<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1999
REGISTRATION NO. 333-78539
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------------
ISMIE HOLDINGS INC.
(Exact Name of registrant as specified in its charter)
DELAWARE 6719 36-4293113
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of incorporation Industrial Classification Identification
or organization) Code Number) Number)
20 North Michigan Avenue
Suite 700
Chicago, Illinois 60602
(312) 782-2749
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------
Alexander R. Lerner
President and Chief Executive Officer
20 North Michigan Avenue
Suite 700
Chicago, Illinois 60602
(312) 782-2749
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------
copies to:
John S. Chapman, Esq.
Richard A. Hemmings, Esq.
Lord, Bissell & Brook
115 South LaSalle Street
Chicago, Illinois 60603
(312) 443-0700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement is declared effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, 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, 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(d) 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. [ ]
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ILLINOIS STATE MEDICAL INTER-INSURANCE EXCHANGE
20 NORTH MICHIGAN AVENUE
SUITE 700
CHICAGO, ILLINOIS 60602
NOTICE OF SPECIAL MEETING
A special meeting of the members of Illinois State Medical
Inter-Insurance Exchange will take place at ____________, Chicago, Illinois at
_______ p.m., local time, on ________, 1999, for the following purpose:
To consider and vote on a proposal to approve a Plan and Agreement of
Merger, dated as of May 5, 1999, among Illinois State Medical
Inter-Insurance Exchange, ISMIE Indemnity Company and ISMIE Holdings
Inc., in which
- ISMIE will merge into Indemnity, with Indemnity
surviving as a subsidiary of Holdings; and
- members of ISMIE who were members on May 5, 1999 will
receive shares of common stock of Holdings in
exchange for the rights and interests they currently
hold as members of ISMIE.
Under ISMIE's Rules and Regulations, no other business may be
transacted at the special meeting.
The purpose of the merger is to convert ISMIE into a company that is
owned by stockholders. The conversion will not affect your insurance coverage.
Only members of ISMIE at the close of business on May 5, 1999 are
entitled to notice of, and eligible to vote at, the special meeting or any
adjournment or postponement of the meeting. Please complete, date and sign the
enclosed proxy card and taxpayer identification card and return them promptly in
the enclosed pre-paid envelope whether or not you intend to attend the special
meeting. You may revoke your proxy in the way described in the accompanying
proxy statement/prospectus at any time before it is voted at the special
meeting.
YOUR BOARD OF GOVERNORS BELIEVES THAT THE CONVERSION IS IN THE BEST
INTERESTS OF ISMIE AND ITS MEMBERS. THE BOARD HAS APPROVED THE MERGER AGREEMENT
AND RECOMMENDS THAT YOU VOTE FOR ITS APPROVAL. YOU ARE ENCOURAGED TO READ THE
ACCOMPANYING PROXY STATEMENT/PROSPECTUS, WHICH PROVIDES DETAILED INFORMATION
ABOUT THE CONVERSION.
Approval of the merger agreement requires the favorable vote of
two-thirds of the eligible members voting in person or by proxy at the special
meeting. YOUR VOTE IS VERY IMPORTANT!
By Order of the Board of Governors of
Illinois State Medical Inter-Insurance Exchange
[LOGO]
Irwin A. Smith, M.D.
Secretary
Chicago, Illinois
, 1999
[Intentionally blank]
<PAGE>
[ISMIE Logo]
CONVERSION PROPOSED - YOUR VOTE IS VERY IMPORTANT
The Board of Governors of the Illinois State Medical Inter-Insurance
Exchange, or ISMIE, has approved a merger agreement designed to convert ISMIE
into a company that is owned by stockholders. If we complete the merger,
members of ISMIE who were members on May 5, 1999 will receive shares of
common stock of ISMIE Holdings Inc., or Holdings, in exchange for their
rights and interest in ISMIE. Holdings will be the parent company of ISMIE
Indemnity Company which will be the successor to ISMIE in the merger. The
conversion will not affect your insurance coverage.
Only members of ISMIE who were members on May 5, 1999 are eligible
to vote on and receive stock in the conversion. In the conversion,
approximately 10,000,000 shares of Holdings common stock will be issued to
and allocated among eligible members as follows:
- 9,000,000 shares of common stock will be allocated pro rata
among all eligible members based on the ratio of each eligible
member's earned premiums to the total earned premiums of all
eligible members from July 1, 1995 through May 5, 1999; and
- 1,000,000 shares of common stock will be allocated evenly
among all eligible members.
We cannot complete the conversion unless the eligible members
approve the merger agreement. We have scheduled a special meeting for our
members to vote on this important matter.
Whether or not you plan to attend the special meeting in person,
please take the time to vote by completing and mailing the enclosed proxy
card. Voting instructions are inside.
The date, time and place of the special meeting is:
___________, 1999
_______ __.m.
_________________________
__________, Illinois
This document provides you detailed information about the conversion
and the special meeting. We urge you to read this entire document carefully. IN
PARTICULAR, YOU SHOULD READ THE "RISK FACTORS" SECTION BEGINNING ON PAGE __ FOR
A DESCRIPTION OF RISKS YOU SHOULD CONSIDER IN EVALUATING THE MERGER.
/s/ Harold L. Jensen
Harold L. Jensen
Chairman of the Board
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
This proxy statement/prospectus is dated __________, 1999
and was first mailed to members on or about _______, 1999
<PAGE>
ORGANIZATIONAL STRUCTURE OF ISMIE BEFORE AND AFTER THE CONVERSION
BEFORE THE CONVERSION AFTER THE CONVERSION
[EDGAR REPRESENTATION OF PRINTED GRAPHIC]
------------- ------------
Policyholders Shareholders
------------- ------------
| |
| |
------------------------ -----------------------
Illinois State Medical
Inter-Insurance Exchange Holdings
"ISMIE"
------------------------ -----------------------
| |
| |
------------------------ -----------------------
ISMIE Holdings Inc. ISMIE Indemnity Company
"Holdings" "ISMIE"
------------------------ -----------------------
|
|
------------------------
ISMIE Indemnity Company
------------------------
After the conversion, Illinois Insurance laws and regulations will
prohibit any person from acquiring control of Holdings, and thus indirect
control of ISMIE, unless that person has obtained the approval of the Illinois
Director of Insurance in advance. Under Illinois law, any purchaser of 10% or
more of the voting stock of an insurance holding company is presumed to have
acquired control of affiliated or subsidiary insurers and must obtain the
approval of the Illinois Director of Insurance before completing the purchase.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ORGANIZATIONAL STRUCTURE OF ISMIE BEFORE AND AFTER THE CONVERSION.......................................................ii
QUESTIONS AND ANSWERS ABOUT THE CONVERSION...............................................................................1
SUMMARY ................................................................................................................3
Who We Are..........................................................................................................3
Our Reasons for the Conversion......................................................................................3
Our Board's Recommendations to Members..............................................................................4
What Eligible Members will Receive in the Conversion................................................................4
The Special Meeting.................................................................................................4
Tax Consequences of the Merger......................................................................................5
Regulatory Approvals................................................................................................5
Dissenters' Rights..................................................................................................5
Interests of Certain Persons in the Conversion......................................................................5
Accounting Treatment................................................................................................5
Selected Financial and Operating Data...............................................................................5
RISK FACTORS.............................................................................................................9
If regulatory or competitive conditions in the medical malpractice insurance industry change, our revenues
could decrease or our expenses could increase so that our earnings are hurt....................................9
Since we currently are licensed to write insurance only in Illinois, any adverse conditions in Illinois
will disproportionately hurt our revenues and profitability ...................................................9
If present managed care trends to employ physicians on large staffs continue, the number of physicians in
our traditional markets will decline and our premiums, revenues and profits could be adversely affected........9
If we are unable to improve our ratings, we could lose business to competitors in the future........................9
If we increase our loss and loss adjustment expense reserves, our income will decrease in the period
in which the adjustment occurs................................................................................10
If interest rates fluctuate, our investment income, cash flows and the value of our investment portfolio
could decline, which in turn could adversely affect our ability to meet our obligations.......................10
If our computer systems or those of our vendors and suppliers do not work properly after December 31, 1999,
our operations will be disrupted..............................................................................11
If we are unable to obtain adequate reinsurance coverage at reasonable rates in the future, it will be
difficult for us to manage our underwriting risks and operate our business profitably.........................11
If our reinsurers do not fulfill their financial obligations to us, or if we do not have adequate
reinsurance coverage, we may not be profitable................................................................11
If we fail to comply with insurance regulatory requirements, or if those requirements become burdensome
to us, we may not be able to operate profitably...............................................................12
iii
<PAGE>
If ISMIE were unable to pay dividends to Holdings, our ability to meet our obligations and pay dividends
to you would be adversely affected and our stock price could decrease.........................................12
Antitakeover provisions could discourage takeover attempts and decrease the value of our stock.....................12
IF AN ACTIVE OR ORDERLY TRADING MARKET DOES NOT DEVELOP, YOU MAY NOT BE ABLE TO SELL YOUR SHARES
PROMPTLY OR AT THE DESIRED PRICE..............................................................................13
FORWARD-LOOKING INFORMATION.............................................................................................13
WHERE YOU CAN FIND MORE INFORMATION.....................................................................................13
THE SPECIAL MEETING.....................................................................................................15
Time, Date and Place...............................................................................................15
Purpose ..........................................................................................................15
Record Date, Quorum and Vote Required..............................................................................15
Recommendation of the Board of Governors...........................................................................15
Interests of the Board of Governors in the Conversion..............................................................15
Proxies ..........................................................................................................15
Proxy Solicitation.................................................................................................16
Questions About the Conversion.....................................................................................16
THE CONVERSION..........................................................................................................17
General ..........................................................................................................17
Background of the Conversion.......................................................................................17
Determination of Eligible Members..................................................................................19
Conversion of Membership Interests.................................................................................19
Consideration......................................................................................................19
Opinion of Salomon Smith Barney....................................................................................20
Recommendation of the Board of Governors...........................................................................24
Description of the Merger Agreement................................................................................27
Dissenters' Rights.................................................................................................29
Additional Aspects of the Merger Agreement and the Conversion......................................................29
COMPARISON OF RIGHTS OF MEMBERS
BEFORE AND AFTER THE CONVERSION....................................................................................31
MARKET FOR COMMON STOCK.................................................................................................44
DIVIDEND POLICY.........................................................................................................44
CAPITALIZATION..........................................................................................................45
FEDERAL INCOME TAX CONSEQUENCES OF THE CONVERSION.......................................................................45
iv
<PAGE>
General............................................................................................................46
Eligible Members...................................................................................................46
ISMIE and ISMIE Indemnity Company..................................................................................47
Issuance of Rules Dealing with Inversions..........................................................................47
Possible Policyholder Dividend Treatment...........................................................................47
Taxpayer Identification Number.....................................................................................48
SELECTED FINANCIAL AND OPERATING DATA...................................................................................49
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................................52
Liquidity and Capital Resources....................................................................................58
Effect of Inflation................................................................................................59
Year 2000 Issues...................................................................................................60
Recent Accounting Pronouncement Not Yet Adopted....................................................................61
BUSINESS ...............................................................................................................61
Overview ..........................................................................................................61
History and Structure..............................................................................................61
Business Strategy..................................................................................................62
Products ..........................................................................................................65
Marketing and Policyholder Services................................................................................68
Premium Rates and Discount Programs................................................................................69
Underwriting.......................................................................................................70
Risk Management Services...........................................................................................71
Claims ..........................................................................................................72
Loss Reserves......................................................................................................74
Reinsurance........................................................................................................78
Investment Portfolio...............................................................................................81
Market Risk........................................................................................................83
Competition........................................................................................................84
Relationship with the Medical Society..............................................................................84
Regulation.........................................................................................................85
Ratings ..........................................................................................................88
Employees..........................................................................................................89
Properties.........................................................................................................89
Litigation.........................................................................................................89
MANAGEMENT..............................................................................................................90
Directors and Executive Officers...................................................................................90
Committees of the Holdings Board...................................................................................92
Director Compensation..............................................................................................93
Executive Compensation.............................................................................................93
v
<PAGE>
Employment Agreements..............................................................................................94
Compensation Plans.................................................................................................95
Related Party Transactions.........................................................................................96
OWNERSHIP OF COMMON STOCK...............................................................................................97
DESCRIPTION OF CAPITAL STOCK............................................................................................99
General............................................................................................................99
Common Stock.......................................................................................................99
Preferred Stock....................................................................................................99
Statutory, Charter and Bylaw Provisions Which Could Have an Anti-Takeover Effect..................................100
Transfer Agent and Registrar......................................................................................102
LEGAL MATTERS..........................................................................................................102
EXPERTS ..............................................................................................................102
GLOSSARY OF SELECTED INSURANCE TERMS.....................................................................................1
INDEX TO FINANCIAL STATEMENTS..........................................................................................F-1
ANNEX I PLAN AND AGREEMENT OF MERGER
ANNEX II OPINION OF THE FINANCIAL ADVISOR
ANNEX III SECTION 168 OF THE ILLINOIS INSURANCE CODE
</TABLE>
vi
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE CONVERSION
Q. WHAT DO I NEED TO DO NOW?
A. PLEASE CAREFULLY REVIEW ALL OF THE MATERIALS WE HAVE SENT TO YOU. AFTER
DOING SO, PLEASE:
- Complete, date and sign the enclosed BLUE PROXY CARD.
- Fill out and sign the enclosed YELLOW TAXPAYER IDENTIFICATION
CARD by including your taxpayer identification number (for
most individuals, your taxpayer identification number is your
social security number).
- Return the completed BLUE PROXY CARD AND YELLOW TAXPAYER
IDENTIFICATION CARD in the enclosed postage-paid envelope. WE
MUST RECEIVE THE PROXY CARD NO LATER THAN ______ P.M., LOCAL
TIME, ON ____________, 1999 (TEN DAYS PRIOR TO THE DATE OF
THE SPECIAL MEETING). YOU HAVE THE RIGHT TO APPEAR AT THE
SPECIAL MEETING AND VOTE IN PERSON.
IF YOU HAVE ANY QUESTIONS OR NEED HELP IN COMPLETING THE PROXY CARD OR
THE TAXPAYER IDENTIFICATION CARD, PLEASE CALL OUR INFORMATION CENTER AT
1-888-__________ (TOLL FREE).
Q. CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A. Yes. You can change your vote at any time before your proxy card is
voted at the special meeting. You can do this in one of three ways.
First, you can send a written notice stating that you would like to
revoke your proxy. Second, you can complete and submit a new proxy
card. Third, you can attend the special meeting and vote in person.
Your attendance alone will not, however, revoke your proxy.
Q. WHEN DO YOU EXPECT THE CONVERSION TO BE COMPLETED?
A. We hope to complete the conversion in 1999. We are working toward
completing the conversion as quickly as possible.
Q. WHEN WILL I RECEIVE MY SHARES IF THE MERGER AGREEMENT IS APPROVED?
A. We will begin to mail the stock certificates to eligible members as
soon as we can after the 30th day following completion of the merger,
unless a dissenters' rights petition is filed with the Illinois
Director of Insurance in accordance with Illinois law. If a
dissenters' rights petition is filed, we will deliver the stock
certificates only after the approval of the merger is affirmed by
the Illinois Director of Insurance.
1
<PAGE>
[intentionally blank-reverse side of Q&A]
2
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED IN OTHER PLACES IN
THIS PROXY STATEMENT/PROSPECTUS. YOU SHOULD READ THE ENTIRE PROXY
STATEMENT/PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION AND THE
FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS.
WHO WE ARE (PAGE 63).... ISMIE is the largest provider of medical malpractice
insurance in Illinois and the eleventh largest in
the United States based on direct premiums written.
We currently insure approximately 8,800 Illinois
physicians who practice alone or in medical groups,
clinics or other healthcare organizations. In
addition, we offer insurance coverage to
approximately 775 corporate and partnership entities
and a variety of other healthcare providers.
For the year ended December 31, 1998, our total
revenue was $182.4 million and our net income was
$12.7 million. For the six months ended June 30,
1999, our total revenue was $94.5 million and our
net income was $7.4 million. As of June 30, 1999,
we had $1.19 billion of total assets, no debt
outstanding and $228.8 million of total equity. We
believe that our leading market share for medical
malpractice insurance in Illinois is due in large
part to the loyalty of our insured physicians.
Our principal executive and business offices are
located at 20 North Michigan Avenue, Suite 700,
Chicago, Illinois 60602-4890, and our telephone
number is (312) 782-2749.
OUR REASONS FOR THE
CONVERSION (PAGE 24)..... We believe 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. We have adopted a strategy which we
believe will improve our ability to compete
effectively in this changing market. As a reciprocal
insurance exchange, which is an organization similar
to a mutual insurance company but without corporate
form, we have limited access to the capital markets
for raising new capital. We believe the conversion
to a holding company structure will permit us to
grow and diversify, improve our ability to raise
capital in the future, enable us to use stock for
acquisitions if and when the opportunities arise and
permit our eligible members to become stockholders
of a publicly-traded Delaware corporation.
3
<PAGE>
OUR BOARD'S
RECOMMENDATIONS TO
MEMBERS (PAGE 24)........ Our Board of Governors has determined that the
conversion is in the best interests of ISMIE and its
members and has approved the merger agreement on
behalf of ISMIE. Our board recommends that you vote
FOR approval of the merger agreement.
WHAT ELIGIBLE MEMBERS
WILL RECEIVE IN THE
CONVERSION (PAGE 19)..... In the conversion, approximately 10,000,000 shares
of the common stock of Holdings will be issued to
and allocated among eligible members of ISMIE as
follows:
- 9,000,000 shares of common stock will be
allocated pro rata among eligible
members based on the ratio of each
eligible member's earned premiums to the
total earned premiums of all eligible
members from July 1, 1995 through
May 5, 1999.
- 1,000,000 shares of common stock will be
allocated evenly among eligible members.
You will receive shares of common stock of Holdings
in exchange for your membership interest in ISMIE.
THE SPECIAL MEETING
(PAGE 15)................ TIME, DATE AND PLACE. The special meeting will be
held at _______ p.m., local time, on _____________,
1999 at __________________, Chicago, Illinois. At
the special meeting, you will be asked to consider
and vote on a proposal to approve the conversion of
ISMIE into a company owned by stockholders.
RECORD DATE. The Board of Governors has set the
close of business on May 5, 1999 as the record date
for determining the members eligible to vote at the
special meeting.
QUORUM. The presence, either in person or by proxy,
of one- hundred eligible members entitled to vote at
the special meeting is necessary to constitute a
quorum.
VOTE REQUIRED. The favorable vote of two-thirds of
all eligible members present in person or by proxy
at the special meeting is required to approve the
merger agreement on behalf of ISMIE. Each eligible
member is entitled to one vote at the special
meeting.
4
<PAGE>
TAX CONSEQUENCES OF THE
MERGER (PAGE 48)......... Eligible members will not recognize gain or loss for
federal income tax purposes on their exchange of
membership interests for Holdings common stock in the
conversion. YOU ARE URGED TO CONSULT YOUR TAX ADVISER
FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF
THE MERGER.
REGULATORY APPROVALS
(PAGE 29)................ If the members approve the merger agreement at the
special meeting, the merger agreement will then have
to be approved by the Illinois Director of Insurance
before we can complete the conversion.
DISSENTERS' RIGHTS
(PAGE 29)................ Under the Illinois Insurance Code, if 5% or more of
the eligible members who do not vote in favor of the
merger agreement at the special meeting file a
petition with the Illinois Director of Insurance for
a hearing on the merger agreement within 30 days
after the merger is completed, the Illinois Director
of Insurance is required to order a hearing upon 15
days' written notice. If the Illinois Director of
Insurance finds that the interests of the members
are not properly protected, or if he finds that any
reasonable objection exists to the merger agreement,
he will enter an order revoking the approval already
given. A copy of section 168 of the Illinois
Insurance Code, which sets forth the full text of
the dissenters' rights, is attached as Annex III to
this proxy statement/prospectus.
INTERESTS OF CERTAIN
PERSONS IN THE
CONVERSION (PAGE 15)..... Except for the common stock allocated to members of
the Board of Governors in their capacity as members
of ISMIE, neither the members of the board nor the
officers of ISMIE will receive any compensation or
other benefits in connection with the completion of
the conversion.
ACCOUNTING TREATMENT
(PAGE 30)................ The conversion involves a reorganization of entities
under common control, and the assets and liabilities
transferred to accomplish the conversion will be
accounted for at historical cost in a manner similar
to that in pooling of interests accounting.
SELECTED FINANCIAL AND OPERATING DATA
The following table shows selected financial and operating data for
ISMIE and subsidiary. The selected income statement data (other than direct
and assumed premiums written) set forth below for
5
<PAGE>
each of the years in the three-year period ended December 31, 1998 and the
selected balance sheet data as of December 31, 1998 and 1997 are derived from
the consolidated financial statements audited by Ernst & Young LLP,
independent auditors, included elsewhere in this proxy statement/prospectus.
The selected financial data for the six month periods ended June 30, 1999 and
1998 are derived from unaudited financial statements which management
believes incorporate all of the adjustments necessary for a fair presentation
of the financial condition and results of operations for those periods. The
selected income statement data (other than direct and assumed premiums
written) for the years ended December 31, 1995 and 1994 and the selected
balance sheet data as of December 31, 1996, 1995 and 1994 are derived from
audited financial statements of ismie and subsidiary. All summary income
statement and balance sheet data are presented in accordance with generally
accepted accounting principles, or GAAP, unless otherwise indicated. You
should read all of the financial statements and related notes beginning at
page F-1 of this proxy statement/prospectus in order to fully understand
ISMIE's financial situation. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
As of or for the Six
Months Ended June 30
As of or for the Year Ended December 31,
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement
Data: (in thousands, except per share, ratios and percentage data)
Premiums written
Direct and
assumed premiums
written $76,165 $73,384 $179,668 $196,152 $207,578 $197,241 $203,756
======= ======= ======== ======== ======== ======== ========
Net premiums
written $64,456 $43,068 $134,215 $104,953 $85,532 $96,809 $140,504
======= ======= ========= ======== ======= ======= ========
Direct and assumed
premiums earned $82,803 $86,804 $177,451 $188,866 $207,857 $221,491 $200,285
Reinsurance (12,983) (30,315) (45,453) (91,199) (122,040) (100,432) (63,252)
premiums ceded ------ ------- --------- -------- --------- --------- ---------
Net premiums earned 69,820 56,489 131,998 97,667 85,817 121,059 137,033
Net investment
income 24,246 22,689 45,361 46,663 46,436 50,927 49,140
Other income 0 0 5,095 0 0 0 0
Realized investment
gains (losses) 388 69 (104) (401) 2,406 322 12,141
-------- -------- -------- -------- -------- -------- --------
Total revenues 94,454 79,247 182,350 143,929 134,659 172,308 198,314
-------- -------- -------- -------- -------- -------- --------
Losses and loss
adjustment expenses 77,728 64,518 153,660 117,816 105,403 177,273 210,046
Other operating
expenses 8,647 7,289 16,222 10,878 6,296 8,793 11,870
-------- -------- -------- -------- -------- -------- --------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
As of or for the Six
Months Ended June 30
As of or for the Year Ended December 31,
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Total expenses 86,375 71,807 169,882 128,694 111,699 186,066 221,916
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes 8,079 7,440 12,468 15,235 22,960 (13,758) (23,602)
Income taxes (benefit) 716 314 (257) (3,206) 19,541 6,007 (8,564)
-------- -------- -------- -------- -------- --------- ---------
Net income (loss) $7,363 $7,126 $12,725 $18,441 $3,419 ($19,765) ($15,038)
======== ======== ======== ======== ======== ========= =========
Balance sheet data:
Total investments and
invested cash $854,400 $746,690 $887,661 $787,333 $780,209 $861,428 $780,362
Total assets 1,185,419 1,228,417 1,211,428 1,246,506 1,287,514 1,362,798 1,263,586
Members' Equity 228,759 229,451 242,690 220,169 193,336 200,969 175,200
Additional Data:
Gross ratios (GAAP)
(1):
Loss & LAE 106.5% 109.2% 94.5% 95.1% 77.4% 128.6% 142.0%
Expense 10.7% 9.7% 10.1% 8.8% 7.4% 6.4% 6.2%
Combined 117.2% 118.9% 104.6% 103.9% 84.8% 135.0% 148.2%
Net ratios (GAAP) (2):
Loss & LAE 111.3% 114.2% 116.4% 120.6% 122.8% 146.4% 153.3%
Expense 12.4% 12.9% 12.3% 11.1% 7.3% 7.3% 8.7%
Combined 123.7% 127.1% 128.7% 131.8% 130.2% 153.7% 161.9%
Pro forma earnings
per share (3) $ 0.74 $1.27
Pro forma book value
per share $22.88
Pro forma book value
per share, net of FAS
115(4) $23.51
Retention rate (5) 95.5% 97.4% 86.0% 90.1% 90.8% 92.4% 93.4%
Investment yield (6) 5.52% 5.89% 5.60% 6.07% 5.77% 6.10% 6.00%
Statutory combined
ratio(7) 124.7% 131.1% 128.5% 131.0% 130.2% 155.5% 161.9%
Statutory surplus $195,088 $178,411 $187,224 $172,713 $158,622 $134,432 $135,339
</TABLE>
7
<PAGE>
(1) Gross ratios represent the ratios of losses and expenses, before
deducting reinsurance recoverables, to direct and assumed premiums
earned, before reinsurance premiums ceded.
(2) Net ratios represent the ratios of losses and expenses, after
deducting reinsurance recoverables, to net premiums earned, after
reinsurance premiums ceded.
(3) Gives effect in all periods to the issuance of approximately
10,000,000 shares of common stock to eligible members. The 100,000
shares of common stock issued to ISMIE indemnity company are not
considered outstanding for purposes of determining the per share
amounts.
(4) ISMIE has designated its entire fixed maturity and equity security
investment portfolio as "available for sale". Under FAS 115, members'
equity reflects unrealized market appreciation or depreciation on
these investments, net of deferred taxes thereon. For purposes of this
calculation, the unrealized market appreciation or depreciation, net
of deferred taxes, has been removed from members' equity.
(5) Represents the percentage of policyholders insured by ISMIE at the
beginning of the year that continued to be insured by ISMIE at the end
of the period.
(6) Represents the yield as determined for statutory reporting purposes
which, for any period, equals annualized investment income, excluding
realized capital gains or losses and net of expenses, divided by the
average of beginning and ending cash and investments at statement
value plus accrued investment income.
(7) Represents the sum of the statutory loss and expense ratios.
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RISK FACTORS
IN CONSIDERING THE MATTERS INCLUDED IN THIS PROXY
STATEMENT/PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS, TOGETHER WITH THE OTHER INFORMATION IN THIS DOCUMENT.
IF REGULATORY OR COMPETITIVE CONDITIONS IN THE MEDICAL MALPRACTICE
INSURANCE INDUSTRY CHANGE, OUR REVENUES COULD DECREASE OR OUR EXPENSES COULD
INCREASE SO THAT OUR EARNINGS ARE HURT.
We derive over 95% of our revenues from medical malpractice
insurance policies issued to physicians, medical groups and allied health
professionals. Our earnings could be hurt by regulatory or competitive
changes affecting rates or other aspects of medical malpractice insurance to
a greater extent than if our business were diversified.
SINCE WE CURRENTLY ARE LICENSED TO WRITE INSURANCE ONLY IN ILLINOIS,
ANY ADVERSE CONDITIONS IN ILLINOIS WILL DISPROPORTIONATELY HURT OUR REVENUES
AND PROFITABILITY .
Our revenues and profitability are affected by Illinois regulatory,
economic and other conditions and could be hurt by negative developments in
Illinois to a greater extent than if we did business in several states or
regions. We believe that medical malpractice jury awards in Illinois,
particularly in the counties of Cook, Madison and St. Clair, are
significantly higher than those in a number of other states.
IF PRESENT MANAGED CARE TRENDS TO EMPLOY PHYSICIANS ON LARGE STAFFS
CONTINUE, THE NUMBER OF PHYSICIANS IN OUR TRADITIONAL MARKETS WILL DECLINE
AND OUR PREMIUMS, REVENUES AND PROFITS COULD BE ADVERSELY AFFECTED.
Our strongest position in the market for physician malpractice
coverage historically has been among self-employed individual practitioners
and those involved in small groups and clinics. The development of managed
care is leading to greater concentrations of physicians employed by hospitals
and other providers. Hospitals and large corporate providers of health care
services arrange for malpractice coverage of their own employees. Therefore,
as physicians move from self-employed medical practices to hospitals or large
clinics in employed staff positions, the market traditionally served by ISMIE
will shrink.
Our marketing to hospitals and large groups has been limited to date
and the competition for these types of risks is more intense. Many hospitals
operate self insured programs covering their employed physicians, and larger,
national insurers such as St. Paul Fire & Marine Insurance Company, CNA
Financial Corporation and Zurich American Insurance Company compete for bigger
corporate and hospital accounts. Some of these competitors have greater
financial resources and higher ratings than we do. As we expand into new
markets, new product lines and new geographical markets, pursuant to our
strategy discussed under "Business -- Business Strategy," we will need to
compete with established companies in these new markets, many of which have
existing relationships with the doctors and medical groups we will seek to
insure.
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IF WE ARE UNABLE TO IMPROVE OUR RATINGS, WE COULD LOSE BUSINESS TO
COMPETITORS IN THE FUTURE.
ISMIE is rated "B++ (Very Good)" by A.M. Best and "BBB+ (Good)" by
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc. Many of the larger insurance companies with which we compete such as St.
Paul Fire & Marine Insurance Company, CNA Financial Corporation and Zurich
American Insurance Company, currently have higher insurance ratings. In
connection with our rating, A.M. Best and Standard & Poor's have commented on
our narrow product line and geographic concentration. Our ability to maintain
or improve our rating may depend on our ability to implement our conversion
and business strategy to grow and diversify. If we are unable to increase our
ratings, it could weaken our competitive position in the future because some
medical groups and other health care providers require that their medical
malpractice insurance providers have an "A" rating.
IF WE INCREASE OUR LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES, OUR
INCOME WILL DECREASE IN THE PERIOD IN WHICH THE ADJUSTMENT OCCURS.
We maintain loss and loss adjustment expense reserves to cover
amounts we estimate we will need to pay policyholders for insured losses and
for the expenses we expect to occur to settle policyholder claims. We make
these estimates based on assumptions related to the ultimate cost of settling
the claims based on facts and interpretation of circumstances then known,
predictions of trends in claims frequency and severity and judicial theories
of liability, legislative activity and other factors. However, establishing
appropriate reserves is an inherently uncertain process involving estimates
of future losses and we cannot be sure that currently established reserves
will prove adequate in light of subsequent actual experience. The inherent
uncertainty is greater for some types of insurance, such as medical
malpractice, where 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, our reaction in terms of modifying underwriting practices
and changing premium rates may lag behind underlying loss trends. In
addition, emerging changes in the practice of medicine, such as new, larger
medical groups that do not have an established claims history and additional
claims resulting from restrictions on treatment by organizations, may require
us to adjust our underwriting and reserving practices.
If our reserves should prove inadequate, we would be required to
increase reserves and incur a charge to earnings in the period that these
reserves are increased, which would reduce income during that period and
could cause our stock price to fall.
IF INTEREST RATES FLUCTUATE, OUR INVESTMENT INCOME, CASH FLOWS AND
THE VALUE OF OUR INVESTMENT PORTFOLIO COULD DECLINE, WHICH IN TURN COULD
ADVERSELY AFFECT OUR ABILITY TO MEET OUR OBLIGATIONS.
Over 95% of our invested assets, which represent 70% of our total
assets, consist of fixed maturity securities. We earn our investment income
primarily from interest income on these fixed income investments. Lower
interest rates reduce the return on our portfolio. Reduced investment income
would also reduce our cash flows. Higher interest rates could reduce the
market value of
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our fixed income investments. If investment income and cash flows were
reduced or the value of our investments declined, our ability to meet our
obligations could be adversely affected.
IF OUR COMPUTER SYSTEMS OR THOSE OF OUR VENDORS AND SUPPLIERS DO NOT
WORK PROPERLY AFTER DECEMBER 31, 1999, OUR OPERATIONS WILL BE DISRUPTED.
We are highly dependent on our computer processing systems. Our
principal computer applications cover three broad areas of its operations:
(1) policy processing; (2) claims processing; and (3) our financial and
accounting systems. We have completed our assessment of all internal
information technology systems that we believe could be significantly
affected by the Year 2000 issue. As a result of our assessment, we identified
some systems that needed to be reprogrammed or replaced in order to bring
them into Year 2000 compliance. We have substantially completed all the
software reprogramming and replacement that we believe will be necessary to
bring these systems into compliance.
We cannot be sure that this compliance schedule will be met or that
any software or systems of our vendors and suppliers, on which our business
is dependent, will be corrected in a timely manner. The inability of vendors
or suppliers to complete their Year 2000 resolution process in a timely
fashion could disrupt our business operations and materially and adversely
impact our results of operations, liquidity or capital resources.
Our failure to complete our Year 2000 compliance project
successfully could result in the disruption of our normal operations and in
the inability or unwillingness of our policyholders to utilize our services.
In a worst case scenario, any failure or disruption could hurt our business,
financial condition and results of operations and could result in litigation
against us based upon any disruption or failure. We also could be adversely
affected if Year 2000 issues result in additional claims being made against
our insureds.
We are in the process of developing contingency plans for our
mission critical business processes in the event of the failure of our own
computer systems or of a disruption of essential infrastructure services. We
expect this planning to be completed in October 1999.
IF WE ARE UNABLE TO OBTAIN ADEQUATE REINSURANCE COVERAGE AT
REASONABLE RATES IN THE FUTURE, IT WILL BE DIFFICULT FOR US TO MANAGE OUR
UNDERWRITING RISKS AND OPERATE OUR BUSINESS PROFITABLY.
Reinsurance involves transferring part of the liability and the
premium under an insurance policy to another insurance company. Like other
insurance companies, we use reinsurance arrangements to limit and manage the
amount of risk we retain, to stabilize our underwriting results and to
increase our underwriting capacity. The amount and cost of reinsurance
available to companies specializing in medical malpractice insurance are
subject, in large part, to prevailing market conditions beyond their control.
Our ability to provide professional liability insurance at competitive
premium rates and coverage limits on a continuing basis will depend in part
upon our ability to secure adequate reinsurance in amounts and at rates that
are commercially reasonable. If
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reinsurance is not available to us at reasonable rates, it will be difficult
for us to manage our underwriting risks and operate our business profitably.
IF OUR REINSURERS DO NOT FULFILL THEIR FINANCIAL OBLIGATIONS TO US,
OR IF WE DO NOT HAVE ADEQUATE REINSURANCE COVERAGE, WE MAY NOT BE PROFITABLE.
We depend on the credit-worthiness of our reinsurers because
reinsurance does not relieve us of liability to our insureds for the risks
transferred, or ceded, to reinsurers. Although we place our reinsurance with
reinsurers we believe are financially stable, the inability of a significant
reinsurer to make payment under the terms of a reinsurance treaty could cause
our business to become unprofitable.
Due to the favorable trends in claims reported since mid-1995, we
have recently modified our reinsurance strategy to increase our retention and
decrease premiums and risk ceded to reinsurers. Though we believe these
changes to be prudent, we may suffer losses if it turns out that we do not
have enough reinsurance. See "Business -- Reinsurance."
IF WE FAIL TO COMPLY WITH INSURANCE REGULATORY REQUIREMENTS, OR IF
THOSE REQUIREMENTS BECOME BURDENSOME TO US, WE MAY NOT BE ABLE TO OPERATE
PROFITABLY.
We are regulated by the Illinois Insurance Department in many
aspects of our business and financial condition. We are also affected by
accounting and financial requirements established by the National Association
of Insurance Commissioners. Our failure to comply with these requirements
could result in consequences ranging from a regulatory examination to a
regulatory takeover of ISMIE and would make our business less profitable. In
addition, insurance laws and regulations could change or additional
restrictions could be imposed which are more burdensome to us and which make
our business less profitable. Because these laws and regulations are for the
protection of policyholders, changes may not be in your best interest as a
stockholder. See "Business -- Regulation."
IF ISMIE WERE UNABLE TO PAY DIVIDENDS TO HOLDINGS, OUR ABILITY TO
MEET OUR OBLIGATIONS AND PAY DIVIDENDS TO YOU WOULD BE ADVERSELY AFFECTED AND
OUR STOCK PRICE COULD DECREASE.
As a stock insurer, ISMIE will be restricted by Illinois law in the
amount of shareholder dividends it can pay in relation to earnings or
surplus, without consent of the Illinois Insurance Department. ISMIE may pay
dividends in any year out of its earned surplus, without regulatory approval,
to the extent of the greater of either 10% of its statutory capital and
surplus at the end of the preceding year or its net income for the preceding
year. If ISMIE had been a stock insurance company on December 31, 1998, the
amount of dividends it would have been permitted to pay during 1999 without
the approval from the Illinois Insurance Department would have been
approximately $18 million.
ANTITAKEOVER PROVISIONS COULD DISCOURAGE TAKEOVER ATTEMPTS AND
DECREASE THE VALUE OF OUR STOCK.
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Holdings' certificate of incorporation and bylaws include provisions
that may have anti-takeover effects and may delay, defer or prevent a
takeover attempt. Holdings is subject to provisions of the Delaware corporate
law that impose restrictions on a company's ability to enter into some
transactions unless the transaction is approved in a prescribed manner. In
addition, Illinois insurance laws restrict the acquisition of control of an
insurance holding company such as Holdings without the prior approval of the
Illinois Director of Insurance. These provisions may discourage a takeover
attempt which you would have considered to be in your best interests or in
which you would have received a substantial premium over the current market
price. As a result, you may not have an opportunity to participate in this
kind of a transaction. The Illinois Insurance Department could withhold its
approval even if the transaction was in the stockholders' best interest if
the Department determines that the transaction would be detrimental to
policyholders.
IF AN ACTIVE OR ORDERLY TRADING MARKET DOES NOT DEVELOP, YOU MAY NOT
BE ABLE TO SELL YOUR SHARES PROMPTLY OR AT THE DESIRED PRICE.
Before the conversion is completed, there will be no public market
for the common stock and we cannot control whether an active or orderly
trading market will develop or be sustained. We have applied to have the
Holdings common stock listed on the Nasdaq National Market once the
conversion is completed. However, we cannot predict the price at which the
common stock will trade on the Nasdaq National Market.
If an active and orderly trading market does not develop, the
trading price of the common stock may fluctuate widely and the bid and ask
price of the common stock might vary significantly. Factors such as
variations in our financial results or other developments affecting us also
could cause the market price of the common stock to fluctuate significantly.
In addition, if a number of stockholders attempt to sell their shares
following completion of the conversion, our share price may go down. See
"Market for Common Stock."
We have considered, and may consider in the future, an initial
public offering of our common stock. However, we cannot be sure that an
initial public offering will occur. If an initial public offering does occur,
sales of substantial amounts of common stock in the public market or the
perception that sales might occur could adversely affect the market price of
the common stock. If an initial public offering does not occur, it is less
likely that an active or orderly trading market will develop for the common
stock.
FORWARD-LOOKING INFORMATION
Some of the statements in this proxy statement/prospectus that are
not historical fact are forward-looking statements which involve known and
unknown risks, uncertainties and other factors that may cause our actual
results to be materially different from historical results or from any
results expressed or implied by the forward-looking statements. These
statements may be identified by the use of words such as "believes,"
"expects," "may," "will," "should," "seeks," "pro forma," or "anticipates,"
and similar expressions. These risks, uncertainties and other factors
include, but are not limited to, the risks described above under the heading
"Risk Factors."
WHERE YOU CAN FIND MORE INFORMATION
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After the conversion, we will file periodic reports and other
information with the Securities and Exchange Commission. We intend to furnish
our stockholders with annual reports containing audited financial information
and to make available a quarterly report containing unaudited financial
information for each of the first three quarters of each year.
We have filed a registration statement on Form S-4 with the
Commission to register the shares of common stock being issued in the
conversion under the Securities Act of 1933. As permitted by Commission
rules, we have included some of the information relating to the offering,
such as the exhibits, in the registration statement rather than this proxy
statement/prospectus. The registration statement can be read and copied at
the Commission's Public Reference Room at 450 Fifth Street, N. W.,
Washington, D. C. 20549. Information about the operation of the Public
Reference Room can be obtained by calling the Commission at 1-800-SEC-0330.
You may also obtain a copy of the registration statement by accessing the
Commission's website at http://www.sec.gov. We urge you to review the
exhibits which are attached to the registration statement, since our
discussion of these documents in the proxy statement/prospectus is often
brief and may not include every provision of the exhibit.
We have not authorized any person to give any information or to make
any representation with respect to the matters described in this proxy
statement/prospectus other than those contained in this proxy
statement/prospectus. Therefore, if anyone gives you information of this
sort, you should not rely on it. The information contained in this document
speaks only as of the date of this proxy statement/prospectus. This proxy
statement/prospectus is not an offer to sell, or a solicitation of an offer
to purchase, the securities offered by this proxy statement/prospectus, or
make a solicitation of a proxy, in any jurisdiction in which, or to or from
any person to or from whom, it is unlawful to make an offer or solicitation.
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THE SPECIAL MEETING
TIME, DATE AND PLACE
The special meeting will be held at _______ p.m., local
time, on __________, 1999 at __________________, Chicago, Illinois.
PURPOSE
At the special meeting, including any adjournment or postponement,
all eligible members will consider and vote upon a proposal to approve the
merger agreement. See "The Conversion - Description of the Merger Agreement."
RECORD DATE, QUORUM AND VOTE REQUIRED
All persons who were members of record of ISMIE on May 5, 1999 are
entitled to notice of, and are eligible to vote at, the special meeting. The
presence, either in person or by proxy, of one hundred eligible members at
the special meeting is necessary to are a quorum. There are approximately
9,667 eligible members of ISMIE. The favorable vote of two-thirds of eligible
members voting in person or by proxy at the special meeting is required to
approve the merger agreement on behalf of ISMIE. Each eligible member is
entitled to one vote at the special meeting.
RECOMMENDATION OF THE BOARD OF GOVERNORS
Your Board of Governors believes that the conversion is in the best
interests of ISMIE and its members and has approved the merger agreement on
behalf of ISMIE. THE BOARD RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE
MERGER AGREEMENT.
INTERESTS OF THE BOARD OF GOVERNORS IN THE CONVERSION
Under ISMIE's Rules and Regulations, only physician members of ISMIE
may serve on the Board of Governors. Each present member of the Board of
Governors is an eligible member of ISMIE who will be entitled to vote on the
merger agreement and to receive Holdings common stock in the conversion. The
number of shares of common stock to be allocated to members of the Board is
set forth under "Ownership of Common Stock." Common stock will be allocated
to members of the Board of Governors on the same basis as all other eligible
members. No additional shares of common stock will be allocated in the
conversion to members of the Board or to management. Upon completion of the
conversion, management and members of the Board of Governors who serve on the
Holdings Board will be eligible to participate in Holdings' equity incentive
plan. See "Management -- Compensation Plans."
PROXIES
Eligible members may vote in person or by proxy. Duly signed
proxies, will, unless revoked, be voted as indicated on those proxies. If a
written proxy card is signed by a member and
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returned without instructions, the proxy will be voted for approval of the
merger agreement. An eligible member who has submitted a proxy may revoke it
at any time before its exercise at the special meeting by delivering to us an
instrument of revocation or a duly signed proxy bearing a later date or by
attending the special meeting and voting in person. However, any later dated
proxy must be delivered to us at least ten days prior to the special meeting
or it will not be counted.
PROXY SOLICITATION
ISMIE will bear the cost of soliciting proxies from its eligible
members. In addition to solicitation by mail, proxies may be solicited by the
directors, staff and certain employees of ISMIE, who will not be specifically
compensated for those services, by personal interview, telephone or other
telecommunication. In addition, ISMIE has retained _______________ to assist
in soliciting proxies for the special meeting at a fee of approximately
$_________ plus out-of-pocket expenses.
QUESTIONS ABOUT THE CONVERSION
If you have questions about the conversion or need help with any of
the accompanying materials you can call ISMIE's information center at
1-888-_________ (toll-free).
If you wish to comment to the Illinois Insurance Department
regarding the conversion, you may write to: Department of Insurance, 320 West
Washington Street, Fourth Floor, Springfield, Illinois 62767-0001 or may send
comments to the Illinois Insurance Department via facsimile at (217) 782-5020.
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THE CONVERSION
GENERAL
We are furnishing this proxy statement/prospectus to eligible
members of ISMIE in connection with the solicitation of proxies by the ISMIE
Board for use at the special meeting. At the special meeting which will be
held on ________, 1999, we will ask you to vote to approve the merger
agreement under which ISMIE will become a wholly-owned subsidiary of Holdings
and the eligible members of ISMIE will receive shares of Holdings' common
stock in exchange for their membership interests. A copy of the merger
agreement is attached to this document as Annex I.
BACKGROUND OF THE CONVERSION
As a result of intense competition throughout the 1980's and 1990's,
premium rate increases in the medical malpractice industry generally have not
kept pace with increases in the severity of claims. Financially strong
companies with comparatively better financial strength ratings are
benefitting from a highly competitive market. We believe that these market
conditions have created a competitive environment that favors larger,
well-capitalized companies with multi-state operations and broad distribution
systems that offer a variety of products.
In light of this competitive environment, in the summer of 1998 we
engaged Salomon Smith Barney to serve as our financial advisor to investigate
the possible conversion of ISMIE from a reciprocal insurance exchange to a
stockholder-owned company or some other transaction involving the issuance of
debt or equity securities in order to secure and strengthen our market
position and prospects for growth in the future.
At a meeting of the Board of Governors on June 26, 1998, Salomon
Smith Barney reviewed in detail with the Board several capital raising
alternatives for ISMIE. The purpose of the review was to analyze the
financial position and operations of ISMIE and alternative sources for
raising capital for a reciprocal insurance exchange, including the
feasibility of a public securities offering by ISMIE in the event it were
restructured and reorganized as a stock corporation. Salomon Smith Barney
discussed the following matters with the Board:
- trends in the insurance industry, including acquisitions of
malpractice insurance companies and the strategic environment
for medical malpractice insurers;
- projections of operating income for ISMIE;
- capital raising alternatives available to reciprocal
insurance companies, including financial reinsurance, the
sale of surplus note securities, the long-term utilization of
a downstream holding company and the conversion to a
corporate structure; and
- constraints inherent in a single state, single line of
business insurance company.
