original liability policies of the Reassured (new, renewal and
replacement) affording the following coverages:
Owners, Landlords and Tenants Liability, Contractual Liability, Elevator
Liability, Owners or Contractors (including railroad) Protective
Liability, Manufacturers and Contractors Liability, Product Liability,
Professional and Malpractice Liability, Storekeepers Liability, Garage
Liability, Automobile Liability (including Massachusetts Motor Vehicle
or Garage Liability)
shall be deemed to include, with respect to such coverages, from the time
specified in Clause V of this paragraph (3), the following provision (specified
as the Broad Exclusion Provision):
BROAD EXCLUSION PROVISION.
It is agreed that the policy does not apply:
1. Under any Liability Coverage to ([ITALICS] injury, sickness,
([ITALICS] disease, death
([ITALICS] or destruction
(bodily injury or property
(damage
(a) with respect to which an insured under the policy is
also an insured under a nuclear energy liability policy
issued by Nuclear Energy Liability Insurance
Association, Mutual Atomic Energy Liability Underwriters
or Nuclear Insurance Association of Canada, or would be
an insured under any such policy but for its termination
upon exhaustion of its limit of liability; or
(b) resulting from the hazardous properties of nuclear
material and with respect to which (1) any person or
organization is required to maintain financial
protection pursuant to the Atomic Energy Act of 1954, or
any law amendatory thereof, or (2) the insured is, or
had this policy not been issued would be, entitled to
indemnity from the United States of America, or any
agency thereof, under any agreement entered into by the
United States of America, or any agency thereof, with
any person or organization.
ED 5/21/96 WILLCOX INCORPORATED REINSURANCE INTERMEDIARIES Page 1 of 2
(Q)/pc/jk
<PAGE> 18
II. Under any Medical Payments Coverage, or under any Supplementary
Payments Provision relating
to ([ITALICS] immediate medical or surgical death
( to expenses incurred with respect
(first aid,
([ITALICS] bodily injury, sickness, disease or death
to ( resulting from the
( hazardous properties of nuclear material and
(bodily injury
arising out of the operation of a nuclear facility by any person
or organization.
([ITALICS] injury sickness,
([ITALICS] disease, death
III. Under any Liability Coverage to ([ITALICS] or destruction
(bodily injury or property
(damage
resulting from the hazardous properties of nuclear material, if
(a) the nuclear material (1) is at any nuclear facility
owned by, or operated by or on behalf of, an insured or
(2) has been discharged or dispersed therefrom:
(b) the nuclear material is contained in spent fuel or waste
at any time possessed, handled, used, processed, stored,
transported or disposed of by or on behalf of an
insured; or
([ITALICS] injury, sickness, disease, death or
([ITALICS] destruction
(c) the ( arises out of the furnishing by an insured
( of services,
(bodily injury or property damage
materials, parts or equipment in connection with the
planning, construction, maintenance, operation or use of
any nuclear facility, but if such facility is located
within the United States of America, its territories or
possessions or Canada, this exclusion (c) applies only
([ITALICS] injury to or destruction of property at
to ([ITALICS] such nuclear facility
(property damage to such nuclear facility and any
(property thereat.
IV. As used in this endorsement:
"HAZARDOUS PROPERTIES" include radioactive, toxic or explosive
properties; "NUCLEAR MATERIAL" means source material, special
nuclear material or byproduct material; "SOURCE MATERIAL,"
"SPECIAL NUCLEAR MATERIAL," and "BYPRODUCT MATERIAL" have the
meanings given them in the Atomic Energy Act of 1954 or in any
law amendatory thereof; "SPENT FUEL" means any fuel element or
fuel component, solid or liquid, which has been used or exposed
to radiation in a nuclear reactor; "WASTE" means any waste
material (1) containing byproduct material other than tailings
or wastes produced by the extraction or concentration of uranium
or thorium from any ore processed primarily for its source
material content, and (2) resulting from the operation by any
person or organization of any nuclear facility included under
the first two paragraphs of the definition of nuclear facility;
"NUCLEAR FACILITY" means
(a) any nuclear reactor.