Salomon Smith Barney emphasized the need for us to become
financially flexible in order to accomplish the strategic initiatives that
our management had identified. While additional capital
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was and is not an immediate need of ISMIE, Salomon Smith Barney also
presented an analysis of the feasibility of a public stock offering if ISMIE
converted to a corporate form. Salomon Smith Barney concluded that it would
be feasible for ISMIE to change its corporate structure in order to gain
access to the public markets and to proceed as a publicly held company.
Salomon Smith Barney also advised us that a holding company structure, under
which ISMIE would become a wholly owned subsidiary of a publicly held holding
company, would better serve us going forward.
At the June 26 meeting, the Board of Governors instructed management
to develop and prepare a plan of conversion, under which ISMIE would become a
stock corporation, for consideration at a future meeting.
On July 29, 1998, we met informally with the staff of the Illinois
Insurance Department to discuss in general terms ISMIE's reasons for the
proposed conversion and possible terms, including share allocation. Our legal
counsel then prepared a merger agreement incorporating the essential
provisions of the conversion, which was presented to the Board of Governors
at its meeting on September 2, 1998. At that meeting, which was also attended
by our legal counsel, our financial advisor and their counsel, the Board
discussed in detail the proposed terms of the conversion and approved in
principle the merger agreement as presented.
Following the September 2, 1998 meeting, we and our legal counsel
reviewed and revised the proposed merger agreement. The Board of Governors
next met on October 9, 1998, and further discussed the terms of the proposed
conversion and timing of implementation of the conversion. No action
regarding the proposed conversion was taken at that meeting. We and our
advisors continued to work on the terms of the merger agreement, including
the method of allocating common stock to be issued in the conversion. On
January 29, 1999, we met again with the staff of the Illinois Insurance
Department to discuss the terms of the proposed conversion.
At a regular meeting of the Board of Governors held on February 5,
1999, the Board met with management, Salomon Smith Barney and legal counsel
to consider the conversion and discuss the proposed merger agreement. No
action regarding the proposed conversion was taken at that meeting.
The Board of Governors met again at a special meeting on May 5,
1999. All but one of the twenty one members of the Board of Governors were
present at the meeting. At this meeting, the Board again met with management,
Salomon Smith Barney and legal counsel to consider the conversion and the
proposed merger agreement. Salomon Smith Barney advised the Board that, based
upon the current structure of the conversion, they were of the opinion that
the exchange of the aggregate membership interests for shares of common stock
under the merger agreement was fair, from a financial point of view, to
eligible members as a group. See " -- Opinion of Salomon Smith Barney." After
discussion and consideration of various factors relating to the proposed
conversion, the members of the Board of Governors present at the meeting
unanimously determined that the conversion was in the best interests of ISMIE
and its members and approved the merger agreement on behalf of ISMIE. See "-
Recommendations of the Board of Governors." The Board of Governors then
directed that the merger agreement be submitted to a vote of the members at a
special meeting of members called for that purpose. The Board set May 5, 1999
as the record date for determining members eligible to vote at the special
meeting and to participate in the conversion.
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Salomon Smith Barney subsequently delivered to the Board of Governors their
written opinion, dated May 5, 1999, a copy of which is attached to this proxy
statement/prospectus as Annex II.
DETERMINATION OF ELIGIBLE MEMBERS
DETERMINATION OF ELIGIBILITY. Your right to vote on the proposal to
approve the merger agreement and to receive stock in the conversion is based
on whether you were a member on May 5, 1999, the date the Board of Governors
adopted the merger agreement. Whether or not you are an eligible member for
purposes of voting and receiving consideration is determined solely from
ISMIE's books and records.
DETERMINATION OF MEMBERSHIP. An ISMIE member is a person or
organization who is a "named insured" or "additional named insured" under a
policy. A "policy" is an insurance policy issued by ISMIE but does not
include either an agreement under which ISMIE has ceded or assumed
reinsurance or a reporting endorsement. "Named insured" or "additional named
insured" means any person who is specifically identified by name in the
declarations page of a policy as a "named insured" or as an "additional named
insured" on any endorsement other than a reporting endorsement. We will
determine the identity of the "named insured" or "additional named insured"
in a policy without regard to any interest of any other person in the policy,
and our determination shall be binding on all members. A "named insured" or
"additional named insured" ceases to be a member when the policy terminates.
CONVERSION OF MEMBERSHIP INTERESTS
Members have rights and interests in ISMIE which for purposes of the
conversion are called membership interests. Membership interests consist of
the rights arising under ISMIE's Subscription Agreements and Rules and
Regulations, the Illinois Insurance Code and otherwise, including the right
to vote for the election of members of the Board of Governors and on other
matters, and to participate in any distribution of surplus upon liquidation,
but not including claim obligations of ISMIE arising under policies. Upon
completion of the conversion, all membership interests in ISMIE will be
canceled and extinguished, and the membership interests of eligible members
will be converted into the right to receive consideration to be distributed
in the conversion, as described below.
CONSIDERATION
ALLOCATION OF SHARES. If the conversion is completed, eligible
members will receive consideration in the form of Holdings common stock. Each
eligible member will be allocated a number of shares of common stock equal to:
(1) 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 that eligible member to the
total earned premiums of all eligible members during
the period beginning on July 1, 1995 and ending on
and including May 5, 1999, plus
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(2) 1,000,000 shares of common stock divided by the
total number of eligible members.
The term "earned premiums" means earned premiums, exclusive of any
premium surcharges, on a policy covering an eligible member at any time
during the period beginning on July 1, 1995 and ending on and including May
5, 1999. The term earned premiums refers to the gross premiums paid to ISMIE
as earned over the period of coverage provided under a policy and is,
therefore, net of return premiums due to cancellations or applications not
accepted. Earned premiums are not reduced by reinsurance premiums ceded or
other reductions made in calculating net premiums earned as presented in the
financial statements contained in this document.
The total amount of earned premiums of all eligible members for the
period July 1, 1995 through May 5, 1999 is approximately $575.7 million, or
$63.97 of earned premiums for each of the 9,000,000 shares of common stock to
be allocated based on earned premiums. There are approximately 9,667 eligible
members who will participate in the allocation of the 1,000,000 shares of
common stock distributed to those members.
As an example of how this would work, if you were a member on May 5,
1999, had joined ISMIE prior to July 1, 1995 and had paid average annual
premiums since that date of $15,480, you would be allocated approximately
1,006 shares of common stock. Of those shares, 903 shares would be allocated
based on your earned premiums and 103 would be allocated because you are an
eligible member. See "-- Recommendation of the Board of Governors --
Determining the Allocation Among Eligible Members."
For more information about the allocation of the common stock among
eligible members, see Section 2.3 of the merger agreement, a copy of which is
included in this proxy statement/prospectus as Annex I.
FRACTIONAL SHARES. No fractional shares of common stock will be
issued to any eligible member in the conversion. Fractional shares will be
rounded up or down to the nearest integral number of shares, with one-half
being rounded upward. Rounding may cause the aggregate number of shares of
common stock issued to eligible members in the conversion to be, in the
aggregate, slightly less or more than 10,000,000.
ESTIMATED ALLOCATION OF SHARES. Your GREEN RECORD CARD indicates the
estimated whole number of shares of common stock that you would be entitled
to receive under the merger agreement.
DELIVERY OF SHARES. We will not send stock certificates for shares
of common stock to eligible members until at least 31 days after the
conversion is completed. See "-- Dissenters' Rights."
OPINION OF SALOMON SMITH BARNEY
We retained Salomon Smith Barney to assist us in evaluating the
possible conversion of ISMIE from an Illinois reciprocal insurance exchange
to a stockholder-owned company in order to
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secure and strengthen ISMIE's market position and growth in the future. See
"-- Background of the Conversion." As part of the engagement, we instructed
Salomon Smith Barney to evaluate the fairness, from a financial point of
view, to the eligible members, as a group, of the exchange of the aggregate
membership interests for shares of common stock of Holdings under the merger
agreement. We imposed no limitations on them concerning the investigation to
be made, or the procedures to be followed, by them in rendering their
opinion. We selected Salomon Smith Barney because of their reputation and
expertise as a nationally recognized investment banking firm. Salomon Smith
Barney, as part of their investment banking services, regularly engages in
the valuation of businesses and securities in connection with stock
repurchases, mergers, acquisitions, underwritings, sales and distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes.
Salomon Smith Barney delivered their written opinion, dated May 5,
1999, to the Board of Governors stating that, as of the date of their
opinion, and based upon the procedures, assumptions and qualifications
described in their opinion, the exchange of the aggregate membership
interests for shares of common stock of Holdings under the merger agreement
is fair, from a financial point of view, to the eligible members as a group.
THE FULL TEXT OF SALOMON SMITH BARNEY'S OPINION, DATED MAY 5, 1999,
WHICH SETS FORTH THE MATTERS REVIEWED, ASSUMPTIONS MADE, FACTORS CONSIDERED,
RELIANCE UPON OTHERS AND LIMITATIONS AS TO THE REVIEW UNDERTAKEN BY THEM, IS
ATTACHED AS ANNEX II TO THIS PROXY STATEMENT/PROSPECTUS. YOU ARE URGED TO
READ CAREFULLY THE OPINION OF SALOMON SMITH BARNEY IN ITS ENTIRETY. ANY
DESCRIPTION OF OR REFERENCE TO SALOMON SMITH BARNEY'S OPINION SHOULD BE
VIEWED IN THE CONTEXT OF THEIR ENTIRE OPINION. THE PREPARATION OF A FAIRNESS
OPINION IS A COMPLEX PROCESS AND DOES NOT LEND ITSELF TO PARTIAL ANALYSIS OR
SUMMARY DESCRIPTION. SALOMON SMITH BARNEY'S OPINION IS DIRECTED TO THE BOARD
OF GOVERNORS AND IS NOT A RECOMMENDATION TO YOU AS TO WHETHER YOU SHOULD VOTE
TO APPROVE THE CONVERSION.
We did not request Salomon Smith Barney to opine as to, and their
opinion does not address, the underlying business decision of the Board of
Governors to proceed with the conversion. In addition, Salomon Smith Barney's
opinion expressly excludes any opinion as to:
- which of ISMIE's policyholders are to be included among the
eligible members;
- the fairness of the proposed consideration to be paid to any
eligible member or to any class of eligible members in
connection with the conversion;
- the fairness of any provisions of the merger agreement
relating to which members receive common stock of Holdings,
the allocation of common stock among eligible members and
other provisions of the merger agreement which distinguish
among eligible members;
- the fair market value of any shares of common stock of
Holdings to be issued under the merger agreement; or
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- the price at which the common stock of Holdings could be sold
in an initial public offering or the price at which the common
stock of Holdings issued in the conversion or in an initial
public offering would trade.
Salomon Smith Barney noted that the price at which the common stock
of Holdings could be sold in an initial public offering, if an initial public
offering were conducted, would be a function of market conditions and the
recent performance of and outlook for ISMIE at that time. Further, Salomon
Smith Barney noted their belief that trading in the common stock of Holdings
for a period following the completion of a distribution of the common stock
of Holdings, including an initial public offering, would be characterized by
a redistribution of the common stock of Holdings among eligible members who
received shares of common stock and other investors. Salomon Smith Barney
also noted that during these periods of redistribution the common stock of
Holdings could trade below the prices at which it would trade on a fully
distributed basis.
In arriving at their opinion, Salomon Smith Barney reviewed,
analyzed and relied upon material bearing upon the financial and operating
condition and prospects of ISMIE and material prepared in connection with the
merger agreement and the conversion. They considered such financial and other
factors as they considered appropriate under the circumstances, including,
among other things, the following:
- the statutory annual statements provided by ISMIE for the
years 1993 through 1998;
- GAAP financial data provided by ISMIE, including the audited
income statements for each year of the five year period ending
December 31, 1998 and the audited balance sheets for each year
of the five year period ending December 31, 1998;
- consolidated financial projections for Holdings and its
subsidiaries after the conversion provided to Salomon Smith
Barney by ISMIE;
- the draft registration statement on Form S-4 of Holdings,
dated April 28,1999;
- a copy of the merger agreement dated May 5, 1999;
- financial data of ISMIE which Salomon Smith Barney compared
with publicly available financial information and market data
of other companies which they believed to be comparable; and
- the financial terms of the transactions contemplated by the
merger agreement which they compared with the financial terms
of other transactions they considered relevant.
Salomon Smith Barney also conducted discussions with management and our
advisors relating to our business and the financial and other aspects of the
merger agreement and the conversion and other matters they believed to be
relevant to their inquiry. In addition, Salomon Smith Barney took into account
their assessment of general economic, market and financial
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conditions, their experience in securities valuation and their knowledge of
the insurance industry generally.
In preparing their opinion, Salomon Smith Barney assumed, at our
instruction, that:
- the conversion will meet all applicable legal and regulatory
requirements and that all necessary action will have been
taken to comply with all applicable laws and requirements,
including the receipt of all required approvals by
policyholders, regulators and otherwise;
- the terms of an initial public offering, if undertaken, would
not affect the legal or tax treatment of the merger agreement
or the conversion;
- the conversion would be completed on the basis described in
the merger agreement;
- ISMIE will receive, prior to the effective date, a private
letter ruling from the Internal Revenue Service or an opinion
from our tax counsel as to certain matters as described in
Section 7.1(d) of the merger agreement; and
- the opinion of our tax counsel, if delivered, will be
confirmed as of the effective date of the merger with no
changes or exceptions whatsoever.
In preparing their opinion, Salomon Smith Barney considered a number of
factors including, but not limited to, the following (in no particular order):
- our belief that growth is extremely important to remain an
effective and competitive insurer in the future;
- our belief that it is of significant strategic importance that
we have broader access to external capital to finance this
growth;
- our financial strength ratings and the considerations on which
those ratings are based;
- in our present form as a reciprocal insurance exchange, we
have limited access to the capital markets for new capital;
- following the conversion, we will have a capital structure
potentially enabling us to access the capital markets for new
capital; and
- the non-transferability of membership interests.
In conducting their review and arriving at their opinion, Salomon Smith
Barney relied upon and assumed the accuracy and completeness of the financial
and other information that was provided to them or was publicly available and
have not attempted to independently verify that information. With respect to
financial forecasts, Salomon Smith Barney assumed that the forecasts
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have been reasonably prepared on a basis reflecting our best currently
available estimates and judgments, and they expressed no opinion with respect
to the forecasts or the assumptions on which they are based. In addition,
Salomon Smith Barney did not make or obtain any evaluations or appraisals of
our properties, assets, liabilities, reserves or surplus. Salomon Smith
Barney's opinion is limited to the fairness, from a financial point of view,
to the eligible members as a group, of the exchange of the aggregate
membership interests for shares of common stock of Holdings, under the merger
agreement. Salomon Smith Barney's opinion is necessarily based upon
conditions as they exist and could be evaluated on the date of their opinion
and the information made available to them through the date of their opinion.
We engaged Salomon Smith Barney to serve as our financial advisor in
the summer of 1998. We agreed to pay Salomon Smith Barney an aggregate fee of
up to $500,000 and to reimburse them for reasonable out-of-pocket expenses up
to $70,000, including fees and expenses of counsel, for their services. These
fees and expenses were payable whether or not Salomon Smith Barney gave us a
favorable fairness opinion. We agreed to indemnify Salomon Smith Barney and
their affiliated entities, directors, officers, employees, legal counsel,
agents and controlling persons against certain costs, expenses and
liabilities to which they may become subject arising out of or in connection
with their engagement. We also agreed to retain Salomon Smith Barney to act
as lead underwriter in connection with an initial public offering, and
Salomon Smith Barney will receive fees in connection with that transaction
when and if completed.
RECOMMENDATION OF THE BOARD OF GOVERNORS
The Board of Governors believes that the terms of the conversion are
in the best interests of ISMIE and its members and recommends that you vote
FOR the approval of the merger agreement at the special meeting.
The Board of Governors approved the terms of the merger agreement at
a meeting held on May 5,1999. At that meeting and at previous meetings of the
Board held on September 2, 1998 and February 5, 1999, members of our senior
management, together with our legal and financial advisors, reviewed with the
Board the background of the proposed conversion, the potential benefits of
the conversion and the terms of the proposed merger agreement. On May 5,
1999, Salomon Smith Barney rendered their opinion as to the fairness, from a
financial point of view, to eligible members as a group, of the exchange of
membership interests for shares of common stock to be allocated in the
conversion. A summary of the opinion and the procedures followed in preparing
the opinion is set forth in "-- Opinion of Salomon Smith Barney."
DETERMINATION THAT THE CONVERSION IS IN THE BEST INTERESTS OF ISMIE
AND ITS MEMBERS. In reaching its determination at the May 5, 1999 meeting
that the conversion is in the best interests of ISMIE and its members, the
Board of Governors consulted with ISMIE's management and its legal and
financial advisors, and considered the following factors:
- The competitive forces affecting the medical malpractice
market in Illinois, which in the view of the Board require
ISMIE to grow and diversify its business in order to remain an
effective and competitive insurer in the future. The Board has
concluded that growth and diversification can best be
accomplished in a corporate form.
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- The strategic importance of ISMIE having broader access to
external capital to achieve this growth, and the Board's
belief that in its present form as a reciprocal insurance
exchange, ISMIE has limited access to the capital markets for
new capital.
- Comments from A.M. Best and Standard & Poor's relating to
ISMIE's narrow product line and geographic concentration.
- The intense competition in the medical malpractice industry.
- The business, operations, earnings, assets, liabilities and
financial condition of ISMIE, on both an historical and
prospective basis, and the benefits to ISMIE that the Board
believes could be realized by pursuing its business strategy
of growth and diversification of which the conversion and
related transactions are a principal part.
- The conversion of other professional liability insurance
companies, including Southern California Physicians Insurance
Exchange and the pending conversion of the Medical
Inter-Insurance Exchange of New Jersey, to publicly held
companies, and the greater access to capital resources and
increased financial and structural flexibility available to
stock companies.
- The opinion of Salomon Smith Barney, based on the limitations
contained in their opinion, that the exchange of the aggregate
membership interests for shares of common stock under to the
merger agreement is fair, from a financial point of view, to
eligible members as a group.
- That the merger of ISMIE and ISMIE Indemnity Company will be a
tax-free reorganization and that eligible members, ISMIE,
Holdings and ISMIE Indemnity Company will not recognize gain
or loss for federal income tax purposes in the merger.
- That membership interests in ISMIE are not transferable, and
that the Holdings common stock, in contrast, will be freely
tradable and will be listed on the Nasdaq Stock Market.
- That as a result of the conversion, eligible members will
become stockholders of Holdings, a Delaware corporation.
Delaware corporate law is widely regarded as the most
extensive and well defined body of corporate law in the United
States, and a substantial body of case law and public policies
have developed with respect to Delaware corporations.
DETERMINING THE ALLOCATION AMONG ELIGIBLE MEMBERS. In determining
which members would be eligible to participate in the conversion and receive
shares of Holdings common stock, and the apportionment of consideration among
eligible members, the Board of Governors further considered the following
factors:
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- the terms of other insurance company conversion transactions,
including the conversion of the Southern California Physicians
Insurance Exchange and the pending conversion of the Medical
Inter-Insurance Exchange of New Jersey;
- the provisions of applicable Illinois statutes;
- the nature and value of the membership interests being
exchanged;
- the financial results for recent years; and
- analyses prepared by management.
These factors are described in more detail below. The Board did not
find it practicable to, and did not, quantify or otherwise assign relative
weights to the individual factors considered in reaching its determinations.
As to the allocation of common stock among eligible members, there
is no Illinois statutory provision for the guidance of the Board of
Governors. The Board believed that two components of value should be given
consideration when allocating the common stock to be issued in the conversion:
- the relative contribution of members to the surplus of ISMIE,
and
- the "intangible" membership interest itself, meaning the right
to vote on significant transactions and for election of the
governing board, irrespective of the contribution to the
assets and surplus of ISMIE.
The Board of Governors considered the earned premiums from the
eligible members to be the predominant factor in determining contribution to
surplus. Earned premiums may contribute to the surplus of ISMIE in two ways.
First, pending the payment of expenses and claims, premiums are invested and
generate investment income to increase ISMIE's earnings. Second, to the
extent the losses and expenses are ultimately less than the aggregate
premiums, some underwriting profit is realized to further increase earnings
and surplus. The Board did not believe that an analysis of contributions to
surplus on an individual policy basis would be meaningful because ISMIE
offers the same coverage forms to all of its members and attempts to
establish rates that are neither excessive nor inadequate among any class of
insureds. The Board intends that all classes of insureds contribute to
surplus in proportion to the premiums they pay. The Board concluded that the
earned premiums themselves were the predominant indicator of contribution to
ISMIE. This approach has been used by other property and casualty companies
in allocating interests in connection with conversion to stock companies,
including the Southern California Physicians Insurance Exchange and the
Medical Inter-Insurance Exchange of New Jersey.
The Board of Governors therefore determined to base the allocation
formula principally on the earned premiums paid by an eligible member in
proportion to the earned premiums paid by all eligible members during a
specified period. Consistent with this approach, the Board further
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concluded that earned premiums should not include any discounts or surcharges
or any premiums paid for reporting endorsements.
ISMIE considered various measurement periods for determining the
amount of premiums to be included in the allocation formula, including
measurement periods used by other companies in similar conversions. ISMIE
concluded that periods of three to five years were the most common
measurement periods in similar conversions and in the demutualization laws of
other states that address allocation procedures. ISMIE selected a measurement
period for earned premiums beginning on July 1, 1995 and continuing through
the May 5, 1999, a measurement period of approximately 3 7/8 years. ISMIE
also determined that a period of approximately 3 7/8 years provided an
appropriate weighing of the interests of both long-time and newer members.
The Board also considered the "intangible" membership interest
itself and what value should be attributed to this interest independent of
premiums paid by eligible members. This intangible value, independent of
premiums, includes the right to vote and any right to share in the assets of
ISMIE in the event of ISMIE's liquidation. The Rules and Regulations of ISMIE
give one vote to each member regardless of longevity with or premiums paid to
ISMIE. See "Comparison of Rights of Members Before and After the Conversion
- -- Description of Rights of Members of ISMIE -- Voting." Since the conversion
could not be effected under Illinois law and under the Rules and Regulations
of ISMIE without the vote of eligible members, ISMIE concluded that there is
value to the intangible membership interests that should be recognized in the
allocation formula.
In considering a value for the membership interest, the Board
concluded that no value should be attributable to the membership interest for
those members who joined after the Board approved the conversion, as this
could encourage healthcare providers to seek a windfall by joining ISMIE
primarily for the purpose of obtaining stock ownership attributable to the
membership interest. ISMIE therefore set the date of adoption of the merger
agreement as the record date for receiving any stock distribution
attributable to the membership interest itself.
The Board of Governors considered what portion of the stock
distribution should be attributed to the intangible membership interest.
ISMIE reviewed other transactions and considered the measurement periods used
for the earned premium component of the distribution and the independent
value, if any, attributed to the membership interest in those transactions.
Because the Board concluded that there is value to the intangible membership
interests, the Board determined that it would be appropriate to allocate some
value represented by the common stock to be issued in the conversion to the
membership interests. ISMIE analyzed various allocations based upon the
membership interests and considered the effect that those allocations would
have on the distribution of consideration to eligible members. The Board
concluded that the allocation formula should provide those persons who were
members of ISMIE at the time the conversion was approved by the Board with a
meaningful ownership interest in ISMIE. Accordingly, the Board determined
that an allocation of 10% of the common stock to be issued in the conversion
was an appropriate measure of value to be attributed to the intangible
membership interests.
Based on all of the factors described above, the Board of Governors
believes that the conversion is in the best interests of ISMIE and its members.
Accordingly, the Board has approved
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the merger agreement and recommends that eligible members vote FOR the
proposal to approve the merger agreement.
DESCRIPTION OF THE MERGER AGREEMENT
The following is a summary of the significant provisions of the
merger agreement, a copy of which is attached as Annex I to the proxy
statement/prospectus. We encourage you to read the merger agreement because
it is the legal document that governs the merger.
EFFECT OF THE MERGER. After the conditions to the merger have been
satisfied or waived, ISMIE will be merged with ISMIE Indemnity Company, and
ISMIE Indemnity Company will continue as a subsidiary of Holdings. The
conversion will be completed and become effective at the time that the
Illinois Director of Insurance issues a certificate of merger, unless the
Illinois Director later revokes his approval of the merger after the exercise
of dissenters' rights as provided in the Illinois Insurance Code. See "-
Dissenters' Rights." After the merger, the separate existence of ISMIE will
cease, and ISMIE Indemnity Company will continue as the surviving corporation.
CONVERSION OF MEMBERSHIP INTERESTS. Subject to applicable
dissenters' rights discussed below, at the effective time of the merger:
- the membership interests of all members will end;
- each eligible member will be allocated his or her pro rata
share of 10,000,000 shares of common stock as provided in
Section 2.3 of the merger agreement; and
- ISMIE Indemnity Company will receive 100,000 shares of common
stock or another number as provided in Section 2.3 of the
merger agreement. These shares will be issued to ISMIE
Indemnity Company so that the conversion will have the tax
consequences discussed in "Material Tax Consequences of the
Conversion."
CONDITIONS TO THE MERGER. In order for the merger to become effective,
and for the conversion to occur, the following conditions must be satisfied:
- The merger agreement must be approved by the favorable vote of
two-thirds of eligible members present in person or by proxy
at the special meeting.
- The merger agreement must be approved by the Illinois Director
of Insurance after approval by eligible members at the special
meeting.
- An opinion of tax counsel regarding material federal income
tax consequences of the merger is required to be received in
order for the merger to become effective. As more fully
discussed in "Certain Federal Income Tax Consequences of the
Conversion," an opinion of tax counsel has been received
regarding these matters and must be reconfirmed before the
merger can be completed.
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ISSUANCE AND DELIVERY OF COMMON STOCK TO ELIGIBLE MEMBERS. The
Holdings common stock allocated to eligible members and ISMIE Indemnity
Company will be treated as having been issued at the time that the merger is
completed. Certificates representing the common stock will be delivered on
the thirty-first day after the effective date of the merger, or as soon as
reasonably practicable after that date, unless a petition has been filed with
the Illinois Director of Insurance in accordance with Section 168 of the
Illinois Insurance Code. If a petition has been filed, the common stock will
be delivered only upon the affirmation of the merger by the Illinois Director
of Insurance following a hearing in accordance with Section 168 of the
Illinois Insurance Code.
AMENDMENT. The merger agreement may not be amended except by an
instrument in writing signed by each of the parties to it. However, after
approval of the merger agreement by eligible members at the special meeting,
no amendment may be made without the further approval of eligible members
which under applicable law requires their further approval.
TERMINATION. The merger agreement may be terminated and the merger
may be abandoned, at any time before the completion of the merger, whether
prior to or after approval of the merger agreement by eligible members at the
special meeting:
- by mutual written consent of the parties;
- if any party breaches in any material respect any of its
covenants or agreements contained in the merger agreement;
- if the merger has not been consummated prior to December 31,
1999; or
- if any court of competent jurisdiction or any other
governmental body has taken any action restraining, enjoining
or otherwise prohibiting the merger and the order, decree,
ruling or other action, has become final and non-appealable.
DISSENTERS' RIGHTS
Under Section 168 of the Illinois Insurance Code, if five percent or
more of all eligible members who do not vote in favor of the merger agreement
at the special meeting file a petition with the Illinois Director of
Insurance within thirty days after the merger has been completed for a
hearing upon the merger agreement, the Illinois Director of Insurance is
required to order a hearing upon at least fifteen days' notice. Any
petitioning eligible member may appear before the Illinois Director of
Insurance at the hearing. If the Illinois Director of Insurance finds that
the interests of the members of ISMIE are not properly protected, or if he
finds that any reasonable objection exists to the merger agreement, he will
enter an order revoking the approval already given. The merger of ISMIE and
ISMIE Indemnity Company would then become null and void, the conversion would
not occur, and no eligible member would receive common stock as proposed or
have any further rights under the merger agreement. The Illinois Director of
Insurance also has the power to revoke any approval of the merger if any
officer, director or employee of any party to the merger agreement fails or
refuses without reasonable cause to attend and testify at the hearing, or to
produce any books or papers called for by the Illinois Director of Insurance.
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ADDITIONAL ASPECTS OF THE MERGER AGREEMENT AND THE CONVERSION
INSURANCE COVERAGE. The conversion will not affect any member's
policy coverage. In the conversion, each member will become a policyholder of
ISMIE Indemnity Company and ISMIE Indemnity Company will assume all policy
and other obligations of ISMIE.
EXPENSES OF THE CONVERSION. All expenses related to the conversion
will be borne by ISMIE.
REGULATORY APPROVALS. Except for approval by the Illinois Director
of Insurance, and compliance with federal and state securities laws, we are
not aware of any material federal or state regulatory requirement necessary
to be complied with or approval that must be obtained in connection with the
conversion.
ISSUANCE OF SHARES TO ISMIE INDEMNITY COMPANY. The merger agreement
provides that Holdings will issue to ISMIE Indemnity Company 100,000 shares
of common stock in consideration of the cancellation of the outstanding
shares of common stock of Holdings currently held by ISMIE. The Board of
Governors and the Holdings Board may adjust the number of shares of common
stock issuable to ISMIE Indemnity Company in the merger in order to ensure
that the common stock issued to ISMIE Indemnity Company has a fair market
value equivalent to the fair market value of the common stock currently held
by ISMIE which is to be canceled in the merger.
The shares of common stock will be issued to ISMIE Indemnity Company
so that the merger will have the tax consequences set forth in "Significant
Federal Income Tax Consequences of the Conversion -- ISMIE and ISMIE
Indemnity Company." Under the Delaware General Corporation Law, or DGCL,
ISMIE Indemnity Company will not be entitled to vote the shares of common
stock issued to it in the conversion, but those shares will be entitled to
receive dividends. Under GAAP those shares will be treated as issued but not
outstanding. See "Capitalization."
ACCOUNTING TREATMENT. The conversion and related transactions
involve a reorganization of entities under common control, and the assets and
liabilities transferred to effect the conversion and related transactions
will be accounted for at historical cost in a manner similar to that in
pooling of interests accounting.
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COMPARISON OF RIGHTS OF MEMBERS
BEFORE AND AFTER THE CONVERSION
Upon completion of the conversion and expiration or termination of
dissenters' rights, your membership interests will be canceled and
extinguished and converted into the right to receive common stock, and you
will become a stockholder of Holdings. The following is a comparison of
rights of eligible members of ISMIE and holders of Holdings common stock.
This comparison is intended to highlight the material rights of members
before and after the conversion and should be read in conjunction with
ISMIE's Rules and Regulations and Holdings' certificate of incorporation and
bylaws, copies of which are available for inspection at the executive offices
of ISMIE and will be sent to you upon request.
DESCRIPTION OF RIGHTS OF MEMBERS OF ISMIE
GENERAL. Membership in ISMIE is limited to and composed of those
persons who are "named insureds" or "additional named insureds" in ISMIE.
"Named insured" or "additional named insured" means any person who is
specifically identified by name in the declarations page of a policy as a
"named insured" or as an "additional named insured" on any endorsement
attached to the policy other than a reporting endorsement. Each "named
insured" or "additional named insured" under a policy of insurance issued by
ISMIE becomes a member when the policy is issued and the period of coverage
commences under the policy.
Membership interests in ISMIE have no preemptive or conversion
rights, redemption rights, or sinking fund provisions.
DESCRIPTION OF RIGHTS OF HOLDERS OF ISMIE
HOLDING STOCK AFTER THE CONVERSION
GENERAL. The authorized capital stock of Holdings consists of (i)
40,000,000 shares of common stock, par value $0.01 per share, and (ii)
5,000,000 shares of preferred stock, par value $0.01 per share. Immediately
after the consummation of the conversion, it is expected that there will be
approximately 10,000,000 shares of common stock outstanding and no shares of
preferred stock outstanding.
Shares of common stock have no preemptive rights, conversion rights,
or redemption rights. No shares of preferred stock will be issued or
outstanding immediately following the conversion. When and if issued, the
preferred stock will have the rights, powers and preferences as may be
established by the Holdings Board. See "Description of Capital Stock --
Preferred Stock."
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DESCRIPTION OF RIGHTS OF MEMBERS OF ISMIE
LIQUIDITY/MARKETABILITY. A membership interest is not transferable and
ceases when the coverage period or certificate period of the member under the
policy issued by ISMIE terminates.
DISTRIBUTIONS. The Board of Governors may declare dividends to
qualifying members of ISMIE. The qualifications of members to receive
dividends declared may be determined by the Board of Governors, except that a
dividend may only be paid to a member who has been insured during four (4)
continuous policy periods.
If ISMIE is liquidated, any assets remaining after payment of all
liabilities would be distributed to members in accordance with the provisions
of Article 13 of the Illinois Insurance Code.
INCOME TAXATION. ISMIE, as a reciprocal insurance exchange, is taxable
under the Internal Revenue Code as a "mutual insurance company." A holder of
a membership interest is not taxed with respect to ISMIE's income, but may
realize taxable income to the extent that ISMIE makes actual distributions
(in the form of premium credits or other dividends) to the holder out of
current or accumulated earnings and profits of ISMIE. As a "mutual insurance
company" for federal income tax purposes, ISMIE will receive a deduction in
the amount of the distributions when accrued.
DESCRIPTION OF RIGHTS OF HOLDERS OF
HOLDINGS STOCK AFTER THE CONVERSION
LIQUIDITY/MARKETABILITY. Holdings has applied for listing of the shares
of common stock on the Nasdaq National Market. As a result, Holdings
anticipates that there will be a public market for the shares of common
stock, although we cannot be sure of the price at which the common stock will
trade. See "Risk Factors -- If an active or orderly trading market does not
develop, you may not be able to sell your shares promptly or at the desired
price."
DISTRIBUTIONS. Subject to the rights of holders of preferred stock, if
any, holders of common stock will be entitled to participate equally in
dividends if, as and when declared by the Holdings Board, and in the
distribution of assets in the event of dissolution. See "Dividend Policy."
ISMIE has not made any determination as to whether it will pay
dividends on the common stock in the foreseeable future. There can be no
assurance that dividends will be paid or, if paid initially, that they would
continue to be paid in the future. See "Dividend Policy."
INCOME TAXATION. Holdings is a taxable entity. A holder of common stock
or preferred stock will not be taxed with respect to Holdings' income, but
will realize taxable income to the extent that Holdings pays dividends to the
holder out of current or accumulated earnings and profits. As a stock
corporation, Holdings will not receive a deduction for dividends.
Accordingly, to the extent distributed, earnings and profits of Holdings
generally will face two levels of federal income tax.
32
<PAGE>
DESCRIPTION OF RIGHTS OF MEMBERS OF ISMIE
ASSESSMENTS. Members may not be assessed on policies issued or renewed
by ISMIE.
MEETINGS AND ACTIONS. Action required to be taken by the members may be
taken at a duly called annual or special meeting of members of ISMIE. Annual
meetings are held during, and at the same place as, the annual meeting of the
Illinois State Medical Society. Special meetings of the members may be called
only by (i) the Chairman of the Board of Governors or (ii) one-third of the
total number of Governors and twenty (20) members of ISMIE.
The business transacted at any special meeting of the members is
confined to matters specified in the notice of meeting.
The Rules and Regulations of ISMIE provide for an advance notice
procedure with respect to the nomination by members of candidates for
election as members of the Board of Governors. Nominations by members require
a nominee to be nominated by an ISMIE policyholder and seconded by two other
members of ISMIE.
The Rules and Regulations of ISMIE may be amended by the Board of
Governors at any regular or special meeting by a vote of two-thirds of the
total Governors holding office or at a meeting of members of ISMIE upon the
favorable vote of two-thirds of the members represented at the meeting either
in person or by proxy.
DOMICILIARY STATE. Illinois
DESCRIPTION OF RIGHTS OF HOLDERS OF
HOLDINGS STOCK AFTER THE CONVERSION
ASSESSMENTS. Shares of common stock and preferred stock will not be
callable or assessable by Holdings.
MEETINGS AND ACTIONS. Any action required or permitted to be taken by
the stockholders of Holdings must be taken by vote of the stockholders at a
duly called annual or special meeting of stockholders and not by written
consent. Special meetings of stockholders may be called only by (i) the
President or Secretary at the request of a majority of the Holdings Board or
(ii) the Chairman of the Holdings Board.
The business transacted at any special meeting of stockholders is
confined to matters specified in the notice of meeting.
The certificate of incorporation establishes an advance notice procedure
with regard to the nomination by stockholders of candidates for election as
directors and with regard to proposals of business to be brought before an
annual meeting of stockholders of Holdings. Notice as to any stockholder
nomination or other proper proposal must be received by Holdings not less
than 60 days nor more than 90 days prior to the anniversary date of the
immediately preceding annual meeting. In the event that the date of the
annual meeting is more than 30 days before or more than 60 days after the
anniversary date, however, the Certificate of incorporation provides
additional time for notice. In addition, the notice must contain certain
specified information concerning the person to be nominated or the matters to
be brought before the meeting as well as the name and address of the
stockholder and the class and number of shares beneficially owned by the
stockholder submitting the proposal.
STATE OF INCORPORATION. Delaware
33
<PAGE>
DESCRIPTION OF RIGHTS OF MEMBERS OF ISMIE
VOTING. Each member entitled to vote is entitled to one vote at all
meetings of members on all matters submitted to the members for action. The
Rules and Regulations of ISMIE generally require the favorable vote of a
majority of members voting to approve matters submitted to the members. There
is no cumulative voting, and, therefore, a majority of the members voting at
the meeting will be entitled to elect all of the members of the Board of
Governors to be elected at the meeting.
DESCRIPTION OF RIGHTS OF HOLDERS OF
HOLDINGS STOCK AFTER THE CONVERSION
VOTING. Holders of common stock are entitled to one vote per share on
all matters with respect to which the holders of common stock are entitled to
vote (including the election of directors) and, except as otherwise required
by law or by the terms of any series of preferred stock then outstanding, the
holders of common stock will exclusively possess all voting power. Under the
DGCL, in the absence of specific requirements in a corporation's certificate
of incorporation or bylaws, all matters submitted to stockholders for
approval must be approved at a meeting at which a quorum is present by the
favorable vote of the holders of a majority of the outstanding shares present
in person or by proxy and entitled to vote, except for election of directors,
which requires a plurality vote, and certain matters governed by Section 203
of the DGCL, which requires the approval of the Board of Directors and of
two-thirds (66-2/3%) vote of disinterested stockholders to approve certain
types of business combinations. See "Description of Capital Stock --
Statutory, Charter and Bylaw Provisions Which Could Have an Anti Takeover
Effect." Pursuant to the certificate of incorporation, directors may be
removed only for cause and only by the favorable vote of two-thirds (66-2/3%
of the outstanding voting securities. In the election of members of the board
of directors, there is no cumulative voting, and therefore, except as
otherwise required by the terms of any series of preferred stock then
outstanding, the holders of a majority of the shares of common stock entitled
to vote and voting at the meeting will be entitled to elect all of the
members of the Board of directors to be elected at the meeting if they choose
to do so.
34
<PAGE>
DESCRIPTION OF RIGHTS OF MEMBERS OF ISMIE
QUORUM. One hundred (100) members represented in person or by proxy
constitutes a quorum for the transaction of business at any meeting of the
members.
PREFERRED STOCK. Not applicable.
LIMITED LIABILITY. The liability of a member generally is limited to the
premiums accrued under the current policies of insurance issued by ISMIE to
the member. Members of ISMIE are not assessable by ISMIE.
DESCRIPTION OF RIGHTS OF HOLDERS OF
HOLDINGS STOCK AFTER THE CONVERSION
QUORUM. The holders of a majority of the stock issued and outstanding
and entitled to vote, represented in person or by proxy, will constitute a
quorum for the transaction of business at all meetings of stockholders.
PREFERRED STOCK. The Holdings Board is authorized, subject to any
limitations prescribed by law, without further action by stockholders, to
issue up to 5,000,000 shares of preferred stock, from time to time, in one or
more series and, with respect to each series, to determine its terms,
including the number of shares, dividend rates, redemption rights, conversion
rights, voting rights and rights on liquidation. Because the Holdings Board
has the power to establish the preferences, powers and rights of each series,
it may confer upon the holders of any particular series of preferred stock
preferences, powers and rights (including dividend rights, voting powers and
liquidation preferences) senior to the rights of the holders of common stock.
No shares of preferred stock will be outstanding immediately following the
conversion, and Holdings has no immediate plans to issue any series of
preferred stock. The issuance of a series of preferred stock could, depending
on the terms of the series, have the effect of discouraging, delaying or
preventing a third party from acquiring or proposing to acquire a majority of
the outstanding voting stock of Holdings. See "Description of Capital Stock -
Preferred Stock."
LIMITED LIABILITY. The liability of holders of common stock is generally
limited to the price paid for the common stock by the holder.
35
<PAGE>
DESCRIPTION OF RIGHTS OF MEMBERS OF ISMIE
MANAGEMENT. ISMIE is a reciprocal insurance exchange and management
responsibility is divided between the Board of Governors and the
attorney-in-fact, Illinois State Medical Insurance Services, Inc. The
attorney-in-fact is designated as the attorney-in-fact for each subscriber
under an agreement which each subscriber signs when making application for
insurance. The power of attorney agreement between the attorney-in-fact and
ISMIE, describes the allocation of powers and duties between the
attorney-in-fact and the Board of Governors.
The attorney-in-fact is under the control and supervision of the Board
of Governors, is authorized to operate the business of ISMIE, accepts or
rejects, underwrites and issues policies for ISMIE, collects and accounts for
all premiums paid, handles and disposes of claims, and performs all related
functions.
DESCRIPTION OF RIGHTS OF HOLDERS OF
HOLDINGS STOCK AFTER THE CONVERSION
MANAGEMENT. The Holdings Board has the power and duty to manage the
business and affairs of Holdings and, indirectly, all its subsidiaries. The
Holdings Board may designate committees, each committee to consist of one or
more directors, and has established an audit committee, a compensation
committee, an executive committee, a stock option committee, a nominating
committee and an investor relations committee. Directors are elected by the
stockholders of Holdings. See "--Voting" and "--Election of Directors."
The officers of Holdings serve at the discretion of the Holdings Board.
36
<PAGE>
DESCRIPTION OF RIGHTS OF MEMBERS OF ISMIE
BOARD OF GOVERNORS. The Rules and Regulations of ISMIE provide that the
Board of Governors shall consist of twenty-one members, each of whom must be
a physician member. The Board of Governors is divided into three classes who
serve for staggered terms. Each class is composed of seven governors, who
serve for a term of three years, with one class being elected at each annual
meeting.
ELECTION OF GOVERNORS. ISMIE's Rules and Regulations provide that
nominations for election of members of the Board of Governors must be made by
members who comply with specified notice procedures. A Nominating Committee
composed of at least three but no more than five members of the Board of
Governors reviews the nominees and presents its recommendations to the
Executive Committee of the Board of Governors which ultimately approves a
slate of recommended nominees for consideration by the members. The Rules and
Regulations also provide that members who comply with specified procedures
may run without being recommended by the Nominating Committee. See "--
Meetings and Actions."
DESCRIPTION OF RIGHTS OF HOLDERS OF
HOLDINGS STOCK AFTER THE CONVERSION
BOARD OF DIRECTORS. The Holdings Board consists of not less than three
and more than fifteen directors, the exact number to be fixed from time to
time by the favorable vote of a majority of the Holdings Board.
Immediately following the consummation of the conversion, the Holdings
Board will consist of ten members. The Board of directors is divided into
three classes who serve staggered terms (not including directors who may be
selected from time to time by holders of preferred stock). Each class
consists, as nearly as possible, of one-third of the total number of
directors, who serve for a term of three years, with one class being elected
at each annual meeting. See "Management -- Directors and Executive Officers."
In the future, the Board's ability to determine the number of directors
could delay any stockholder from obtaining majority representation on the
Holdings Board and filling the new vacancies with its own nominees until the
next stockholder election.
ELECTION OF DIRECTORS. The Certificate of incorporation provides that
nominations for election of directors may be made only by or at the direction
of the Holdings Board or by any stockholder of Holdings entitled to vote on
the election of directors who complies with specified notice procedures and
who was a stockholder of record at the time of giving notice. See "--
Meetings and Actions." Directors are elected at the annual meeting of
stockholders except when filling vacancies or newly-created vacancies. See
"-- Vacancies." A plurality of votes present in person or by proxy and
entitled to vote on the election of directors is required for election.
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<PAGE>
DESCRIPTION OF RIGHTS OF MEMBERS OF ISMIE
REMOVAL OF GOVERNORS. ISMIE's Rules and Regulations do not contain any
provisions relating to the removal of a member of the Board of Governors.
VACANCIES. Vacancies in the Board of Governors are filled by a vote of
the majority of the remaining Governors (1) for the remaining term if the
remaining term is less than 18 months, or (2) only until the next annual
meeting of members if the remaining term is more than 18 months.
DESCRIPTION OF RIGHTS OF HOLDERS OF
HOLDINGS STOCK AFTER THE CONVERSION
REMOVAL OF DIRECTORS. The Certificate of incorporation provides that
directors can be removed from office only for cause and only with the vote of
two-thirds of the voting power of the then outstanding shares of voting stock
of Holdings, voting together as a single class.
VACANCIES. The Certificate of incorporation provides that vacancies on
the Holdings Board and any newly-created directorships resulting from an
increase in the authorized number of directors may be filled for the
remainder of a term only by an favorable vote of a majority of the remaining
directors (even though less than a quorum). The provisions of the Certificate
of incorporation governing removal of directors and the filling of vacancies
would preclude a third party from removing incumbent directors and
simultaneously gaining control of the Holdings Board by filling vacancies
created by the removal with its own nominees unless, among other things, the
third party controls at least two-thirds of the combined voting power of
Holdings' voting stock.
38
<PAGE>
DESCRIPTION OF RIGHTS OF MEMBERS OF ISMIE
INDEMNIFICATION. ISMIE's Rules and Regulations provide that ISMIE shall
indemnify the members of the Board of Governors, the officers of ISMIE, the
employees of ISMIE and any person serving as a director, trustee, officer, or
employee of another enterprise at the request of ISMIE, from and against
expenses (including attorneys' fees), judgments, decrees, fines, penalties,
and amounts paid in settlement actually and reasonably incurred in connection
with any actions, suits or proceedings relating to claims or liabilities
asserted against the management or operations of ISMIE, including any
derivative actions brought in the name of or on behalf of ISMIE. However,
indemnification may be made only if the person acted in good faith and in a
manner reasonably believed to be in, or not opposed to, the best interests of
ISMIE and, with respect to any criminal proceeding, had no reasonable cause
to believe the conduct was unlawful. In a derivative action, no
indemnification will be made if the person shall have been finally adjudged
to be liable for negligence or misconduct unless the court in which the
action was brought shall determine that the person is fairly and reasonably
entitled to indemnity for the expenses.
AMENDMENTS TO GOVERNING DOCUMENTS. Members of ISMIE may adopt, alter,
amend or repeal provisions of ISMIE's Rules and Regulations by the vote of
two-thirds of the members voting at an annual or special meeting or by the
vote of two-thirds of the number of Governors holding office at any regular
or special meeting of the Board.
DESCRIPTION OF RIGHTS OF HOLDERS OF
HOLDINGS STOCK AFTER THE CONVERSION
INDEMNIFICATION. The Certificate of incorporation provides that Holdings
shall indemnify its directors, officers and any person serving at the request
of the corporation as a director, officer employee or agent of another
corporation, 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
the person's capacity as a director, officer, employee or agent of Holdings,
from and against expenses (including attorneys' fees), judgments, fines and
settlements arising from the action, suit or proceeding to the fullest extent
authorized by the DGCL. Section 145(a) of the DGCL provides that a
corporation may indemnify a director, officer, employee or agent if the
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. As permitted by the DGCL, the Certificate of incorporation
eliminates in specified circumstances the monetary liability of the directors
of Holdings for a breach of their fiduciary duties as directors.
AMENDMENTS TO GOVERNING DOCUMENTS. Stockholders of Holdings are entitled
to adopt, alter, amend, rescind or repeal provisions of the Holdings Bylaws
by the favorable vote of a majority of the stockholders present in person or
by proxy at a duly called meeting of stockholders at which a quorum is
present. The Holdings Board is also entitled to alter, amend, change or
repeal provisions of the Holdings Bylaws by majority vote. Generally, under
Section 242 of the DGCL, an amendment to
39
<PAGE>
DESCRIPTION OF RIGHTS OF MEMBERS OF ISMIE
FINANCIAL REPORTING. ISMIE is not required to provide the members with
any annual or quarterly income and expense statements or balance sheets.
ISMIE is required to file annual and quarterly financial statements prepared
in accordance with statutory accounting practices (SAP) with the Illinois
Insurance Department, which are open to public inspection. ISMIE provides to
members an annual report of its financial condition and results of
operations, prepared in accordance with GAAP and audited by independent
auditors.
BUSINESS COMBINATIONS. The Rules and Regulations of ISMIE do not contain
any provisions relating to business combinations. The Illinois Insurance Code
generally requires a vote of two-thirds of the members voting in person or by
proxy to approve a merger, consolidation or plan of exchange.
DESCRIPTION OF RIGHTS OF HOLDERS OF
HOLDINGS STOCK AFTER THE CONVERSION
the Certificate of incorporation requires adoption by the Holdings Board of a
resolution setting forth the proposed amendment and the approval of the
resolution by a majority vote of the common stock issued, outstanding and
entitled to vote.
FINANCIAL REPORTING. Holdings will file annual and quarterly reports
with the Securities and Exchange Commission and with the Nasdaq National
Market. Holdings will also provide to the holders of common stock annual and
quarterly reports of its financial condition and results of operations,
prepared in accordance with GAAP and, with respect to the annual reports,
audited by independent auditors. Following the conversion, ISMIE will file
annual and quarterly financial statements under SAP with the Illinois
Insurance Department.
BUSINESS COMBINATIONS. The DGCL generally requires that a majority of
the stockholders approve a merger, consolidation or the sale, lease or
exchange of all or substantially all of a corporation's property and assets.
The DGCL contains additional restrictions where the action or transaction is
with, or proposed by or on behalf of, an "interested stockholder" (defined
generally as a person owning 15% or more of Holdings' outstanding voting
stock). See "--Anti-takeover Provisions" and "Description of Capital Stock --
Statutory, Charter and Bylaw Provisions Which Could Have an Anti-Takeover
Effect."
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<PAGE>
DESCRIPTION OF RIGHTS OF MEMBERS OF ISMIE
ANTI-TAKEOVER PROVISIONS. As a reciprocal insurance exchange, ISMIE has
no capital stock or other transferable ownership interests and therefore
could not be acquired by a hostile bidder. The Board of Governors is divided
into three classes of directors, serving staggered three-year terms. As a
result, one third of the Board of Governors is elected each year. This
classified board provision could delay a majority of members who do not favor
the policies of the Board of Governors from removing a majority of the Board
of Governors for two years.
DESCRIPTION OF RIGHTS OF HOLDERS OF
HOLDINGS STOCK AFTER THE CONVERSION
ANTI-TAKEOVER PROVISIONS. Holdings is a Delaware corporation and is
subject to the provisions of Section 203 of the DGCL. In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning
15% or more of Holdings' outstanding voting stock) from engaging in a
"business combination" (as defined in Section 203) with Holdings for three
years following the time that person became an interested stockholder unless:
- before that person became an interested stockholder, the Holdings
Board approved the transaction in which the interested stockholder became an
interested stockholder or approved the business combination;
- upon completion of the transaction that resulted in the interested
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of Holdings outstanding at the time
the transaction commenced (excluding stock held by directors who are also
officers of Holdings and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held by
the plan will be tendered in a tender or exchange offer); or
- at or following the time on which that person became an interested
stockholder, the business combination is approved by the Holdings Board and
authorized at a meeting of stockholders by the favorable vote of the holders
of at least two-thirds of the outstanding voting stock of Holdings not owned
by the interested stockholder.
Under Section 203, these restrictions also do not apply to certain
business combinations proposed by an interested stockholder following the
announcement or notification of one of certain extraordinary transactions
involving Holdings and a person who was not an interested stockholder during
the previous three years or who became an
41
<PAGE>
DESCRIPTION OF RIGHTS OF HOLDERS OF
HOLDINGS STOCK AFTER THE CONVERSION
interested stockholder with the approval of a majority of Holdings' directors
or during a time when the restrictions in Section 203 did not apply, if that
extraordinary transaction is approved or not opposed by a majority of the
directors (but not less than one) who were directors before any person became
an interested stockholder in the previous three years or who were recommended
for election or elected to succeed the directors by a majority of the
directors then in office.
The Holdings Board of directors is divided into three classes of
directors, serving staggered three-year terms. The classified board
provisions could have the effect of discouraging a third party from making a
tender offer or otherwise attempting to gain control of Holdings. The
Certificate of incorporation of Holdings and its Bylaws also contain certain
provisions that may delay, defer or prevent a change of control of Holdings
and make removal of management more difficult. These provisions are intended
to
- improve the likelihood of continuity and stability in the composition
of the Holdings Board and in the policies formulated by the Holdings Board;
- discourage certain types of transactions which may involve an actual
or threatened change of control of Holdings;
- reduce the vulnerability of Holdings to an unsolicited proposal for a
takeover of we that does not contemplate the acquisition of all its
outstanding shares or an unsolicited proposal for the restructuring or sale
of all or part of Holdings; and
- discourage certain tactics that may be used in proxy fights.
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<PAGE>
DESCRIPTION OF RIGHTS OF HOLDERS OF
HOLDINGS STOCK AFTER THE CONVERSION
Moreover, the issuance of shares of preferred stock by Holdings (or the
issuance of rights to purchase shares) could be used to discourage an
unsolicited acquisition proposal. For instance, the issuance of a series of
preferred stock might (i) impede a business combination by including class
voting rights that would enable the holders to block a transaction or (ii)
facilitate a business combination by including voting rights that would
provide a required percentage vote of the stockholders. Also, under certain
circumstances, the issuance of preferred stock could adversely affect the
voting power of the holders of common stock.
The provisions described in "-- Meetings and Actions," "-- Board of
directors," "Election of Directors," "-- Removal of Directors," "--
Vacancies," and "-- Amendments to Governing Documents," together with the
ability of the Holdings Board to authorize the issuance of preferred stock
without further stockholder action, could delay or frustrate the removal of
incumbent directors or the assumption of control of Holdings by the holder of
a large block of common stock. These provisions could also discourage or make
more difficult a merger, tender offer or proxy contest even if a majority of
the stockholders might consider the event to be in their best interest. See
"Description of Capital Stock -- Statutory, Charter and Bylaw Provisions
Which Could Have an AntiTakeover Effect."
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<PAGE>
MARKET FOR COMMON STOCK
ISMIE, as a reciprocal insurance exchange, does not have any capital
stock. Holdings has been organized for the purpose of becoming the parent
company of ISMIE upon completion of the conversion. We have applied to have
the Holdings' common stock approved for listing, after completion of the
conversion, on the Nasdaq National Market under the symbol "ISME." We cannot
be sure that an active or orderly market for the common stock will develop
after listing or, if developed, will continue. Regardless of whether a public
market for the common stock develops, if a substantial number of shares of
common stock are sold by eligible members or any other stockholders following
the completion of the conversion, the market price of the common stock could
fall.
Although we have considered, and may consider in the future, an initial
public offering of Holdings' common stock, we cannot be sure that an initial
public offering will occur. If an initial public offering does not occur, it
is less likely that an active or orderly trading market will develop for
Holdings' common stock. The absence of an active and orderly trading market
could adversely effect the market price of the common stock after the
conversion. See "Risk Factors -- If an active or orderly trading market does
not develop, you may not be able to sell your shares promptly or at the
desired price."
DIVIDEND POLICY
The declaration and payment of dividends to holders of common stock will
be at the discretion of the Holdings Board and will be dependent upon our
financial condition, results of operations, cash requirements, future
prospects, regulatory restrictions on the payment of dividends to Holdings by
ISMIE and other factors considered relevant by the Holdings Board. We have
not made any determination whether we will pay dividends on the common stock
in the foreseeable future. We cannot be sure whether dividends will be paid
or, if paid initially, that they would continue to be paid in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." See "Comparison of Rights of
Members Before and After the Conversion -- Distributions."
Following completion of the conversion, Holdings will be an insurance
holding company whose assets will consist primarily of the outstanding shares
of the common stock of ISMIE. 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 ISMIE. The payment of dividends by ISMIE to Holdings will be restricted
by applicable insurance law. See "Risk Factors -- If we fail to comply with
insurance regulatory requirements, or if those requirements become burdensome
to us, we may not be able to operate profitably," "Business -- Regulation
- -- Regulation of Dividends from Insurance Subsidiaries".
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CAPITALIZATION
The information set forth in the table presented below is derived from
the consolidated financial statements and the related notes included in this
proxy statement/prospectus. The table presents the capitalization of: (1)
ISMIE and subsidiary at June 30, 1999; and (2) Holdings, adjusted to reflect,
on a pro forma basis as if the conversion had occurred as of June 30, 1999,
the effect of the conversion and the issuance of 10,000,000 shares of common
stock in the conversion to eligible members and 100,000 shares of common
stock to ISMIE Indemnity Company. The table should be read in conjunction
with the historical consolidated financial statements and related notes
included in this proxy statement/prospectus.
<TABLE>
<CAPTION>
At June 30, 1999
----------------------------------------
Actual As Adjusted
------------------ ------------------
(Dollars in Thousands)
<S> <C> <C>
Total debt.................................................... $ - $ -
Equity:
Preferred stock, $0.01 par value, 5,000,000
shares authorized; no shares issued and
outstanding................................................... - -
Common stock, $0.01 par value,
40,000,000 shares authorized; 10,100,000 issued and
10,000,000 outstanding, as adjusted (1)....................... - 100
Additional paid-in capital.................................... - 234,970
Policyholders' surplus/retained earnings...................... 235,070 -
Accumulated other comprehensive loss.......................... (6,311) (6,311)
--------- ---------
Total Equity............................................. $228,759 $228,759
--------- ---------
Total capitalization.......................................... $228,759 $228,759
========= =========
</TABLE>
(1) The 100,000 shares issued to ISMIE Indemnity Company in the conversion
are treated as issued but not outstanding under GAAP. See "The
Conversion -- Additional Aspects of the Merger Agreement and the
Conversion -- Issuance of Shares to ISMIE Indemnity Company."
FEDERAL INCOME TAX CONSEQUENCES OF THE CONVERSION
The following discussion is a summary of material federal income tax
consequences which are expected to result from the conversion and the related
transactions, and is based on the opinion
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of our tax counsel, Lord, Bissell & Brook. This summary is based on the
current provisions of the Internal Revenue Code of 1986, existing Treasury
Regulations and administrative rulings and court decisions, all of which
could change with retroactive effect. The discussion is limited to those
persons who are citizens or residents of the U.S., corporations or
partnerships organized in or under the laws of the U.S., and an estate or
trust, the income of which is taxable by the federal government regardless of
its source.
Lord, Bissell & Brook's opinion is based on current law, assumptions
set forth in the opinion, representations from ISMIE, Holdings and ISMIE
Indemnity Company and other information, data, documentation and materials
they relied on. An opinion of counsel is not binding on the Internal Revenue
Service, and therefore we cannot be sure that this opinion would not be
challenged by the Internal Revenue Service or would be sustained by a court
if it were challenged.
It is impractical to comment on all aspects of federal, state, local
and foreign laws that may affect the tax consequences of the conversion as
they relate to each eligible member. This discussion does not address any
aspect of foreign, state or local law or federal estate or gift tax
considerations. In addition, the discussion does not address how the federal
income tax rules affect all of the possible types of eligible members, some
of whom (e.g., tax-exempt entities) may be taxable under special rules not
discussed in this document.
THE DISCUSSION SET FORTH BELOW ADDRESSES ONLY THE SIGNIFICANT
FEDERAL INCOME TAX CONSEQUENCES OF GENERAL APPLICATION WHICH ARE EXPECTED TO
RESULT FROM THE CONVERSION. ELIGIBLE MEMBERS ARE URGED TO CONSULT THEIR TAX
ADVISORS TO DETERMINE THE TAX CONSEQUENCES OF THE CONVERSION, AND HOLDING AND
DISPOSITION OF COMMON STOCK TO BE RECEIVED IN CONNECTION WITH THE CONVERSION,
INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN
INCOME AND OTHER TAX LAWS WITH RESPECT TO THEIR OWN PARTICULAR CIRCUMSTANCES.
GENERAL
Assuming that the conversion and the related transactions will take
place as described in this proxy statement/prospectus and that the factual
matters represented by ISMIE are true and correct, it is the opinion of Lord,
Bissell & Brook that (1) the conversion will constitute a reorganization
within the meaning of Section 368(a) of the Code, (2) eligible members will
recognize no gain or loss for federal income tax purposes by reason of the
exchange of their membership interests for the common stock, and (3) no gain
or loss will be recognized by ISMIE, Holdings or ISMIE Indemnity Company, as
further discussed below.
ELIGIBLE MEMBERS
Eligible members will not recognize gain or loss for federal income
tax purposes on their exchange of membership interests for common stock in
the conversion. The tax basis in their common stock will be equal to their
tax basis in their exchanged membership interests, which is deemed to be zero
for federal income tax purposes. The holding period for the common stock
received by an eligible member will include the holding period for the
exchanged membership interest.
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<PAGE>
On a sale or other taxable disposition of common stock issued in the
conversion, eligible members will recognize gain in an amount equal to the
amount of cash and fair market value of any property received upon the sale
or other taxable disposition minus their tax basis in that common stock.
Since their tax basis in the common stock would be zero, as discussed above,
the entire amount of cash and fair market value of any property received
would be the amount of taxable gain. This gain will be long-term capital gain
if the holding period of the common stock, which includes the holding period
of the exchanged membership interest, is more than one year.
Policies issued by ISMIE before the conversion will not be treated
as reissued or newly issued in exchange for existing policies as a result of
the conversion. Accordingly, the federal income tax rules that currently
apply to each policy will generally continue to apply after the conversion.
ISMIE AND ISMIE INDEMNITY COMPANY
Subject to the discussion below under "-- Issuance of Rules Dealing
with Inversions," no gain or loss will be recognized by ISMIE or ISMIE
Indemnity Company as a result of the conversion. ISMIE Indemnity Company's
tax basis in the assets of ISMIE acquired in the merger will be equal to the
tax basis of those assets in the hands of ISMIE immediately prior to the
merger.
ISSUANCE OF RULES DEALING WITH INVERSIONS
There is a pending project at the Internal Revenue Service dealing
with the tax consequences of a transaction involving an "inversion" of
members of an affiliated group (I.E., the positions of the members are
inverted or otherwise reversed). The Service has announced in Notice 94-93
that any Treasury Regulations addressing inversion transactions will apply to
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,
Lord, Bissell & Brook does not believe that income or gain recognition should
be required in connection with the conversion and the related transactions.
POSSIBLE POLICYHOLDER DIVIDEND TREATMENT
You should be aware that a federal court of appeals recently affirmed a
federal district court decision which rejected a claim by a life insurance
company that its distribution to its policyholders of stock and cash under
its plan of demutualization should be treated as a policyholder dividend
distribution, rather than as part of an exchange. UNUM CORP. V. UNITED
STATES, 929 F. Supp. 15 (D. Me. 1996), AFF'D, 130 F.3d 501 (1st Cir. 1997),
CERT. DENIED, 119 S. Ct. 42 (1998). If the distribution were treated for
federal income tax purposes as a dividend distribution, ISMIE would be
entitled to a policyholder dividend deduction equal to the amount of cash and
the fair market value of any stock distributed, and each policyholder
receiving stock or cash would likely be treated for federal income tax
purposes as if the policyholder had received a policyholder dividend equal to
the
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<PAGE>
amount of cash or the fair market value of the stock received. Consistent
with the holding in UNUM CORP., ISMIE plans to treat the common stock
distributed in the conversion as issued in exchange for the membership
interests in a tax-free reorganization and not as a policyholder dividend.
In the unlikely event that any portion of the consideration received by
an eligible member in the conversion were treated as a policyholder dividend,
the normal tax consequences of the receipt of a policyholder dividend would
apply rather than the rules summarized above. The tax basis of the common
stock received in the conversion would be equal to the fair market value of
that stock at the effective time of the merger, and the holding period of the
exchanged membership interest would not be included in the holding period of
the common stock received.
TAXPAYER IDENTIFICATION NUMBER
It is important that you complete, sign and return the taxpayer
identification card accompanying your proxy card. For most individuals, your
taxpayer identification number is your Social Security number. ANY ELIGIBLE
MEMBER WHO FAILS TO COMPLETE, SIGN AND RETURN THIS CARD MAY FACE A $50
PENALTY AND WE MAY BE REQUIRED TO WITHHOLD FOR FEDERAL INCOME TAXES 31% OF
ANY CASH PAYMENT, INCLUDING ANY FUTURE DIVIDENDS ON COMMON STOCK, YOU WOULD
OTHERWISE RECEIVE. This 31% withholding is not an additional tax and any
amount withheld may be claimed on the your federal income tax return as a
credit against the your federal income tax liability.
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<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table shows selected financial and operating data for
ISMIE and subsidiary. The selected income statement data (other than direct
and assumed premiums written) set forth below for each of the years in the
three-year period ended December 31, 1998 and the selected balance sheet data
as of December 31, 1998 and 1997 are derived from the consolidated financial
statements audited by Ernst & Young LLP, independent auditors, included
elsewhere in this proxy statement/prospectus. The selected financial data for
the six month periods ended June 30, 1999 and 1998 are derived from unaudited
financial statements which management believes incorporate all of the
adjustments necessary for a fair presentation of the financial condition and
results of operations for those periods. The selected income statement data
(other than direct and assumed premiums written) for the years ended December
31, 1995 and 1994 and the selected balance sheet data as of December 31,
1996, 1995 and 1994 are derived from audited financial statements of ISMIE
and subsidiary. All selected income statement and balance sheet data are
presented in accordance with GAAP, unless otherwise indicated. You should
read all of the financial statements and related notes beginning at page F-1
of this proxy statement/prospectus in order to fully understand ISMIE's
financial situation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
As of or for the Six
Months Ended June 30
As of or for the Year Ended December 31,
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(in thousands, except per share, ratios and percentage data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement
Data:
Premiums written
Direct and
assumed premiums
written $76,165 $73,384 $179,668 $196,152 $207,578 $197,241 $203,756
======= ======= ======== ======== ======== ======== ========
Net premiums
written $64,456 $43,068 $134,215 $104,953 $85,532 $96,809 $140,504
======= ======= ========= ======== ======== ======== ========
Direct and assumed
premiums earned $82,803 $86,804 $177,451 $188,866 $207,857 $221,491 $200,285
Reinsurance
premiums ceded (12,983) (30,315) (45,453) (91,199) (122,040) (100,432) (63,252)
------- ------- --------- -------- -------- -------- --------
Net premiums earned 69,820 56,489 131,998 97,667 85,817 121,059 137,033
Net investment
income 24,246 22,689 45,361 46,663 46,436 50,927 49,140
Other income 0 0 5,095 0 0 0 0
49
<PAGE>
<CAPTION>
As of or for the Six
Months Ended June 30
As of or for the Year Ended December 31,
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(in thousands, except per share, ratios and percentage data)
<S> <C> <C> <C> <C> <C> <C> <C>
Realized investment
gains (losses) 388 69 (104) (401) 2,406 322 12,141
------- ------- --------- -------- -------- -------- --------
Total revenues 94,454 79,247 182,350 143,929 134,659 172,308 198,314
------- ------- --------- -------- -------- -------- --------
Losses and loss
adjustment expenses 77,728 64,518 153,660 117,816 105,403 177,273 210,046
Other operating
expenses 8,647 7,289 16,222 10,878 6,296 8,793 11,870
------- ------- --------- -------- -------- -------- --------
Total expenses 86,375 71,807 169,882 128,694 111,699 186,066 221,916
------- ------- --------- -------- -------- -------- --------
Income (loss) before
income taxes 8,079 7,440 12,468 15,235 22,960 (13,758) (23,602)
Income taxes (benefit) 716 314 (257) (3,206) 19,541 6,007 (8,564)
------- ------- --------- -------- -------- -------- --------
Net income (loss) $7,363 $7,126 $12,725 $18,441 $3,419 ($19,765) ($15,038)
======= ======= ========= ======== ======== ======== ========
Balance Sheet Data:
Total investments and
invested cash $854,400 $746,690 $887,661 $787,333 $780,209 $861,428 $780,362
Total assets 1,185,419 1,122,417 1,211,428 1,246,506 1,287,514 1,362,798 1,263,586
Members' Equity 228,759 229,451 242,690 220,169 193,336 200,969 175,200
Additional Data:
Gross ratios (GAAP)
(1):
Loss & LAE 106.5% 109.2% 94.5% 95.1% 77.4% 128.6% 142.0%
Expense 10.7% 9.7% 10.1% 8.8% 7.4% 6.4% 6.2%
Combined 117.2% 118.9% 104.6% 103.9% 84.8% 135.0% 148.2%
Net ratios (GAAP) (2):
Loss & LAE 111.3% 114.2% 116.4% 120.6% 122.8% 146.4% 153.3%
Expense 12.4% 12.9% 12.3% 11.1% 7.3% 7.3% 8.7%
Combined 123.7% 127.1% 128.7% 131.8% 130.2% 153.7% 161.9%
Pro forma earnings
per share (3) $ 0.74 $1.27
Pro forma book value
per share $22.88
50
<PAGE>
<CAPTION>
As of or for the Six
Months Ended June 30
As of or for the Year Ended December 31,
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(in thousands, except per share, ratios and percentage data)
<S> <C> <C> <C> <C> <C> <C> <C>
Pro forma book value
per share, net of FAS
115(4) $23.51
Retention rate (5) 95.5% 97.4% 86.0% 90.1% 90.8% 92.4% 93.4%
Investment yield (6) 5.52% 5.89% 5.60% 6.07% 5.77% 6.10% 6.00%
Statutory combined
ratio (7) 124.7% 131.1% 128.5% 131.0% 130.2% 155.5% 161.9%
Statutory surplus $195,088 $178,411 $187,224 $172,713 $158,622 $134,432 $135,339
</TABLE>
(1) Gross ratios represent the ratios of losses and expenses, before
deducting reinsurance recoverables, to direct and assumed premiums
earned, before reinsurance premiums ceded.
(2) Net ratios represent the ratios of losses and expenses, after deducting
reinsurance recoverables, to net premiums earned, after reinsurance
premiums ceded.
(3) Gives effect in all periods to the issuance of approximately 10,000,000
shares of common stock to eligible members. The 100,000 shares of
common stock issued to ISMIE Indemnity Company are not considered
outstanding for purposes of determining the per share amounts.
(4) ISMIE has designated its entire fixed maturity and equity security
investment portfolio as "available for sale". Under FAS 115, members'
equity reflects unrealized market appreciation or depreciation on these
investments, net of deferred taxes thereon. For purposes of this
calculation, the unrealized market appreciation or depreciation, net of
deferred taxes, has been removed from members' equity.
(5) Represents the percentage of policyholders insured by ISMIE at the
beginning of the year that continued to be insured by ISMIE at the end
of the period.
(6) Represents the yield as determined for statutory reporting purposes
which, for any period, equals annualized investment income, excluding
realized capital gains or losses and net of expenses, divided by the
average of beginning and ending cash and investments at statement value
plus accrued investment income.
(7) Represents the sum of the statutory loss and expense ratios.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and the related notes appearing elsewhere
in this proxy statement/prospectus.
GENERAL
The financial results for medical malpractice insurers are
influenced by a number of factors, many of which are beyond ISMIE's control.
These factors include, among other things, changes in frequency and severity
of claims, changes in tort laws (tort reform), judicial decisions and changes
in general economic conditions. The availability of medical malpractice
insurance, or the industry's underwriting capability, is determined primarily
by historical underwriting results, investment returns, available capital and
the perception of adequate pricing.
Historically, the financial performance of medical malpractice
insurers has tended to fluctuate in cyclical patterns characterized by
periods of greater competition in pricing and underwriting terms and
conditions followed by periods of capital shortage and lesser competition. In
a soft market, competitive conditions can result in premium rates and
underwriting terms and conditions which may be below profitable levels. For a
number of years, medical malpractice insurers in Illinois and elsewhere have
faced a soft insurance market. We cannot be sure whether or when these
conditions will improve.
Our financial results in recent years have been influenced by a
number of factors, including:
- the need to institute premium discounts to compete
effectively for business from physician groups;
- reductions in the number of insureds as a result of stricter
underwriting and increased competition;
- claims trends and the timing of reported claims as a result
of earlier tort reform efforts;
- changes in reinsurance strategies designed to stabilize
operating results and protect our surplus position;
- changes in our deferred income tax account; and
- recent increases in the use of independent brokers to sell
our coverages.
PREMIUM TRENDS. The growth of managed healthcare and the
consolidation of healthcare providers have led to major changes in the
medical malpractice insurance industry, which we believe will continue in the
future. Practice management organizations, hospitals, administrators
52
<PAGE>
of large group practices and other organizations increasingly influence the
purchasing decision for the medical malpractice insurance coverages of their
affiliated physicians. At the same time, the medical malpractice insurance
market in Illinois has become even more competitive. In response to these
challenges, ISMIE has designed and is marketing its Clinic Option program,
which provides premium discount opportunities and risk management programs to
physician groups with favorable loss experience. This has resulted in
reductions in direct premiums written over the past three years. ISMIE
expects that it will continue to offer experienced based discount programs in
the future. We implemented a general rate increase of 12% in mid year 1998,
targeted at those insureds with less favorable loss experience, which partly
offset the impact of premium discounts. Earlier, we had increased our rates
9% in 1995, 15% in 1994 and 5% in 1993. Over the past three years, premium
decreases also reflect reductions ranging from 2% to 6% in the number of
insureds per year as a result of ISMIE's application of stricter underwriting
criteria as well as increased competition.
CLAIMS TRENDS. Our claims cost trends have improved in recent years
following high claims costs in the early 1990's. Claims frequency increased
significantly in 1995 just before passage of tort reform legislation in
Illinois. We believe this earlier than expected surge of claims resulted in a
corresponding reduction in reported claims for the next two years,
particularly in 1996 when losses and loss adjustment expenses dropped to
$105.4 million from $177.3 million in 1995 and our gross GAAP loss and LAE
ratio dropped to 77.4% from 128.6%. Even though the Illinois legislation was
subsequently reversed, we have continued to experience lower claims frequency
as compared to historical patterns. It is uncertain whether this reduction in
claims frequency will continue.
REINSURANCE. Consistent with industry practice, we have
traditionally reinsured a portion of our risks, ceding to reinsurers an
agreed portion of the risk and paying to the reinsurers a premium based on
the direct premiums received on the reinsured policies. We determine the
nature and amount of our reinsurance based on our evaluation of the risks we
have insured, consultation with our reinsurance brokers and consulting
actuaries and market conditions. Our strategy is to obtain reinsurance to
protect against unexpected increases in severity and frequency in any given
year. From 1995 to 1997, as a result of improved operating results, we
steadily increased our retention under our excess of loss reinsurance program
from a retention level of $500,000 to $1 million per medical incident. For
the policy year July 1, 1995 to June 30, 1996, we purchased reinsurance from
Cologne Re (Dublin), which provided a combination of quota share and stop
loss protection. We entered into the Cologne Re treaty after consulting with
our internal and external actuaries. This treaty was designed to provide us
additional protection against higher than expected claims frequency for the
periods covered, such as that experienced in the first half of 1995, and
reduce the impact of increased claims exposure as we increased our net
retention levels under our excess reinsurance programs. We entered into
similar treaties with Cologne Re for both the 1996/1997 and1997/1998 policy
years. During the period the treaties were in effect, we substantially
increased our statutory surplus from $110.1 million to $178.4 million and our
claims frequency improved significantly. Accordingly, we commuted the first
two treaties and recovered cash of $81.1 million in 1997 and $79.1 million in
1998. There was no premium ceded to Cologne Re after June 30, 1998.
53
<PAGE>
DEFERRED TAX AMOUNTS. Our deferred tax assets and liabilities arise
because of differences between the requirements of the tax laws and the
recognition and measurement requirements of financial accounting standards.
Deferred tax assets and liabilities are determined based on the differences
between the tax and financial reporting bases of the assets and liabilities
and are measured using the applicable tax rates in effect. The principal
component of our total deferred tax asset relates to tax basis loss reserve
discounting. Note 4 of Notes to the Consolidated Financial Statements
provides a summary of all the components of our deferred tax assets and
liabilities. Under financial accounting standards, we are required to assess
the need for a valuation allowance related to the deferred tax assets. A
valuation allowance must be established if it is "more likely than not" that
the deferred tax assets will not be realized. Future realization of deferred
tax assets ultimately depends on sufficient taxable income over certain time
periods.
We established a valuation allowance of $14.4 million in 1995 based on
our analysis of the future realization of the deferred tax assets at December
31, 1995. The valuation allowance was then reviewed and changed as follows for
the years ended December 31, 1996, 1997 and 1998, respectively:
Increase (Decrease)
In Valuation Allowance
----------------------
1996 $8,914,000
1997 ($8,597,000)
1998 ($4,901,000)
The establishment of the valuation allowance and subsequent changes to the
balance had a significant impact on our income tax provision and net income
for the years 1995 through 1998.
Our analysis to determine the amount of the valuation allowance
considered a number of sources of taxable income that, if available, provide
evidence that supports the realization of the deferred tax assets. These
sources were generally consistent each year and can be summarized as follows:
- Taxable income in prior carryback years.
- Taxable income from reversals of existing taxable temporary
differences.
- Expected future taxable income.
In each of the years 1995 through 1998, the principal factor we
considered when determining the balance of the valuation allowance was
expected future taxable income. When we established the initial valuation
allowance in 1995, we had experienced three consecutive years of pre-tax
financial reporting basis losses and also net operating losses for tax
purposes. Although these losses were caused by one-time events (principally
reserve strengthening in 1993 and 1994 and the front loading of claims due to
the passage of tort reform in Illinois in 1995), we believed at that time
that there was uncertainty over the future realization of the deferred tax
assets at
54
<PAGE>
December 31, 1995. In 1996, we reported significant improvement in our
pre-tax financial reporting basis results, but continued to have a loss for
income tax return purposes. The continuing income tax return loss was the
principal negative evidence that contributed to the increase in the valuation
allowance in 1996. For 1997 and 1998, we experienced positive pre-tax
financial reporting basis results and also reported taxable income. These
factors were considered in our analysis of our ability to produce future
taxable income. This positive evidence was the principal reason we were able
to reduce the valuation allowance in 1997 and 1998. For further information
about our deferred tax assets and liabilities, see Note 4 of Notes to the
Consolidated Financial Statements.
INCREASED USE OF BROKERS. The growth of managed healthcare and
consolidation of healthcare providers have led to changes in how we market
our insurance coverages. Historically, because of our relationship with the
Medical Society, we did not rely on brokers to sell policies. Insurance sold
to physicians insured through larger organizations is increasingly sold
through brokers and our strategy is and will continue to be to strengthen our
broker relationships to expand our business through programs such as the
Clinic Option program. Independent brokers produce approximately 32% of our
premiums written. Increased use of brokers will continue to increase
marketing expense, but we will continue to utilize our rigorous expense
controls which we believe have been successful to date.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
PREMIUMS. Direct premiums written increased $2.8 million to $76.2
million for the six months ended June 30, 1999 from $73.4 million for the
same period in 1998, due primarily to a small increase in the number of
insured physicians. Net premiums earned increased $13.3 million to $69.8
million for the six months ended June 30, 1999 from $56.5 million for the
same period in 1998. This increase was due to the reduction in ceded premiums
associated with the termination of the quota share reinsurance program.
NET INVESTMENT INCOME. Net investment income increased $1.5 million
to $24.2 million for the six months ended June 30, 1999 from $22.7 million
for the same period in 1998. Average invested assets for six months ended
June 30, 1999 were 14.0% higher than the same period in 1998, due primarily
to funds received from commuting a portion of the quota share reinsurance
program. The overall pre-tax investment yield was 5.52% for the six months
ended June 30, 1999, a decrease from a yield of 5.89% for the same period in
1998.
LOSSES AND LAE. Losses and loss adjustment expenses, net of
reinsurance, increased $13.2 million to $77.7 million for the six months
ended June 30, 1999 from $64.5 million for the same period in 1998. The
increase was due primarily to the reduction in losses ceded associated with
the termination of the quota share reinsurance program in 1998. The net loss
ratio decreased to 111.3% for the six months ended June 30, 1999 from 114.2%
for the same period in 1998. The reduction in the net loss ratio was
attributable primarily to a decrease in reported claims between these
periods. Because of the reinsurance in place during this period, management
believes it is also meaningful to examine the losses on our book of business
by analyzing the direct loss ratio.
55
<PAGE>
The direct loss ratio for the six months ended June 30, 1999 and 1998 was
106.5% and 109.2%, respectively, attributable primarily to a general decrease
in frequency of claims.
OTHER OPERATING EXPENSES. Other operating expenses increased $1.3
million to $8.6 million for the six months ended June 30, 1999 from $7.3
million for the same period in 1998. This was due primarily to a $0.8 million
decrease in the commission ceding allowance associated with the quota share
reinsurance program and increased expenses relating to the conversion.
Commissions paid to brokers as a result of increased brokerage transactions
increased somewhat for the first half in 1999 over the same period in 1998.
We believe another meaningful way to compare our operating expenses is by
looking at our direct expense ratio, before reinsurance transactions. On this
basis, direct expenses were 10.7% for the six months ended June 30, 1999, up
1.0 percentage point from 9.7% for the six months ended June 30, 1998.
FEDERAL INCOME TAXES. Our income tax expense was approximately $0.7
million for the six months ended June 30, 1999 compared to $0.3 million for
the same period in 1998. The difference between the effective tax rate and
the statutory rate relates principally to changes in the valuation allowance
established for deferred tax assets. The valuation allowance represents that
portion of the deferred tax assets for which it is more likely than not that
a tax benefit will not be realized. For more information, please see "-
General - Deferred Tax Amounts" above and Note 4 of Notes to the Consolidated
Financial Statements.
NET INCOME. Net income increased $0.3 million to $7.4 million for
the six months ended June 30, 1999 from $7.1 million for the same period in
1998. The increase in net income primarily reflects an increase in net
investment income, enhanced by an improvement in the combined ratio.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
PREMIUMS. Direct premiums written decreased $16.5 million to $179.7
million for the year ended December 31, 1998 from $196.2 million for the same
period in 1997. This decrease was due primarily to premium discounts
associated with the conversion of group practices to the Clinic Option
program. In addition, there was a small decrease in the number of insured
physicians for the year. Net premiums earned increased $34.3 million to
$132.0 million for the year ended December 31, 1998 from $97.7 million for
the same period in 1997. This increase was due to the reduction in ceded
premiums associated with our quota share reinsurance program.
NET INVESTMENT INCOME. Net investment income decreased $1.3 million
to $45.4 million for the year ended December 31, 1998 from $46.7 million for
the same period in 1997. The overall pretax investment yield was 5.60% for
the year ended December 31, 1998, a decrease from the yield of 6.07% for the
same period in 1997.
LOSSES AND LAE. Losses and loss adjustment expenses, net of
reinsurance, increased $35.9 million to $153.7 million for the year ended
December 31, 1998 from $117.8 million for the same period in 1997. The
increase was due primarily to a reduction in losses ceded under the quota
share reinsurance program in 1998. The net loss ratio decreased to 116.4% for
the year ended December 31, 1998 from 120.6% for the same period in 1997. The
reduction in the net loss ratio
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<PAGE>
was attributable primarily to a decrease in reported claims between these
periods. The direct loss ratio for the years ended December 31, 1998 and 1997
was 94.5% and 95.1%, respectively, attributable primarily to a general
decrease in frequency of claims.
OTHER OPERATING EXPENSES. Other operating expenses increased $5.3
million to $16.2 million for the year ended December 31, 1998 from $10.9
million for the same period in 1997. This was due primarily to a $0.5 million
increase in commissions paid to brokers as a result of increased broker
transactions, a $4.0 million decrease in the commission ceding allowance
associated with the quota share reinsurance program and expenses of $0.7
million related to the proposed conversion of ISMIE to a stock company. These
factors resulted in a 1.2 percentage point increase in the net expense ratio
to 12.3% for the year ended December 31, 1998 from 11.1% for the same period
in 1997. Our direct expense ratio, before reinsurance transactions, was 10.1%
for the year ended December 31, 1998, up from 8.8% for the year ended
December 31, 1997.
FEDERAL INCOME TAXES. Our income tax benefit decreased approximately
$2.9 million to $0.3 million for the year ended December 31, 1998 compared to
$3.2 million for the same period in 1997. The difference between the
effective tax rate and the statutory rate relates principally to changes in
the valuation allowance established for deferred tax assets. The valuation
allowance represents that portion of the deferred tax assets for which it is
more likely than not that a tax benefit will not be realized. For more
information, please see "- General - Deferred Tax Amounts" above and Note 4
of Notes to the Consolidated Financial Statements.
NET INCOME. Net income decreased $5.7 million to $12.7 million for
the year ended December 31, 1998 from $18.4 million for the same period in
1997. The decrease in net income primarily reflects an increase in net
premiums earned, at a combined ratio greater than 100%, as a result of a
reduction in ceded premiums under our quota share reinsurance program; a
slight increase in the net expense ratio; and the decrease in our income tax
benefit.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
PREMIUMS. Direct premiums written decreased $11.4 million to $196.2
million for the year ended December 31, 1997 from $207.6 million for 1996,
due primarily to premium discounts related to the conversion of group
practices to the Clinic Option program plus a small decrease in the number of
insured physicians. Net premiums earned increased $11.9 million to $97.7
million for the year ended December 31, 1997 from $85.8 million for 1996, due
to the reduction in ceded premiums associated with our quota share
reinsurance program.
NET INVESTMENT INCOME. Net investment income increased $0.3 million
to $46.7 million for the year ended December 31, 1997 from $46.4 million for
1996. A decrease of approximately 4% in average invested assets between
periods was offset by an increase in the overall pre-tax yield on investments
to 6.07% for the year ended December 31, 1997 from 5.77% for 1996. The
increase in yield resulted from a change in the portfolio composition that
added relatively more investment grade corporate bonds in lieu of lower
yielding U.S. treasury securities.
LOSSES AND LAE. Losses and LAE, net of reinsurance, increased $12.4
million to $117.8 million for the year ended December 31, 1997 from $105.4
million for 1996. The increase resulted primarily from an increase in
retention levels under our excess of loss reinsurance
57
<PAGE>
program, but was offset by a 4.5% decrease in reported claims. The net loss
and LAE ratio decreased 2.2 percentage points to 120.6% for the year ended
December 31, 1997 from 122.8% for 1996. The direct loss and LAE ratio for the
year ended December 31, 1997 and 1996 were 95.1% and 77.5% respectively. The
direct loss and LAE ratio in 1996 was 17.6% lower than in 1995 due to a
one-time favorable effect of a reduction in claims reported during 1996 after
a "frontloading" of claims experienced during 1995 immediately prior to the
passage of tort reform legislation in Illinois.
OTHER OPERATING EXPENSES. Other operating expenses increased $4.6
million to $10.9 million for the year ended December 31, 1997 from $6.3
million for 1996. This was due primarily to a $0.9 million increase in
commissions paid to brokers as a result of increased broker transactions and
a $3.3 million decrease in the commission ceding allowance associated with
the quota share reinsurance program. These factors resulted in a 3.8
percentage points increase in the net expense ratio to 11.1% for the year
ended December 31, 1997 from 7.3% for 1996. The direct expense ratio
increased to 8.8% for the year ended December 31, 1997 from 7.4% for 1996.
FEDERAL INCOME TAXES. The income tax benefit was $3.2 million for
the year ended December 31, 1997 compared to income tax expense of $19.5
million for 1996. The difference between the effective tax rate and the
statutory rate relates principally to changes in the valuation allowance
established for deferred tax assets. The valuation allowance represents that
portion of the deferred tax assets for which it is more likely than not that
a tax benefit will not be realized. For more information, please see "-
General - Deferred Tax Amounts" above and Note 4 of Notes to the Consolidated
Financial Statements.
NET INCOME. Net income increased $15.0 million to $18.4 million for
the year ended December 31, 1997 from $3.4 million for 1996. The increase in
1997 resulted primarily from an increase in our income tax benefit to $3.2
million for 1997 in contrast to an income tax expense of $19.5 million in
1996. Items offsetting this increase were a realized investment loss of $0.4
million for the year ended December 31, 1997 as compared to a gain of $2.4
million for 1996 and a $4.6 million increase in other operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of cash are from 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, and to purchase additional invested
assets. Historically, we have been successful in timing the maturities of our
fixed income investments to permit us to manage our cash flow and liquidity
in order to meet anticipated short-term and long-term payment of obligations.
We seek to maximize opportunities to earn interest on those funds that are
not immediately required to meet our obligations.
Prior to 1998, ISMIE's cash flow fluctuated due to reinsurance
transactions. The largest cash outflow came from premiums paid for the
purpose of quota share reinsurance program. Also, ISMIE made scheduled
premium payments in each year, reflecting the additional premiums due above
the deposits paid three years prior. Excluding these reinsurance
transactions, ISMIE would
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have shown net cash provided by operating activities of $12.9 million, $14.6
million and $39.6 million for the years 1998, 1997 and 1996, respectively.
In addition, effective July 1, 1998 ISMIE discontinued a reinsurance
program with Cologne Re (Dublin) which provided a combination of quota share
and stop loss protection. This program began July 1, 1995. ISMIE's improved
surplus position, along with recent favorable trends in claims frequency,
also enabled it to commute the first two years of this reinsurance program,
thereby recovering cash of $81.1 million in 1997 and $79.1 million in 1998.
The 1997/1998 treaty with Cologne Re remains in force.
ISMIE invests primarily in government-backed securities, and
securities that are A-rated or higher based on Standard & Poor's and Moody's
rating systems. The average overall effective maturity of ISMIE's portfolio
has consistently been slightly under five years, which approximates the
anticipated turnover rate of its loss reserves. To further improve liquidity,
ISMIE has maintained about 25% of its invested assets in U.S. treasury notes
and short-term investments. See "Business--Investment Portfolio."
Approximately 38% of our fixed maturity portfolio consists of
mortgage-backed and other asset-backed securities. These securities are
subject to prepayment risk and credit risk. During periods of declining
interest rates, mortgage-backed securities may be prepaid and as a result we
generally will be unable to reinvest the proceeds of any prepayment at
comparable yields. Conversely, during periods of rising interest rates,
prepayments are generally slow and mortgage-backed securities that have an
amortized value that is less than par may incur a decrease in yield or a loss
as a result of slower prepayments. Credit risk is the risk that the
securities may suffer a default. We manage the prepayment risk of our
mortgage-backed and asset-backed securities by concentrating those securities
in fifteen year U.S. agency pass through securities which are inherently less
volatile and have more stable average life and cash flow characteristics. We
manage credit risk by investing only in mortgage-backed and asset-backed
securities that are in U.S. agency securities or are AAA rated securities
where we believe the risk of loss of principal due to borrower defaults is
minimal. We do not own high risk mortgage-backed or other asset- backed
securities. Since all of our holdings are AAA rated, and short to
intermediate duration securities, we believe our mortgage-backed and other
asset-backed securities are readily marketable.
As a holding company, Holdings' assets will consist primarily of the
stock of ISMIE. The principal source of funds for Holdings will be dividends
from ISMIE and proceeds, if any, from the issuance of debt and equity
securities. ISMIE is and will be restricted by Illinois law in the amount of
dividends it can pay in relation to earnings or surplus, without consent of
the Illinois Insurance Department. ISMIE may pay dividends in any year,
without regulatory approval, to the extent of the greater of (1) 10% of its
statutory capital and surplus at the end of the preceding year or (2) its net
income for the preceding year. If ISMIE had been a stock insurance company on
December 31, 1998, the amount of dividends it would have been permitted to
pay during 1999 without approval from the Illinois Insurance Department would
have been approximately $18 million.
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Based on historical trends, market conditions and its business plan,
we believe that our sources of funds will be sufficient to meet our liquidity
needs in the foreseeable future. However, because economic, market and
regulatory conditions may change, we cannot be sure that our sources of funds
will be sufficient to meet these liquidity needs. Also, our short-term and
long-term liquidity needs may vary because of the uncertainties regarding the
timing of claims settlement.
EFFECT OF INFLATION
The primary effect of inflation on us relates to 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 our results cannot be accurately
known until claims are ultimately settled. Based on actual results to date,
we believe that loss and LAE reserve levels and our rate making process
adequately incorporate the effects of inflation.