(b) any equipment or device designed or used for (1)
separating the isotopes of uranium or plutonium, (2)
processing or utilizing spent fuel, or (3) handling,
processing or packaging waste.
(c) any equipment or device used for the processing,
fabricating or alloying of special nuclear material if
at any time the total amount of such material in the
custody of the insured at the premises where such
equipment or device is located consists of or contains
more than 25 grams of plutonium or uranium 233 or any
combination thereof, or more than 250 grams of uranium
235.
(d) any structure, basin, excavation, premises or place
prepared or used for the storage or disposal of waste.
and includes the site on which any of the foregoing is located,
all operations conducted on such site and all premises used for
such operations; "NUCLEAR REACTOR" means any apparatus designed
or used to sustain nuclear fission in a self-supporting chain
reaction or to contain a critical mass of fissionable material;
[ITALICS] With respect to injury to or destruction of property,
the word "injury" or "destruction"
"property damage" includes all forms of radioactive
contamination of property.
[ITALICS] includes all forms of radioactive contamination of
property.
V. The inception dates and thereafter of all original policies
affording coverages specified in this paragraph (3), whether
new, renewal or replacement, being policies which become
effective on or after 1st May, 1960, provided this paragraph (3)
shall not be applicable to
(i) Garage and Automobile Policies issued by the Reassured
on New York risks, or
(ii) statutory liability insurance required under Chapter 90,
General Laws of Massachusetts.
until 90 days following approval of the Broad Exclusion
Provision by the Governmental Authority having jurisdiction
thereof.
(4) Without in any way restricting the operation of paragraph (1) of
this Clause, it is understood and agreed that paragraphs (2) and (3) above are
not applicable to original liability policies of the Reassured in Canada and
that with respect to such policies this Clause shall be deemed to include the
Nuclear Energy Liability Exclusion Provisions adopted by the Canadian
Underwriters Association or the Independent Insurance Conference of Canada.
- -------------------------------------------------------------------------------
*NOTE. The words printed in italics in the Limited Exclusion Provision
and in the Broad Exclusion Provision shall apply only in relation to original
liability policies which include a Limited Exclusion Provision or a Broad
Exclusion Provision containing those words.
- ------------------------------------------------------------------------------
Page 2 of 2
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 DEC-31-1995
<DEBT-HELD-FOR-SALE> 657,595 606,155
<DEBT-CARRYING-VALUE> 0 0
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<EQUITIES> 18,754 61,083
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 691,996 695,021
<CASH> 8,144 3,053
<RECOVER-REINSURE> 4 27
<DEFERRED-ACQUISITION> 544 468
<TOTAL-ASSETS> 790,416 781,358
<POLICY-LOSSES> 472,836 466,187
<UNEARNED-PREMIUMS> 23,158 19,916
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<POLICY-HOLDER-FUNDS> 10,586 8,646
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0 0
0 0
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<TOTAL-LIABILITY-AND-EQUITY> 790,416 781,358
90,144 116,354
<INVESTMENT-INCOME> 31,184 40,424
<INVESTMENT-GAINS> 11,554 7,950
<OTHER-INCOME> 179 281
<BENEFITS> 86,554 118,023
<UNDERWRITING-AMORTIZATION> 0 0
<UNDERWRITING-OTHER> 10,164 12,561
<INCOME-PRETAX> 36,343 34,425
<INCOME-TAX> 7,494 10,056
<INCOME-CONTINUING> 19,849 24,369
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 19,849 24,369
<EPS-PRIMARY> 1.98 2.44
<EPS-DILUTED> 0 0
<RESERVE-OPEN> 446,627 449,566
<PROVISION-CURRENT> 125,160 175,856
<PROVISION-PRIOR> (38,606) (57,833)
<PAYMENTS-CURRENT> 3,413 11,481
<PAYMENTS-PRIOR> 78,710 109,481
<RESERVE-CLOSE> 451,058 446,627
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>