YEAR 2000 ISSUES
We have completed our assessment of all internal information
technology systems that we believe could be significantly affected by the
Year 2000 issue. In February 1998, we completed the installation of new
systems to handle our policy processing requirements. We believe that these
systems are Year 2000 compliant because these systems are currently
processing new business and policy renewals with an effective date in 1999
and expiration date in the year 2000. We installed our claims processing
system in 1989 and designed it with a four digit year code field. Testing of
the claims processing system is ongoing to verify the system's overall Year
2000 compliance. We purchased our financial and accounting systems from third
party vendors. We have received vendor certification that the financial and
accounting systems are Year 2000 compliant. Completion of the user testing
phase for all significant systems is expected by mid- September, with all
remediated systems fully tested and implemented by the end of September. We
expect to complete all phases of our Year 2000 efforts by October 31, 1999.
We are gathering information about the Year 2000 compliance status
of its significant vendors and suppliers. We have received written
certification from approximately 95% of our vendors, service providers,
brokers and other business partners certifying as to the status of their Year
2000 compliance readiness. We are not aware of any vendor or supplier with a
Year 2000 compliance problem that would materially impact our results of
operations, liquidity, or capital resources. However, we have no means of
ensuring that those vendors or suppliers will be Year 2000 compliant. The
inability of vendors or suppliers to complete their Year 2000 resolution
process in a timely fashion could materially and adversely impact our
operations, liquidity or capital resources.
We are utilizing internal and external resources to reprogram or
replace, test, and implement the software modifications for Year 2000
compliance. We have incurred costs to date of approximately $80,000 and costs
are estimated to be less than $175,000 through the end of the project, which
is targeted for October 1999. These costs do not include expenditures
associated with installing new or upgraded systems as part of our ongoing
efforts to maintain and upgrade our information technology. We have
considered these costs in preparing our capital and operating
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budgets. Year 2000 compliance costs are being expensed as they are incurred.
We cannot be sure, however, that efforts will be completed within these
estimated costs and time periods. See "Risk Factors -- If our computer
systems or those of our vendors and suppliers do not work properly after
December 31, 1999, our operations will be disrupted."
We may also be adversely affected if Year 2000 issues result in
additional claims being made against our insureds. While we believe that our
risk of loss from Year 2000 issues is not extensive because of the relatively
small number of exposures that likely would be impacted by the Year 2000, we
cannot be sure about the degree of liability we might face because of those
claims.
RECENT ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
which was to be effective for fiscal years beginning after June 15, 1999. In
June 1999, the FASB issued SFAS No. 137 which deferred the effective date of
this statement to fiscal years beginning after June 15, 2000. Adoption of
this statement is not expected to have a significant impact on our financial
position or results of operations because we do not engage in any significant
derivative or hedging activities.
BUSINESS
OVERVIEW
Founded by the Illinois State Medical Society in 1976, ISMIE is the
largest provider of medical malpractice insurance in Illinois and is the
eleventh largest provider of medical malpractice insurance in the United
States based on direct premiums written. We currently insure approximately
8,800 Illinois physicians who practice alone or in medical groups, clinics or
other healthcare organizations. In addition, we offer insurance coverage to
approximately 775 corporate and partnership entities as well as a variety of
other healthcare providers.
For the six months ended June 30, 1999 our total revenue was $94.5
million and our net income was $7.4 million. As of June 30, 1999, we had
$1.19 billion of total assets, no debt outstanding and $228.8 million of
total equity. In 1998, A.M. Best upgraded our insurer financial strength
rating to "B++ (Very Good)." In 1999, Standard & Poor's upgraded our rating
to "BBB+ (Good)," citing our strong leading market position as a provider of
medical malpractice insurance in Illinois, and our strong capitalization.
Medical malpractice insurance, or medical professional liability
insurance, insures the physician 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, total medical malpractice premiums in the United
States in 1997 exceeded $5.7 billion. In Illinois, the fourth largest market
for medical malpractice insurance based on premiums written, approximately
$393.0 million of medical malpractice premiums were written in 1997 by
licensed insurance companies. Our share of the medical malpractice premiums
written in Illinois in 1997 by licensed insurance companies was approximately
50%. For the last five years, on average, we have had a policyholder
retention rate in excess of 90%.
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HISTORY AND STRUCTURE
ISMIE is an Illinois reciprocal insurance exchange organized in 1976
by the Medical Society to provide medical malpractice insurance to its
physician and other healthcare provider members. A reciprocal insurer is an
insurance company similar to a mutual insurance company but without corporate
form. Like a mutual company, a reciprocal is organized and operated for the
benefit of its members. Members of a reciprocal insure one another through a
commonly appointed attorney-in-fact, and the company generally is not
operated for profit. Earnings that ISMIE has generated through its history
have been used to increase its surplus, thereby increasing its capacity to
write more business and absorb losses. ISMIE was organized with capital
contributed by members in the form of guaranty fund certificates. These
certificates were redeemed before 1989.
The business of ISMIE is managed by its Board of Governors and by
its attorney-in-fact, Illinois State Medical Insurance Services, Inc., or
ISMIS. ISMIS was formed in July 1998 and is owned by ISMIE. Before July 1998,
the attorney-in-fact for ISMIE was a company owned by the Medical Society.
ISMIE plans to contribute the stock of ISMIS to Holdings just before the
conversion. After the conversion, ISMIS will continue to perform service
functions for ISMIE as a subsidiary of Holdings.
Holdings is a new Delaware corporation formed to be the publicly
held holding company for ISMIE after the conversion. Holdings was organized
in April, 1999 and has no operating history. Our principal executive and
business offices are located at 20 North Michigan Avenue, Suite 700, Chicago,
Illinois 60602-4890, and our telephone number is (312) 782-2749.
Since its organization in 1976 by the Medical Society, ISMIE and the
Medical Society have enjoyed a mutually beneficial relationship which has
cultivated the loyalty of Illinois physicians to ISMIE. We believe that our
leading market share for medical malpractice insurance in Illinois is due in
large part to the loyalty of our insured physicians. Over the past five
years, on average, we have had a policyholder retention rate in excess of
90%. We attribute this loyalty to:
- the high quality, personalized "Physician-First Service" we
provide;
- our traditional focus on the physician marketplace;
- our commitment to protecting the reputation of our insureds
and our aggressive defense of claims;
- our financial stability;
- our ability to customize product features and programs to fit
the needs of different customers; and
- our close relationship with the medical community, including
our longstanding relationship with the Medical Society.
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BUSINESS STRATEGY
We believe 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. We have
adopted a strategy which we believe will enable us to compete effectively,
improve profitability and create long-term growth, while maintaining
consistent coverage and market presence. Our strategy is to:
- maintain our strong relationship with our policyholders and
continue to provide superior service;
- expand geographically by increasing the number of states in
which we write policies;
- improve product offerings to include hospital coverage, our
"Physician Business Practice Liability (E&O/D&O)" insurance,
workers compensation insurance and employment practices
liability insurance;
- respond to market changes, including strengthening our
relationships with independent brokers and agents in order to
expand our Clinic Option program, while continuing to expand
our direct relationships with individual policyholders;
- maintain underwriting discipline in order to emphasize
profitability rather than premium volume;
- maintain operating expense below the industry average;
- continue to improve our financial ratings; and
- pursue acquisition and consolidation opportunities relating
to our core insurance business.
As part of this strategy, we have undertaken the conversion. We
believe that the conversion will improve our ability to achieve our strategic
goals by providing us:
- greater operating flexibility;
- access to the capital markets and opportunities to use our
stock for acquisitions; and
- a form of organization that has a higher degree of regulatory
certainty than we have as a reciprocal insurance exchange.
To implement our strategy, we have taken the following steps:
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MAINTAIN RELATIONSHIPS. To help assure a continued close relationship
with our policyholders and with the Medical Society, we intend to continue to
provide the superior service which we believe has fostered those
relationships. See "--Relationship with the Medical Society" and "Management
- -- Related Party Transactions."
GEOGRAPHIC EXPANSION. To initiate our geographic expansion beyond
Illinois, we have entered into a fronting relationship to write business in
other states. "Fronting" is a reinsurance arrangement where one insurance
company issues policies to specified insureds and then reinsures all or
substantially all of the risks on the insurance to another insurance company
for a fee or a portion of the profits on the business. This is a first step
toward our goal of expanding into the neighboring states of Wisconsin, Iowa,
Missouri, Kentucky, Indiana and Michigan. Eventually, we intend to become a
fully admitted carrier in these and possibly other states.
IMPROVED PRODUCT OFFERINGS. We are in the process of expanding our
product offerings to include employment practices liability, hospital
affiliated staff medical malpractice liability and workers compensation
insurance. We intend to market these products aggressively.
In 1998, we began a one year pilot program in conjunction with the
Illinois Provider Trust, an organization managed by a subsidiary of the
Illinois Hospital and Healthsystems Association, or the IHHA, which provides
hospital malpractice coverage for its members. Under this program, we offer a
combined hospital and affiliated professional staff medical malpractice
liability insurance program at three Illinois hospitals. We believe that
programs like this represent an increasing share of the market for
malpractice insurance and provide us with a significant area for future
growth. See "Business -- Products -- IPT Pilot Program."
Additionally, we recently began a relationship with the IHHA where
the Illinois Compensation Trust, another organization managed by a subsidiary
of the IHHA, acts as the managing general agent to administer a workers
compensation product marketed to physicians and physician organizations.
ISMIE acts as both a direct insurer and a reinsurer in this program. See
"Business -- Reinsurance --Reinsurance Assumed."
EXPANSION OF OUR CLINIC OPTION PROGRAM AND STRENGTHENING BROKER
RELATIONSHIPS. We believe 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 other organizations increasingly influence 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 these organizations will increase. We
believe that these organizations increasingly will seek well-capitalized
medical malpractice insurers that can provide a full range of products and a
high level of service.
In response to these challenges, we have designed and are
marketing our Clinic Option program, which provides discount opportunities
and risk management programs to physicians groups. We began our Clinic Option
program in 1992. It has expanded steadily since then and now covers
approximately 34% of all policyholders. Historically, because of our
relationship with the Medical Society, we have not relied on brokers to sell
policies. However, we believe that
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insurance sold to physicians insured through larger organizations
increasingly will be sold through independent brokers An important part of
expanding business through programs such as the Clinic Option program is
strengthening our relationships with independent brokers. As part of our
effort to foster relationships with brokers, we are now beginning to align
our broker commissions with market levels.
MAINTAINING UNDERWRITING DISCIPLINE. Our experience with, commitment
to and focus on medical malpractice insurance for over 20 years has allowed
us to develop a strong knowledge of the market and to build an extensive data
base of medical malpractice claims experience. We take advantage of this
specialized expertise in medical malpractice insurance to set premiums that
we believe are appropriate for exposures being insured. We have also adopted
more prospective underwriting guidelines that apply to insureds with evolving
adverse loss experience. This enables us to provide lower premiums or pricing
for those insureds who have the best loss experience, and minimize the
propensity for adverse selection within the insured base. As we expand our
business, we intend to maintain underwriting discipline and emphasize
profitability over premium growth.
CONTROL OF OPERATING EXPENSES. ISMIE's net expense ratio, defined as
other operating expenses as a percent of net premiums earned, has ranged from
7% to 12% over the last five years, remaining consistently below the industry
average for medical malpractice insurers, which management estimates ranged
from 15% - 18% for the same period. Although increased use of brokers in
writing group business has led to an increase in operating expenses, we will
continue to utilize the rigorous controls which have proved successful to
date. We believe we will be able to improve operating efficiencies if we
achieve our business strategy through the conversion.
IMPROVE STRONG FINANCIAL RATINGS. Our traditional goal has been to
continually improve our strong financial ratings through steady performance.
We believe that the conversion will provide us with increased corporate
flexibility and greater access to capital, and as a result will help us to
improve our financial ratings.
PURSUE STRATEGIC ACQUISITION OPPORTUNITIES. We believe that the
conversion will better position us to make strategic acquisitions by
providing greater access to capital as a source of financing and creating a
stock acquisition currency. We believe that consolidation will continue in
the medical professional liability insurance industry and that opportunities
to make strategic acquisitions may arise which could provide an effective way
to expand our business, product offerings and geographic scope.
PRODUCTS
ISMIE underwrites professional and related liability policy
coverages for physicians, physician medical groups and clinics, associated
healthcare professionals and other providers in the healthcare industry. Our
principal products are discussed below.
PHYSICIAN AND MEDICAL GROUP LIABILITY. ISMIE offers coverage for
both physicians who are sole practitioners and those who are part of a
medical group or clinic. The policy issued to physicians and medical groups
or clinics includes:
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- coverage for professional liability which arises out of
medical practice;
- a limited defendant reimbursement benefit which is payable
for attendance at certain depositions and trial; and
- a limited legal expense reimbursement benefit for proceedings
brought by a governmental disciplinary board.
Professional liability insurance provides protection against the liability of
physicians and their employees arising from an error in the diagnosis or
treatment of a patient's condition.
We issue our professional liability coverages primarily on a "claims
made" basis. We provide coverage for claims reported to us during the policy
period arising from incidents that occurred on or after the retroactive date
contained in the policy. We also offer "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 ISMIE's claims made form. We provide tail
coverage without additional charge for insured physicians who die or become
totally disabled during the coverage period of the policy and those who
retire from the practice of medicine after having been insured by ISMIE for
at least sixty consecutive months and who are also at least 55 years old. As
of July 1, 1999, free retirement tail coverage will be granted at any age, as
long as the insured physician has been insured with ISMIE for 10 years.
For individual physicians, we offer limits of insurance up to $2.0
million per person, with an aggregate policy limit of up to a $4.0 million
per person for all claims reported for each calendar year or other 12-month
policy period. The most common limit is $1.0 million per claim or occurrence,
with a $3.0 million aggregate policy limit. The defense reimbursement benefit
for governmental disciplinary proceedings is $25,000.
Our Clinic Option program provides various discount opportunities
and effective risk management programs to groups of physicians. Tail coverage
is available to physicians under the Clinic Option on the same basis as it is
to all of our insureds. Under the Clinic Option program, practice groups are
underwritten on a group basis instead of on a per physician basis. This
allows for experience rating. The Clinic Option program provides economies of
scale for both the physicians and for ISMIE by permitting underwriting and
pricing considerations to be made on a collective basis. Through the Clinic
Option program, ISMIE is able to offer competitive pricing while striving to
maintain underwriting discipline. Additionally, development of the Clinic
Option program has allowed us to maintain our relationship with physicians
regardless of changes in the way they organize their practice.
The Clinic Option limits are $1.0 million or $2.0 million per person
with a shared annual aggregate limit based on the number of physicians in the
group. The shared annual aggregate limit under the Clinic Option program is
generally less than the accumulated aggregate limit would be for a group of
doctors insured individually. At $1.0 million per person limits, the ratio of
the shared annual aggregate limit to the number of physicians in a group
ranges from 2.50 for a group of two physicians to .86 for a group of
ninety-nine physicians. At $2.0 million per person limits,
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the ratio ranges from 3.00 for a group of two to .91 for a group of
ninety-nine. These ratios decrease as the number of physicians in a group
increases beyond ninety-nine.
To date, substantially all of our premiums have been generated by
physician and medical group liability insurance.
OTHER COVERAGES. Other coverages, some of which we believe offer the
opportunity for significant growth, include the following:
- IPT PILOT PROGRAM. We recently began a one year pilot program
in conjunction with the Illinois Provider Trust, an
organization composed of 38 Illinois hospitals which is
managed by a subsidiary of the IHHA, to offer a combined
hospital and affiliated professional staff medical
malpractice liability insurance program at one Illinois
hospital. Due to the success of this venture, we have
expanded this pilot program to other hospitals within
Illinois.
- ICT PROGRAM. Earlier this year, we entered into a reinsurance
treaty with the Illinois Compensation Trust, another
organization managed by a subsidiary of the IHHA, under which
the Illinois Compensation Trust would act as the managing
general agent to market a workers compensation product to
physicians and physician organizations. ISMIE would act as
both a direct insurer and a reinsurer under this proposed
program. See "Business -- Reinsurance -- Reinsurance
Assumed."
- HEALTHCARE PROVIDER LIABILITY. We offer our professional
liability insurance to a variety of specialty provider
organizations, including outpatient surgery centers,
hemodialysis laboratories and associated healthcare
professionals. These policies include the standard
professional liability coverage provided to physicians and
medical groups. The policies generally are issued on a claims
made basis with the limits of liability up to those offered
to larger medical groups. The limits of coverage under our
healthcare provider policies are between $1.0 million and
$2.0 million each person, with a $3.0 million to $4.0 million
aggregate policy limits.
- PHYSICIAN BUSINESS PRACTICE LIABILITY (E&O/D&O). In 1995, we
introduced a policy that provides coverage for liability
arising out of the conduct of an insured's business
operations and for liability of directors and officers of an
organization. We designed the Physician Business Practice
Liability (E&O/D&O) product to address the need for coverage
in activities such as utilization review, credentialing, peer
review, quality assurance and other aspects of delivering
health care services in a managed care environment. In
addition, the product includes coverage for the liability of
directors and officers. We generally issue these policies on
a claims made basis. The limits of coverage under these
policies issued by ISMIE are between $1.0 million and $2.0
million.
- EMPLOYMENT PRACTICES LIABILITY INSURANCE. Together with NAS
Insurance Services, an underwriting manager for Lloyds of
London in the United States, we provide employment practices
liability insurance to physicians and physician organizations
and
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hospitals. Employment practices liability insures the
employer for suits brought by employees for wrongful
termination, harassment, and discrimination claims. The
limits of coverage range from $100,000 to $1.0 million per
occurrence.
- JOINT HOSPITAL RISK MANAGEMENT PROGRAMS. In 1990, we entered
into a joint program with a Chicago hospital on a pilot basis
under which ISMIE insureds who were members of the medical
staff were eligible for premium discounts. These premium
discounts were based on mandatory participation in risk
management, as well as participation in a joint defense
program.
Based upon the success of this initial joint program, other
hospital medical staffs requested participation in a joint
program with ISMIE. In 1995, we began joint programs with two
other Chicago-area hospitals. In 1996, we added two downstate
hospitals and a physician-hospital organization. We now have
10 similar programs in operation, affecting over 600
physician policyholders.
Each of these joint programs has varying discount levels,
depending on whether they require risk management
participation of members and their participation in a joint
defense program. Although not all programs have agreed to
joint defense, all of the joint programs have mandatory risk
management participation as an element of the program.
MARKETING AND POLICYHOLDER SERVICES
We employ several strategies for marketing our products and
providing policyholder services. We market our products to physicians,
physician groups, group managers and other key decision-makers within a group
principally through recommendations from our large existing policyholder
base, advertisements in medical journals and other publications, seminars on
healthcare and risk management topics for physicians, and direct mail
solicitation.
As part of our marketing and service efforts, we also maintain the
ISMIE network of physician policyholders at most hospitals in Illinois. We
developed the ISMIE network in the mid-1980's to promote personal physician
representation of ISMIE at the hospital level and to foster advocacy and
communication between ISMIE and its policyholders. Currently, the ISMIE
network has approximately 180 physician representatives. These ISMIE
representatives are physicians at each hospital who have volunteered to be a
local informational liaison between their colleagues and ISMIE. They maintain
an awareness of new and existing ISMIE products and programs and assist in
keeping their local physician colleagues up-to-date regarding them. In
addition, they are asked to report back to ISMIE any questions or concerns
that policyholders have. ISMIE uses this information to identify and address
policyholder concerns.
In addition to these direct marketing channels, we sell our products
through independent brokers who currently produce approximately 32% of our
direct premiums written. Larger physician groups and clinics frequently
prefer brokers over direct solicitation when they purchase professional
liability insurance, and we believe that our broker relationships are
important to our ability to grow in that market segment.
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The following pie chart summarizes our physician and medical group
professional liability direct premiums written for the year ended
December 31, 1998:
[GRAPHIC PIE CHART]
43.8% Group with less than ten physicians
41.6% Sole Practitioner Physicians
14.8% Group with ten or more physicians
Over the past five years, direct premiums written attributable to
sole practitioner physician members decreased slightly from 44.9% at December
31, 1993 to 41.6% at December 31, 1998. Group coverage increased
proportionately. Over this period, direct premiums written under our Clinic
Option program increased steadily from 3% at year end 1993 to over 28% at
year end 1998.
We regularly provide account information to all insureds and
maintain relationships with all policyholders insured by ISMIE. Each insured
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 larger physician group
and clinics, we have a service team composed of underwriting, risk management
and claims management representatives, each of whom the policyholder may
contact directly for prompt response.
In addition, through a formal outreach program, we present seminars
and communication forums at the local level. Through this program, our
representatives present workshops and exhibits during various specialty and
other healthcare related organization meetings. This provides an effective
communication vehicle for information about our products and services.
PREMIUM RATES AND DISCOUNT PROGRAMS
Through our own actuarial staff and independent actuaries, we
establish rates and rating classifications for our insured physicians and
clinics. Rates are based on loss and LAE experience that ISMIE has developed
since 1976. Based on our large policyholder base and the length of time we
have been in business, we believe we have established the largest database of
experience of any professional liability insurer in Illinois. ISMIE has
various rating classifications based on medical specialty, practice location,
years in practice and limits of coverage. We also offer various
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discount programs, including discounts for part-time practice, newly
practicing physicians, loss free physicians based on number of years without
losses, and group practice. Approximately 70% of all of our active
policyholders currently qualify for the loss free discount. Additional
discounts are available to qualifying groups based on favorable loss
experience through the Clinic Option program. Risk management discounts are
awarded to qualified insureds who attend risk management programs. Surcharges
and debit charges may also be given to insureds based on unfavorable loss
experience.
We set rates annually and file them with the Illinois Insurance
Department. We implemented general rate increases of 12% in 1998, 9% in 1995,
15% in 1994 and 5% in 1993. Where warranted by favorable loss experience,
changes were made to discount programs to offset a portion of the rate
increase. These rate actions did not have a material effect on policyholder
retention.
ISMIE has not paid dividends to its policyholders since 1991. We
believe that policyholders prefer receiving premium credits through discounts
rather than receiving dividends. We also believe that discounts are a better
way to provide rewards for favorable loss experience of an insured.
UNDERWRITING
Our underwriting division 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 our coverages. In addition, the division provides extensive
support for our marketing activities, including sales presentations to both
existing and prospective policyholders, outreach activities and policyholder
services. See "-- Marketing and Policyholder Services."
Our underwriting division consists of thirty professional and
support staff. All of the professional staff is involved in underwriting
professional liability coverage for physicians and their employees. However,
a select number specialize in underwriting employment practices liability
insurance and the Physician Business Practice Liability (E&O/D&O) product.
We follow strict procedures for the issuance of all professional
liability policies. We require each applicant or member of an applicant
medical group to provide proof of medical licensing and complete a detailed
application that provides a personal and professional history, the type and
nature of the applicant's professional practice, information relating to
specific practice procedures, hospital and professional affiliations and a
complete history of any prior claims and incidents.
We perform a continuous process of re-underwriting our insureds. We
develop information concerning physicians with large losses, a high frequency
of claims or unusual practice characteristics is developed through online
claims and risk management reports. Beginning in 1999, we plan to send
current practice questionnaires to approximately one-third of our insureds
each year. Each insured should receive a current practice questionnaire
approximately every three years. These questionnaires will request
information similar to that
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<PAGE>
submitted in connection with the original application for insurance. We
designed the questionnaires 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.
The underwriting division is assisted by the Physician Review and
Evaluation Panel (PREP) which is composed of nine practicing physicians who
are insured by ISMIE. Members of PREP are not employed by us, but receive
compensation for their services on the panel. PREP provides medical expertise
to the underwriting process. The panel meets monthly and reviews underwriting
profiles which include information regarding practice patterns and
relationships, overall loss experience, details of significant claims, loss
ratios and frequency ratios. A review by PREP may result in mandatory risk
management, continuing medical education, coverage restrictions, surcharges
or non-renewal. Physicians have the right to seek reconsideration of some
actions by PREP. We have found that physician input in the underwriting
process is often helpful in fairly judging exposure to malpractice risk and
improving the practice characteristics of the insured.
RISK MANAGEMENT SERVICES
The risk management department provides a variety of educational
activities for all policyholders in an effort to minimize and prevent losses
and supplement our marketing efforts. Activities are directed in three
general areas: those that are of general interest to all policyholders, those
issues that are specialty-specific, and activities designed as remedial
education for identified policyholders.
Among the general interest activities are:
- risk management seminars for both physicians and their office
staffs that we conduct throughout Illinois;
- self-study programs designed to educate physicians in risk
management principles;
- audio and videotapes on risk management topics and litigation
support; and
- written pamphlets and brochures that address general and
specific risk management topics.
Specialty-specific activities are identified and designed by
designated subcommittees composed of physicians in the designated specialty
areas. By reviewing specialty-specific claims, these subcommittees develop
educational materials, including seminars, pamphlets and advisories to help
each policyholder evaluate and implement risk management activities that are
designed to address their specific practice needs.
We also make available educational activities to policyholders who
require assistance in specifically identified areas. Among these activities
are:
- on-site office assessments, with specific recommended
improvement strategies;
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<PAGE>
- small group workshops designed to address general, as well as
specific problem areas; and
- access to other general interest materials that are
designated to be helpful to the individual policyholder.
Many of our educational programs have been approved for continuing
medical education credit, which is required for renewal of medical licenses
in Illinois.
CLAIMS
Our claims department is responsible for:
- selecting and assigning defense counsel;
- establishing injury estimates which we use in developing
reserves for loss and LAE, directing the defense of each
claim while weighing objective and subjective issues to
establish settlement values; and
- negotiating settlements while directing the claim in
preparation for trial.
Under most of our policies, except Physician Business Practice Liability
(E&O/D&O) policies, we are obligated to defend our insureds. In almost all
cases, the person bringing the claim against the physician is already
represented by legal counsel when the claim is reported to us.
Our claims department consists of approximately 50 technical and
management personnel, plus support staff. These personnel are responsible for
all aspects of claims handling and coverage analysis from initial reporting
through appeals of verdicts. We have an experienced claims staff which is
able to handle all claims without using independent adjusters. Experience
shows that the longer a claim goes unsettled, the more likely a loss will be
paid. Therefore, ISMIE places a priority on resolving claims as early as
possible.
One distinct feature of our claims department is our
"Physician-First Service" program through which we strive to develop a high
degree of involvement and interaction with our policyholders. We encourage
insured physicians to remain actively involved in their claims throughout the
legal discovery process in addition to the trial. We believe that a
physician's close involvement not only benefits the physician during the
claims process but also leads to a more efficient and successful disposition
of the claim. To further encourage this involvement, we provide a "defendant
reimbursement" stipend for each day of attendance at depositions or other
discovery and at trial.
Medical malpractice claims often involve highly complex medical and
legal issues which take a significant amount of time to resolve and often
carry severe damages. The sensitive nature of these claims requires an
open-minded professional approach to claims disposition. We believe that we
have developed a reputation for aggressively defending our insureds against
non- meritorious claims. Over the past five years, ISMIE has taken more than
10% of claims to verdict and has won 80% of these claims. During this period,
nearly 80% of all the claims against ISMIE
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<PAGE>
insureds have been resolved with no payment made. Each claim, when received,
is viewed as neutral. The claims department works to develop facts to move
the claim into a "defend" or "settle" category as soon as possible. Our
desire is to settle cases that should be settled as early in the claims
process as possible. A system of ascending authority levels ensures that the
more serious claims receive multiple reviews. We also maintain a special unit
of claims personnel to work with insured physicians to help resolve patient
conflicts early to avoid litigation where possible.
A special Physician Review Committee or PRC, encompasses a large
variety of specialties and is composed of nine voting members and
approximately twenty consulting members. The PRC makes each decision to
defend or settle a claim. Each member of the PRC must have previously been
through the professional liability litigation process. The PRC is appointed
by the ISMIE Board of directors based upon recommendations submitted by the
claims department. A significant number of the PRC members have developed
several years of experience reviewing claims. All claims involving settlement
and all claims taken to verdict are reviewed by the PRC. As soon as
sufficient information is developed to establish a "defend" or "settle"
posture, the claim handler submits the case to the PRC with detailed
information about the claim which specifically includes the claim handler's
recommendation, the defense attorney's recommendation and the insured
physician's recommendation. If the insured disagrees with the PRC's decision,
the insured physician may meet with the PRC to discuss the case and the PRC's
decision. This doctor to doctor interaction has helped us develop a strong
loyalty among our policyholders.
Litigation defense is provided almost exclusively by private law
firms with lawyers whose primary focus is defending malpractice cases. ISMIE
maintains a database to track and analyze trends in our claims experience and
to assess the rates, cost and other performance data of our defense counsel.
Our ongoing, high volume relationships allow us to work more closely and
efficiently with defense counsel and insureds to provide the best defense
possible while maintaining consistency in results at a reasonable cost.
We monitor the ongoing satisfaction of our insureds through a series
of claims monitoring surveys. These surveys allow us to promptly address
developing problems on specific cases and also to ensure that our policies
and procedures continue to address our customer's concerns. To ensure that we
maintain our strong market presence and customer satisfaction, every claim
that is filed receives three monitoring surveys during the pendency of the
claim. These surveys are generally conducted 45 days after the claim is
filed, after the decision to "defend" or "settle" has been reached, and after
a claim is closed.
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LOSS RESERVES
We establish our loss and loss adjustment expense reserves based on
known facts and our interpretation of circumstances, including our experience
with similar cases and historical trends involving claim payment patterns,
loss payments, pending levels of unpaid claims, as well as court decisions
and economic conditions. For claims-made policies, reserves apply only to
claims that have been reported during the period that coverage has been
granted. We establish reserves for claims under claims-made policies at the
time the claim is reported to us. For "tail coverage," which is available
under an extended reporting endorsement feature of the policy, an estimate of
possible future claims needs to be made as well. In addition, we establish
reserves on an ongoing basis to fund the issuance of free tail coverage.
While historical experience is helpful in determining loss trends, each case
is unique and the outcomes can vary substantially from any pattern derived.
Therefore, ISMIE attempts to record reserves based on its best estimate of
future losses and expenses from claims. Nevertheless, we cannot be sure
whether the reserves recorded will ultimately be adequate to cover the losses
from claims.
Adding to the uncertainty in establishing loss reserves is the fact
that medical malpractice claims can typically take several years to close. In
fact, more than 45% of ISMIE's direct loss reserves as of December 31, 1998
were related to losses incurred in 1995 or earlier. The majority of
unfavorable loss development prior to 1995 related to underestimated exposure
under occurrence policies, which we wrote until 1986. As of December 31,
1998, there remained $46 million, or about 5% of total reserves, in estimated
unpaid losses and LAE applicable to occurrence policies written prior to 1986.
The setting of loss reserves involves a projection of ultimate
losses, developed through an actuarial study of ISMIE's claims history and an
assessment of economic trends. We also consider the injury estimates
established by the claims analysts and the liability assessment of the PRC.
Actuaries rely heavily on historical trends, but also consider any changes in
economic and legal conditions. As additional information becomes available,
we may revise estimates reflected in earlier reserve projections. Any
increase to previously set reserves could reduce our earnings for the period
in which the increase is made.
External factors, such as judicial precedents, social temperament
and economic conditions increase the uncertainties associated with estimating
ultimate losses. The inherent uncertainty of estimating reserves is
relatively greater for companies like ours writing long-tail casualty
insurance, due primarily to the greater length of time before ultimate claims
resolution.
ISMIE uses both its internal actuarial staff and independent
actuaries to establish its reserves. ISMIE's independent actuaries review
reserves for losses and LAE at the end of each policy year and prepare a
report that includes a recommended level for reserves. ISMIE considers their
recommendations, along with other factors, when determining reserve levels.
Between reserve studies, ISMIE continues to monitor trends in frequency and
severity, settlements, judicial and legislative decisions, etc. in order to
refine estimates and keep them current.
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The following table shows our loss reserve experience and sets forth a
reconciliation of beginning and ending reserves for unpaid losses and LAE for
the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999 Year Ended December 31
------------- ----------------------
(in thousands) 1999 1998 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Reserves for losses and LAE at beginning of $895,275 $946,082 $946,082 $980,217 $1,021,647
period
Less reinsurance recoverables 221,759 331,857 331,857 395,104 362,978
-------- -------- -------- -------- ----------
Net reserves for losses and LAE at beginning of
period 673,516 614,225 614,225 585,113 658,669
-------- -------- -------- -------- ----------
Provision for losses and LAE for claims, net of
reinsurance, occurring in:
Current period 77,728 64,518 163,962 121,912 99,373
Prior periods 0 0 (10,302) (4,096) 6,030
-------- -------- -------- -------- ----------
Total incurred losses and LAE 77,728 64,518 153,660 117,816 105,403
-------- -------- -------- -------- ----------
Effect of commutation 0 0 79,130 81,080 0
Less loss and LAE payments for claims, net of
reinsurance, occurring in:
Current period 144 676 4,379 6,436 3,449
Prior periods 80,947 94,243 169,120 163,348 175,510
-------- -------- -------- -------- ----------
Total payments 81,091 94,919 173,499 169,784 178,959
-------- -------- -------- -------- ----------
Net reserves for losses and LAE at end of period 670,153 583,824 673,516 614,225 585,113
Add reinsurance recoverables 216,902 340,492 221,759 331,857 395,104
-------- -------- -------- -------- ----------
Reserves for losses and LAE at end of period $887,055 $924,316 $895,275 $946,082 $980,217
======== ======== ======== ======== ==========
</TABLE>
The following tables reflect the development of loss and LAE reserves, on a
net basis and then on a gross basis, for the periods indicated at the end of
that year and each subsequent year. The first line shows the reserves as
originally reported at the end of the stated year. Each calendar year end
reserve includes the estimated unpaid liabilities for that report or accident
year and for all prior report or accident years. The section under the
caption "liability reestimated as of" shows the original recorded reserve as
adjusted as of the end of each subsequent year to reflect the cumulative
amounts paid and all other facts and circumstances discovered during each
year. The line "cumulative redundancy (deficiency)" reflects the difference
between the latest reestimated
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<PAGE>
reserve amount and the reserve amount as originally established. The section
under the caption "cumulative amount of liability paid through" shows the
cumulative amounts paid related to the reserves as of the end of each
subsequent year. In evaluating the information in the tables below, you
should note that each amount includes the effects of all changes in amounts
of prior periods. The tables present development data by calendar year and do
not relate the data to the year in which the claim was reported or the
accident actually occurred. Conditions and trends that have affected the
development of these reserves in the past will not necessarily recur in the
future.
ISMIE RESERVE REDUNDANCY (DEFICIENCY) -- NET BASIS
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss & LAE 496,674 583,442 643,309 644,913 643,285 622,108 648,158 658,669 585,113 614,225 673,516
Reserves
Liability
Reestimated as
of:
1 Years Later 511,249 582,554 628,553 647,011 654,407 631,924 631,502 666,835 581,015 603,923
2 Years Later 513,671 595,474 649,320 669,605 656,932 622,002 635,237 675,466 568,237
3 Years Later 548,577 619,696 669,300 668,413 644,392 616,055 649,167 668,652
4 Years Later 583,511 654,292 661,326 668,057 634,752 630,760 628,315
5 Years Later 606,915 650,864 657,991 652,131 646,342 621,108
6 Years Later 599,366 659,804 638,725 667,934 635,901
7 Years Later 604,378 642,734 648,967 665,281
8 Years Later 588,554 655,741 648,506
9 Years Later 602,245 655,000
10 Years Later 601,090
Cumulative
Redundancy
(Deficiency) (104,416) (71,558) (5,197) (20,368) 7,384 1,000 19,843 (9,983) 16,876 10,302
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<PAGE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cumulative
Amount of
Liability Paid
Through:
1 Years Later 87,923 105,137 158,356 182,397 215,785 178,197 157,706 177,647 82,266 89,989
2 Years Later 179,720 247,834 311,117 366,149 362,097 306,971 305,116 281,713 187,373
3 Years Later 301,243 372,263 455,001 479,100 446,811 411,334 400,236 403,451
4 Years Later 387,839 496,965 533,566 542,517 513,741 478,766 467,690
5 Years Later 481,754 556,359 565,489 578,261 551,223 527,175
6 Years Later 517,881 582,684 584,351 601,749 571,624
7 Years Later 536,849 597,253 595,936 616,044
8 Years Later 549,884 607,304 608,311
9 Years Later 558,609 618,387
10 Years Later 567,117
Net Reserves -
December 31, 614,225 673,516
Reinsurance
Recoverables 331,857 221,759
------- -------
Gross Reserves 946,082 895,275
======= =======
</TABLE>
ISMIE RESERVE REDUNDANCY (DEFICIENCY) - GROSS BASIS
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss & LAE 621,979 779,907 798,029 809,477 883,428 895,401 942,680 1,021,647 980,216 946,082 895,275
Reserves
Liability
Reestimated
as of:
1 Years Later 687,594 740,996 920,247 874,846 921,458 901,168 921,056 988,686 942,868 920,082
2 Years Later 670,255 884,888 995,332 928,603 922,253 889,572 917,112 955,765 928,940
3 Years Later 832,919 963,057 1,046,736 927,095 906,562 874,327 862,439 927,020
4 Years Later 919,492 1,029,169 1,040,873 922,085 888,383 826,722 833,221
5 Years Later 973,990 1,028,149 1,034,152 896,722 851,312 810,232
6 Years Later 968,461 1,029,244 1,006,606 872,998 841,288
7 Years Later 965,633 1,004,791 981,457 873,238
8 Years Later 941,648 984,897 987,319
9 Years Later 924,447 991,535
10 Years 929,668
Later
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<PAGE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cumulative
Redundancy
(Deficiency) (307,689) (211,628) (189,290) (63,761) 42,140 85,169 109,459 94,627 51,276 26,000
Cumulative
Amount of
Liability Paid
Through:
1 Years Later 104,407 136,269 322,908 226,377 268,996 222,547 197,010 200,949 192,288 214,041
2 Years Later 226,791 443,517 519,649 460,672 459,126 389,062 366,765 373,981 386,142
3 Years Later 512,699 611,926 710,312 610,706 580,201 513,446 484,033 525,216
4 Years Later 643,275 776,665 818,862 704,188 665,697 596,114 580,016
5 Years Later 769,847 859,669 873,334 755,841 709,270 659,555
6 Years Later 824,992 896,773 903,293 777,372 740,442
7 Years Later 849,479 919,602 908,241 797,770
8 Years Later 869,249 919,374 925,986
9 Years Later 865,970 935,084
10 Years 878,603
Later
Gross
Reserves -
December 31 946,082 895,275
Reinsurance
Recoverables 331,857 221,759
------- -------
Net Reserves 614,225 673,516
======= =======
</TABLE>
While we believe our reserves for losses and LAE are adequate, we
cannot be sure that our ultimate losses and LAE will not deviate, perhaps
substantially, from the estimates reflected in our financial statements. If
our reserves should prove inadequate, we will have to increase reserves,
which could have a material adverse effect on our financial condition or
results of operation.
REINSURANCE
REINSURANCE CEDED. ISMIE follows customary industry practice by
reinsuring a portion of its risks. We cede to reinsurers a portion of our
risk and pay a premium to reinsurers based upon direct premiums received on
all policies that we reinsure. 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 policies reinsured, it does make the
reinsurer liable to the insurer to the extent of the reinsurance ceded. We
determine how much reinsurance to purchase based upon the evaluation of the
risks we have insured, consultation with our reinsurance brokers and market
conditions, including the availability and pricing of reinsurance. During the
ten years between 1989 and 1998, through excess reinsurance we have reduced
our average loss by 31%, from $360,000 per claim average on a gross basis to
$247,000 per claim average on a net of reinsurance basis.
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<PAGE>
ISMIE's reinsurance strategy is to obtain reinsurance to protect
against unexpected increases in severity and frequency in any given year.
From 1995 to 1997, ISMIE steadily increased its retention under its excess of
loss reinsurance program from a retention level of $500,000 per medical
incident to $1,000,000 per medical incident. With increased retentions, ISMIE
bears more of the potential losses and cedes only losses excess of specified
retention levels to reinsurers. In 1998, ISMIE ceded $45.5 million of its
earned premiums to reinsurers.
ISMIE has two layers of excess reinsurance: a per incident treaty
(ISMIE often has more than one insured named in a lawsuit or claim arising
from the same incident, and therefore multiple policies and limits may be
involved), and a per claim treaty applicable to insureds with $2 million/$4
million limits. The per incident treaty is applicable to all medical
malpractice policies and applies to the first $1.0 million in limits per
insured per incident. Currently, ISMIE retains the first $1.0 million per
incident and the per incident treaty covers losses up to $5.0 million per
incident. The per claim treaty covers $1.0 million excess of $1.0 million per
insured per claim for insurance with $2.0 million/$4.0 million policy limits.
For the three-year period from July 1, 1995 to July 1, 1998, ISMIE
purchased reinsurance from Cologne Re (Dublin), which provided a combination
of quota share and stop loss protection. This reinsurance provided ISMIE
additional protection against higher than expected claims frequency and
severity. During the period that this treaty was in effect, we substantially
improved our surplus position on a statutory basis, from $110.1 million to
$178.4 million. ISMIE has discontinued this reinsurance program effective
July 1, 1998. Our improved surplus position, along with recent favorable
trends in claims frequency, permitted us to commute the first two years of
this reinsurance program and recover cash of $81.1 million in 1997 and $79.1
million in 1998.
ISMIE also has a treaty which is applicable to $5.0 million per
claim limits issued to entities under our Clinic Option program and our
corporate policy. This treaty cedes 100% of $3.0 million excess of $2.0
million per claim to reinsurers.
In addition, ISMIE has a quota share treaty applicable to all
Physician Business Practice Liability (E&O/D&O) policies. ISMIE retains 10%
of all losses on these policies and 90% is ceded to reinsurers.
We place reinsurance under reinsurance treaties and agreements with
a number of individual companies and with syndicates at Lloyd's to avoid
concentrations of credit risk. The following table identifies the most
significant reinsurers, their percentage participation in the aggregate
reinsured risk based upon premiums paid and their rating as of December 31,
1998. No other reinsurer's percentage participation in 1998 exceeded 3% of
total reinsurance premiums.
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<PAGE>
<TABLE>
<CAPTION>
PREMIUMS CEDED PERCENTAGE OF TOTAL
FOR YEAR ENDED REINSURANCE
REINSURER DECEMBER 31, 1998 RATING (1) PREMIUMS
- --------- ----------------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cologne Re (Dublin) $15,986 AAA 35.2%
Transatlantic Reinsurance Co. $6,052 A ++ 13.3%
Lloyd's Syndicates $4,376 A 9.6%
Union America Insurance Co. $4,252 A - 9.4%
CNA Reinsurance Co. (U.K.) $3,385 A 7.4%
NAC Reinsurance Corp. $2,697 A + 5.9%
Everest Reinsurance Re $1,930 A 4.2%
Kemper Reinsurance Co. $1,908 A 4.2%
Chartwell Reinsurance Co. $1,526 A 3.4%
Other reinsurers (2) $3,341 7.4%
------- -------
Total $45,453 100.00%
======= =======
</TABLE>
(1) All ratings are assigned by A.M. Best, except for Cologne Re
(Dublin) which is rated by Standard & Poor's. Our minimum requirement for
ratings of our reinsurers is "B+" or better from A.M. Best or "A" or better
from Standard & Poor's.
(2) None of the "other reinsurers" percentage of total reinsurance
premiums exceeded 3% of total reinsurance premiums in 1998.
We analyze the credit quality of our reinsurers and rely on our
brokers and intermediaries to assist in the analysis. To date we have not
experienced any material difficulties in collecting reinsurance recoverables.
However, we cannot be certain of the future ability of any of our reinsurers
to meet their obligations. The largest percentage of reinsurance ceded to any
one company is ceded to Cologne Reinsurance Co. (Dublin) which is a
non-admitted carrier in the U.S. Recoverables from this reinsurer are secured
by an irrevocable and unconditional letter of credit issued by Citibank N.A.
and a trust account at AmalgaTrust (Chicago). ISMIE is the sole beneficiary
of both the letter of credit and trust account.
REINSURANCE ASSUMED. Earlier this year, we entered into a
reinsurance treaty with the Illinois Compensation Trust to reinsure the
Trust's workers' compensation risks. The Trust is organized under the
Illinois Religious and Charitable Organization Risk Pooling Act and insures
the workers' compensation risks of various Illinois hospitals. The risk
assumed by ISMIE is the layer of $375,000 excess of $25,000 per claim. The
Trust retains the first $25,000 of loss. The estimated aggregate amount of
losses assumed under this treaty are approximately $2.6 million.
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INVESTMENT PORTFOLIO
Return on invested assets is an important component of our operating
results. Our investment managers make our investments for us in accordance
with the prescribed investment objectives and guidelines. ISMIE's guidelines
emphasize high-quality, fixed-maturity investments. ISMIE has used Scudder
Insurance Assets Management (SIAM) since 1985 to manage its portfolio, which
has primarily been fixed-income securities. ISMIE also uses an investment
advisor, Gofen & Glossberg, to review the performance of its portfolio
relative to the market and economic conditions.
ISMIE recently hired two equity investment managers, Dearborn
Partners and Trees Front Associates, to institute an equity securities
portfolio. We began this investment program in July, 1998 in order to provide
more diversification in our overall portfolio. We currently restrict this
portfolio to no more than 5% of ISMIE's total invested assets.
The following table sets forth the composition of ISMIE's investment
portfolio at the dates indicated. All of the fixed maturity securities are
held as available-for-sale.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998 December 31, 1997
------------------------- ----------------------- --------------------
Cost or Cost or Cost or
Amortized Amortized Amortized
(in thousands) Cost Fair Value Cost Fair Value Cost Fair Value
------------ ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturity securities:
U.S. government obligations $119,460 $117,847 $155,166 $161,007 $152,551 $154,165
Corporate securities 365,362 357,065 345,733 356,579 261,739 264,863
Mortgage-backed and other asset-backed 301,793 298,124 285,929 289,930 307,854 311,001
securities
States, territories and
possessions, and public utilities 12,297 12,054 12,307 12,675 6,694 6,787
-------- -------- --------- --------- -------- --------
Total fixed maturity securities: 798,912 785,090 799,135 820,191 728,838 736,816
Equity securities 19,909 24,021 15,975 17,969 0 0
-------- -------- --------- --------- -------- --------
Total $818,821 $809,111 $815,110 $838,160 $728,838 $736,816
======== ======== ========= ========= ======== ========
</TABLE>
The mortgage-backed and other asset-backed portfolio represents
approximately 38% of our total fixed maturity portfolio, and consists
primarily of "standard" and "more complex" securities. The mortgage-backed
securities are issued on and collateralized by an underlying pool of
single-family home mortgages. The asset-backed securities are collateralized
by an underlying pool of receivables or other assets. Pools are commonly home
equity loans, credit card and auto loans, and manufactured housing loans.
Principal and interest payments from the underlying pool are distributed pro
rata to the security holders. All of our mortgage-backed and other
asset-backed securities are U.S. agency securities or AAA rated. Our
investment portfolio does not include any "interest only" or "principal only"
mortgage securities. Mortgage-backed and other asset-backed securities
involve the same risks associated with all fixed income investments: interest
rate risk, reinvestment rate risk, and default or credit risk. In addition,
mortgage-backed and other asset-backed securities possess prepayment risk,
which is the risk
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that a security's originally scheduled interest and principal payments will
differ considerably due to changes in the level of interest rates.
Our investment portfolio of fixed maturity securities consists
primarily of intermediate-term, investment-grade securities. Our investment
policy provides that fixed maturity securities investments are limited to
purchases of investment-grade securities or unrated securities which, in the
opinion of a national investment advisor, should qualify for that rating. The
table below contains additional information concerning the investment ratings
of our fixed maturity investments at June 30, 1999:
<TABLE>
<CAPTION>
As of June 30, 1999 Amortized Percentage
Cost Fair Value of Fair Value
--------- ---------- -------------
(in thousands)
<S> <C> <C> <C>
TYPE/RATING OF INVESTMENT
AAA (including U.S. government
obligations) $421,253 $415,971 53.0%
AA 43,670 42,015 5.3
A 225,361 220,602 28.1
BBB 108,628 106,502 13.6
-------- -------- -------
$798,912 $785,090 100.0%
======== ======== =======
</TABLE>
The following table sets forth information concerning the maturities
of fixed maturity securities in our investment portfolio as of June 30, 1999:
<TABLE>
<CAPTION>
As of June 30, 1999 Amortized Percentage
Cost Fair Value of Fair Value
--------- ---------- -------------
(in thousands)
<S> <C> <C> <C>
Years to maturity:
One through five 221,034 218,420 27.8
After five through ten 262,062 255,471 32.5
After ten 14,023 13,075 1.7
Mortgage-backed securities and
other asset-backed securities 301,793 298,124 38.0
Totals $798,912 $785,090 100.0%
======== ======== ======
</TABLE>
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MARKET RISK
The value of our fixed-maturity portfolio is subject to interest rate
risk. As market interest rates decrease, the value of the portfolio goes up
with the opposite holding true in rising interest rate environments. A common
measure of the interest sensitivity of fixed-maturity assets is modified
duration, a calculation that takes maturity, coupon rate, yield and call
terms to calculate an average age of the expected cash flows. The longer the
duration, the more sensitive the asset is to market interest rate
fluctuations.
The value of our common stock equity investments is dependent
upon general conditions in the securities markets and the business and
financial performance of the individual companies in the portfolio. Values
are typically based on future economic prospects as perceived by investors in
the equity markets.
The first column of the following table shows the estimated
fair values of our fixed-maturity and common stock portfolios as of June 30,
1999. The second column shows the effect on current estimated fair values
assuming a 100 basis point increase in market interest rates and a 10%
decline in equity price.
<TABLE>
<CAPTION>
Estimated Fair Value At
Estimated Fair Value at Adjusted Market
Current Market Rates/Prices as Indicated
(in thousands) Rates/Prices Below
----------------------- -------------------------
<S> <C> <C>
Interest rate risk(1)
Fixed-maturity securities
Available-for-sale $785,090 $752,790
Equity price risk (2)
Common stocks $24,021 $21,619
</TABLE>
(1) Adjusted interest rates assume a 100 basis point increase in
market rates at June 30, 1999
(2) Adjusted equity prices assume a 10 percent decline in values at
June 30, 1999
For all its financial assets and liabilities, ISMIE attempts to
maintain reasonable average durations, consistent with the maximization of
income without sacrificing investment quality and providing for liquidity and
diversification.
The estimated fair values at the adjusted market rates (assuming a
100-basis point increase in market interest rates) are calculated using
discounted cash flow analysis and duration modeling where appropriate. The
estimated values do not consider the effect that changing interest rates
could have on prepayment activity.
This sensitivity analysis provides only a limited, point-in-time view
of the market risk sensitivity of our fixed-maturity and common stock
investments. The actual impact of market
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interest rate and price changes on our financial instruments may differ
significantly from those shown in the sensitivity analysis. The sensitivity
analysis is further limited as it does not consider any actions that we could
take in response to actual and/or anticipated changes in interest rates and
equity prices.
COMPETITION
The medical malpractice insurance market in Illinois is highly
competitive. We believe that the principal competitive factors include
pricing, financial stability, ratings, breadth and flexibility of coverage
and the quality and level of service provided. ISMIE competes with numerous
insurance companies in the Illinois market. Our principal competitors for
physicians and medical groups consist of several commercial insurance
companies and, increasingly, self-insurance programs by hospitals for
acquired physician practices. Each of these competitors is actively engaged
in soliciting insureds in Illinois, ISMIE's primary area of operations, and
each has offered assessments or premiums at very competitive rates during the
past few years. The number of licensed insurance carriers in the medical
professional liability insurance market in Illinois has dramatically
increased from six in 1992 to approximately thirty-two today. At the same
time, a number of health care professionals have left the insurance market
because many become a part of self-insurance programs instituted by hospitals
that have acquired physician practices. Despite substantial increases in
competition over the past five years and the increase in the use of
self-insurance, ISMIE has experienced a reduction of only 12.5% of persons or
entities covered under existing policies since 1993. We believe this
favorable experience is a result of to our superior customer service and the
close relationships we have with our insured policyholders.
We expect to encounter similar competition from local physician-owned
insurance companies, commercial companies and self-insurance programs in
other states as we carry out our expansion plans. We plan to compete in other
states principally through offering superior policyholder service. All
markets in which we now write insurance and which we would expect to enter
have competitors with substantially greater financial and operating resources
and higher ratings than we do.
RELATIONSHIP WITH THE MEDICAL SOCIETY
ISMIE was organized in 1976 by the Illinois State Medical Society,
and has received the active support of the Medical Society in building its
physician and medical group policyholder base. Each of the executive officers
of Holdings also serves in an executive capacity for the Medical Society. Dr.
Geline, a director of Holdings, also serves as a trustee of the Medical
Society. See "Management - Directors and Executive Officers." We also have a
shared services agreement with the Medical Society under which we share the
costs of office, administrative, employee, lobbying and other services. See
"Management--Related Party Transactions -- Services and Office Space."
Our close relationship with the Medical Society has been critical to
the success of ISMIE. As a reciprocal insurance exchange, ISMIE has been
wholly owned and governed by its members. ISMIE has relied on its
relationship with the Medical Society in marketing its policies.
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In 1998, this relationship was modified to eliminate the requirement that
policyholders be members of the Medical Society and to transfer the function
of the attorney-in-fact from the Medical Society to ISMIE. Following the
conversion, we will endeavor to continue our shared services agreement and,
through personalized service, to maintain our close relationship with the
Medical Society.
REGULATION
GENERAL. Insurance companies are regulated by government agencies in
states in which they transact insurance. The extent of regulation varies by
state, but regulation usually includes:
- establishing standards of solvency which insurers must maintain;
- regulating premium rates and policy forms;
- setting minimum capital and surplus requirements;
- requiring the licensing of companies and agents;
- approving accounting methods and methods of setting statutory
loss and expense reserves;
- setting requirements for and limiting the types and amounts of
investments;
- establishing requirements for the filing of annual statements
and other financial reports;
- conducting periodic statutory examinations of the affairs of
insurance companies;
- approving proposed changes of control; and
- limiting the amounts of dividends that may be paid without prior
regulatory approval.
State insurance departments also conduct periodic examinations of
the affairs of insurance companies. This regulation and supervision are
primarily for the benefit and protection of policyholders and not for the
benefit of investors.
Since ISMIE is an Illinois company and we write substantially all of
our insurance in Illinois, and will continue to write a large portion of our
insurance in Illinois following the conversion, Illinois laws and regulations
have the most significant impact on us and our operations.
HOLDING COMPANY REGULATION. The Illinois Insurance Holding Company
System Act, or the Holding Company Act, requires us to file information
periodically with the Illinois Insurance Department, including information
relating to our capital structure, ownership, financial
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condition and general business operations, and information relating to
transactions and agreements between ISMIE and its affiliates. We must also
give the Illinois Insurance Department prior notice of transactions between
us and our affiliates, including sales, loans, guarantees, transfer of assets
or liabilities, investments, reinsurance agreements, and management
agreements and cost sharing arrangements. These kinds of transactions may
not be entered into if disapproved by the Illinois Insurance Department.
The Holding Company Act also provides that the acquisition or change
of "control" of an Illinois insurance company or of any person or entity that
controls an insurance company cannot be consummated without the prior
approval of the Illinois Director of Insurance. 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 an Illinois insurance company or of a
person or entity that controls an Illinois insurance company, such as
Holdings. A person or entity seeking to acquire direct or indirect "control,"
of an Illinois insurance company is generally required to file with the
Illinois Director of Insurance an application for change of control
containing information required by statute and published regulations and
provide a copy of the application to us. The Holding Company Act and other
provisions of the Illinois Insurance Code also effectively restrict us from
consummating certain reorganizations or business combinations without prior
regulatory approval.
We will also be governed by insurance holding company laws in other
states that contain similar provisions and restrictions if we become licensed
in those states.
REGULATION OF DIVIDENDS FROM INSURANCE SUBSIDIARIES. Following the
conversion, the Holding Company Act will limit the ability of ISMIE to pay
dividends to Holdings. Without prior notice to and approval of the Illinois
Director of Insurance, ISMIE 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 12 months exceeds the greater of
ISMIE's statutory net income for the preceding calendar year or 10% of our
policyholder surplus as of the preceding December 31. Regulations further
require that policyholder surplus following a dividend or other distribution
be reasonable in relation to its outstanding liabilities and adequate to its
financial needs. The Illinois Insurance Code permits the payment of dividends
only out of statutory earned (unassigned) surplus. In addition, an insurance
company must provide notice to the Illinois Insurance Department of all
dividends after declaration, but prior to payment.
RISK-BASED CAPITAL. The NAIC has developed, and states including
Illinois have adopted, a methodology for assessing the adequacy of statutory
surplus of property and casualty insurers which includes a risk-based capital
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 risk-based capital by taking into account certain risks
related to the insurer's assets, including risks related to its investment
portfolio and ceded reinsurance, and the insurer's liabilities, including
underwriting risks related to the nature and experience of its insurance
business. The risk-based capital rules provide for
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different levels of regulatory attention depending on the ratio of a
company's total adjusted capital to its "authorized control level" of
risk-based capital.
NAIC-IRIS RATIOS. The NAIC Insurance Regulatory Information System,
or IRIS, was developed by a committee of state insurance regulators 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 12 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 departments of insurance.
REGULATION OF INVESTMENTS. State laws and regulations require
Illinois insurance companies to diversify 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. In some instances, this
would require divestiture of non-qualifying investments over specified time
periods unless otherwise permitted by the state insurance authority.
PRIOR APPROVAL OF POLICY FORMS. Illinois insurance laws require us
to submit policies and endorsements to the Illinois Director of Insurance for
prior approval. We may be unable to implement desired endorsements or forms
if the Illinois Director of Insurance does not approve them. See "Risk
Factors -- If we fail to comply with insurance regulatory requirements, or if
those requirements become burdensome to us, we may not be able to operate
profitably." Following the conversion, if we or any future subsidiary of
Holdings become licensed in other states, then policy forms and endorsements
under those other states also would have to be reviewed and approved by those
states. Also, many other states, but not Illinois, require notice to state
insurance departments of, and in some cases prior approval of, insurance
rates before those rates can be implemented.
INSURANCE GUARANTY ASSOCIATIONS. All states, including Illinois,
require admitted property and casualty insurers to become members of guaranty
funds or associations which generally protect policyholders of member
insurers in the event of the insolvency of the insurers. Guaranty funds or
associations pay certain claims made against insolvent insurers, and guaranty
funds assess their members in order to fund the payment of those claims and
related guaranty fund expenses. Maximum assessments permitted by law in any
one year vary by state, and Illinois permits a maximum assessment of 1.0% of
annual premiums written by a member in that state during the preceding year.
In 1998, ISMIE was assessed $93,000.
MEDICAL MALPRACTICE TORT REFORM. In cooperation with the Medical
Society, we have consistently advocated proposals for medical malpractice
tort reform and other legislation which we believe would benefit our
policyholders. It is our intent to continue to work with the Medical Society
on these efforts.
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Since its formation in 1976, ISMIE has worked closely with the
Medical Society to secure tort reform for the benefit of physicians, patients
and its operational results. In 1976 the initial efforts led successfully to
legislation reducing the time period within which individuals could file
claims. A similar reduction in the time period for filing claims for minors
was achieved in 1987.
Over the course of several years beginning in 1977, ISMIE
successfully promoted legislation to provide confidentiality to peer review
activities including those of ISMIE and its agents. We believe that the
confidential nature of peer review reduces negligent incidents in medical
practice by promoting the frank evaluation of medical care and practice
patterns.
In 1985, ISMIE and the Medical Society successfully initiated broad
malpractice reform legislation that withstood legal attack in the Illinois
Supreme Court. This legislation required the filing of Affidavits of Merit
with each malpractice case and prohibited the award of punitive damages in
medical malpractice cases. The legislation made several other substantive
changes in the way in which malpractice cases were filed, all of which
contributed to providing stability in the Illinois marketplace and in the
frequency of claims. Legislation providing additional reforms which we
advocated was adopted in 1995 but was struck down by the Illinois Supreme
Court in 1997.
ISMIE has continued its legislative efforts with the Medical Society
and we believe we are recognized as a leading force in efforts at malpractice
and tort reform.
MEDICAL MALPRACTICE REPORTS. We must report detailed information
with regard to settlements or judgments against our Illinois physician
insureds to the Illinois Department of Professional Regulation, which has
responsibility for investigations and initiation of proceedings relating to
professional medical conduct in Illinois. In addition, we must report all
payments to the National Practitioners' Data Bank and the reports are
accessible by state licensing and disciplinary authorities, hospital and
other peer review committees and other providers of medical care.
RATINGS
In 1998, A.M. Best, which rates insurance companies based on factors
of concern to policyholders, increased our rating to "B++ (Very Good)," from
"B+ (Very Good)" citing improved profitability, adequate loss reserves and
our strong position in the Illinois medical professional liability market.
The improved rating also acknowledges the actions taken by our management to
position us to compete in the changing market. Our ability to maintain or
improve our ratings may depend on our ability to implement successfully our
business strategy. This rating is the fifth highest of 13 ratings that A.M.
Best assigns to solvent insurance companies, which currently range from "A++
(Superior)" to "D (Poor)." Publications of A.M. Best indicate that the B++
rating is assigned to those companies that in A.M. Best's opinion "have a
good ability to meet their ongoing obligations to policyholders." 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
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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.
Standard & Poor's assigns ratings to insurance companies with
respect to their ability to pay under their insurance policies. Ratings
assigned by Standard & Poor's to solvent insurance companies currently range
from "AAA (Extremely Strong)" to "CC (Extremely Weak)." ISMIE received its
first official rating of "BBB (Good)" from Standard & Poor's in 1996. This
rating is within the "secure" range of Standard & Poor's rating hierarchy. In
1999, Standard & Poor's upgraded ISMIE's rating to "BBB+ (Good)," citing
ISMIE's strong leading market position as a provider of medical malpractice
insurance in Illinois, and it's strong capitalization.
EMPLOYEES
As of June 30, 1999, we had approximately 172 full time equivalent
employees. None of the employees is covered by a collective bargaining
agreement. We believe that our employee relations are good.
PROPERTIES
Our headquarters are located in Chicago, Illinois where we occupy
approximately 75,000 square feet under a lease expiring in 2011. We also have
office space in Springfield, Illinois in a building we own. The Springfield
office building contains approximately 40,000 square feet, of which we lease
and occupy approximately 10,000 square feet. ISMIE is both a general partner
and a limited partner in a limited partnership which owns the building
containing our Chicago headquarters. The Chicago building is currently
encumbered by a mortgage loan. We believe that our office space is adequate
for its present needs and that we will be able to secure additional office
space in the future if necessary.
LITIGATION
We are from time to time named as a defendant in various lawsuits
incidental to our insurance business. The most common litigation includes
claims where lawsuit verdicts exceed the available coverage. We vigorously
defend these actions, unless a reasonable settlement appears appropriate. We
believe that adverse results, if any, in the actions currently pending should
not have a material adverse effect on our cash flow, results of operation or
financial condition. Other than claims against our insureds, we are not
currently involved in any litigation.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the
individuals who serve as directors and executive officers of Holdings.
NAME POSITION
---- --------
Harold L. Jensen, M.D. Chairman of the Board
Walter Whisler, M.D. Vice Chairman of the Board
Alexander R. Lerner President, Chief Executive Officer and Director
Donald A. Udstuen Chief Operating Officer and Director
Jeffrey M. Holden Chief Administrative Officer
Eugene J. Gross Chief Financial Officer and Assistant Treasurer
Saul J. Morse General Counsel and Assistant Secretary
Irwin A. Smith, M.D. Secretary and Director
Peter A. Brusca, M.D. Treasurer and Director
Richard A. Geline, M.D. Director
Henri S. Havdala, M.D. Director
Robert M. Reardon, M.D. Director
Jane Jackman, M.D. Director
Holdings' Board of directors currently consists of ten persons,
divided into three classes of directors and elected for staggered terms as
follows: Class I, composed of three persons and elected for a term expiring
at the 2000 annual meeting of stockholders; Class II, composed of four
persons and elected for a term expiring at the 2001 annual meeting of
stockholders; and Class III, composed of three persons and elected for a term
expiring at the 2002 annual meeting of stockholders. Class I directors are
Mr. Udstuen and Drs. Reardon and Jackman. Class II directors are Drs. Jensen,
Geline, Havdala and Smith. Class III directors are Mr. Lerner and Drs. Brusca
and Whisler. Following the expiration of the initial term as described above,
directors will serve for three-year terms.
DIRECTORS AND EXECUTIVE OFFICERS. Set forth below is the description
of the business positions for the directors and executive officers of
Holdings held during at least the past five years. Each of the directors has
been a director of Holdings since it was organized in April 1999.
Harold L. Jensen, M.D., 73, is the Chairman of the Board of
Holdings. Dr. Jensen has been a member of the Board of Governors of ISMIE
since 1987 and Chairman since 1991. Dr.
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Jensen also has served as Vice-President of Medical Affairs at Ingalls
Memorial Hospital in Harvey since 1988. He has been an internist in Harvey,
Illinois, for more than 33 years. Dr. Jensen is a member of the Medical
Society and the American Medical Association.
Walter W. Whisler, M.D., 65, is Vice Chairman of the Board of
Holdings. He has been a member of the Board of Governors of ISMIE since 1977
and Vice Chairman since 1992. He also served as Vice Chairman from 1982-1990.
He has been a Board certified neurosurgeon in Chicago, Illinois for over 30
years. He also serves as Professor and Chairman of the Department of
Neurosurgery at Rush Medical College & Rush-Presbyterian St. Luke's Medical
Center. Dr. Whisler is a member of the Medical Society and the American
Medical Association.
Alexander R. Lerner, 53, is President and Chief Executive Officer
and a director of Holdings. Mr. Lerner has served as Chief Executive Officer
of ISMIE since 1985 and Chief Executive Officer of the attorney-in-fact since
its formation in July, 1998. Mr. Lerner also has served as the Chief
Executive Officer of the Medical Society since 1981. Mr. Lerner also serves
as chairman of the Illinois Sports Facilities Authority and is a member of
the American Association of Medical Society Executives.
Donald A. Udstuen, 56, is Chief Operating Officer of Holdings. Mr.
Udstuen has served as Chief Operating Officer of ISMIE since 1991 and
Secretary/Treasurer and Chief Operating Officer of the attorney-in-fact since
its formation in July, 1998. Mr. Udstuen also has served as the Associate
Executive Vice President of the Medical Society since 1987, and previously
served as its chief financial officer and governmental affairs director and
its chief lobbyist.
Jeffrey M. Holden, 47, is Chief Administrative Officer of Holdings.
Mr. Holden has served as Chief Administrative Officer of ISMIE since July,
1998, and Chief Administrative Officer of the attorney-in-fact since its
formation in July, 1998. Mr. Holden has also served as Chief Operating
Officer of the Medical Society since January, 1992, and previously served, at
various times, as the Assistant Executive Vice President, Vice President of
Governmental Affairs, and Chief Lobbyist of the Medical Society.
Eugene J. Gross, 48, is Chief Financial Officer and Assistant
Treasurer of Holdings. Mr. Gross has served as Chief Financial Officer of
ISMIE since 1991, and Chief Financial Officer of the attorney-in-fact since
its formation in July, 1998. Mr. Gross also has served as Chief Financial
Officer of the Medical Society since 1991. Prior to joining ISMIE, Mr. Gross
held senior management positions with Allstate Insurance Company and
Metropolitan Life.
Saul J. Morse, Esq., 51, is General Counsel and Assistant Secretary
of Holdings. Mr. Morse has served as General Counsel of ISMIE since 1992. Mr.
Morse has served as General Counsel of the attorney-in-fact since its
formation in July, 1998. He also has served as Vice President and General
Counsel of the Medical Society since 1992. Prior to joining ISMIE, Mr. Morse
was managing partner of the law firm of Morse, Giganti & Appleton, in
Springfield, Illinois. Mr. Morse is a Clinical Assistant Professor in the
Department of Medical Humanities at Southern Illinois University School of
Medicine. Mr. Morse is a member of the Sangamon County Bar Association,
Illinois State Bar Association and the American Bar Association, the Defense
Research Institute, and the American Health Lawyers Association.
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Irwin A. Smith, M.D., 82, is Secretary and a director of Holdings.
He has served on the Board of Governors of ISMIE since 1977. Now retired, has
been a Board certified family physician in Northbrook, Illinois, for more
than 50 years.
Peter A. Brusca, M.D., 58, is a director of Holdings. He has served
on the Board of Governors of ISMIE since 1990. He has been a Board certified
otolaryngologist in Carol Stream, Illinois, for over 20 years. Dr. Brusca is
a member of the Medical Society and the American Medical Association, and is
a fellow of the American College of Surgeons, the American Academy of
Otolaryngology, the American Academy of Facial, Plastic & Reconstructive
Surgery, and the American Academy of Cosmetic Surgery. He has also served as
a member of the Health Advisory Committee for United States Representative
Dennis Hastert.
Richard A. Geline, M.D., 61, is a director of Holdings. He has
served on the Board of Governors of ISMIE since 1989. He has been a Board
certified orthopaedic Surgeon in Skokie, Illinois, for over 28 years. Dr.
Geline is the immediate past president of the Medical Society and a member of
the American Medical Association. He is also a member of the American Academy
of Orthopaedic Surgeons.
Henri S. Havdala, M.D., 68, is a director of Holdings. He has served
on the Board of Governors of ISMIE since 1977. He has been a Board certified
anesthesiologist in Lincolnwood, Illinois, for over 35 years. Dr. Havdala is
a member of the Medical Society, the American Medical Association and the
American Society of Anesthesiologists.
Jane Jackman, M.D., 55, is a director of Holdings. She has served on
the Board of Governors of ISMIE since 1993. She has been a Board certified
family physician in Springfield, Illinois, for over 25 years. She is a past
president of the Medical Society, a member of the American Medical
Association and the American Academy of Family Physicians. Dr. Jackman is
also a Clinical Associate Professor, Department of Family practice, at the
Southern Illinois University School of Medicine.
Robert M. Reardon, M.D., 70, is a director of Holdings. He has
served on the Board of Governors of ISMIE since 1988. Now retired he has been
a Board certified ophthalmologist in Bloomington, Illinois, for over 35
years. Dr. Reardon is a past president of the Medical Society, a member of
the American Medical Association and the American Academy of Ophthalmology.
He is also a member of the Board, and serves as Vice President, of Illinois
Wesleyan University.
COMMITTEES OF THE HOLDINGS BOARD
The Holdings Board will have the following standing committees
immediately following the conversion:
EXECUTIVE COMMITTEE. The Executive Committee will have the authority
to exercise all powers of the Holdings Board between meetings of the Holdings
Board, except in cases where action of the entire Holdings Board is required
by the certificate of incorporation, the bylaws or applicable law.
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AUDIT COMMITTEE. The Audit Committee will make recommendations
concerning the engagement of independent public accountants, review the scope
of audit engagement, review the services and reports of the accountants,
review any major accounting changes, consider the range of audit and
non-audit fees and review the adequacy of our internal accounting controls.
The members of the Audit Committee will be independent directors.
COMPENSATION COMMITTEE. The Compensation Committee will establish
compensation levels for the executive officers of Holdings, review
significant employee benefit programs and establish, as it considers
appropriate, and administer executive compensation programs, including bonus
plans, stock option and other equity-based programs, deferred compensation
plans and any other cash or stock incentive programs. The Chief Executive
Officer will establish remuneration levels for other employees.
STOCK OPTION COMMITTEE. The Stock Option Committee will administer
our employee stock option plans.
NOMINATING COMMITTEE. The Nominating Committee will recommend to the
Board of directors candidates for director and membership on committees of
the Board of directors of Holdings and its subsidiaries.
INVESTMENT COMMITTEE. The Investment Committee will oversee the
investment activities and portfolio management of Holdings and its
subsidiaries.
INVESTOR RELATIONS COMMITTEE. The Investor Relations Committee will
review and make recommendations to management regarding policies and
procedures to be adopted by Holdings regarding communications with
stockholders, analysts and others.
The Holdings Board may from time to time establish other committees
to facilitate the management of Holdings.
DIRECTOR COMPENSATION
The Chairman of the Board will receive an annual retainer of $60,000
plus reimbursement of automobile and other expenses. Each non-employee
director will be paid $1,200 per day for attendance at meetings of the Board
and committees of the Board, meetings of a board of a subsidiary on which the
director serves, and each seminar or other meeting attended on special
assignment on our behalf. All non-employee directors will be reimbursed for
reasonable travel and other expenses incurred to attend meetings of the
Holdings Board and committees of the Board.
EXECUTIVE COMPENSATION
Holdings was organized as a Delaware corporation in April, 1999, and
consequently did not pay any cash compensation to its executive officers for
the year ended December 31, 1998. The following Summary Compensation Table,
therefore, sets forth information concerning the compensation paid or accrued
by ISMIE and the attorney-in-fact for (i) the President and Chief
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Executive Officer and (ii) and each of the other four most highly compensated
executive officers of ISMIE for services rendered during the year ended
December 31, 1998:
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Salary($) Bonus($) Other Annual All Other
Name and Principal Position Year --------- -------- Compensation(2) Compensation($)(3)
- ---------------------------- ----- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Alexander R. Lerner, President 1998 $588,812 $342,337(1) $305,813 $43,504
and Chief Executive Officer
Donald A. Udstuen, Chief 1998 $361,427 $24,188 $43,730
Operating Officer
Jeffrey M. Holden, Chief 1998 $247,708 $16,334 $23,635
Administrative Officer
Eugene J. Gross, Chief Financial 1998 $192,970 $10,000 $59,370 $15,985
Officer and Assistant Treasurer
Saul J. Morse, General Counsel 1998 $270,251 $1,426 $16,086
and Assistant Secretary
</TABLE>
(1) Includes $214,356 paid to Mr. Lerner to permit him to make an
installment of principal and interest on a loan from ISMIE. Mr. Lerner
will continue to receive the $214,356 bonus through the year 2000,
after which Mr. Lerner's compensation will be reduced by that amount.
(2) Represents amounts reimbursed for payment of taxes. For Mr. Lerner, the
amount includes $168,765 paid to reimburse taxes with respect to the
bonus of $214,356 paid to him. Mr. Lerner will continue to receive
reimbursement for taxes on this bonus through the year 2000, after
which Mr. Lerner's compensation will be reduced by the amount of the
reimbursement. For Mr. Gross, the amount includes $18,718 for
automobile and related expenses, and $10,162 for club dues.
(3) Represents contributions by ISMIE and the attorney-in-fact to a 401(k)
Plan in the amount $9,856, $15,312, $8,863, $14,766 and $14,960 for
the accounts of Messrs. Lerner, Udstuen, Holden, Gross and Morse,
respectively; and insurance premiums of $33,648, $28,418, $14,772,
$1,219 and $1,126, for Messrs. Lerner, Udstuen, Holden, Gross and
Morse, respectively.
EMPLOYMENT AGREEMENTS
ISMIE and the attorney-in-fact have entered into employment
agreements with each of the named executives which will be assumed by
Holdings after the conversion. These agreements are intended to secure for us
the continued services of those executive officers and to provide them
appropriate incentives for their maximum efforts. The compensation levels
under the employment agreements have been established by the Boards of ISMIE
and the attorney-in-fact based on the executive officer's value to the
enterprise and competitive considerations, including the fact that until now
the companies have been unable to offer any
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equity incentives to them for their efforts. The Boards of ISMIE and the
attorney-in-fact have engaged independent compensation consultants to assist
in determining appropriate levels of compensation and benefits for the
executives.
The current terms of the employment agreements for Messrs. Lerner,
Udstuen, Holden, Morse and Gross are effective through December 31, 2004,
March 15, 2001, March 18, 2001, April 30, 2002 and June 30, 2001,
respectively. In the case of Mr. Lerner, unless otherwise determined by the
Boards, his employment will be extended by one year during each year of the
initial seven year term so that, after each extension, a seven year term
remains. Thereafter, the term will be extended on a year to year basis unless
ISMIE and the attorney-in-fact give notice to Mr. Lerner by September 1 that
they will not renew the employment agreement for another year. The employment
agreements provide for a current base compensation payable by ISMIE and the
attorney-in-fact to Messrs. Lerner, Udstuen, Holden, Morse and Gross of
$440,099, $173,744, $151,628, $221,352 and $198,759, respectively, with
annual increases of not less than 8%, 7%, 7%, 4% and 4%, respectively. Mr.
Lerner's annual compensation for each of 1998, 1999 and 2000 includes a bonus
amount of $214,356, plus additional amounts to cover taxes on the bonus
amount, which Mr. Lerner intends to use to repay a loan from ISMIE. Mr.
Lerner's annual compensation will be reduced by the amount of this annual
bonus and tax reimbursement beginning January 1, 2001.
The employment agreements require the executives to devote at least
a majority of their time to ISMIE and the attorney-in-fact. Each of the named
executives is also employed by the Medical Society and spends the balance of
his working hours on the affairs of the Medical Society. Mr. Lerner's
employment agreement provides that if his employment with the Medical Society
or the attorney-in-fact terminates for any reason, he will increase the time
he devotes to ISMIE by the additional time that becomes available due to his
termination, and ISMIE will increase his compensation by the amount of
compensation that he had earned from the Medical Society or the
attorney-in-fact under his employment agreement with the Medical Society or
the attorney-in-fact, as the case may be. In no event will the increase
exceed the amount of compensation that Mr. Lerner is then receiving from
ISMIE.
Upon termination of any of the employment agreements by ISMIE and
the attorney-in-fact without cause, or by any of the executive officers for
good reason, as those terms are defined in their employment agreements, the
executive officer will be entitled to receive the aggregate value of his
compensation and benefits for the remaining term of his employment agreement
or for a minimum of two years if the remaining term is less than two years.
COMPENSATION PLANS
DEFERRED COMPENSATION AGREEMENTS. ISMIE has entered into deferred
compensation agreements with its executive officers and other key employees,
including the named executive officers, which will be assumed by Holdings
following the conversion. The deferred compensation agreements provide for a
deferment of a portion of the employer's compensation and for distributions
to be made in the event of death, severance of affiliation with ISMIE,
disability or other time as ISMIE or the trustee under the trust maintained
in connection with the deferred compensation arrangements may determine. The
right of a participant to receive
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distributions under the deferred compensation agreements may be forfeited for
acts contrary to the interests of ISMIE or for insubordination.
401(k) PLAN. ISMIE participates in a 401(k) plan which offers
eligible employees the opportunity to contribute to the 401(k) plan on a
regular basis through payroll deductions. Also, ISMIE 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. The 401(k)
plan's benefits are based on amounts contributed and individual account
investment performance. All full-time employees of ISMIE who have completed
one year of service and are over the age of 21 years are eligible to
participate in the 401(k) plan.
1999 LONG-TERM EQUITY INCENTIVE PLAN. Directors, officers and key
employees of ISMIE are eligible to participate in our 1999 Long-Term Equity
Incentive Plan adopted by Holdings in May, 1999. Except as otherwise
specified in the long-term plan, the plan is administered by the Stock Option
Committee of the Board of Directors. Under the long-term plan, participants
may be granted nonqualified stock options, incentive stock options, stock
appreciation rights, restricted stock, phantom stock and other stock-based
awards. Up to 1,000,000 shares of common stock may be issued or sold under
the long-term plan, but this number may be adjusted. Under the long-term
plan, nonqualified stock options may be granted to participants to purchase
shares of common stock of Holdings at an option price of not less than 85% of
the fair market value of a share of common stock at the time the option is
granted. Options granted under the long-term plan terminate no later than ten
years from the date of grant.
RELATED PARTY TRANSACTIONS
DIRECTORS AS POLICYHOLDERS. The members of the Holdings Board, except
Mr. Lerner and Mr. Udstuen, are also policyholders of ISMIE and are eligible
to receive common stock in the conversion. See "Ownership of Common Stock."
These directors may experience claims requiring coverage under their
insurance policies.
SERVICES AND OFFICE SPACE. ISMIE, the attorney-in-fact and the
Medical Society share various support services under a shared services
agreement. The shared services agreement will be assumed by Holdings
following the conversion. Currently, services covered by the agreement are
office space, administrative, human resources, public relations, membership
services, communications, mail and other miscellaneous services. The
agreement has a term of five years and thereafter is automatically renewed on
an annual basis. Any party may terminate the agreement upon six month's prior
notice. Under the agreement, each party pays its pro rata share of the
estimated cost of providing the services based on the amount of services
expected to be used by each party. If actual usage of the services varies
from expected usage, adjustments to the rates may be negotiated by the
parties.
LOANS TO EXECUTIVE OFFICERS. Messrs. Lerner, Udstuen and Holden are
indebted to ISMIE and the attorney-in-fact under loans which will be assumed
by Holdings following the conversion. The loans are secured by mortgages on
the executives' homes. The principal balance remaining on the loans at
January 31, 1999 was $272,573, $102,672, and $466,751 for
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Messrs. Lerner, Udstuen and Holden, respectively. The loans are evidenced by
notes which bear interest at 6% and mature in 2021, in the case of Messrs.
Lerner and Udstuen, and in 2020 in the case of Mr. Holden (a portion of Mr.
Holden's loan matures in 2024). ISMIE believes the terms of the loans are
substantially equivalent to what the officers could have obtained from
unaffiliated third parties.
OWNERSHIP OF COMMON STOCK
The following table sets forth information regarding beneficial
ownership of Holdings common stock as of the completion of the conversion by
(i) each director and executive officer named in the Summary Compensation
Table and (ii) all directors and executive officers of Holdings as a group.
No person will own more than 5% of the outstanding shares of common stock.
The number of shares of common stock beneficially owned by each physician
director represents the number of shares the director and persons and
entities affiliated with the director are expected to receive as eligible
members under the terms of the conversion. Except as noted below, each holder
listed 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 ISMIE Holdings Inc., 20 North Michigan Avenue, Suite 700,
Chicago, Illinois 60602-4890.
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<TABLE>
<CAPTION>
NUMBER OF SHARES
EXPECTED TO BE PERCENT
NAME BENEFICIALLY OWNED OF TOTAL
- ---- ------------------ --------
<S> <C> <C>
Harold L. Jensen, M.D........................... 197 *
Walter Whisler, M.D............................. 4,237 *
Alexander R. Lerner............................. -0- -0-
Donald A. Udstuen............................... -0- -0-
Jeffrey M. Holden............................... -0- -0-
Eugene J. Gross................................. -0- -0-
Saul J. Morse................................... -0- -0-
Irwin A. Smith, M.D............................. 535 *
Peter A. Brusca, M.D............................ 1,729 *
Richard A. Geline, M.D.......................... 3,496 *
Henri S. Havdala, M.D........................... 754 *
Robert M. Reardon, M.D.......................... 172 *
Jane Jackman, M.D............................... 560 *
All directors and executive officers 11,680
as a group (13 persons)......................... *
</TABLE>
--------
* Less than one percent
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of the conversion, the authorized capital stock of
Holdings will consist of 40,000,000 shares of common stock, $0.01 par value per
share, and 5,000,000 shares of preferred stock, par value $0.01 per share, the
rights, preferences and powers of which may be designated by the Holdings Board.
At present, there are no shares of preferred stock issued or outstanding.
The following description sets forth the significant aspects of the
capital stock of Holdings should not be considered 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 DGCL, and the
certificate of incorporation and the bylaws of Holdings.
COMMON STOCK
Holders of shares of common stock have one vote per share on matters to
be voted upon by the stockholders and, except for the prior rights of the
holders of preferred stock, to receive dividends ratably when and as declared by
the Holdings Board out of legally available funds. Stockholders are also
entitled to share ratably in the assets of Holdings 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 do
not have 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 shares of common stock to be issued in the conversion
when issued will be fully paid and nonassessable. The rights, preferences and
powers of holders of common stock are secondary to the rights of the holders of
shares of any series of preferred stock which Holdings may issue in the future.
Pursuant to Section 160 of the DGCL, ISMIE Indemnity Company will not be
entitled to vote the shares of common stock issued to it in the conversion. See
"The Conversion -- Additional Aspects of the Conversion and the Merger Agreement
- -- Issuance of Shares to ISMIE Indemnity Company."
PREFERRED STOCK
The Holdings Board will have 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 must be stated in a resolution or resolutions providing for
the issuance of the series of preferred stock 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 Holdings, making removal of the
present management more difficult,
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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 Holdings.
STATUTORY, CHARTER AND BYLAW PROVISIONS WHICH COULD HAVE AN ANTI-TAKEOVER EFFECT
The following is a description of provisions of the DGCL, Illinois law
and the certificate of incorporation and bylaws of Holdings which could have an
anti-takeover effect. This summary should not be considered complete and should
be read with reference to the complete text of the DGCL, the certificate of
incorporation and the bylaws.
Holdings is governed by 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 time that the person became an "interested
stockholder," unless the business combination is approved in a prescribed
manner. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the "interested stockholder."
Subject to 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.
Illinois Insurance laws and regulations provide that no person may
acquire control of Holdings, and thus indirect control of its insurance
subsidiary, ISMIE Indemnity Company, unless the person has obtained the prior
approval of the Illinois Director of Insurance. Under Illinois law, any
purchaser of 10% or more of the voting stock of an insurance holding company is
presumed to have acquired control of affiliated or subsidiary insurers and is
required to obtain the approval of the Illinois Director of Insurance before
consummating the purchase.
Some provisions of the Certificate of incorporation and bylaws could
have anti-takeover effects. These provisions are intended to improve the
likelihood of continuity and stability in the composition of the policies
formulated by the Holdings Board. In addition, these provisions also are
intended to ensure that the Holdings Board will have sufficient time to act in
what the Board of directors believes to be in the best interests of ISMIE and
its stockholders. These provisions also are designed to reduce the vulnerability
of Holdings to an unsolicited proposal for a takeover 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 Holdings. The provisions are also
intended to discourage 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 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 the event would be favorable to the interest of
stockholders.
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CLASSIFIED BOARD OF DIRECTORS. The certificate of incorporation
provides for the 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 Holdings Board
will be elected each year. The classified board provision will help to assure
the continuity and stability of the Holdings Board and the business strategies
and policies of Holdings as determined by the 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
Holdings without the approval of the Holdings Board. In addition, the classified
board provision could delay stockholders who oppose the policies of the Holdings
Board from electing a majority of the Holdings Board for two years.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS. The
certificate of incorporation provides that stockholder action can be taken only
at an annual or special meeting of stockholders and prohibits stockholder action
by written consent in lieu of a meeting. The certificate of incorporation also
provides that special meetings of stockholders may be called only by the
President or Secretary at the request of a majority of the Holdings Board, or by
the Chairman. Stockholders are not permitted to call a special meeting of
stockholders or to require that the Holdings Board call a special meeting.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINEES. The certificate of incorporation establishes 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
Holdings. The stockholder notice procedure provides that only persons who are
nominated by, or at the direction of, the Holdings Board, or by a stockholder
who is entitled to vote at the meeting and who has given timely written notice
to the Secretary of Holdings prior to the meeting at which directors are to be
elected, will be eligible for election as directors. The stockholder notice
procedure also provides that at an annual meeting only the business may be
conducted as has been brought before the meeting by, or at the direction of, the
Holdings Board or by a stockholder who is entitled to vote at the meeting and
who has given timely written notice to the Secretary of the stockholder's
intention to bring the business before the 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 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 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 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, that business shall not be discussed or transacted.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES. The certificate of
incorporation provides that the Holdings Board will consist of not less than
three and not more than fifteen 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 Holdings. The Holdings Board currently
consists of ten directors. Further, unless affected by the rights of the holders
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of any series of preferred stock then outstanding, the certificate of
incorporation authorizes the Holdings Board to fill newly created
directorships. If a number of vacancies existed in the Holdings Board, this
provision could delay the ability of a stockholder from obtaining majority
representation on the Holdings Board by permitting the Holdings Board to
enlarge the Holdings Board in certain circumstances and fill the new
directorships with its own nominees. A director so elected by the Holdings
Board holds office until the next election of the class for which the
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 certificate of incorporation also provides that directors
may be removed only for cause and only by the favorable vote of holders of
two-thirds 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 Holdings
Board by filling the vacancies created by the removal with its own nominees.
EXCULPATION; INDEMNIFICATION. Holdings has included in its certificate
of incorporation 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. We believe
that these provisions are necessary to attract and retain qualified persons as
directors and officers.
BYLAWS. The certificate of incorporation provides that the directors
shall have concurrent power with the stockholders to make, alter, amend, change,
add or repeal the bylaws.
TRANSFER AGENT AND REGISTRAR
______________ has been appointed as the transfer agent and
registrar for the common stock.
LEGAL MATTERS
The validity of the common stock to be issued in the conversion will be
passed on for us by our counsel, Lord, Bissell & Brook.
EXPERTS
The consolidated financial statements of the Illinois State Medical
Inter-Insurance Exchange and subsidiary at December 31, 1998 and 1997, and for
each of the three years in the period ended December 31, 1998 and the balance
sheet of ISMIE Holdings Inc. at April 14, 1999 appearing in this proxy
statement/prospectus and registration statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon,
appearing elsewhere in this document, and are included in reliance upon the
reports given the authority of that firm as experts in accounting and auditing.
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GLOSSARY OF SELECTED INSURANCE TERMS
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 to the policy,
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"
which generally insures claims that arise
from incidents that occurred during the
policy period irrespective of when the
claims are reported.
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 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.
G-1
<PAGE>
GAAP Generally accepted accounting principles
in use throughout the United States in the
preparation of financial statements,
including the financial statements
presented in this proxy
statement/prospectus.
Incurred but not reported The estimated liabilities for future
(IBNR) reserves payments of losses and loss adjustment
expense that have occurred, but have not
yet been reported to the insurer.
Loss adjustment expense (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 Liabilities established for loss
reserves adjustment expense. Loss adjustment
expense includes an estimated provision
for incurred but not reported losses.
Loss ratio The ratio of net incurred losses and loss
adjustment expense to net premiums earned.
Net incurred losses include an estimated
provision for incurred but not reported
losses.
Net premiums written Gross premiums written less premiums
ceded.
Premiums ceded The consideration paid to reinsurers in
connection with reinsurance transactions.
Premiums earned The portion of premiums written applicable
the expired period of policies and,
accordingly, recognized as revenue during
a given period.
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.
G-2
<PAGE>
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 expenses 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.
Risk-Based Capital (RBC) Regulatory and rating agency targeted
Requirements 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 The accounting rules and procedures
(SAP) 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.
G-3
<PAGE>
ISMIE Holdings, Inc.
As of June 30, 1999 and as of April 14, 1999
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................F-2
Balance Sheets as of June 30, 1999 and as of April 14, 1999...........F-3
Notes to Balance Sheets...............................................F-4
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Board of Directors
ISMIE Holdings Inc.
We have audited the accompanying balance sheet of ISMIE Holdings Inc. as of
April 14, 1999. 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 ISMIE Holdings Inc. as of April 14,
1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
April 14, 1999
F-2
<PAGE>
ISMIE Holdings, Inc.
Balance Sheets
<TABLE>
<CAPTION>
JUNE 30 APRIL 14
1999 1999
---------------------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Investment in subsidiary $1,000 $1,000
--------- ---------
Total assets $1,000 $1,000
--------- ---------
--------- ---------
STOCKHOLDER'S EQUITY
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding $ - $ -
Common stock, $.01 par value, 40,000,000 shares
authorized; 1,000 shares issued and outstanding 10 10
ADDITIONAL PAID-IN CAPITAL 990 990
--------- ---------
Total stockholder's equity $1,000 $1,000
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
ISMIE Holdings, Inc.
Notes to Balance Sheets
April 14, 1999
1. ORGANIZATION
ISMIE Holdings Inc. (ISMIE Holdings) is a Delaware corporation that is a wholly
owned subsidiary of Illinois State Medical Inter-Insurance Exchange (Exchange).
ISMIE Holdings has no historic operations and was organized in April 1999 as
part of the Exchange's plan to reorganize its corporate structure.
In April 1999, ISMIE Holdings acquired the outstanding stock of ISMIE Indemnity
Company, a newly organized Illinois stock insurer.
2. UNAUDITED INTERIM INFORMATION
The accompanying balance sheet and notes as of June 30, 1999 are unaudited. In
the opinion of management, such information contains all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of ISMIE
Holdings' balance sheet. There were no operations for the period from April 14,
1999 (date of inception) through June 30, 1999.
3. RELATED PARTIES
Certain of the members of the ISMIE Holdings Board of Directors are also
policyholders of the Exchange and eligible to receive Common Stock of ISMIE
Holdings. These directors may experience claims requiring coverage under their
respective insurance policies.
F-4
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Index to Consolidated Financial Statements
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors.........................................................................F-6
Consolidated Balance Sheets as of December 31, 1998 and 1997, and as of
June 30, 1999.......................................................................................F-7
Consolidated Statements of Income for the years ended December 31, 1998, 1997,
and 1996, and for the six months ended June 30, 1999 and 1998.......................................F-8
Consolidated Statements of Changes in Members' Equity for the years ended
December 31, 1998, 1997, and 1996, and for the six months ended June 30, 1999.......................F-9
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997, and 1996, and for the six months ended June 30, 1999 and 1998................................F-10
Notes to Consolidated Financial Statements............................................................F-11
</TABLE>
F-5
<PAGE>
Report of Independent Auditors
Board of Governors
Illinois State Medical Inter-Insurance Exchange
We have audited the accompanying consolidated balance sheets of the Illinois
State Medical Inter-Insurance Exchange and subsidiary as of December 31, 1998
and 1997, and the related consolidated statements of income, changes in members'
equity, and cash flows for each of the three years in the period ended December
31, 1998. 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 consolidated financial position of the Illinois State
Medical Inter-Insurance Exchange and subsidiary at December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
March 1, 1999,
except for Note 12, as to which the date is
May 5, 1999
F-6
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Consolidated Balance Sheets
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998 1997
--------------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Investments (NOTE 3):
Fixed maturities - At fair value (amortized cost:
1999 - $798,912; 1998 - $799,135; 1997 - $785,090 $820,191 $736,816
$728,838)
Equity securities - At fair value (cost: 1999 -
$19,909; 1998 - $15,975) 24,021 17,969 -
Other invested assets 10,108 10,581 11,422
----------- ---------- ------------
819,219 848,741 748,238
Cash and cash equivalents 35,181 38,920 39,095
Premiums receivable 13,298 9,134 12,015
Accrued investment income 11,059 10,957 9,721
Income taxes recoverable 938 3,373 12,605
Reinsurance receivables (NOTE 7) 223,496 232,613 335,426
Funds held by reinsurers 11,167 9,290 25,797
Deferred income taxes (NOTE 4) 45,731 32,682 37,200
Other assets (NOTE 5) 25,330 25,718 26,409
----------- ---------- ------------
$1,185,419 $1,211,428 $1,246,506
----------- ---------- ------------
----------- ---------- ------------
LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Losses and loss adjustment expenses (NOTES 6 AND 7) $887,055 $895,275 $946,082
Unearned premiums 18,979 24,343 22,126
Funds held for or payable to reinsurers 14,119 15,461 25,617
Accrued expenses and other liabilities (NOTE 5) 23,612 24,626 23,415
Income taxes payable 1,050 888 455
Advanced premiums billed but not collected 11,845 8,145 8,642
----------- ---------- ------------
956,660 968,738 1,026,337
Commitments and contingencies (NOTES 7 AND 10)
Members' equity:
Unassigned members' equity 235,070 227,707 214,982
Accumulated other comprehensive income (6,311) 14,983 5,187
(loss)
----------- ---------- ------------
228,759 242,690 220,169
----------- ---------- ------------
$1,185,419 $1,211,428 $1,246,506
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Consolidated Statements of Income
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED DECEMBER 31
1999 1998 1998 1997 1996
------- -------- --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME
Premiums earned $69,820 $56,489 $131,998 $97,667 $85,817
Net investment income 24,246 22,689 45,361 46,663 46,436
Net realized gains (losses)
on investments (NOTE 3) 388 69 (104) (401) 2,406
Other income - - 5,095 - -
------- -------- --------- --------- --------
94,454 79,247 182,350 143,929 134,659
LOSSES AND EXPENSES
Losses and loss adjustment 77,728 64,518 153,660 117,816 105,403
expenses
Other underwriting
expenses 8,647 7,289 16,222 10,878 6,296
------- -------- --------- --------- --------
86,375 71,807 169,882 128,694 111,699
------- -------- --------- --------- --------
Income before income taxes 8,079 7,440 12,468 15,235 22,960
Income taxes (credit) (NOTE
4):
Current 2,300 2,100 500 3,900 -
Deferred (1,584) (1,786) (757) (7,106) 19,541
------- -------- --------- --------- --------
716 314 (257) (3,206) 19,541
------- -------- --------- --------- --------
Net income $7,363 $7,126 $12,725 $18,441 $3,419
------- -------- --------- --------- --------
Earnings per share (pro forma)
- Unaudited (NOTE 12) $ .74 $1.27
------- ------
------- ------
</TABLE>
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Consolidated Statements of Changes in Members' Equity
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
UNASSIGNED OTHER
MEMBERS' COMPREHENSIVE
EQUITY INCOME (LOSS) TOTAL
---------- -------------- -----------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $193,122 $7,847 $200,969
1996 activity:
Net income 3,419 - 3,419
Other comprehensive income:
Change in unrealized loss on
investments, net of tax - (11,052) (11,052)
Comprehensive loss - - (7,633)
-------- ---------- ----------
BALANCE AT DECEMBER 31, 1996 196,541 (3,205) 193,336
1997 activity:
Net income 18,441 - 18,441
Other comprehensive income:
Change in unrealized gain on
investments, net of tax - 8,392 8,392
Comprehensive income - - 26,833
-------- ---------- -----------
BALANCE AT DECEMBER 31, 1997 214,982 5,187 220,169
1998 activity:
Net income 12,725 - 12,725
Other comprehensive income:
Change in unrealized loss on
investments, net of tax - 9,796 9,796
Comprehensive income - - 22,521
-------- ---------- -----------
BALANCE AT DECEMBER 31, 1998 227,707 14,983 242,690
1999 activity (unaudited):
Net income 7,363 - 7,363
Other comprehensive income:
Change in unrealized loss on
investments, net of tax - (21,294) (21,294)
Comprehensive loss - - (13,931)
-------- ---------- -----------
BALANCE AT JUNE 30, 1999
(UNAUDITED) $235,070 $ (6,311) $228,759
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-9
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Consolidated Statements of Cash Flows
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 YEAR ENDED DECEMBER 31
1999 1998 1998 1997 1996
------- ------------ --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $7,363 $7,126 $12,725 $18,441 $3,419
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Deferred income tax (1,584) (1,786) (757) (7,106) 19,541
Amortization of net premium on
investments 495 664 1,381 1,724 2,185
Net realized (gains) losses on
investments (388) (69) 104 401 (2,406)
Decrease in book value of other
invested assets 83 83 166 166 176
(Increase) decrease in
receivables and other assets 3,362 (16,130) 121,656 43,470 (20,444)
Increase (decrease) in unpaid
losses and loss adjustment
expenses (8,220) (21,766) (50,807) (34,135) (41,430)
Increase (decrease) in unearned
premiums, funds held for or
payable to reinsurers,
advanced premiums billed but
not collected and accrued
expenses and other liabilities (4,021) (5,705) (7,223) (29,986) (27,792)
Increase in income taxes payable, net
of amounts recoverable 2,597 447 9,665 3,538 2,776
------- ------------ ------------ --------- ---------
Net cash provided by (used in) operating
activities (313) (37,136) 86,910 (3,487) (63,975)
INVESTING ACTIVITIES
Purchase of investments (160,441) (111,152) (302,135) (128,722) (120,049)
Proceeds from sale or maturity of
investments 157,015 115,341 215,052 150,397 183,932
------- ------------ ------------ --------- ---------
Net cash provided by (used in) investing
activities (3,426) 4,189 (87,083) 21,675 63,883
FINANCING ACTIVITIES - OTHER - - (2) (8) (284)
------- ------------ ------------ --------- ---------
Increase (decrease) in cash and cash
equivalents (3,739) (32,947) (175) 18,180 (376)
Cash and cash equivalents, at beginning
of period 38,920 39,095 39,095 20,915 21,291
------- ------------ ------------ --------- ---------
Cash and cash equivalents, at end of
period $35,181 $6,148 $38,920 $39,095 $20,915
------- ------------ ------------ --------- ---------
------- ------------ ------------ --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
F-10
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Notes to Consolidated Financial Statements
1. ORGANIZATION AND OPERATIONS
The Illinois State Medical Inter-Insurance Exchange (Exchange) provides
comprehensive professional liability insurance to Illinois physicians. The
Exchange is an inter-insurance exchange, or reciprocal, formed under the
Illinois Insurance Code. An inter-insurance exchange is an organization under
which policyholders "exchange" insurance contracts and thereby insure each other
and become members of the Exchange. The Exchange is managed under contract by
Illinois State Medical Insurance Services, Inc. (Services), which was formed on
July 1, 1998, as a wholly owned subsidiary of the Exchange, subject to the
general supervision of the Exchange's Board of Governors. Prior to July 1, 1998,
the Exchange was managed by an affiliated entity, Illinois Medical Physician
Insurance Services, Inc. (IMPIS), which is a wholly owned subsidiary of the
Illinois State Medical Society (Society). Services and IMPIS are compensated by
the Exchange on a cost-reimbursement basis. The Exchange and Services were
organized solely for the purpose of providing insurance for Illinois physicians.
Generally, the Exchange has not been operated to generate a profit. Earnings
that the Exchange has generated through its history have been used to write
additional business and absorb losses. The Exchange was organized with capital
contributed by members in the form of guaranty fund certificates. These
certificates were redeemed before 1989.
Since July 1, 1986, all insurance policies issued by the Exchange are on a
"claims made" basis and provide coverage for the policyholder for claims first
made against the policyholder and reported to the Exchange during the policy
period for claims which occurred on or after the retroactive date stated in the
policy. Prior to July 1986, all insurance policies issued by the Exchange were
on an "occurrence" basis and provided coverage for the policyholder for claims
incurred during the policy period regardless of when the claims were reported to
the Exchange. The Exchange also provides, upon payment of an additional premium,
a reporting endorsement that extends the period in which claims otherwise
covered by the "claims made" policy may be reported to the Exchange. In the
event of death or permanent disability of a policyholder, the reporting
endorsement is issued without additional premium. Upon retirement of a
policyholder, as defined in the policy, the policyholder may be eligible for a
credit toward the additional premium for the reporting endorsement calculated at
one-ninetieth of the additional premium for each consecutive month that the
policyholder was insured by the Exchange. In no event will the credit exceed
100% of the additional premium. The Exchange establishes reserves to fund the
reporting endorsements that are issued without additional premium or with
reduced premiums.
F-11
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the financial
statements of the Exchange and Services (since date of inception), collectively,
the "Company." These financial statements have been prepared in conformity with
generally accepted accounting principles. All transactions between the Exchange
and Services have been eliminated in the preparation of the consolidated
financial statements.
USE OF ESTIMATES
The preparation of the consolidated financial statements of the Company requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates and assumptions, and such differences may be material to the
financial statements.
INVESTMENTS
The Company has designated its entire fixed-maturities and equity securities
portfolio as available-for-sale. These available-for-sale investments are
carried at fair value. Changes in fair value for these investments, after
adjustment for deferred income taxes, are reported as other comprehensive income
directly in members' equity.
Fair values for fixed maturities and equity securities are based on quoted
market prices, or, if they are not actively traded, on estimated values obtained
from independent pricing services. Realized gains or losses are determined on
the basis of specific identification and are included in the determination of
net income or loss. The discount or premium on investments is amortized using
the interest method.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for losses and loss adjustment expenses represents an estimate of
the ultimate net cost of all such amounts that are unpaid at the balance sheet
dates. The Company does not discount the liability for losses and loss
adjustment expenses. The liability is based on loss and loss adjustment expense
factors determined by independent consulting actuaries using statistical
analyses and projections and the historical loss experience of the Company, and
gives effect to estimates of trends in claim severity and
F-12
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
frequency. These estimates are continually reviewed and, as adjustments become
necessary, such adjustments are included in current operations. Although
management believes that the estimate of the liability for losses and loss
adjustment expenses is reasonable in the circumstances, it is possible that the
actual incurred losses and loss adjustment expenses will not conform to the
assumptions inherent in the determination of the liability. Accordingly, the
ultimate settlement of losses and the related loss adjustment expenses may vary
significantly from the estimated amounts included in the financial statements.
PREMIUMS
Premiums are earned ratably over the policy period to which they apply. Net
premiums written totaled $134,215,000, $104,953,000, and $85,532,000 in 1998,
1997, and 1996, respectively.
REINSURANCE
Reinsurance premiums, losses, and loss adjustment expenses are accounted for on
a basis consistent with the accounting for the original policies issued and the
terms of the reinsurance contracts. Premiums ceded to other companies have been
reported as a reduction of premium revenue. Reinsurance receivables are reported
as assets in the accompanying consolidated balance sheets. There are no
restrictions on the funds paid to or held for reinsurers.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs (primarily commissions and beginning in 1998, the
Illinois privilege tax), which vary with and are directly related to the
production of business, are capitalized and amortized over the effective period
of the related policies. Included in other underwriting expenses were policy
acquisition costs of $2,039,000 and $1,675,000 for the six months ended June 30,
1999 and 1998, and $3,413,000, $2,253,000, and $1,303,000 for the years ended
December 31, 1998, 1997, and 1996, respectively.
There were no unamortized policy acquisition costs at any of the balance sheet
dates.
OTHER INCOME
During 1998, the Company received $5,095,000 representing interest on federal
income taxes recoverable from prior tax years.
F-13
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash balances and investments with initial
maturities of three months or less.
FINANCIAL INSTRUMENTS
The fair values of investments are reported in Note 3. The fair values of other
financial instruments approximate their carrying values at the balance sheet
dates.
SEGMENT INFORMATION
In 1997, the Financial Accounting Standards Board (FASB) issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which became effective on December 31, 1998. The Company operates in only one
reportable industry segment and therefore Statement No. 131 did not require
disclosure of any significant information beyond that previously provided in the
Company's consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company plans to adopt Statement No.
133 on the effective date. Statement No. 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. The Company does not anticipate that the adoption of this
Statement will have a significant effect on its results of operations or
financial position.
In 1998, the Accounting Standards Executive Committee of the AICPA issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," SOP 98-1, which has been
adopted prospectively as of January 1, 1999, requires the capitalization of
certain costs incurred in connection with developing or obtaining internal-use
software. Prior to the adoption of SOP 98-1, the Company expensed all
internal-use-software-related costs as incurred. The effect of adopting SOP 98-1
was not material to the Company's consolidated operating results.
F-14
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INTERIM INFORMATION
The accompanying financial statements and notes as of June 30, 1999, and for the
six months ended June 30, 1999 and 1998, are unaudited. In the opinion of
management, such information contains all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the Company's
financial statements. The results of operations for the interim period are not
necessarily indicative of results that may be expected for the entire year.
3. INVESTMENTS
The amortized cost, gross unrealized gains and losses, and fair value of
investments in fixed maturities and equity 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>
AT JUNE 30 , 1999 (UNAUDITED)
Fixed maturity securities:
U.S. government obligations $119,460 $ 714 $ (2,327) $117,847
Corporate securities 365,362 1,486 (9,783) 357,065
Mortgage-backed and other
asset-backed securities 301,793 1,017 (4,686) 298,124
States, territories, and
possessions 6,690 - (123) 6,567
Public utilities 5,607 - (120) 5,487
---------------------------------------------------------------
Total fixed maturities 798,912 3,217 (17,039) 785,090
Total equity securities 19,909 4,424 (312) 24,021
===============================================================
$818,821 $ 7,641 $ (17,351) $809,111
===============================================================
AT DECEMBER 31, 1998
Fixed maturity securities:
U.S. government obligations $155,165 $ 5,848 $ (7) $161,006
Corporate securities 345,733 10,965 (119) 356,579
Mortgage-backed and other
asset-backed securities 285,930 4,191 (190) 289,931
States, territories, and
possessions 6,691 319 - 7,010
Public utilities 5,616 49 - 5,665
---------------------------------------------------------------
Total fixed maturities 799,135 21,372 (316) 820,191
Total equity securities 15,975 2,440 (446) 17,969
===============================================================
$815,110 $23,812 $ (762) $838,160
===============================================================
</TABLE>
F-15
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1997
Fixed maturity securities:
U.S. government obligations $152,551 $ 1,809 $ (195) $154,165
Corporate securities 261,739 3,781 (657) 264,863
Mortgage-backed and other
asset-backed securities 307,854 4,074 (927) 311,001
States, territories, and 6,694 93 - 6,787
possessions
---------------------------------------------------------------
Total fixed maturities $728,838 $ 9,757 $(1,779) $736,816
===============================================================
</TABLE>
The amortized cost and fair value of fixed maturities, by contractual maturity,
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30 , 1999 DECEMBER 31, 1998
AMORTIZED FAIR AMORTIZED FAIR
MATURITY COST VALUE COST VALUE
- ----------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Due after one year through five years $221,034 $218,420 $261,404 $265,674
Due after five years through ten years 262,062 255,471 237,777 250,166
Due after ten years 14,023 13,075 14,024 14,420
---------------------------------------------------------------
497,119 486,966 513,205 530,260
Mortgage-backed and other asset-
backed securities 301,793 298,124 285,930 289,931
---------------------------------------------------------------
$798,912 $785,090 $799,135 $820,191
===============================================================
</TABLE>
The expected maturities in the foregoing table will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
The components of the equity securities are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
---------------------------------------
(UNAUDITED)
<S> <C> <C>
Equity securities:
Common stock:
Banks, trust, and insurance companies $ 3,667 $ 2,501
Industrial, miscellaneous, and all other 20,354 15,468
---------------------------------------
Total equity securities $ 24,021 $ 17,969
=======================================
</TABLE>
F-16
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Proceeds from the sales of fixed maturities were $107,970,000 and $84,177,000
for the six months ended June 30, 1999 and 1998, and $135,390,000, $105,489,000,
and $123,388,000 for the years ended December 31, 1998, 1997, and 1996,
respectively. Proceeds from the sales of equity securities were $2,490,000 for
the six months ended June 30, 1999, and $1,810,000 for the year ended December
31, 1998.
Major categories of net investment income are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED DECEMBER 31
1999 1998 1998 1997 1996
-------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Fixed maturities $25,219 $23,662 $47,171 $47,373 $48,373
Equity securities 84 - 50 - -
Cash and cash 782 636 1,390 2,060 1,738
equivalents
Other 310 305 601 621 602
-------------------------------------------------------------------------------
Total investment 26,395 24,603 49,212 50,054 50,713
income
Investment expenses 2,149 1,914 3,851 3,391 4,277
-------------------------------------------------------------------------------
Net investment income $24,246 $22,689 $45,361 $46,663 $46,436
===============================================================================
</TABLE>
Realized gains and losses on investments are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED DECEMBER 31
1999 1998 1998 1997 1996
-------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Fixed maturities:
Gross realized gains $650 $265 $ 853 $ 545 $1,852
Gross realized losses - - 478 537 576
-------------------------------------------------------------------------------
Net realized gains on
fixed maturities 650 265 375 8 1,276
Equity securities:
Gross realized gains - - 81 - -
Gross realized losses 124 - 157 - -
-------------------------------------------------------------------------------
Net realized losses on
equity securities (124) - (76) - -
Other invested assets:
Gross realized gains - - - - 1,269
Gross realized losses 138 196 403 409 139
Net realized gains -------------------------------------------------------------------------------
(losses) on other (138) (196) (403) (409) 1,130
invested assets
-------------------------------------------------------------------------------
Net realized gains
(losses) on
investments $388 $ 69 $(104) $(401) $2,406
===============================================================================
</TABLE>
F-17
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The change in the Company's unrealized appreciation (depreciation) on fixed
maturities was $15,071,000, $12,909,000, and $(17,003,000), for the years ended
December 31, 1998, 1997, and 1996, respectively.
At December 31, 1998 and 1997, fixed maturities with an aggregate amortized cost
of $3,134,000 and $3,027,000, respectively, were held on deposit to meet
statutory and reinsurance escrow requirements.
The Company participates, through a trustee, in a securities lending program
with major securities brokers. Investment securities with an aggregate fair
value of $74,610,000 (unaudited) were loaned to various brokers in connection
with a securities lending program at June 30, 1999. These securities are
returnable on demand and collateralized by cash deposits amounting to
approximately 102% of the market value of the securities loaned. Since the
Company may demand that a counterparty return the securities which it has
borrowed at any time, the Company retains effective control of all assets
participating in the securities lending program. The Company receives lending
fees and continues to earn interest on the loaned securities.
There were no investment securities loaned at December 31, 1998 or 1997.
F-18
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. INCOME TAXES
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities, and are measured
using the enacted tax rates.
Significant components of deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998 1997
----------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Tax-basis loss reserve discounting adjustment $42,183 $42,486 $47,408
Alternative minimum tax credit carryforward 2,244 4,674 4,046
Tax-basis unearned premium reserve adjustment 3,335 79 1,233
Tax-basis fixed asset adjustment 469 1,396 1,367
Net unrealized losses on securities 3,398 - -
Other 2,392 1,765 1,176
----------------------------------------------
Total deferred tax assets 54,021 51,114 55,230
Valuation allowance for deferred tax assets (7,753) (9,857) (14,758)
----------------------------------------------
Deferred tax assets net of valuation allowance 46,268 41,257 40,472
Deferred tax liabilities:
Discount amortization on bonds and other (537) (508) (480)
Net unrealized gains on securities - (8,067) (2,792)
----------------------------------------------
Total deferred tax liabilities (537) (8,575) (3,272)
----------------------------------------------
Net deferred tax asset $45,731 $32,682 $37,200
==============================================
</TABLE>
The nature of the deferred tax assets and liabilities are such that the reversal
pattern for these temporary differences should result in realization of a
portion of the deferred tax assets. The Company establishes a "valuation
allowance" for any portion of the deferred tax asset where management believes
that it is more likely than not that the asset will not be realized. The Company
evaluates a number of factors when determining the valuation allowance. A
principal factor includes the Company's estimate of future taxable income. The
changes in the valuation allowance were due principally to changes in the
Company's estimate of future taxable income. These estimates are influenced by
the Company's actual financial reporting-basis results. The valuation allowance
decreased by $2,104,000 for the six months ended June 30, 1999, decreased by
$4,901,000 and $8,597,000 in 1998 and 1997, respectively, and increased by
$8,914,000 in 1996.
F-19
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. INCOME TAXES (CONTINUED)
A reconciliation of income tax computed at the United States federal statutory
tax rate of 35% to income tax expense is as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED DECEMBER 31
1999 1998 1998 1997 1996
----------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal income tax at 35% $ 2,828 $2,604 $4,364 $ 5,332 $ 8,036
Prior-period tax return
adjustments - - (170) 68 1,740
Change in valuation
allowance (2,104) (2,450) (4,901) (8,597) 8,914
Other (8) 160 450 (9) 851
----------------------------------------------------------------------
Total income tax expense
(benefit) $ 716 $ 314 $ (257) $(3,206) $19,541
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
At December 31, 1998, the Company has alternative minimum tax credits of
approximately $4,674,000 that have no expiration date. The Company received
refunds of income taxes of $11,665,000, $3,737,000, and $3,842,000 in 1998,
1997, and 1996, respectively, and made tax payments of $2,500,000 in 1998.
5. ANNUITIES PURCHASED TO FUND CERTAIN OBLIGATIONS
The Company currently purchases annuities without recourse on a competitive
basis to fund settlements of indemnity losses. The nature and terms of the
annuities vary according to settlements. The current value of annuities
purchased in prior years from other insurance companies, but with recourse to
the Company, and reflected as an other asset and an other liability in the
consolidated balance sheets, totaled $17,356,000 and $17,222,000 as of December
31, 1998 and 1997, respectively. The Company becomes liable only in the event
that an insurance company cannot meet its obligations under existing agreements
and state guaranty funds are not available.
F-20
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and ending loss
and loss adjustment expenses (LAE) reserve balances, net of reinsurance
receivables, as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED DECEMBER 31
1999 1998 1998 1997 1996
--------- --------- -------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Liability for losses and LAE,
net of reinsurance
receivables, at beginning of $673,516 $614,225 $614,225 $585,113 $658,669
period
Add: Provision for losses and LAE
for claims, net of reinsurance,
occurring during:
Current period 77,728 64,518 163,962 121,912 99,373
Prior periods - - (10,302) (4,096) 6,030
--------- --------- -------- -------- ----------
Incurred losses and LAE during
the current period, net of 77,728 64,518 153,660 117,816 105,403
reinsurance
Effect of commutation - - 79,130 81,080 -
Deduct: Loss and LAE payments for
claims, net of reinsurance,
occurring during:
Current period 144 676 4,379 6,436 3,449
Prior periods 80,947 94,243 169,120 163,348 175,510
--------- --------- -------- -------- ----------
Claim payments during the current
period, net of reinsurance 81,091 94,919 173,499 169,784 178,959
--------- --------- -------- -------- ----------
Liability for losses and LAE, net of
reinsurance receivables, at end of 670,153 583,824 673,516 614,225 585,113
period
Reinsurance receivable on losses and
LAE, at end of period 216,902 340,492 221,759 331,857 395,104
--------- --------- -------- -------- ----------
Liability for losses and LAE, gross
of reinsurance receivables, at end $895,275 $946,082 $980,217
of period $887,055 $924,316
--------- --------- -------- -------- ----------
--------- --------- -------- -------- ----------
</TABLE>
The incurred development related to prior years for the years ended December 31,
1998 and 1997, was principally a result of the Company's methodology of
reallocating reserves for death, permanent disability, or retirement (DDR)
policies from prior years to the current year upon issuance of a DDR policy.
This reallocation has no effect on the Company's total incurred losses. For
1996, the incurred development related to prior years was a result of
higher-than-expected losses and related expenses in 1996.
F-21
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED)
During 1998 and 1997, the Exchange received proceeds of $79,130,000 and
$81,080,000, respectively, related to the commutation of a ceded reinsurance
agreement in each year. At the time of the commutations, the Exchange reduced
reinsurance receivables totaling $62,784,000 and $30,992,000 related to the 1998
and 1997 periods, respectively. Favorable net loss reserve development related
to the commutations was substantially offset by increases in gross loss reserves
on other accident years.
7. REINSURANCE
Certain premiums and losses and loss adjustment expenses 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.
The Company's ceded reinsurance arrangements reduced certain items in the
accompanying consolidated financial statements as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED DECEMBER 31
1999 1998 1998 1997 1996
-------- ---------- -------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Premiums earned $12,983 $30,316 $45,453 $91,199 $122,040
Losses and loss adjustment
expenses 10,436 30,282 13,951 61,820 55,577
</TABLE>
Amounts reported as reinsurance receivables represent estimates of the ultimate
losses which will exceed the Company's retention levels. Included in reinsurance
receivables at June 30, 1999, and December 31, 1998 and 1997, were amounts due
from Cologne Re (Dublin) totaling $10,075,000, $10,075,000, and $85,686,000,
respectively. The majority of the remaining reinsurance receivables are due from
other United Kingdom-based reinsurers. The Company would remain liable to the
extent that the reinsuring companies were unable to meet their obligations.
Premiums ceded to reinsurers represent the estimated ultimate reinsurance
premiums based on estimated losses to be reinsured.
F-22
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. STATUTORY ACCOUNTING PRACTICES
The statutory accounting practices prescribed or permitted by regulatory
authorities for the Exchange differ in some respects from generally accepted
accounting principles. Members' equity and net income, as reported to the
domicillary state insurance department in accordance with statutory accounting
practices, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory surplus at year-end $187,224 $172,712 $158,621
Statutory net income for the year 11,968 11,335 22,960
</TABLE>
9. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement No. 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or members' equity.
Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in members' equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
Statement 130.
F-23
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. COMPREHENSIVE INCOME (CONTINUED)
The components of comprehensive income, and the related tax effects, are as
follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT Amount
BEFORE INCOME NET OF
TAXES TAXES TAXES
----------- --------- ---------
<S> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
Unrealized holding losses arising during
the period $(32,233) $(11,281) $(20,952)
Reclassification adjustment (526) (184) (342)
----------- ---------- ---------
Total other comprehensive income $(32,759) $(11,465) $(21,294)
----------- ---------- ---------
YEAR ENDED DECEMBER 31, 1998
Unrealized holding gains arising during
the year $15,370 $5,380 $9,990
Reclassification adjustment (299) (105) (194)
--------- ---------- -----------
Total other comprehensive income $15,071 $5,275 $9,796
--------- ---------- -----------
YEAR ENDED DECEMBER 31, 1997
Unrealized holding gains arising during
the year $12,918 $4,521 $8,397
Reclassification adjustment (8) (3) (5)
--------- ---------- ------------
Total other comprehensive income $12,910 $4,518 $8,392
--------- ---------- ------------
YEAR ENDED DECEMBER 31, 1996
Unrealized holding losses arising during
the year $(15,728) $(5,505) $(10,223)
Reclassification adjustment (1,276) (447) (829)
----------- --------- ------------
Total other comprehensive income $(17,004) $(5,952) $(11,052)
----------- --------- -------------
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
The Company has entered into certain lease and related agreements for office
space. The principal lease agreement is through November 2011, and contains
certain escalation clauses. At December 31, 1998, future minimum annual payments
under these agreements are $1,675,000.
F-24
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense for 1998, 1997, and 1996 amounted to $1,704,000, $1,700,000, and
$1,667,000, respectively. The Company received rental income of $377,000,
$371,000, and $381,000 in 1998, 1997, and 1996, respectively, from the Society
for office space made available for their use. The rental rates paid by the
Society for office space were based on current market rates.
The Company has been named as defendant in various legal actions in which
plaintiffs are seeking material amounts. Management intends to defend these
actions vigorously and believes that the actions should not have a material
adverse effect on the Company's financial position, results of operations, or
cash flows.
11. RELATED PARTIES
The Exchange, Services, and Society share various support services pursuant to a
Shared Services Agreement (the Shared Services Agreement). The services covered
by the Agreement are office space, administrative, human resources, public
relations, membership services, communications, mail, and other miscellaneous
services. The Shared Services Agreement has a term of five years, and thereafter
is automatically renewed on an annual basis. Any party may terminate the Shared
Services Agreement upon six months prior notice.
All such services are provided to each party. The total expenses incurred for
these services are allocated based on rates established and negotiated between
the parties. The rates are based on estimates of usage by entity. If actual
usage of the services varies from expected usage, adjustments to the rates may
be negotiated by the parties. Management believes the rates charged to the
Exchange are at competitive prices and the allocation method between the parties
is reasonable.
12. CONVERSION
On May 5, 1999, 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 ISMIE Holdings Inc. (the Conversion). Pursuant to the Conversion,
the Exchange will merge with and into ISMIE Indemnity Company (ISMIE Indemnity),
a newly organized Illinois stock insurer and a wholly owned subsidiary of ISMIE
Holdings Inc. that will be the surviving corporation of the Conversion. The
assets and liabilities of the Exchange
F-25
<PAGE>
Illinois State Medical Inter-Insurance Exchange and Subsidiary
Notes to Consolidated Financial Statements (continued)
12. CONVERSION (CONTINUED)
that will be merged into ISMIE Indemnity will be accounted for at a historical
cost in a manner similar to that in a pooling of interests. ISMIE Indemnity will
be licensed to write property and casualty insurance lines in the state of
Illinois, but has not conducted business prior to the Conversion.
The principal purpose of the Conversion is to enhance the Exchange's ability to
achieve its strategic goals by providing greater operating flexibility and
access to the capital markets. The Conversion will also provide Members of the
Exchange with shares of Common Stock in exchange for their membership interests
in the Exchange.
Certain of the members of the ISMIE Holdings Inc. Board of Directors are also
policyholders of the Exchange and eligible to receive Common Stock in the
Conversion. These directors may experience claims requiring coverage under their
respective insurance policies.
A special meeting of the Exchange Members will be held to approve the Merger
Agreement.
The Exchange incurred expenses related to the Conversion of $717,000 and
$730,000 for the year ended December 31, 1998 and six months ended June 30,
1999, respectively.
The costs of the Conversion are expensed as incurred.
Unaudited pro forma net income per share included in the consolidated statements
of income gives effect to the Conversion and the issuance of 10,000,000 shares
of Common Stock to Eligible Members of the Exchange.
F-26
F-26
<PAGE>
ANNEX I
PLAN AND AGREEMENT OF MERGER
THIS PLAN AND AGREEMENT OF MERGER (the "Plan"), dated as of May 5, 1999,
is among ISMIE HOLDINGS INC., a Delaware corporation ("Holdings"), ISMIE
INDEMNITY COMPANY, an Illinois corporation and a wholly owned subsidiary of
Holdings ("New Insurer"), and ILLINOIS STATE MEDICAL INTER-INSURANCE
EXCHANGE, an Illinois reciprocal insurance exchange (the "Company").
RECITALS
WHEREAS, the Company is an Illinois reciprocal insurance exchange
organized pursuant to the provisions of Article IV of the Insurance Code of
the State of Illinois (the "Illinois Insurance Code");
WHEREAS, New Insurer is an Illinois stock insurance company organized to
transact insurance under the Illinois Insurance Code;
WHEREAS, Holdings is a corporation incorporated in the State of Delaware
and a wholly owned subsidiary of the Company;
WHEREAS, Article X of the Illinois Insurance Code authorizes the merger
of the Company with and into the New Insurer;
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 proposed and duly approved the merger of the Company with
and into New Insurer (the "Merger") upon the terms and subject to the
conditions set forth in this Plan and in accordance with the Illinois
Insurance Code;
WHEREAS, in the Merger, the Membership Interests (as hereinafter
defined) of the Company shall be cancelled and extinguished in exchange for
the consideration described herein;
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;
I-1
<PAGE>
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 of this
Agreement being satisfied or duly waived, and in accordance with and subject
to the provisions of this Plan and the Illinois Insurance Code, at the
Effective Time (as defined in Section 1.2) 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 shall cease, and New Insurer shall continue
as the surviving corporation, sometimes hereinafter referred to as the
"Surviving Corporation," under the corporate name it possesses immediately
prior to the Effective Time. The Company and New Insurer are sometimes
hereinafter referred to as the "Constituent Entities."
1.2 EFFECTIVE TIME OF THE MERGER. The Merger shall be effected and
become effective at the time (herein called the "Effective Time") the
Illinois Director of Insurance issues a certificate of merger as provided for
in Section 163 of the Illinois Insurance Code. The day on which the Effective
Time occurs is hereinafter called the "Effective Date."
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 Illinois
Insurance Code, including, without limitation, Section 166 of the Illinois
Insurance Code. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time the Surviving Corporation shall have all of
the rights, privileges, immunities and powers and shall be subject to all of
the duties and liabilities granted or imposed by the Illinois Insurance Code.
The Surviving Corporation shall thereupon and thereafter possess all the
rights, privileges, immunities, powers and franchises of a public as well as
of a private nature, of each of the Constituent Entities; and all property,
real, personal and mixed, and all debts due on whatever account, including
subscriptions to shares, assessments payable from members or policyholders,
and all other choses in action and all and every other interest of, or
belonging to or due to, each of the Constituent Entities shall be deemed to
be transferred to and vested in the Surviving Corporation without further act
or deed; and the title to any real estate, or any interest therein, under the
laws of the State of Illinois vested in any of such companies shall not
revert or be in any way impaired by reason of such Merger. The Surviving
Corporation shall thenceforth be responsible and liable for all the
liabilities and obligations of the Constituent Entities; any
I-2
<PAGE>
claim existing or action or proceeding pending by or against any of the
Constituent Entities may be prosecuted to judgment as if such merger or
consolidation had not taken place, or the Surviving Corporation may be
substituted in its place; neither the rights of creditors nor any liens upon
the property of any of the Constituent Entities shall be impaired by such
Merger, but such liens shall be limited to the property upon which they were
liens immediately prior to the time of such Merger, unless otherwise provided
herein.
1.4 SUBSEQUENT ACTIONS. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deed, bill of
sale, assignment, assurance or any other action or thing is 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 the Illinois Insurance
Code.
1.6 DIRECTORS AND OFFICERS. The members of the Board of Directors of
New Insurer immediately prior to the Effective Time shall be the initial
directors of the Surviving Corporation, and the officers of New Insurer
immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation, in each case until their successors are duly elected
and qualified.
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:
I-3
<PAGE>
"Adoption Date" means May 5, 1999, the date that the Board of Governors
adopted this Plan.
"Attorney-in-Fact" means Illinois State Medical Insurance Services,
Inc., an Illinois corporation, a wholly owned subsidiary of the Company and
the Company's attorney-in-fact.
"Director" means the Director of Insurance of the Illinois Department,
or such governmental officer, body or authority as may succeed such Director
as the primary regulator of the Company's insurance business under applicable
law.
"Earned Premiums" means earned premiums (exclusive of any premium
surcharges) in respect of a Policy at any time during the period beginning on
July 1, 1995 and ending on and including the Adoption Date.
"Eligible Member" means a Person who is a Member of the Company on the
Adoption Date.
"Holdings Common Stock" means the common stock, par value $.01 per
share, of Holdings.
"Illinois Department" means the Department of Insurance of the State of
Illinois.
"Member" means a Person who is a Named Insured or Additional Named
Insured under a Policy. A Named Insured or Additional Named Insured ceases
to be a Member when the period of time (without regard to any extended
reporting period) which commences with the Policy effective date specified on
the declarations page expires or terminates, either upon cancellation,
non-renewal of the Policy, or otherwise.
"Named Insured" or "Additional Named Insured" means any Person who is
specifically identified by name in the declarations page of a Policy as a
"named insured" or as an "additional named insured" on any endorsement
attached thereto other than a reporting endorsement. The Named Insured or
Additional Named Insured in any Policy as of any date shall be determined on
the basis of the Company's records as of such date, and the Company shall not
be required to examine or consider any other facts or circumstances. The
identity of the Named Insured or Additional Named Insured in a Policy shall
be determined by the Company without giving effect to any interest of any
other Person in such Policy and such determination shall be binding.
"Membership Interests" means rights of Members of the Company arising
under the APPLICANT SUBSCRIBER'S REPRESENTATION, AUTHORIZATION AND RELEASE,
APPLICATION FOR MEMBERSHIP--POWER OF ATTORNEY between Members and the Company
(the "Subscription
I-4
<PAGE>
Agreements"), the Company's Rules and Regulations, the Illinois Insurance
Code or otherwise, including, without limitation, the right to vote for
members of the Board of Governors and on other matters and the right they may
have in any assets of the Company and to participate in any distribution of
surplus on liquidation of the Company (but not including claim obligations of
the Company arising under Policies).
"Merger Shares" means the shares of Holdings Common Stock to be
delivered by virtue of the Merger (i) to Eligible Members and (ii) to New
Insurer as consideration for the cancellation of the shares of Holdings
Common Stock held by the Company, which cancellation shall occur by virtue of
the Merger.
"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
reinsurance or (ii) a reporting endorsement.
2.2 CANCELLATION AND CONVERSION OF 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 any other Person, and
subject to Section 2.6 hereof regarding dissenter's rights:
(a) All Membership Interests in existence immediately prior to the
Effective Time shall be cancelled and extinguished.
(b) Membership Interests of Eligible Members shall be converted into
the right to receive the number of Merger Shares as provided in Section
2.3(a) and Section 2.4 below.
(c) The Holdings Common Stock held by the Company immediately prior
to the Effective Time shall be cancelled and converted into the right to
receive the number of Merger Shares as provided in Section 2.3(b) below.
(d) Each share of common stock of New Insurer issued and outstanding
immediately prior to the Effective Time shall be converted into one validly
issued, fully paid and nonassessable share of common stock of the Surviving
Corporation.
I-5
<PAGE>
2.3 ALLOCATION OF MERGER SHARES. The Merger Shares issuable in the
Merger shall be allocated among the Eligible Members and New Insurer as
follows:
(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 Holdings Common Stock equal to the product of x and y, where "x"
equals 9,000,000 shares of Holdings Common Stock and "y" equals the
ratio of the Earned Premiums of such Eligible Member to the total
Earned Premiums of all Eligible Members during the period beginning on
July 1, 1995 and ending on and including the Adoption Date, plus
(ii) Each Eligible Member shall be allocated a number of shares
of Holdings Common Stock equal to 1,000,000 shares of Holdings Common
Stock divided by the total number of Eligible Members.
(b) The number of Merger Shares allocable to New Insurer shall be (i)
100,000 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 Holdings Common Stock held by the Company which are to be cancelled in
the Merger pursuant to Section 2.5 hereof.
2.4 FRACTIONAL SHARES. No fractional shares of Holdings Common Stock
shall be issued upon consummation of the Plan. The number of shares of
Holdings Common Stock calculated in accordance with Section 2.3 in respect of
each Eligible Member and New Insurer shall be the sum of the number of shares
of Holdings Common Stock after rounding such number to the nearest integral
number of shares (with one-half being rounded upward). Because of such
rounding, the aggregate number of shares of Holdings Common Stock issued to
Eligible Members in the Merger may be slightly more or less than 10,000,000.
2.5 ISSUANCE, DELIVERY, VOTING AND DIVIDENDS. Subject to Section 2.6
hereof, the Merger Shares allocated to the Eligible Members and New Insurer
shall be deemed to have been issued at the Effective Time. The Merger Shares
shall be delivered to the recipients thereof on the thirty-first day after
the Effective Date, or as soon as reasonably practicable thereafter, unless
the petition specified in Section 2.6 hereof has been filed with the Director
prior thereto. If such a petition has been filed, the Merger Shares shall be
delivered only upon the conclusion of the Director's review of dissenting
policyholder rights or the issuance of an order permitting or confirming the
effectiveness of the Merger in accordance with
I-6
<PAGE>
Section 168 of the Illinois Insurance Code. No recipient shall have the
right to vote the Merger Shares, and no dividends or other distributions with
respect to the Merger Shares shall be paid to any recipient, until the Merger
Shares are delivered as provided herein. Following delivery of the Merger
Shares, (i) each recipient other than New Insurer shall have the right to
vote its Merger Shares at any meeting the record date of which is after the
date of such delivery, and (ii) there shall be paid, without interest, to
each recipient in whose name the certificates representing the Merger Shares
are registered, all dividends and other distributions payable in respect of
such Merger Shares on a date subsequent to, and in respect of a record date
after, the Effective Time and prior to such delivery. Such recipient shall
also be entitled to receive, on the payment date therefor, any dividend or
distribution the record date for which occurs prior to such delivery and the
payment date for which occurs following such delivery.
2.6 DISSENTING MEMBERS' RIGHTS. If five percent or more of all
Eligible Members who do not vote in favor of the Plan at the Special Meeting
at which this Plan was adopted by the Eligible Members, at any time within
thirty days after the Effective Date, shall file a petition with the Director
for a hearing upon the Plan, the Director shall then order a hearing upon
said petition, fix the time and place of such hearing, and give written
notice to the Constituent Entities (as defined in Section 1.1), at least
fifteen days before the date of such hearing, all as provided in Section 168
of the Illinois Insurance Code. Any Eligible Member so petitioning may appear
before the Director at such hearing, either in person or by an attorney, and
be heard with reference to the Plan. If, upon such hearing being had, the
Director finds that the interests of the Members of the Company are not
properly protected, or if he finds that any reasonable objection exists to
this Plan, he shall enter an order revoking the approval already given, and
the Merger, and this Plan, shall, thereupon, become null and void. In the
event of the entry of such an order by the Director, no party hereto nor any
Eligible Member shall have any further rights under this Agreement. The
Director shall also have the power to revoke any approval of the Merger if
any officer, director or employee of any Constituent Entity shall, after
reasonable notice, fail or refuse without reasonable cause to attend and
testify at such hearing, or to produce any books or papers called for by the
Director.
2.7 NO FURTHER INTEREST IN THE COMPANY. Subject to Section 2.6 hereof,
as of the Effective Time, each Member of the Company shall cease to be a
Member, and shall have no further Membership Interest or any other interest
in the Company or any interest in the Surviving Corporation, except for any
interest that a Member may have as a holder of Holdings Common Stock or
rights as a policyholder under any Policy issued by the Company.
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ARTICLE III
APPROVAL BY THE DIRECTOR
3.1 DIRECTOR'S APPROVAL. This Plan is subject to the approval of the
Director pursuant to Article X of the Illinois Insurance Code. The change of
control of Holdings and New Insurer contemplated by the Plan is subject to
the standards established under Article VIII 1/2 of the Illinois Insurance
Code.
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
insurance exchange duly organized, validly existing and in good standing
under the laws of the State of Illinois. The Company has all requisite power
and authority required for it to hold, lease, convey or dispose of assets
held for subscribers 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.
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 approved the execution,
delivery and performance of this Plan and recommends the approval of this
Plan by the Eligible Members. Subject only to approval of the Company's
Eligible Members and the Director 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
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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
Power of Attorney Agreement between the Company and the Attorney-in-Fact, or
the Company's Rules and Regulations 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 Illinois Insurance Code, 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 the 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 the
Company of the transactions contemplated by this Plan, except where the
failure to give such notice, make such filings, or obtain such
authorizations, consents or approvals would, individually or 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, 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 stock insurance corporation duly organized,
validly existing and in good standing under the laws of the State of
Illinois. At the Effective time, each of Holdings and New Insurer will be
duly qualified or licensed to do business, and will be in good standing, in
each jurisdiction
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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. At
the Effective Time, New Insurer will hold a certificate of authority from the
Director to transact Class 2 and Class 3 insurance in the State of Illinois,
and such certificate of authority will be in full force and effect at the
Effective Time.
5.2 CAPITALIZATION. As of the date of this Plan, Holdings has an
authorized capital stock of 40,000,000 shares of Holdings Common Stock, par
value $.01 per share, of which 1,000 shares are duly and validly issued and
outstanding, fully paid and nonassessable, all of which are held by the
Company, and 5,000,000 shares of Preferred Stock, par value $.01 per share,
none of which is issued and outstanding. As of the date of this Plan, New
Insurer has an authorized capital stock of 500,000 shares of common stock,
par value $100 per share, of which 10 shares are duly and validly issued and
outstanding, fully paid, nonassessable, all of which are held by Holdings.
At the Effective Time, 25,000 shares of New Insurer will be duly and validly
issued and outstanding, fully paid and nonassessable, all of which will be
held by Holdings.
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
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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 Illinois Insurance Code, the Exchange Act, the Securities Act, and the
"takeover" or "blue sky" laws of the 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 the
failure to give such notice, make such filings, or obtain such
authorizations, consents or approvals would, individually or 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 Illinois Department as soon as is
reasonably practicable all necessary requests for approval, applications
and other necessary registrations and filings, including, but not limited
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;
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(c) mail to Eligible Members, as soon as is reasonably practicable
after receiving any required regulatory approvals (other than approval of
this Agreement under Article X of the Illinois Insurance Code), 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 not, 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, contain any untrue statement of a material fact or 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 Holdings Common Stock on a
national securities exchange or the Nasdaq Stock Market;
(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.
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6.2 SPECIAL MEETING OF ELIGIBLE MEMBERS OF THE COMPANY.
(a) The Company shall take all action necessary, in accordance with
the Illinois Insurance Code, the Subscription Agreements and the Company's
Rules and Regulations, 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 Adoption
Date.
(c) Each Eligible Member shall be entitled to vote in person or by
proxy in a manner to be prescribed by the Director and the Company's Rules
and Regulations; 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 approve the
Merger and this Plan.
(e) The Company shall use its best efforts to solicit from Eligible
Members proxies or otherwise secure the vote or consent of the Eligible
Members in favor of approval of the Merger and the Plan.
(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 20 days prior to the
Special Meeting, and such notice and proxy shall be in a form satisfactory
to the Director. Notice of the Special Meeting shall be accompanied by
information relevant to the Special Meeting.
(g) The affirmative vote of the Eligible Members required for
approval of this Plan and the Merger shall be two-thirds of the votes cast
by 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 shall 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 term "officer" including for this purpose the chief executive officer,
the chief operating officer, the chief administrative officer, the chief
financial officer and the chief legal officer)(the "Indemnified Parties") to
the fullest extent permitted by applicable
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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 (or, 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 Rules and Regulations 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 Illinois authorized to
transact insurance under the Illinois Insurance Code, (ii) the policyholders
of the Company immediately prior to the Effective Time shall become
policyholders of the Surviving Corporation; (iii) the Surviving Corporation
shall 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 of suit; and (iv) the Surviving Corporation shall timely file
with the Director the financial statements and tax returns required by the
Illinois Insurance Code, and shall timely pay all taxes found to be due
relating to the business of the
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Company in the State of Illinois during the calendar year of the Merger, in
accordance with the Illinois Insurance Code.
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 Illinois
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 the Illinois Insurance Code, by the requisite vote or consent
of the shareholders of New Insurer required by the Illinois Insurance Code,
and by the requisite vote or consent of the stockholder of Holdings;
(d) the Company shall have received 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 Holdings Common Stock
pursuant to the Merger;
(e) 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
(f) prior to the Effective Time, the Company and Holdings shall have
received from an investment banking firm of recognized standing an opinion
that the
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exchange of the aggregate Membership Interests for the Merger Shares 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
(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,
1999; 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.
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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,
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such provision, as to such jurisdiction, shall be ineffective, without
invalidating the remaining provisions of this Plan or affecting the 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:
Illinois State Medical Inter-Insurance Exchange
20 North Michigan Avenue, Suite 700
Chicago, Illinois 60602-4890
Attention: Chairman, Board of Governors
If to Holdings to:
ISMIE Holdings Inc.
20 North Michigan Avenue, Suite 700
Chicago, Illinois 60602-4890
Attention: Chairman, Board of Directors
If to New Insurer, to:
ISMIE Indemnity Company
20 North Michigan Avenue, Suite 700
Chicago, Illinois 60602-4890
Attention: Chairman, Board of Directors
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9.8 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.
9.9 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.
9.10 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 Illinois applicable to contracts made and to be performed
therein.
[SIGNATURE PAGE FOLLOWS]
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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."
ILLINOIS STATE MEDICAL INTER-INSURANCE EXCHANGE
By:
--------------------------------------------
Chairman
By:
--------------------------------------------
Secretary
ISMIE INDEMNITY COMPANY
By:
--------------------------------------------
Chairman
By:
--------------------------------------------
Secretary
ISMIE HOLDINGS INC.
By:
--------------------------------------------
Chairman
By:
--------------------------------------------
Secretary
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ANNEX II
[SALOMON SMITH BARNEY INC. LETTERHEAD]
May 5, 1999
The Board of Governors
Illinois State Medical Inter-Insurance Exchange
20 North Michigan Avenue, Suite 700
Chicago, IL 60602
Members of the Board of Directors:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the Eligible Members of Illinois State
Medical Inter-Insurance Exchange ("ISMIE" or the "Company"), as a group, of
the exchange of the aggregate Membership Interests for shares of Common Stock
of ISMIE Holdings Inc. (the "Holding Company"), pursuant to the Plan and
Agreement of Merger among the Company, the Holding Company and ISMIE
Indemnity Company, an Illinois stock insurance company, dated May 5, 1999
(the "Plan"). Capitalized terms not otherwise defined herein are used as
defined in the Plan.
The Plan provides for a merger and related transactions pursuant to
Article X of the Illinois Insurance Code (the "Conversion") and further
provides, among other things, that: (1) the Company will merge with and into
ISMIE Indemnity Company, the surviving corporation of the Merger; (2)
following such merger, ISMIE Indemnity Company will be a wholly owned
subsidiary of the Holding Company; (3) the Membership Interests in ISMIE will
be extinguished; (4) Eligible Members will receive shares of Common Stock of
the Holding Company as compensation for relinquishing their Membership
Interests in ISMIE; and (5) at the discretion of the board of directors of
the Holding Company, shares of Common Stock of the Holding Company may be
offered to the public in an Initial Public Offering.
As you are aware, Salomon Smith Barney Inc. has acted as financial
advisor to the Company in connection with the Conversion and has received a
fee in connection with those services. In addition, the Company has agreed
to retain Salomon Smith Barney Inc. as lead underwriter in connection with a
possible initial public offering (the "IPO"). Salomon Smith Barney Inc. and
its affiliates (including Citigroup Inc. and The Robinson-Humphrey Company,
LLC) may have other business relationships with the Company. The Company has
agreed to indemnify us for certain liabilities arising out of the rendering
of this opinion.
Pursuant to the Illinois Insurance Code, the Plan must be approved by
(a) the Illinois Director of Insurance (the "Director") and (b) not less than
two-thirds of the
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The Board of Governors
Illinois State Medical Inter-Insurance Exchange
May 5, 1999
Page 2
Eligible Members present in person or by proxy at the Special Meeting of the
policyholders. If approved by Eligible Members and the Director, and if the
other conditions set forth in the Plan or required by law are satisfied, the
Merger contemplated by the Plan will become effective on the Effective Date.
We do not express any opinion as to: (1) which of the Company's
policyholders are to be included among the Eligible Members; (2) the fairness
of the proposed consideration to be paid to any particular Eligible Member or
to any class of Eligible Members in connection with the Conversion, including
any provisions of the Plan relating to which Eligible Members receive Common
Stock of the Holding Company, the allocation of such Common Stock among
Eligible Members and other provisions of the Plan which distinguish among
Eligible Members; and (3) the fair market value of any shares of Common Stock
of the Holding Company to be issued pursuant to the Plan, the price at which
the Common Stock could be sold in an Initial Public Offering (the "IPO
Price"), or the price at which the Common Stock of the Holding Company issued
in connection with the Plan or pursuant to an Initial Public Offering will
trade. We note that the IPO Price would be a function of market conditions
and the recent performance of and outlook for the Company at that time. We
believe that trading in the Common Stock of the Holding Company for a period
following the completion of a distribution of the Common Stock of the Holding
Company, including an Initial Public Offering, would be characterized by a
redistribution of the Common Stock of the Holding Company among Eligible
Members that were issued shares of Common Stock and other investors. It is
possible that during these periods of redistribution, the Common Stock of the
Holding Company may trade at prices below the prices at which it would trade
on a fully distributed basis.
In arriving at our opinion, we have reviewed, analyzed and relied upon
material bearing upon the financial and operating condition and prospects of
the Company and material prepared in connection with the Plan and the
Conversion, and we have considered such financial and other factors as we
have deemed appropriate under the circumstances, including, among other
things, the following: (1) the statutory annual statements provided by the
Company for the years 1993 through 1998; (2) certain GAAP financial data
provided by the Company, including the audited income statements for each
year of the five year period ending December 31, 1998 and the audited balance
sheets for each year of the five year period ending December 31, 1998 (3)
certain consolidated financial projections for the Holding Company and its
subsidiaries after the Conversion provided to us by the Company; (4) the
draft Registration Statement on Form S-4 of the Company dated April 28, 1999;
(5) a copy of the Plan dated May 5, 1999; (6) certain financial data of the
Company which we compared with publicly available financial information and
market data of other companies which we believed to be comparable; and (7)
the financial terms of the transactions contemplated by the Plan and the
exhibits thereto which we compared with the financial terms of other
transactions we deemed to be relevant. We have also conducted discussions
with the management and advisors of the Company relating to the business of
the Company and certain financial and other aspects of the Plan and the
Conversion and such other matters we believe
II-2
<PAGE>
The Board of Governors
Illinois State Medical Inter-Insurance Exchange
May 5, 1999
Page 3
relevant to our inquiry. We have also taken into account our assessment of
general economic, market and financial conditions, our experience in
securities valuation and our knowledge of the insurance industry generally.
Furthermore, you have directed us to assume and we have assumed that:
(1) the Conversion will meet all applicable legal and regulatory requirements
and that all necessary action will have been taken to comply with all
applicable laws and requirements, including the receipt of all required
approvals by policyholders, regulators and otherwise; and (2) the terms of an
Initial Public Offering (which have not yet been determined), would not
affect the legal or tax treatment of the Plan or the Conversion. We have also
assumed that, as of the date hereof, the Conversion will be completed on the
basis described in the Plan. We have been advised as to certain legal and tax
matters by counsel to the Company and, with respect to such matters, we have
relied upon such counsel.
We have assumed that the Company will receive, prior to the Effective
Date, a private letter ruling from the Internal Revenue Service or an opinion
from its tax counsel as to certain tax matters as described in Section 7.1(d)
of the Plan. For purposes of our opinion, we have assumed that, if an opinion
from tax counsel is delivered, then such opinion of tax counsel is correct
and will be confirmed as of the Effective Date with no changes or exceptions
whatsoever.
In preparing our opinion, we have taken into account a number of factors
including, but not limited to, the following (in no particular order): (1)
the fact that the Company has advised us that growth is extremely important
to remain an effective and competitive insurer in the future; (2) the fact
that the Company has advised us that it is of significant strategic
importance that it have broader access to external capital to finance this
growth; (3) the Company's financial strength ratings and the considerations
on which such ratings are based; (4) in its present form as a reciprocal
insurer, the Company has limited access to the capital markets for new
capital; (5) following the Conversion, the Company will have a capital
structure potentially enabling it to access the capital markets for new
capital; and (6) the illiquidity of Membership Interests.
In conducting our review and arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of the financial and other
information provided to us or publicly available and have not attempted to
independently verify the same. With respect to the financial projections, we
have assumed that such projections have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
Company, and we express no opinion with respect to such projections or the
assumptions on which they are based. We have not made or obtained any
evaluations or appraisals of the properties, assets, liabilities, reserves or
surplus of the Company. Our opinion as expressed herein is limited to the
fairness, from a financial point of view, to the Eligible Members of the
exchange of the aggregate membership interests for shares of Common Stock of
the Holding Company pursuant to the Plan, and does not address the Company's
underlying business decision to participate in the Plan and Conversion,
II-3
<PAGE>
The Board of Governors
Illinois State Medical Inter-Insurance Exchange
May 5, 1999
Page 4
and does not constitute a recommendation to any Eligible Member as to how
such Eligible Member should vote with respect to the Plan. Our opinion is
necessarily based upon conditions as they exist and can be evaluated on the
date hereof and the information made available to us through the date hereof.
It is understood that this letter is for the information of the Board of
Governors of the Company and is not to be quoted or referred to, in whole or
in part, in any document or used for any other purpose without the prior
written consent of Salomon Smith Barney Inc., except that it may be referred
to in, and attached as an exhibit to, the Proxy Statement/Prospectus to be
sent to Eligible Members, and copies of it may be provided to the Director.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of the date hereof, the exchange of the aggregate Membership
Interests for shares of Common Stock of the Holding Company pursuant to the
Plan is fair, from a financial point of view, to the Eligible Members of the
Company, as a group.
Very truly yours,
/s/ Salomon Smith Barney Inc.
Salomon Smith Barney Inc.
II-4
<PAGE>
ANNEX III
SECTION 168 OF THE ILLINOIS INSURANCE CODE
RIGHTS OF DISSENTING POLICYHOLDER OF DOMESTIC COMPANY
Section 168. Rights of Dissenting Policyholder of Domestic Company.
(1) If not less than five per centum of all the policyholders in any domestic
company who were entitled to vote with respect to any merger or consolidation
and who did not vote in favor of such merger or consolidation at the meeting
at which the agreement of merger or consolidation was adopted by the
policyholders of such company, or if not less than five per centum of the
members of any domestic fraternal benefit society party to a merger or
consolidation shall file, at any time within thirty days after the agreement
of merger or consolidation is effected, a petition with the Director for a
hearing upon such agreement of merger or consolidation, the Director shall
order a hearing upon said petition, fix the time and place of such hearing,
and give written notice to the companies that are parties to the merger or
consolidation, at least fifteen days before the date of such hearing. Any
member or policyholder so petitioning may appear before the Director at such
hearing, either in person or by an attorney, and be heard with reference to
said agreement. If, upon such hearing being had, the Director finds that the
interests of the members or policyholders, as the case may be, of such
company are not properly protected, or if he finds that any reasonble
objection exists to such agreement, he shall enter an order revoking the
approval already given, and the agreement of merger or consolidation shall,
thereupon, become null and void.
(2) The Director shall have like power to revoke any approval of any
such agreement if any officer, director or employee of any company party to
such agreement shall, after reasonable notice, fail or refuse without
reasonable cause to attend and testify at such hearing, or to produce any
books or papers called for by said Director.
<PAGE>
PART II
INFORMATION NOT REQUIRED
IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Under Delaware law, a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to an action (other than an action by or in the right of the
corporation) by reason of his service as a director or officer of the
corporation, or his service, at the corporation's request, as a director,
officer, employee or agent of another corporation or other enterprise, against
expenses (including attorneys' fees) that are actually and reasonably incurred
by him ("Expenses"), and judgments, fines and amounts paid in settlement that
are actually and reasonably incurred by him, in connection with the defense or
settlement of the action, provided that he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the corporation's best
interests, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful. Although Delaware law
permits a corporation to indemnify any person referred to above against Expenses
in connection with the defense or settlement of an action by or in the right of
the corporation, provided that he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests,
if the person has been judged liable to the corporation, indemnification is only
permitted to the extent that the Court of Chancery (or the court in which the
action was brought) determines that, despite the adjudication of liability, the
person should be indemnified for the Expenses. The Delaware General Corporation
Law also provides for mandatory indemnification of any director, officer,
employee or agent against Expenses to the extent the person has been successful
in any proceeding covered by the statute. In addition, the Delaware General
Corporation Law provides the general authorization of advancement of a
director's or officer's litigation expenses in lieu of requiring the
authorization of the advancement by the board of directors in specific cases,
and that indemnification and advancement of expenses provided by the statute
shall not be considered exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement or otherwise.
Article Ninth of the Certificate of incorporation of Holdings Inc. (the
"Registrant") provides for the broad indemnification of the directors and
officers of the Registrant and for advancement of litigation expenses to the
fullest extent permitted by current Delaware law.
Article Seventh of the Certificate of incorporation of the Registrant
eliminates the personal liability of a director to the Registrant or its
stockholders under certain circumstances, for monetary damages for breach of
fiduciary duty as a director.
103
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A. EXHIBITS
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
2 Plan and Agreement of Merger by and among Holdings Inc., ISMIE
Indemnity Company, and Illinois State Medical Inter-Insurance Exchange,
dated May 5, 1999.**
3.1 Certificate of incorporation.**
3.2 Bylaws.**
5 Opinion of Lord, Bissell & Brook.*
8 Opinion of Lord, Bissell & Brook regarding tax matters.*
10.1 1999 Long-Term Equity Incentive Plan.
10.2 Excess of Loss Reinsurance Agreement, effective July 1, 1997 among
Illinois State Medical Inter-Insurance Exchange and the reinsurers
listed therein.
10.3 First Excess Cession Reinsurance Agreement, effective July 1, 1997
among Illinois State Medical Inter-Insurance Exchange and the
reinsurers listed therein.
10.4 Second Excess Cession Reinsurance Agreement, effective July 1, 1997
among Illinois State Medical Inter-Insurance Exchange and the
reinsurers listed therein.
10.5 Physician's Business Practice Liability Quota Share Reinsurance
Agreement, effective July 1, 1997 among Illinois State Medical
Inter-Insurance Exchange and the reinsurers listed therein.
10.6 Aggregate Stop Loss Reinsurance Contract, effective July 1, 1997
between Illinois State Medical Inter-Insurance Exchange and Cologne
Reinsurance Company (Dublin) Ltd.**
10.7 Shared Services Agreement among the Illinois State Medical
Inter-Insurance Exchange, Illinois State Medical Services, Inc. and
Illinois State Medical Society.*
10.8 Lease dated October 14, 1996, by and between U.S. Equities Realty,
Inc., as agent for the Beneficiary of LaSalle National Bank, as Trustee
under Trust No. 106020 and Illinois State Medical Inter-Insurance
Exchange, as amended.
10.9 Amended and Restated Employment Agreement dated January 20, 1999,
between Illinois State Medical Inter-Insurance Exchange and Alexander
R. Lerner.*
104
<PAGE>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
10.10 Amended and Restated Employment Agreement dated January 20, 1999,
between Illinois State Medical Inter-Insurance Exchange and Donald
Udstuen.*
10.11 Amended and Restated Employment Agreement dated January 20, 1999,
between Illinois State Medical Inter-Insurance Exchange and Jeffrey M.
Holden.*
10.12 Employment Agreement dated April 21, 1999, between Illinois State
Medical Inter-Insurance Exchange and Saul Morse.*
10.13 Amended and Restated Employment Agreement dated January 20, 1999,
between Illinois State Medical Inter-Insurance Exchange and Eugene J.
Gross.*
21 Subsidiaries of the registrant.**
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Lord, Bissell & Brook (to be included in Exhibit 5).*
23.3 Consent of Salomon Smith Barney Inc. (included in Annex II to the proxy
statement/prospectus).
24 Power of Attorney.**
27 Financial Data Schedule.
99.1 Form of Proxy Card.
99.2 Form of Taxpayer Identification Card.
99.3 Form of Record Card.
- ----------------
* To be filed by amendment
** 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 22. UNDERTAKINGS.
(a) (1) The undersigned Registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is
105
<PAGE>
a part of this registration statement, by any person or party who is deemed
to be an underwriter within the meaning of Rule 145(c), the issuer undertakes
that the reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who may
be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is
filed pursuant to the paragraph immediately preceding, or (ii) that
purports to meet the requirements of section 10(a)(3) of the Securities
Act and is used in connection with an offering of securities subject to
Rule 415 (Section 230.415 of this chapter), will be filed as a part of
an amendment to the registration statement and will not be used until
the amendment is effective, and that, for purposes of determining any
liability under then Securities Act, each the post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of the securities at that
time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities 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 Commission the
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against the 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 the
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 whether the indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of the issue.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
106
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chicago,
State of Illinois, on October 22, 1999.
ISMIE Holdings, Inc.
By: /s/ Alexander R. Lerner
-------------------------------------
Alexander R. Lerner
President and Chief Executive Officer
107
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities indicated on October 22, 1999.
Name Title
- ---- -----
*
- ---------------------------------
Harold L. Jensen, M.D. Chairman of the Board
*
- ---------------------------------
Walter Whisler, M.D. Vice Chairman of the Board
/s/ Alexander R. Lerner
- --------------------------------- President, Chief Executive Officer
Alexander R. Lerner and Director (principal executive
officer)
*
- ---------------------------------
Donald A. Udstuen Chief Operating Officer and
Director
*
- ---------------------------------
Eugene J. Gross Chief Financial Officer and
Assistant Treasurer (principal
financial and accounting officer)
*
- ---------------------------------
Irwin A. Smith, M.D. Secretary and Director
*
- ---------------------------------
Peter A. Brusca, M.D. Treasurer and Director
*
- ---------------------------------
Richard A. Geline, M.D. Director
*
- ---------------------------------
Henri S. Havdala, M.D. Director
*
- ---------------------------------
Robert M. Reardon, M.D. Director
*
- ---------------------------------
Jane Jackman, M.D. Director
*By: /s/ Alexander R. Lerner
-------------------------------------------
Alexander R. Lerner
as attorney-in-fact for
108
<PAGE>
each of the persons indicated
109
<PAGE>
EXHIBIT 10.1
ISMIE HOLDINGS INC.
1999 LONG-TERM EQUITY INCENTIVE PLAN
SECTION 1
OBJECTIVE
The objective of the ISMIE Holdings Inc. 1999 Long-Term Equity Incentive
Plan (the "Plan") is to attract and retain the best available directors,
executive personnel and employees to be responsible for the management,
growth and success of the business, and to provide an incentive for such
individuals to exert their best efforts on behalf of the Company and its
shareholders.
SECTION 2
DEFINITIONS
2.1 GENERAL DEFINITIONS. The following words and phrases, when used
herein, shall have the following meanings:
(a) "AGREEMENT" - The written document which evidences the grant of
any Award under the Plan and which sets forth the terms, conditions, and
limitations relating to such Award. No Award shall be valid until so
evidenced.
(b) "AWARD" - The grant of any Option, Stock Appreciation Right,
share of Restricted Stock, share of Phantom Stock, Other Stock Based
Award, or any combination thereof.
(c) "BOARD" - The Board of Directors of ISMIE Holdings Inc.
(d) "CODE" - The Internal Revenue Code of 1986, as amended, and
including the regulations promulgated pursuant thereto.
(e) "COMMITTEE" - The Stock Option Committee of the Board of
Directors of the Company, which shall consist solely of two or more
non-employee directors within the meaning of Rule 16b-3 under the Act,
as the same may be amended or supplemented from time to time, and outside
directors within the meaning of section 162(m) of the Code.
(f) "COMMON STOCK" - The present shares of Common Stock of the
Company, and any shares into which such shares are converted, changed or
reclassified.
(g) "COMPANY" - ISMIE Holdings Inc., a Delaware corporation, and its
groups, divisions, and subsidiaries.
1
<PAGE>
(h) "EMPLOYEE" - Any person employed by the Company as an employee or
any director of the Company, regardless of whether the director is an
employee of the Company.
(i) "FAIR MARKET VALUE" - The fair market value of Common Stock on a
particular day shall be the closing price of the Common Stock on the
NASDAQ or any national stock exchange on which the Common Stock is traded,
on the last preceding trading day on which such Common Stock was traded.
(j) "OPTION" - A right granted under Section 6 hereof to purchase
Common Stock of the Company at a stated price for a specified period of
time, subject to the terms and conditions of the Plan and the applicable
Agreement.
(k) "OTHER STOCK BASED AWARD" - An award granted under Section 9
hereof that is valued in whole or in part by reference to, or is otherwise
based on, the Company's Common Stock.
(l) "PARTICIPANT" - Any Employee designated by the Committee to
participate in the Plan.
(m) "PHANTOM STOCK" - A right granted under Section 8 hereof to
receive payment from the Company in cash, stock, or in combination
thereof, in an amount determined by the Fair Market Value of Common Stock.
(n) "PERIOD OF RESTRICTION" - The period during which Shares of
Restricted Stock or Phantom Stock rights are subject to forfeiture or
restrictions on transfer pursuant to Section 8 of the Plan.
(o) "RESTRICTED STOCK" - Shares granted to a Participant which are
subject to restrictions on transferability pursuant to Section 8 of the
Plan.
(p) "SHARES" - Shares of Common Stock.
(q) "STOCK APPRECIATION RIGHT" or "SAR" - The right granted under
Section 7 hereof to receive a payment from the Company in cash, Common
Stock, or in combination thereof, equal to the excess of the Fair Market
Value of a share of Common Stock on the date of exercise over a specified
price fixed by the Committee, but subject to such maximum amounts as the
Committee may impose.
2.2 OTHER DEFINITIONS. In addition to the above definitions, certain
words and phrases used in the Plan and any Agreement may be defined elsewhere
in the Plan or in such Agreement.
2
<PAGE>
SECTION 3
COMMON STOCK
3.1 NUMBER OF SHARES. Subject to the provisions of Section 3.3:
(a) the number of Shares which may be issued or sold or for which
Options or Stock Appreciation Rights may be granted under the Plan may not
exceed 1,000,000 Shares; and
(b) the maximum number of Shares which may be issued or sold or for
which Options or Stock Appreciation Rights may be granted to a Participant
under the Plan during any calendar year may not exceed 100,000 Shares.
3.2 RE-USAGE. If an Option or SAR expires or is terminated,
surrendered, or canceled without having been fully exercised, or if any other
grant (other than Restricted Stock) results in any Shares not being issued,
the Shares covered by such Option, SAR, or other grant, as the case may be,
shall again be immediately available for Awards under the Plan.
3.3 Adjustments.
(a) Subject to Section 3.3(b) below, in the event of any change in
the outstanding Common Stock by reason of a stock split, stock dividend,
combination, reclassification or exchange of Shares, recapitalization, or
other similar event, the Committee shall, in such manner and to such
extent as it deems appropriate and equitable, adjust the number of SARs
and the number of Shares available for Options, grants of Restricted
Stock, and Other Stock Based Awards as specified in Section 3.1(a), and
the number of Shares subject to outstanding Options, SARs, grants of
Restricted Stock, and Other Stock Based Awards, and the price thereof,
the Fair Market Value and the maximum number of Shares which may be
issued or sold or for which Options or Stock Appreciation Rights may be
granted to a Participant under the Plan during any calendar year as
specified in Section 3.1(b), as applicable, and any such adjustment shall
be binding and conclusive on all parties. Any fractional Shares
resulting from any such adjustment shall be disregarded.
(b) In the event of an extraordinary dividend or other distribution,
merger, reorganization, consolidation, combination, sale of assets, split
up, exchange, or spin off, or other extraordinary corporate transaction,
the Committee may, in such manner and to such extent (if any) as it
deems appropriate and equitable make provision for a cash payment or
for the substitution or exchange of any or all outstanding Awards or the
cash, securities or property deliverable to the holder of any or all
outstanding Awards based upon the distribution or consideration payable
to holders of Common Stock upon or in respect of such event; provided,
however, in each case, that with respect to any Award constituting an
"incentive stock option" within the meaning of section 422 of the Code
(or any successor provision) no such adjustment may be made that would
cause the Plan to violate section 422 of the Code (or any successor
provision).
3
<PAGE>
SECTION 4
ELIGIBILITY AND PARTICIPATION
Participants in the Plan shall be those Employees selected by the
Committee to participate in the Plan who hold positions of responsibility and
whose participation in the Plan the Committee determines to be in the best
interests in the Company.
SECTION 5
ADMINISTRATION
5.1 COMMITTEE. The Plan shall be administered by the Committee. The
members of the Committee shall be appointed by and shall serve at the
pleasure of the Board, which may from time to time change the Committee's
membership. In the absence of a Committee, the Board shall exercise all of
the powers of the Committee hereunder.
5.2 AUTHORITY. The Committee shall have the sole and complete
authority to:
(a) determine the individuals to whom awards are granted, the type and
amounts of awards to be granted and the time of all such grants;
(b) determine the terms, conditions and provisions of, and
restrictions relating to, each Award granted;
(c) interpret and construe the Plan and all Agreements;
(d) prescribe, amend and rescind rules and regulations relating to the
Plan:
(e) determine the content and form of all Agreements;
(f) determine all questions relating to Awards under the Plan,
including whether any conditions relating to an Award have been met;
(g) maintain accounts, records and ledgers relating to Awards;
(h) maintain records concerning its decisions and proceedings;
(i) employ agents, attorneys, accountants or other persons for such
purposes as the Committee considers necessary or desirable; and
(j) do and perform all acts which it may deem necessary or appropriate
for the administration of the Plan and to carry out the objectives of the
Plan.
4
<PAGE>
5.3 DETERMINATIONS. All determinations, interpretations, or other
actions made or taken by the Committee pursuant to the provisions of the Plan
shall be final, binding, and conclusive for all purposes and upon all persons.
5.4 DELEGATION. The Committee may delegate to appropriate senior
officers of the Company its duties under the Plan pursuant to such conditions
and limitations as the Committee may establish.
SECTION 6
STOCK OPTIONS
6.1 TYPE OF OPTION. Each Option granted under this Plan shall be of
one of two types: (i) an "incentive stock option" within the meaning of
section 422 of the Code (or any successor provision); or (ii) a non-qualified
stock option.
6.2 GRANT OF OPTION. An Option may be granted to Participants at such
time or times as shall be determined by the Committee. Each Option shall be
evidenced by a written Agreement that shall specify the exercise price, the
duration of the Option, the number of Shares to which the Option applies, and
such other terms and conditions not inconsistent with the Plan as the
Committee shall determine. No incentive stock options may be awarded after
the tenth anniversary of the date this Plan is adopted by the Board.
6.3 OPTION PRICE. The per share option price shall be not less than
85 percent of the Fair Market Value at the time the Option is granted (100
percent in the case of an incentive stock option, or 110 percent in the case
of an incentive stock option granted to a Participant who at the time the
Option is granted owns stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the Company or of its
parent).
6.4 EXERCISE OF OPTIONS. Options awarded under the Plan shall be
exercisable at such times and shall be subject to such restrictions and
conditions, including the performance of a minimum period of service after
the grant, as the Committee may impose, which need not be uniform for all
Participants; provided, however, that no Option shall be exercisable for more
than 10 years after the date on which it is granted (5 years in the case of
an incentive stock option granted to a Participant who at the time the Option
is granted owns stock possessing more than 10 percent of the total combined
voting power of all classes of stock of the Company or of its parent).
6.5 PAYMENT. The Committee shall determine the procedures governing
the exercise of Options, and shall require that the per share option price be
paid in full at the time of exercise. The Committee, in its discretion, may
permit a Participant to elect to pay the option price upon the exercise of an
Option by irrevocably authorizing a third party to sell Shares (or a
sufficient portion of the Shares) acquired upon exercise of the Option and
remit to the Company a sufficient portion of the sale proceeds to pay the
entire option price and any tax withholding resulting from such exercise.
The Committee, in its discretion, may also permit a Participant to make
payment in cash, or in Shares already owned by the Participant, valued at the
Fair Market Value thereof, as partial or full payment of the exercise price. As
5
<PAGE>
soon as practical after full payment of the exercise price, the Company
shall deliver to the Participant a certificate or certificates representing
the acquired Shares.
6.6 RIGHTS AS A SHAREHOLDER. Until the exercise of an Option and the
issuance of Shares in respect thereof, a Participant shall have no rights as
a Shareholder with respect to the Shares covered by such Option.
SECTION 7
STOCK APPRECIATION RIGHTS
7.1 GRANT OF STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may
be granted to Participants at such time or times as shall be determined by
the Committee and shall be subject to such terms and conditions as the
Committee may decide. A grant of an SAR shall be made pursuant to a written
Agreement containing such provisions not inconsistent with the Plan as the
Committee shall approve.
7.2 EXERCISE OF SARs. SARs may be exercised at such times and subject
to such conditions, including the performance of a minimum period of service,
as the Committee shall impose. Any SAR related to a non-qualified stock
option may be granted at the same time such Option is granted or at any time
thereafter before exercise or expiration of such Option. Any SAR related to
an incentive stock option shall be granted at the same time such Option is
granted. SARs which are granted in tandem with an Option may only be
exercised upon the surrender of the right to exercise an equivalent number of
Shares under the related Option and may be exercised only with respect to the
Shares for which the related Option is then exercisable.
7.3 PAYMENT OF SAR AMOUNT. Upon exercise of an SAR, the Participant
shall be entitled to receive payment of an amount determined by multiplying:
(a) any increase in the Fair Market Value of a Share at the date of
exercise over the Fair Market Value of a Share at the date of grant, by
(b) the number of Shares with respect to which the SAR is exercised;
provided, however, that at the time of grant, the Committee may
establish, in its sole discretion, a maximum amount per Share which will
be payable upon exercise of an SAR.
7.4 METHOD OF PAYMENT. Subject to the discretion of the Committee,
which may be exercised at the time of grant, the time of payment, or any
other time, payment of an SAR may be made in cash, Shares or any combination
thereof.
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SECTION 8
RESTRICTED STOCK OR PHANTOM STOCK
8.1 GRANT OF RESTRICTED STOCK OR PHANTOM STOCK. The Committee may
grant Shares of Restricted Stock or Phantom Stock rights to such Participants
at such times and in such amounts, and subject to such other terms and
conditions not inconsistent with the Plan as it shall determine. Each grant
of Restricted Stock or Phantom Stock rights shall be evidenced by a written
Agreement setting forth the terms of such Award.
8.2 RIGHTS AS A SHAREHOLDER. Unless otherwise determined by the
Committee at the time of grant, Participants holding Restricted Stock
granted hereunder may exercise full voting rights and other rights as a
Shareholder with respect to those Shares during the period of restriction.
Holders of Phantom Stock rights shall not be deemed Shareholders and, except
to the extent provided in accordance with the Plan, shall have no rights
related to any Shares.
8.3 DIVIDENDS AND OTHER DISTRIBUTIONS. Unless otherwise determined by
the Committee at the time of grant, Participants holding Restricted Stock
shall be entitled to receive all dividends and other distributions paid with
respect to those Shares, provided that if any such dividends or distributions
are paid in shares of stock, such shares shall be subject to the same
forfeiture restrictions and restrictions on transferability as apply to the
Restricted Stock with respect to which they were paid. Unless otherwise
determined by the Committee at the time of grant, Participants holding
Phantom Stock rights shall not be entitled to receive cash payments equal to
any cash dividends and other distributions paid with respect to a
corresponding number of Shares.
8.4 PAYMENT OF PHANTOM STOCK RIGHTS. The Committee may, at the time
of grant, provide for payment in respect of Phantom Stock rights in cash,
Shares, partially in cash and partially in Shares, or in any other manner not
inconsistent with this Plan.
SECTION 9
OTHER STOCK BASED AWARDS AND OTHER BENEFITS
9.1 OTHER STOCK BASED AWARDS. The Committee shall have the right to
grant Other Stock Based Awards which may include, without limitation, the
grant of Shares based on certain conditions, the payment of cash based on the
performance of the Common Stock, and the payment of Shares in lieu of cash
under other Company incentive bonus programs. A Grant of an Other Stock
Based Award shall be made in such manner and at such times as the Committee
may determine.
9.2 OTHER BENEFITS. The Committee shall have the right to provide
types of Awards under the Plan in addition to those specifically listed
utilizing shares of stock or cash, or a combination thereof, if the Committee
believes that such Awards would further the purposes for which the Plan was
established. Payment under or settlement of any such Awards shall be made in
such manner and at such times as the Committee may determine.
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SECTION 10
AMENDMENT, MODIFICATION, AND TERMINATION OF PLAN
The Board of Directors at any time may terminate or suspend the Plan,
and from time to time may amend or modify the Plan. No amendment,
modification, or termination of the Plan shall in any manner adversely affect
any Award theretofore granted under the Plan without the consent of the
Participant (or if the Participant is not then living, the affected
beneficiary).
SECTION 11
TERMINATION OF EMPLOYMENT
11.1 TERMINATION OF EMPLOYMENT DUE TO RETIREMENT. Unless otherwise
determined by the Committee at the time of grant, in the event a
Participant's employment with the Company terminates by reason of retirement
after age 65, any Option or SAR granted to such Participant which is then
outstanding may be exercised at any time prior to the expiration of the term
of the Option or SAR or within three (3) years following the Participant's
termination of employment, whichever period is shorter, and any Restricted
Stock, Phantom Stock rights, or other Award then outstanding for which any
restriction has not lapsed prior to the effective date of retirement shall be
forfeited.
11.2 TERMINATION OF EMPLOYMENT DUE TO DEATH OR DISABILITY. Unless
otherwise determined by the Committee at the time of grant, in the event a
Participant's employment with the Company is terminated by reason of death or
incapacity, any Option or SAR granted to such Participant which is then
outstanding may be exercised by the Participant or the Participant's legal
representative at any time prior to the expiration date of the term of the
Option or SAR or within three (3) years following the Participant's
termination of employment, whichever period is shorter, and any Restricted
Stock, Phantom Stock rights, or other Award then outstanding shall become
nonforfeitable and shall become transferable or payable, as the case may be,
as though any restriction had expired.
11.3 TERMINATION OF EMPLOYMENT FOR ANY OTHER REASON. Unless otherwise
determined by the Committee at the time of grant, in the event the employment
of the Participant with the Company shall terminate for any reason other than
misconduct or one described in Section 11.1 or 11.2, any Option or SAR
granted to such Participant which is then outstanding may be exercised by the
Participant at any time prior to the expiration date of the term of the
Option or SAR or within three (3) months following the Participant's
termination of employment, whichever period is shorter; any Restricted Stock,
Phantom Stock rights, or other Award then outstanding for which any
restriction has not lapsed prior to the date of termination of employment
shall be forfeited upon termination of employment. If the employment of a
Participant is terminated by the Company by reason of the Participant's
misconduct, any outstanding Option or SAR shall cease to be exercisable on
the date of the Participant's termination of employment; any Restricted
Stock, Phantom Stock rights, or other Award then outstanding for which any
restriction has not lapsed prior to the date of termination of employment
shall be forfeited upon termination of employment. As used herein,
"misconduct" means: (i) one or more demonstrable and material acts of
dishonesty, disloyalty, insubordination or willful misconduct; (ii) the
continued failure, in the judgment of the Chief Executive Officer of the
Company or the Board by the Participant to substantially perform
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his duties (other than any such failure resulting from his death or
disability); or (iii) the termination of the Participant's employment with
the Company for "cause" within the meaning of any written employment
agreement between the Participant and the Company. The Committee shall
determine whether a Participant's employment is terminated by reason of
misconduct.
11.4 ACCRUAL OF RIGHT AT DATE OF TERMINATION. Unless otherwise
determined by the Committee at the time of grant, the Participant shall have
the right to exercise an Option or SAR as indicated in Section 11.1, 11.2,
and 11.3 only to the extent the Participant's right to exercise such Option
or SAR had accrued at the date of termination of employment pursuant to the
terms of the applicable Agreement and had not previously been exercised.
11.5 COMMITTEE DISCRETION. The Committee shall be entitled to make
such rules, regulations and determinations as it deems appropriate in respect
of any leave of absence taken by a Participant. Without limiting the
generality of the foregoing, the Committee shall be entitled to determine
(i) whether or not a Participant's leave of absence shall constitute a
termination of employment within the meaning of the Plan and (ii) the impact,
if any, of any such leave of absence on Awards granted to such Participant.
Unless otherwise determined by the Committee in its sole discretion, a
Participant shall be considered to have terminated employment if his or her
employer ceases to be an affiliate of the Company, even if he or she
continues to be employed by such employer.
SECTION 12
MISCELLANEOUS PROVISIONS
12.1 NON-TRANSFERABILITY OF AWARDS. Unless otherwise determined by the
Committee at the time of grant, and except as provided in Section 11, no
Award granted under the Plan shall be assignable, transferable, or payable to
or exercisable by anyone other than the Participants to whom it was granted;
provided, however, that no Award consisting of incentive stock options may be
transferred by a Participant other than by will or the laws of descent and
distribution, and may be exercised during the Participant's lifetime only by
the Participant.
12.2 NO GUARANTEE OF EMPLOYMENT OR PARTICIPATION. Nothing in the Plan
or in any Award granted pursuant to the Plan, nor in any Agreement made
pursuant to the Plan, shall interfere with or limit in any way the right of
the Company to terminate any Participant's employment at any time, nor confer
upon any Participant any right to continue in the employment of the Company.
No Employee shall have a right to be selected as a Participant, or, having
been so selected, to receive any future Awards. Nothing contained in the
Plan, or in any Award granted pursuant to the Plan, nor in any Agreement made
pursuant to the Plan, shall interfere in any way with the right of the
Company to terminate the Participant's employment at will or change the
Participant's compensation at any time.
12.3 TAX WITHHOLDING. The Company shall have the authority to
withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy federal, sate, and local withholding tax requirements
on any Award under the Plan, and the Company may defer payment of cash or
issuance of Shares until such requirements are satisfied. The Committee may,
in its discretion, permit a Participant to elect, subject to such conditions
as the Committee shall require, to have Shares otherwise issuable under
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the Plan withheld by the Company and having a Fair Market Value
sufficient to satisfy all or part of the Participant's estimated total
federal, state, and local tax obligation associated with the transaction.
12.4 GOVERNING LAW. The Plan and all determinations made and actions
taken pursuant hereto, to the extent not otherwise governed by the Code,
shall be governed by the laws of the State of Illinois and construed in
accordance therewith.
12.5 EFFECTIVE DATE. The Plan shall be effective immediately upon
approval by the shareholders of the Company, provided, however, that no Award
requiring the issuance of Shares shall be exercised or paid out unless at the
time of such exercise or payout (i) such Shares are covered by a currently
effective registration statement filed under the Securities Act of 1933, as
amended, if one is then required, or in the sole opinion of the Company and
its counsel such issuance of Shares is otherwise exempt from the registration
requirements of such act, and (ii) such Shares are listed on any securities
exchange upon which the Common Stock of the Company is listed.
12.7 UNFUNDED PLAN. Insofar as the Plan provides for Awards of cash,
Shares, rights or a combination thereof, the Plan shall be unfunded. The
Company may maintain bookkeeping accounts with respect to Participants who
are entitled to Awards under the Plan, but such accounts shall be used merely
for bookkeeping convenience. The Company shall not be required to segregate
any assets that may at any time be represented by interests in Awards nor
shall the Plan be construed as providing for any such segregation. None of
the Committee, the Company or its Board of Directors shall be deemed to be a
trustee of any cash, Shares or rights to Awards granted under the Plan. Any
liability of the Company to any Participant with respect to an Award or any
rights thereunder shall be based solely upon any contractual obligations that
may be created by the Plan and any Agreement, and no obligation of the
Company under the Plan shall be deemed to be secured by any pledge or other
encumbrance on any property of the Company.
12.8 PROVISIONS RELATING TO SECTION 16 PERSONS. Notwithstanding any
other provision herein, any Option or similar right (including an SAR)
granted hereunder to a Participant who is then subject to Section 16 of the
Securities Exchange Act of 1934 shall not be transferable other than by will
or the laws of descent and distribution and shall be exercisable during the
Participant's lifetime only by him.
12.9 ASSUMPTION OF AWARDS BY THE COMPANY. The Company, from time to
time, also may substitute or assume outstanding awards granted by another
company, whether in connection with an acquisition of such other company or
otherwise, by either (a) granting an Award under the Plan in substitution of
such other company's award, or (b) assuming such award as if it had been
granted under the Plan if the terms of such assumed award could be applied to
an Award granted under the Plan. Such substitution or assumption shall be
permissible if the holder of the substituted or assumed award would have been
eligible to be granted an Award under the Plan if the other company had
applied the rules of the Plan to such grant. In the event the Company
assumes an award granted by another company, the terms and conditions of such
award shall remain unchanged (except that the exercise price and the number
and nature of Shares issuable upon exercise of any such option will be
adjusted appropriately pursuant to Section 424(a) of the Code). In the event
the Company elects to grant a new Award rather than assuming an existing
option, such new Award may be granted with a similarly adjusted exercise
price.
12.10 TERM OF THE PLAN. No Award shall be granted pursuant to the Plan
after May 4, 2009.
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EXHIBIT 10.2
EXCESS OF LOSS REINSURANCE AGREEMENT
<TABLE>
<CAPTION>
ARTICLE PAGE
------- ----
<S> <C> <C>
BUSINESS COVERED I
EXCLUSIONS II
TERRITORY III
TERM AND CANCELLATION IV
DEFINITIONS V
RETENTION AND LIMIT VI
WARRANTY VII
PREMIUM VIII
CONTINGENT PROFIT COMMISSION IX
REPORTS X
NET RETAINED LIABILITY XI
NOTICE OF LOSS AND LOSS SETTLEMENTS XII
INTEREST PENALTY XIII
SUBROGATION XIV
EXTRA CONTRACTUAL OBLIGATIONS AND
EXCESS LIMITS LIABILITY XV
OFFSET XVI
INSOLVENCY XVII
ARBITRATION XVIII
DELAYS, ERRORS OR OMISSIONS XIX
ENTIRE AGREEMENT/AMENDMENTS XX
INSPECTION XXI
TAXES XXII
FEDERAL EXCISE TAX XXIII
CURRENCY XXIV
RESERVES AND FUNDING XXV
SERVICE OF SUIT XXVI
COMMUTATION XXVII
INTERMEDIARY XXVIII
</TABLE>
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EXCESS OF LOSS REINSURANCE AGREEMENT
THIS AGREEMENT is made and entered into by and between the ILLINOIS STATE
MEDICAL INTER-INSURANCE EXCHANGE, Chicago, Illinois (hereinafter called the
"Company") of the one part, and the various Reinsurers as identified by the
attached Interests and Liabilities Agreements (hereinafter called the
"Reinsurers") of the other part.
WITNESSETH
That in consideration of the mutual covenants hereinafter contained and upon
the terms and conditions hereinbelow set forth, the parties hereto agree as
follows:
ARTICLE I
BUSINESS COVERED
Reinsurers will indemnify the Company, subject to the limits set forth in the
RETENTION AND LIMIT ARTICLE for losses to the Company in respect of
Professional Liability Policies (including Personal Injury Liability) and
Extended Reporting Endorsements attaching thereto, covering medical
practitioners, and their medical partnerships, clinics, and corporations.
All reinsurance for which Reinsurers will be obligated by virtue of this
Agreement will be subject to the same terms, conditions, interpretations,
waivers, modifications, and alterations as the respective Policies of the
Company to which this reinsurance applies, subject always to the terms and
conditions of this Agreement. Nothing herein will in any manner create any
obligations or establish any rights against Reinsurers in favor of any third
parties or any persons not parties to this Agreement except as provided in
the INSOLVENCY ARTICLE.
ARTICLE II
EXCLUSIONS
No reinsurance indemnity will be afforded under this Agreement for:
A. Loss or liability excluded by the attached Nuclear Incident Exclusion
Clause Liability - Reinsurance - U.S.A. (NMA 1590).
B. 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
guarantee hind, insolvency fund, plan, pool, association, hind, 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,
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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.
C. Directors' and Officers' Liability when written as such.
D. Reinsurance assumed.
ARTICLE III
TERRITORY
The territorial scope of this Agreement will follow that of the Company's
Policies.
ARTICLE IV
TERM AND CANCELLATION
PART I
This part of the Agreement will apply to all Loss Events during the period from
July 1, 1997, 12:01 a.m. Central Standard Time, to July 1, 1999, 12:01 a.m.
Central Standard Time, where the Date of Loss of such Loss Event is on or after
July 1, 1997, 12:0 1 a.m. Central Standard Time.
PART II
This part of the Agreement will apply to all losses under Policies (including
Extended Reporting Endorsements attaching thereto) attaching during the
period from July 1, 1997, 12:01 a.m. Central Standard Time, to July 1, 1999,
12:01 a.m. Central Standard Time, but only in respect of those losses where
the Date of Loss for such Loss Event is reported prior to July 1, 1995, 12:0
1 a.m. Central Standard Time.
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IN RESPECT OF BOTH PARTS I AND II
In the event this Agreement is not renewed, this Agreement will expire on a
cut-off basis, and the Reinsurers will not be liable for any Loss Events
occurring on or after the expiration date, except for as hereinafter provided.
The parties recognize that in the event of non-renewal of this Agreement,
Loss Events occurring prior to expiration may involve claims first reported
to the Company after expiration. In such event such claims will be considered
part of the Loss Event and covered under this Agreement so long as the
policies to which such claims attached were in force at the time of
non-renewal, continuously renewed by the Company or other carrier from the
date of expiration until the date the claim is first reported to the Company,
and the date that the claim was first reported to the Company is less than
eight years from the date of expiration. Any such policy will be deemed to
have a limit of liability and coverage no greater than that provided by such
policy at the time of expiration.
The Reinsurers shall remain liable for Loss Events occurring after expiration
of this Agreement only as respects any extended reporting endorsements in
force at the expiration date of this Agreement. Any extended reporting
endorsements in force at the expiration date of this Agreement will run-off
until their natural expiration dates, but for the purpose of this Agreement,
not exceeding eight years from the expiration date of this Agreement.
Notwithstanding the foregoing, the parties to this Agreement recognize that a
Loss Event may involve claims covered by this Agreement, as well as claims
not covered hereunder. In such a case, the Company's retention and the
Reinsurers' limit of liability for the Loss Event will be proportionate, with
the amount of Ultimate Net Loss to be retained by the Company being reduced
to that percentage which the Company's settled losses covered by this
Agreement bear to the total of all the Company's settled losses contributing
to the same Loss Event. The Reinsurers' liability will be arrived at in the
same manner.
In the event any Reinsurer hereon ceases to write Casualty business during
the term of this Agreement, said Reinsurer's participation, at the option of
the Company, may be canceled ab initio and each party will return to the
other party all transactions previously paid in respects of the Agreement
within seven working days. Upon the return of the previously paid
transactions, the Reinsurer will be relieved of all liabilities incurred
under this Agreement. Furthermore, if at any time during the term of this
Agreement either party to this Agreement is acquired or controlled by, merged
with, or reinsures its entire business with any other company, corporation,
or individual or individuals not controlling that party's operations at the
inception of this Agreement, the other party will have the right to cancel
this Agreement by giving 30 days written notice by certified or registered
mail.
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Notwithstanding the expiration (or cancellation) of this Agreement as
hereinabove provided, its provisions will continue to apply to all unfinished
business hereunder to the end that all obligations and liabilities incurred
by each party hereunder will be hilly performed and discharged.
ARTICLE V
DEFINITIONS
The following definitions will be used in this Agreement:
A. The term "Ultimate Net Loss" as used in this Agreement will mean the
actual loss paid by the Company, or for which the Company becomes
liable to pay (including 90% of any Extra Contractual Obligation
amount as defined herein, 90% of any Excess Limits Liability amount
as defined herein and interest accrued prior to judgment where such
interest is made part of the judgment, but will exclude all other
interest and expenses which will be handled in accordance with the
NOTICE OF LOSS AND LOSS SETTLEMENTS ARTICLE), but salvages and all
recoveries, including recoveries under all reinsurance that inures
to the benefit of this Agreement whether recovered or not, will be
first deducted from such loss to arrive at the amount of liability
attaching hereunder.
All salvages, recoveries, or payments recovered or received subsequent
to loss settlements hereunder will be applied as if recovered or
received prior to the aforesaid settlement and all necessary
adjustments will be made by the parties hereto.
Nothing in this definition will be construed to mean that losses are
not recoverable hereunder until the Company's Ultimate Net Loss has
been ascertained.
B. The term "Policy" as used in this Agreement will mean any binder,
policy, certificate, contract, or agreement of insurance, whether
written or oral, issued, accepted, or held covered provisionally or
otherwise, by the Company or on behalf of the Company by Illinois
State Medical Insurance Services, Inc.
C. The term "Claim Made" or "Claims Made" as used in this Agreement will
mean receipt by the Company of notice that a claim is being made or
may be made against an insured covered under a Policy affording
coverage on the basis of claims so made, provided that the nature of
the notice satisfies the requirements of the Policy involved. The date
the claim is considered to be first made, as provided for in the
Company's Policy, will be considered as the date of loss for this
Agreement.
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D. The term "Extended Reporting Endorsement" as used in this Agreement
will mean coverage for Claims Made after the cancellation, termination,
or expiration of the Company Policy on losses that would have been
covered under the Policy had the claims been made during the term of
that Policy.
As respects Extended Reporting Endorsements:
1. The reporting period is unlimited; however, for purposes of
this Agreement, the reporting period is deemed to be eight
years, and the Reinsurers will have no liability for Claims
Made after this period.
2. The limits of the Policy are restated as of the effective date
of the Extended Reporting Endorsement and annually thereafter.
3. For deceased, disabled, and retired insureds, coverage under
an Extended Reporting Endorsement is automatic with no further
charge as all Policy rates include a charge for such coverage.
For all other insureds, the Company's premium for an Extended
Reporting Endorsement will be calculated as a percentage of
the expiring Policy premium, and such premium will be
considered to be fully earned on the cancellation,
termination, or expiration date of the Policy.
E. The term "Loss Event" as used in this Agreement will mean any one
casualty, accident, loss, or series of casualties, accidents, or losses
caused by an error or omission to act, or series of errors or omissions
to act.
The date of any Loss Event, regardless of the number of Policies,
extended reporting endorsements, or claimants involved, will be deemed
to be the date upon which the first claim is first notified to the
Company. Notwithstanding the foregoing, as respects Part II of the Term
and Cancellation Article, the date of any Loss Event for claims made
during an extended reporting period issued prior to July 1, 1995, will
be the last in force day of the original Policy period.
F. The term "Gross Net Earned Premium Income" as used in this Agreement
will mean gross earned premium income on business the subject of this
Agreement, less earned premium income paid for reinsurance, recoveries
under which would inure to the benefit of this Agreement.
G. The term "Statutory Reserves" as used in this Agreement will mean the
Reinsurers' shares of those loss and loss expense reserves in respect
of policy limits up to $5,000,000 that are subject to this Agreement,
as reflected on the Company's statutory financial statement to the
state insurance department as at June 30th.
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ARTICLE VI
RETENTION AND LIMIT
PART I
The Reinsurers will be liable in respect of each and every Loss Event, for the
Ultimate Net Loss over and above an initial Ultimate Net Loss of $1,000,000,
each and every Loss Event, subject to a limit of liability to the Reinsurers of
$4,000,000, each and every Loss Event.
Notwithstanding the limits of liability stated above, the Reinsurers' maximum
liability for all losses recoverable including pro-rata expenses recoverable in
accordance with the NOTICE OF LOSS AND LOSS SETTLEMENTS ARTICLE will be limited
to an amount equal to 250% of the Reinsurers' premium as calculated in
accordance with the PREMIUM ARTICLE.
Amounts recoverable under the Company's Excess Cession Reinsurance Agreements
(100% basis), or which would be recoverable were it not for the limits of
liability stated in those Agreements, will be deducted in determining the
Ultimate Net Loss for purposes of this Agreement.
Should a claim be made during the period of this Agreement under an Extended
Reporting Endorsement attaching to Policies attaching to Agreements incepting
prior to July 1, 1995, recoveries made under such prior Agreement years will
inure to the benefit of Reinsurers hereon.
PART II
An interlocking of policies format was utilized in the RETENTION AND LIMIT
ARTICLES of the Company's former FIRST EXCESS OF LOSS REINSURANCE AGREEMENTS (in
force prior to July 1, 1995). In order to preserve the integrity of this format
for those Agreements, the following provisions are in place, however, the
Company, acting as a co-reinsurer under this section, will retain the liability
under this section that would otherwise be the responsibility of Reinsurers
hereon:
A. The Reinsurers will be liable in respect of each and every loss, each
and every insured, for the Ultimate Net Loss over and above an initial
Ultimate Net Loss of $500,000 each and every loss, each and every
insured, subject to a limit of liability to the Reinsurers of $500,000
each and every loss, each and every insured.
B. The Reinsurers will be liable for the Ultimate Net Loss over and above
an initial Ultimate Net Loss of $500,000 each and every Loss Event,
subject to a limit of liability to the Reinsurer of $2,000,000 each and
every Loss Event. Recoveries under subsection A. above will be deducted
in determining the Ultimate Net Loss for purposes of this section.
C. The parties to this Agreement recognize that a Loss Event may involve
Policies covered by this Agreement, as well as Policies not covered
hereunder but only by reason of having been written or renewed before
the term of this Agreement. In such a case, the Company's
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retention and the Reinsurers' limit of liability for the Loss Event
will be proportionate, with the amount of Ultimate Net Loss to be
retained by the Company being reduced to that percentage which the
Company's sealed losses under Policies covered by this Agreement
bear to the total of all the Company's settled losses contributing
to the same Loss Event. The Reinsurers' liability will be arrived at
in the same manner.
D. Amounts recoverable under the Company's Excess Cessions Reinsurance
Agreements (100% basis), or which would be recoverable were it not for
the limits of liability specified in those Agreements, will also be
deducted in determining the Ultimate Net Loss for purposes of this
section.
ARTICLE VII
WARRANTY
It is hereby warranted that:
A. The maximum limits of liability on Policies and their Extended
Reporting Endorsements reinsured hereunder are as follows, or so
deemed.
1. As respects Policies issued to individuals:
(a) $2,000,000 any one loss, any one insured; and
(b) $4,000,000 in the aggregate per Policy period per insured.
2. As respects Physician Clinic Policies:
(a) $2,000,000 any one loss, any one insured; and
(b) an amount equal to $4,000,000 multiplied by the number of
insureds, in the aggregate per Policy period.
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3. As respects partnerships, corporations, and entity coverage provided
under Physician Clinics Policies:
(a) $5,000,000 any one loss, any one insured; and
(b) $10,000,000 in the aggregate per Policy period per insured.
B. Excess cessions reinsurance above $1,000,000 each and every loss, each
and every insured, $3,000,000 in the aggregate per insured per Policy
period (other than Physician Clinic Policies where the aggregate limit
per Policy period is a multiple of the number of insureds) will be
deemed in force, and recoveries will inure to the benefit of the
Reinsurers hereon regardless of the limits of liability of such
reinsurance.
C. The Company will be the sole judge of what constitutes one insured for
all purposes of this Agreement.
ARTICLE VIII
PREMIUM
A. The Company will pay the Reinsurers an annual deposit premium of
$20,520,000, payable in equal quarterly installments in advance.
B. Within 60 days following the expiration of this Agreement, the Company
will adjust the deposit premiums against a rate of 12.00% of the
Company's Gross Net Earned Premium Income.
ARTICLE IX
CONTINGENT PROFIT COMMISSION
Three years following the expiration of this Agreement a contingent calculation
will be prepared by the Company in accordance with the following, and a
contingent, if any, paid to the Company by the Reinsurers.
A. INCOME
The Reinsurers' premium for this Agreement, being the gross ceded
premium.
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B. Outgo
1. Loss and loss expense paid by the Reinsurers under this
Agreement, plus 100% of Statutory Reserves,
2. PLUS: The Reinsurers' expense allowance of 15% of the
Reinsurers' premium as in A. above,
The contingent will be 40% of the amount by which Income exceeds Outgo.
The contingent calculation will be provisional until all losses covered
hereunder have been settled, closed, or commuted. In the interim, annual
adjustments will be made between the parties.
Should Outgo exceed Income, the difference will be considered as the Reinsurers'
loss and will be carried forward into the contingent calculation for the renewal
of this Agreement, but not to exceed three years.
ARTICLE X
REPORTS
Within 60 days after the expiration of this Agreement, the Company will furnish
the Reinsurers with:
A. Gross Net Earned Premium Income of the Company.
B. Any other information that the Reinsurers may require to prepare their
NAIC Statements that is reasonably available to the Company.
ARTICLE XI
NET RETAINED LIABILITY
This Agreement applies only to that portion of any insurance covered by this
Agreement that the Company retains net for its own account, and in calculating
the amount of any loss hereunder and also in computing the amount in excess of
which this Agreement attaches, only loss or losses in respect of that portion of
any insurance that the Company retains net for its own account will be included.
The amount of the Reinsurer liability hereunder in respect of any loss or losses
will not be increased by reason of the inability of the Company to collect from
any other reinsurers, whether specific or general, any amounts that may have
become due from them, whether such inability arises from the insolvency of such
other reinsurers or otherwise.
ARTICLE XII
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NOTICE OF LOSS AND LOSS SETTLEMENTS
The Company will advise the Reinsurers of all claims which, in the opinion of
the Company may involve the Reinsurers, and of all subsequent developments on
these claims that may materially affect the position of the Reinsurers. Such
advices are to include any claim where the reserve is more than $500,000.
Such advices are to be furnished periodically to the Reinsurers through monthly
loss activity reports within 45 days of the end of the month. Inadvertent
omission in dispatching the aforementioned notices will in no way affect the
obligation of the Reinsurers of such omission promptly upon discovery.
The Reinsurers agree to abide by the loss settlements of the Company, provided
such loss settlements are within the terms and conditions of this Agreement,
however, when so requested the Company will afford the Reinsurers an opportunity
to be associated with the Company, at the expense of the Reinsurers in the
defense of any claim or suit or proceeding involving this Agreement and the
Company will cooperate with the Reinsurers in every respect in the defense or
control of such claim, suit, or proceeding.
The Reinsurers will pay their share of loss settlements immediately upon receipt
of proof of loss hereunder from the Company.
All investigation, adjustment, legal expense, including expense incurred as a
result of a declaratory judgment action, and interest (other than interest
accrued prior to judgment where such interest becomes part of the judgment)
incurred by the Company (except office expenses and salaries of officials and
employees not classified as loss adjusters) will be divided between the Company
and the Reinsurers in proportion to their respective shares of the Ultimate Net
Loss as determined in the RETENTION AND LIMIT ARTICLE. Such expense will be in
addition to the limits stated in the RETENTION AND LIMIT ARTICLE, but will be
subject to the aggregate limit as stated therein.
However, if a verdict, judgment, or award is reversed or reduced, the Company
and the Reinsurers will share expenses incurred in securing such reversal or
reduction in the proportion that each benefits from the reversal or reduction.
Expenses incurred up to the time of the original verdict, judgment, or award
will be shared in proportion to what would have been each party's share.
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ARTICLE XIII
INTEREST PENALTY
Overdue payments under this Agreement will be subject to interest penalties. The
sole purposes of this Article are: (1) to establish a point in time when a
payment will be considered overdue, and (2) to provide a method of calculating
interest penalties. The provisions of this Article will, therefore, not alter
the provisions contained within any other Article of this Agreement.
A. Payments from the Company to the Reinsurers will be considered overdue:
1. For the initial deposit premium;
a. 60 days after Agreement inception, if a Reinsurer
authorized its share prior to the inception date; or
b. 60 days after a Reinsurer authorized its share, if
its authorization was made after Agreement inception
date.
2. 30 days after the due dates of the remaining deposit premiums.
3. 120 days after the due dates of the adjustment premiums.
For purposes of this Paragraph A only, payments from the Company to the
Reinsurers will mean that the Reinsurers have actually received the
payments.
B. Payments from the Reinsurers to the Company will be considered overdue
45 days after the Reinsurers receive the request for payment, except:
1. If the information contained in the request for payment is
either not in accordance with the terms of this Agreement or
not complete enough to allow the Reinsurers to validate the
Company's request for payment, then, within 30 days of receipt
of the request for payment, the Reinsurers will request such
additional information, and the payment will be considered
overdue 45 days after the Reinsurers receive the requested
additional information.
2. If the 45-day period noted above is exceeded because a
Reinsurer disputes the validity of the request for payment,
interest penalties will be payable for the entire overdue
period, but only on the final settlement amount of the
originally-disputed request for payment.
If, on such a disputed request for payment, the Company drew
funds from a letter of credit or from any other funding
vehicle established by a Reinsurer for the purposes
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of making payments to the Company, the Company will incur
interest penalties from the time of the draw until the time of
the final settlement, but only on the difference between the
amount drawn and the amount of the final settlement, the
Company paying such difference and interest penalties to the
Reinsurer within 45 days of the final settlement.
For purposes of this Paragraph B only, payments received by the
Intermediary within the 45-day time period will not be considered
overdue.
C. Interest penalties, from the time a payment in considered overdue until
the time of payment, will be computed by using the prime rate, as
reported in the Wall Street Journal on the day on which the payment
becomes overdue, plus 1%.
D. An interest penalty may be waived by the party to which it is owed, but
such a waiver will not alter the rights to other interest penalties
that may then be owed or owed in the future.
ARTICLE XIV
SUBROGATION
Should the Company effect subrogation recovery or receive reimbursement on loss
subject to this Agreement, then such recovery, less all expenses incurred in
effecting the recovery (excluding salaries and expenses of officials and
employees of the Company not classified as loss adjusters) will be applied
between the parties having interest in the loss in the order inverse to that in
which their respective liability attached.
Should a recovery effort be unsuccessful, or should the expenses of making a
recovery exceed the recovery, then the Company and the Reinsurer will share such
expense in proportion to their interest in the loss.
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ARTICLE XV
EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS LIMITS LIABILITY
This Agreement will extend to cover any losses arising from claims related extra
contractual obligations and/or excess limits liability.
"Extra contractual obligations" as used in this Agreement will mean those
liabilities not covered under any other provision of this Agreement, which arise
from the handling of any claim on business covered hereunder; such liabilities
arising because of, but not limited to, the following: failure to settle within
the policy limit, by reason of alleged or actual negligence, fraud, or bad faith
in rejecting an offer of settlement, in the preparation of the defense, in the
trial of any action against the insured, or in the preparation or prosecution of
an appeal consequent upon such action.
"Excess limits liability" as used in this Agreement will mean damages payable in
excess of the policy limit as a result of the Company's alleged or actual
negligence, fraud, or bad faith in failing to settle and/or rejecting a
settlement within the policy limit, in the preparation of the defense, in the
trial of any action against the insured, or in the preparation or prosecution of
an appeal consequent upon such action. Excess limits liability is any amount for
which the Company would have been contractually liable to pay had it not been
for the limits of the reinsured policy.
There will be no recovery hereunder where the extra contractual obligation or
excess limits liability has been incurred due to fraud committed by a member of
the Board of Directors or a corporate officer of the Company, acting
individually, collectively, or in collusion with a member of the Board of
Directors, a corporate officer, or a partner of any other corporation,
partnership, or organization involved in the defense or settlement of a claim on
behalf of the Company.
The date on which any extra contractual obligation and/or excess limits
liability is incurred by the Company will be deemed, in all circumstances, to be
part of the original loss and the date of such loss, for purposes of this
Agreement, will be deemed in all circumstances to be the date of loss determined
in accordance with the definition of Loss Event as provided in the DEFINITIONS
ARTICLE and subject always to the provision of the TERM ARTICLE.
Nothing in this Article will be construed to create a separate or distinct loss
apart from the original covered loss that gave rise to the extra contractual
obligations and/or excess limits liability discussed in the preceding
paragraphs. In no event will the total liability of Reinsurers exceed their
aggregate limit of liability as set forth in the RETENTION AND LIMIT ARTICLE.
ARTICLE XVI
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OFFSET
In the event of insolvency, the parties hereto will be entitled to exercise
their rights to offset any monies or balances due from each party to the other
as the case may be in accordance with the provisions of the Illinois Insurance
Code governing offset entitlements.
ARTICLE XVII
INSOLVENCY
A. In the event of the Company's insolvency, the reinsurance
afforded by this Contract shall be payable by the Reinsurer on the
basis of the Company's liability under the policies reinsured
without diminution because of the Company's insolvency or because
its liquidator, receiver, conservator or statutory successor has
failed to pay all or a portion of any claims, subject however to the
right of the Reinsurer to offset against such funds due hereunder,
any sums that may be payable to it by said insolvent Company in
accordance with the OFFSET ARTICLE. The reinsurance shall be payable
by the Reinsurer directly to the Company, its liquidator, receiver,
conservator or statutory successor except (a) where this Contract
specifically provides another payee of such reinsurance in the event
of the Company's insolvency or (b) where the Reinsurer, with the
consent of the direct insured or insureds, has assumed such policy
obligations of the Company as direct obligations of itself to the
payees under such policies in substitution for the Company's
obligation to such payees.
B. The Company's liquidator, receiver, conservator or
statutory successor shall give written notice of the pendency of a
claim against the Company under the policies reinsured within a
reasonable time after such claim is filed in the insolvency
proceeding. During the pendency of such claim, the Reinsurer may
investigate said claim and interpose in the proceeding where the
claim is to be adjudicated, at its own expense, any defense that it
may deem available to the Company, its liquidator, receiver,
conservator or statutory successor. The expense thus incurred by the
Reinsurer shall be chargeable against the Company, subject to court
approval, as part of the expense of conservation or liquidation to
the extent that such proportionate share of the benefit shall accrue
to the Company solely as a result of the defense undertaken by the
Reinsurer.
C. In the event of insolvency of the Company, the Reinsurer under this
Contract will have all rights, as more fully set forth in Section 173
of Illinois Insurance Code, as amended.
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ARTICLE XVIII
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 shall 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 30 days after being requested to do so by
the other party, the latter after 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 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 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 Chicago, Illinois 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 Illinois. 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 make its decision considering the custom and practice
of the applicable insurance and reinsurance business as promptly as
possible 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 XIX
DELAYS, ERRORS, OR OMISSIONS
Inadvertent delays, errors, or omissions made in connection with this Agreement
or any transaction hereunder will not relieve either party from any liability
that would have attached had such delay, error, or omission not occurred,
provided always that such error or omission is rectified immediately upon
discovery.
ARTICLE XX
ENTIRE AGREEMENT/AMENDMENTS
This Agreement constitutes the entire agreement between the parties. This
Agreement may be altered or amended in any of its terms and conditions by mutual
consent of the Company and the Reinsurers either by addenda hereto or by an
exchange of letters; such addenda or letters will then constitute a part of this
Agreement.
ARTICLE XXI
INSPECTION
The Company will place at the disposal of the Reinsurers at all reasonable
times, and the Reinsurers will have the right to inspect, through their
authorized representatives, all books, records and papers of the Company in
connection with any reinsurance hereunder, or claims in connection herewith. The
cost of such inspection will be borne by the Reinsurers.
ARTICLE XXII
TAXES
The Company will pay all taxes (except Federal Excise Tax) on premiums reported
to Reinsurers on this Agreement.
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ARTICLE XXIII
FEDERAL EXCISE TAX
(This Article applies to Reinsurers domiciled outside the United States of
America, excepting Lloyd's London Underwriters and other Reinsurers exempt from
Federal Excise Tax.)
Reinsurers will allow for the purpose of paying 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 such tax. In the event of any return of premium, Reinsurers will deduct the
aforesaid percentage from the return premium payable hereon and the Company or
its agent will recover such tax from the United States Government.
ARTICLE XXIV
CURRENCY
The use of the sign "V in this Agreement is in reference to United States of
America Dollars. Therefore, premiums due Reinsurers and loss payments due the
Company hereunder will be in United States of America Dollars.
ARTICLE XXV
RESERVES AND FUNDING
This clause is only applicable to those Reinsurers who cannot qualify for credit
by the State having jurisdiction over the Company's loss reserves.
As regards Policies issued by the Company coming within the scope of this
Agreement, when the Company files with the insurance department or sets up on
its books Statutory Reserves for losses covered hereunder which it is required
to set up by law, it will forward to the Reinsurers a statement showing the
proportion of such loss reserves applicable to them.
The Reinsurers hereby agrees that they will apply for and secure delivery to the
Company a clean, irrevocable, and unconditional Letter of Credit issued by a
bank chosen by the Reinsurers and acceptable to the appropriate insurance
authorities, in an amount equal to the Reinsurers' proportion of 100% of the
Statutory Reserves (as defined in this Agreement) that have been reported to the
Reinsurers as shown in the statement prepared by the Company.
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The Letter of Credit will be "Evergreen," will be issued for a period of not
less than one year, and will be automatically extended for one year from its
date of expiration or any future expiration date unless 30 days prior to any
expiration date, the bank notifies the Company by certified or registered mail
that it elects not to consider the Letter of Credit extended for any additional
period.
The Company, or its successors in interest, undertakes to use and apply any
amounts it may draw upon such Credit pursuant to the terms of the Agreement
under which the Letter of Credit is held, for the following purposes only:
A. To pay the Reinsurers' share or to reimburse the Company for
the Reinsurers' share of any liability for loss reinsured by
this Agreement, the payment of which has been agreed by the
Reinsurers and which has not otherwise been paid.
B. To make refund of any sum which is in excess of the actual
amount required to pay the Reinsurers' share of any liability
reinsured by this Agreement.
C. In the event the Company receives notice that the Letter of
Credit will not be extended beyond its expiration date as
provided for above, to establish deposit of the
Reinsurers' share of 100% of the Statutory Reserves under
this Agreement. Such cash deposit will be held in an
interest bearing account separate from the Company's
other assets, and interest thereon will accrue to the
benefit of the Reinsurers. The Company will ensure that a
rate of interest is obtained for the Reinsurers on such a
deposit account that is at least equal to the rate that
would be paid by the bank that issued the Letter of
Credit. The Company will account to the Reinsurers on an
annual basis for all interest accruing on the cash
deposit account for the benefit of the Reinsurers.
The bank will 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.
At annual intervals, or more frequently as agreed but never more frequently than
semiannually, the Company will prepare a specific statement, for the sole
purpose of amending the Letter of Credit, of the Reinsurers' share of 100% of
the Statutory Reserves. If the statement shows that the Reinsurers' share of
100% of the Statutory Reserves:
A. Exceeds the balance of credit as of the statement date, the
Reinsurers will, within 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.
B. Is less than the balance of credit as of the statement date,
the Company will, within 30 days after receipt of written
request from the Reinsurers, release such excess credit by
agreeing to secure an amendment to the Letter of Credit
reducing the
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amount of credit available by the amount of excess credit.
All expenses incurred in the establishment or maintenance of such Letters of
Credit will be for the account of the Reinsurers.
ARTICLE XXVI
SERVICE OF SUIT
(This Article applies to Reinsurers domiciled outside the United States of
America and/or unauthorized in any state, territory, or district of the
United States of America that has jurisdiction over the Company and in which
a subject suit has been instituted. This Article is not intended to conflict
with or override the panics' obligation to arbitrate their disputes in
accordance with the ARBITRATION ARTICLE.)
In the event of the failure of any Reinsurer hereon to pay any amount claimed
to be due hereunder, such Reinsurer, at the request of the Company, wiil
submit to the jurisdiction of a court of competent jurisdiction within the
United States. Nothing in this Article constitutes or should be understood to
constitute a waiver of the Reinsurer's rights to commence an action in any
court of competent jurisdiction in the United States, to remove an action to
a United States District Court, or to seek a transfer of a case to another
court as permitted by the laws of the United States or of any state in the
United States. Service of process in such suit may be made upon Lord, Bissell
and Brook, 115 South LaSalle Street, Chicago, Illinois 60603, or another
party specifically designated in the applicable Interests and Liabilities
Agreement attached hereto. In any suit instituted against it upon this
Agreement, the Reinsurer will abide by the final decision of such court or of
any appellate court in the event of any appeal.
The above-named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of Company
to give a written undertaking to the Company that they will enter a general
appearance upon the Reinsurer's behalf in the event such a suit will be
instituted.
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 the successor or
successors in office, as its true and lawful attorney upon whom may be served
any lawfi.al process in any action, suit or proceeding instituted by or on
behalf of the Company or any beneficiary hereunder, arising out of this
Agreement, and hereby designates the above-named as the person to whom the
said officer is authorized to mail such process or a true copy thereof.
ARTICLE XXVII
COMMUTATION
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At the Company's option at any time beginning two years from the expiration
(or cancellation) of this Agreement, the amount of the then known and
incurred but not reported losses will be ascertained by the Company and a
statement listing amounts paid and reserved will be submitted to the
Reinsurers. This statement will form the basis of an agreed value for all
such ultimate incurred losses. The calculation of such known and incurred but
not reported losses, if desired by either party, will be calculated by an
independent actuary.
Except as may be mutually agreed, these calculations, duly signed by the
Company, will be considered the final and agreed value of all known losses
and incurred but not reported losses for this Agreement. The amounts shown to
be due to the Company, if any, will be accepted by the Company as Bill
settlement of the Reinsurers' liability for all such losses and expenses,
constituting, thereby, a complete release of the Reinsurers' liability for
all such losses and expenses.
ARTICLE XXVIII
INTERMEDIARY
Aon Re Inc., an Illinois corporation, or one of its affiliated corporations
duly licensed as a reinsurance intermediary, is hereby recognized as the
Intermediary negotiating this Agreement for all business hereunder. All
communications (including but not limited to notices, statements, premiums,
return premiums, commissions, taxes, losses, loss expenses, salvages, and
loss settlements) relating to this Agreement will be transmitted to the
Company or the Reinsurers through the Intermediary. Payments by the Company
to the Intermediary will be deemed payment to the Reinsurers. Payments by the
Reinsurers to the Intermediary will be deemed payment to the Company only to
the extent that such payments are actually received by the Company.
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U.S.A
NUCLEAR INCIDENT EXCLUSION CLAUSE--LIABILITY--REINSURANCE
1. This reinsurance does not cover any loss or liability accruing to
the Reassured as a member of, or sub scriber 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, to INJURY, SICKNESS, DISEASE, DEATH OR DESTRUCTION bodily injury or
property damage with respect to which an insured under the policy is also 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.
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 U 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 I
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
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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:
I. 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 States of
America, or any agency thereto, with any person or organization.
II. Under any Medical Payments Coverage, or under any Supplementary
Payments Provision relating to IMMEDIATE MEDICAL OR SURGICAL RELIEF
first aid, to expenses incurred with respect
to BODILY INJURY, SICKNESS, DISEASE OR DEATH bodily injury
resulting from the hazardous properties of nuclear material
and arising out of the operation of a nuclear facility by any
person or organization.
III. Under any Liability Coverage, to INJURY, SICKNESS, DISEASE, DEATH 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
(c) the INJURY, SICKNESS, DISEASE, DEATH OR DESTRUCTION bodily injury or
property damage arises out of 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, but if such facility is
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located within the United States of America, its territories, or possessions or
Canada, this exclusion (c) applies only to INJURY TO OR DESTRUCTION OF PROPERTY
AT 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 materials" means source materials, 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 and (2) resulting from the operation by any person or organization of
any nuclear facility included within the definition of nuclear & city under
paragraph (a) or (b) thereof "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" INCLUDES ALL FORMS OF RADIOACTIVE CONTAMINATION OF PROPERTY.
"property damage" 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 I 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 of the Independent Insurance Conference of Canada.
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- --------------------------------------------------------------------------------
*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.
N.M.A. 1590 (21/9/67)
Approved by Lloyd's Underwriters' Non-Marine Association.
AMENDMENT TO THE DEFINITION OF WASTE
It is agreed that the definition of "waste" contained in sub-paragraph IV
above is amended to read as follows:
"Waste" means any material
(a) containing byproduct material other than the tailings or waste
produced by the extraction or concentration of uranium or thorium from any
ore processed primarily for its source material content, and
(b) 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.
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EXCESS OF LOSS REINSURANCE AGREEMENT
ADDENDUM TO THE FINAL PLACEMENT SLIP
COMPANY: Illinois State Medical Inter-Insurance Exchange Illinois
PROGRAM
INCEPTION: July 1, 1995, 12:01 a.m. Central Standard Time.
EFFECTIVE: PART I
Covering Loss Events during the 24-month term beginning July
1, 1997 where Date of Loss of such Loss event is on or after
July 1, 1997.
PART II
Covering losses under policies (including extended reporting
endorsements attaching thereto) attaching during the 24-month
term beginning July 1, 1997, but only in respect of those
losses where the Date of Loss of such Loss Event is reported
prior to July 1, 1995.
As respects Part II only, the Date of Loss for claims made
during an extended reporting period issued prior to July 1,
1995, will be the last in force day of the original policy
period.
IN RESPECT OF BOTH PARTS I AND II
In the event this Agreement is not renewed, the Reinsurers
will remain liable for all Loss Events that involve Policies
in force at expiry. Additionally, reinsurers will remain
liable for losses relating to a Loss Event first reported
during the treaty period. So long as the insured had a policy
in force with the Company at the time of non renewal. Such
run-off period shall be subject to the payment of an
additional premium calculated at the premium rate applied to
the unearned premiums as of the date of expiration. Any
additional premium shall form part of the premium due for year
prior to expiry. Additionally, any extended reporting
endorsement in force at expiry to run off until their natural
expiry dates are exceeding eight years from the expiry of this
Agreement. Furthermore, should the regulatory authority hind
the Company to continued policy coverage. Reinsurers shall
also be liable as provided herein until the Company can
lawfully non-renew such policies.
IT IS HEREBY NOTED AND AGREED, that effective July 1, 1997, the EFFECTIVE
Section is amended to read as follows:
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ILLINOIS STATE MEDICAL INTER-INS. EXCH. EXCESS OF LOSS
ADDENDUM NO. 1
EFFECTIVE: PART I
Covering Loss Events during the 24-month term beginning July
1, 1997 where Date of Loss of such Loss Event is on or after
July 1, 1997.
PART II
Covering losses under policies (including extended reporting
endorsements attaching thereto) attaching during the 24-month
term beginning July 1, 1997, but only in respect of those
losses where the Date of Loss of such Loss Event is reported
prior to July 1, 1995.
As respects Part II only, the Date of Loss for claims made
during an extended reporting period issued prior to July 1,
1995, will be the last in force day of the original policy
period.
IN RESPECT OF BOTH PARTS I AND II
In the event this Agreement is not renewed, the Contract will
expire on a cut-off basis, and the Reinsurers will not be
liable for any Loss Event occurring on or after the expiration
date, except for any Loss Events involving in force extended
reporting endorsements. Any extended reporting endorsements in
force at the expiration date of this Agreement will run-off
until their natural expiration dates not exceeding eight years
from the expiration date of this Agreement.
Notwithstanding the foregoing, the parties to this Agreement
recognized that a Loss event may involve Policies covered by
this Agreement, as well as Policies not covered hereunder but
only by reason of having been written by the Company after the
nonrenewal of this Agreement. In such a case, the Company's
retention and the Reinsurers' limit of liability for the Loss
Event will be proportionate, with the amount of Ultimate Net
Loss to be retained by the Company being reduced to that
percentage which the Company's settled losses under Policies
covered by this Agreement bear to the total of all the
Company's settled losses contributing to the same Loss Event.
The Reinsurer's liability will be arrived at in the same
manner.
EFFECTIVE:
(cont'd)
Notwithstanding the other provisions in this Article, in the
event the
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ILLINOIS STATE MEDICAL INTER-INS. EXCH. EXCESS OF LOSS
ADDENDUM NO. 1
Company's Policies are written in a jurisdiction where
cancellation, renewal, or nonrenewal is regulated by the
insurance authorities, and the Company is bound by such
regulations and statues of said jurisdiction or by judicial
decision, the Reinsurers will remain liable on any such
Policies in force at the expiration date of this Agreement
until the date each expires or until the first renewal date
when the Company can lawfully nonrenew said Policies,
whichever occurs first. If, however, the Company intends to
hold the business net and for its own account, or has other
reinsurance agreements that would apply to such business, the
Reinsurers will not be liable for longer than the run-off
period set forth above.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
Assuming that you find everything to be in order, please indicate your
acceptance and approval by signing and returning this Addendum to the Final
Placement Slip to Aon Re Inc.
ACCEPTED &
APPROVED:_______________________________________________________________________
REFERENCE
NUMBER:_______________________________ DATED:__________________________________
(For processing purposes it is important that you provide our Company's
reference number for this program.)
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<PAGE>
EXCESS OF LOSS REINSURANCE AGREEMENT
ADDENDUM 2 TO THE FINAL PLACEMENT SLIP
COMPANY: Illinois State Medical Inter-Insurance Exchange Illinois
PROGRAM
INCEPTION: July 1, 1995, 12:0 1 a.m. Central Standard Time.
EFFECTIVE: PART I
Covering Loss Events during the 24-month term beginning July
1, 1997 where Date of Loss of such Loss Event is on or after
July 1,1997.
PART II
Covering losses under policies (including extended reporting
endorsements attaching thereto) attaching during the 24-month
term beginning July 1, 1997, but only in respect of those
losses where the Date of Loss of such Loss Event is reported
prior to July 1, 1995.
As respects Part II only, the Date of Loss for claims made
during an extended reporting period issued prior to July 1,
1995, will be the last in force day of the original policy
period.
IN RESPECT OF BOTH PARTS I AND II
In the event this Agreement is not renewed, the Contract will
expire on a cut-off basis, and the Reinsurers will not be
liable for any Loss Event occurring on or after the expiration
date, except for any Loss Events involving in force extended
reporting endorsements. Any extended reporting endorsements in
force at the expiration date of this Agreement will run-off
until their natural expiration dates not exceeding eight years
from the expiration date of this Agreement.
Notwithstanding the foregoing, the parties to this Agreement
recognized that a Loss Event may involve Policies covered by
this Agreement, as well as Policies not covered hereunder but
only by reason of having been written by the Company after the
nonrenewal of this Agreement. In such a case, the Company's
retention and the Reinsurers' limit of liability for the Loss
Event will be proportionate, with the amount of Ultimate Net
Loss to be retained by the Company being reduced to that
percentage which the
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ILLINOIS STATE MEDICAL INTER-INS. EXCH. EXCESS OF LOSS
ADDENDUM NO. 2
Company's settled losses under Policies covered by this
Agreement bear to the total of all the Company's settled
losses contributing to the same
IN RESPECT OF BOTH PARTS I AND II (CONT'D)
Loss Event. The Reinsurers' liability will be arrived at in
the same manner.
Notwithstanding the other provisions in this Article, in the
event the Company's Policies are written in a jurisdiction
where cancellation, renewal, or nonrenewal is regulated by the
insurance authorities, and the Company is bound by such
regulations and statues of said jurisdiction or by judicial
decision, the Reinsurers will remain liable on any such
Policies in force at the expiration date of this Agreement
until the date each expires or until the first renewal date
when the Company can lawfully nonrenew said Policies,
whichever occurs first. If, however, the Company intends to
hold the business net and for its own account, or has other
reinsurance agreements that would apply to such business, the
Reinsurers will not be liable for longer than the runoff
period set forth above.
IT IS HEREBY NOTED AND AGREED that, effective July 1, 1998 the following
revisions are made to this Agreement:
EFFECTIVE: The term of Part I and II of this Agreement is extended to 36
months to expire at 12:00 a.m. Central Standard Time, July 1,
2000.
CONTINGENT
PROFIT
COMMISSION: FOR THE PERIOD JULY 1, 1997 TO JUNE 30. 1999
40% of net profit (based on statutory incurred losses). 15%
RHOEF, 2 year adjustment period. Adjusted 36 months after the
close of 2 year adjustment period. Deficit credit carry
forward to next adjustment period.
FOR THE PERIOD JULY 1, 1999 TO JUNE 30, 2000
40% of net profit (based on statutory incurred losses). 15%
RHOEF, 1 year adjustment period. Adjusted 36 months after the
close of
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ILLINOIS STATE MEDICAL INTER-INS. EXCH. EXCESS OF LOSS
ADDENDUM NO. 2
adjustment period. Such calculation to include any deficit or
credit from prior two year adjustment period.
For purposes of this Agreement, this adjustment period shall
include the excess of income less Outgo from the profit
commission for the prior adjustment period, with any profit
commission due for this adjustment period to be after the
deduction of the profit commission paid for the prior profit
commission.
Deficit carry forward for a maximum of three years.
EXCLUSIONS:
- Directors and Officers Liability, when written as
such.
- Reinsurance Assumed other than business retroceded to
the Company from Fronting arrangements for business
written in states where the Company is not licensed.
- Nuclear Incident Exclusion Clause - Liability -
U.S.A. (N.M.A. 1590).
- Insolvency Funds Exclusion Clause.
OTHER
PROVISIONS: The following is added to the Other Provisions Section:
For the purposes of this Agreement, the date of loss under
occurrence policies shall be deemed to be the date such claim
was made in accordance with the Company's definition of Claim
Made.
INFORMATION: The following is added to the Information Section:
At the end of the first quarter of the 1999 calendar year,
estimated GNEPI for the period 7/1/99 - 6/30/2000 will be
provided by the Company. Deposit premium for the period 7/1/99
- 6/30/2000 will be adjusted accordingly. Deposit premium will
continue to be based on 90% of actual.
Agreed by all Reinsurers except RJH 122.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
IT IS HEREBY NOTED AND AGREED that, effective July 1, 1998 the following
revisions are made to this Agreement:
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ILLINOIS STATE MEDICAL INTER-INS. EXCH. EXCESS OF LOSS
ADDENDUM NO. 2
EXCLUSIONS:
- Directors and Officers Liability, when written as
such.
- Reinsurance Assumed other than claims made business
retroceded to the Company from Fronting arrangements
for business written in states where the Company is
not licensed.
- Nuclear Incident Exclusion Clause - Liability -
U.S.A. (N.M.A. 1590).
- Insolvency Funds Exclusion Clause.
OTHER
PROVISIONS: The following is added to the Other Provisions Section:
For the purposes of this Agreement, the date of loss under
occurrence policies shall be deemed to be the date such claim
was made in accordance with the Company's definition of Claim
Made.
Agreed by RJH 122 only.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
In accordance with your instructions we have placed reinsurance with the
Reinsurer(s) listed here subject to the terms and conditions hereinabove stated.
We ask that you promptly advise us if the ten conditions, or Reinsurer(s) vary
in any respect from your instructions. Aon Re Inc. will not responsible for the
financial or other obligations of any Reinsurer(s). Should you desire financial
information regarding the Reinsurer(s) listed hereon, please contact us and we
will furnish it.
THE REINSURER'S OBLIGATIONS UNDER THIS AGREEMENT ARE SEVERAL AND NOT JOINT AND
ARE LIMITED SOLELY TO EXTENT OF THEIR INDIVIDUAL PARTICIPATIONS. THE REINSURERS
ARE NOT RESPONSIBLE FOR THE PARTICIPATION OF CO-SUBSCRIBING REINSURER WHO FOR
ANY REASON DOES NOT SATISFY ALL OR PART OF ITS OBLIGATIONS.
IT IS HEREBY NOTED AND AGREED that, effective July 1, 1999, Reinsurers Signed
lines are follows:
<TABLE>
<CAPTION>
REINSURED WITH
DOMESTIC COMPANIES PERCENTAGE
- ------------------ ----------
<S> <C>
Chartwell Reinsurance Company 7.0000%
</TABLE>
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<PAGE>
ILLINOIS STATE MEDICAL INTER-INS. EXCH. EXCESS OF LOSS
ADDENDUM NO. 2
<TABLE>
<S> <C>
Everest Reinsurance Company 6.0000%
Kemper Reinsurance Company 6.0000%
NAC Reinsurance Corporation 10.0000%
Odyssey Reinsurance Corporation 4.0000%
Sydney Reinsurance Corporation 2.0000%
Transatlantic Reinsurance Company 20.0000%
--------
TOTAL DOMESTIC COMPANIES 55.0000%
</TABLE>
PLACEMENT THROUGH NICHOLSON LESLIE NORTH AMERICAN REINSURANCE BROKERS
<TABLE>
<CAPTION>
UNDERWRITERS AT LLOYD'S, LONDON
- -------------------------------
<S> <C>
Lloyd's Syndicate #0122 RJH 0.3800%
Lloyd's Syndicate #0205 HGJ 0.7500%
Lloyd's Syndicate #0362 WEH 1.5100%
Lloyd's Syndicate #0376 JHV 0.3400%
Lloyd's Syndicate #0435 DPM 4.5300%
Lloyd's Syndicate #0991 AEG 1.3200%
Lloyd's Syndicate #1003 SJC 0.2900%
Lloyd's Syndicate #1007 SVH 3.7700%
Lloyd's Syndicate #1096 RAS 1.0000%
Lloyd's Syndicate #2003 SIC 0.4600%
Lloyd's Syndicate #2376 JHV 0.1600%
-------
TOTAL UNDERWRITERS AT LLOYD'S, LONDON 14.5100%
</TABLE>
<TABLE>
<CAPTION>
LONDON COMPANIES
- ----------------
<S> <C>
CNA International Reinsurance Company Limited 12.6400%
Unionamerica Insurance Company Limited 17.8500%
--------
TOTAL LONDON COMPANIES 30.4900%
TOTAL PLACEMENT THRU NICHOLSON LESLIE NORTH AMERICAN 45.0000%
REINSURANCE BROKERS
TOTAL ALL PARTICIPANTS 100.0000%
</TABLE>
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
Assuming that you find everything in order, please indicate your acceptance and
approval by
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ILLINOIS STATE MEDICAL INTER-INS. EXCH. EXCESS OF LOSS
ADDENDUM NO. 2
signing and returning this Final Placement Slip to Aon Re Inc.
ACCEPTED &
APPROVED: ____________________________________________________________
REFERENCE
NUMBER: ____________________________ DATED:____________________________
(FOR PROCESSING PURPOSES IT IS IMPORTANT THAT YOU PROVIDE YOUR COMPANY'S
REFERENCE NUMBER FOR THIS PROGRAM.)
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EXHIBIT 10.3
FIRST EXCESS CESSION REINSURANCE AGREEMENT
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE PAGE
BUSINESS COVERED I
EXCLUSIONS II
TERRITORY III
TERM AND CANCELLATION IV
DEFINITIONS V
RETENTION AND LIMIT VI
WARRANTY VII
PREMIUM VIII
CEDING COMMISSION IX
CONTINGENT X
REPORTS AND REMITTANCES XI
NET RETAINED LIABILITY XII
NOTICE OF LOSS AND LOSS SETTLEMENTS XIII
INTEREST PENALTY XIV
SUBROGATION XV
EXTRA CONTRACTUAL OBLIGATIONS AND
EXCESS LIMITS LIABILITY XVI
OFFSET XVII
INSOLVENCY XVIII
ARBITRATION XIX
DELAYS, ERRORS OR OMISSIONS XX
ENTIRE AGREEMENT/AMENDMENTS XXI
INSPECTION XXII
TAXES XXIII
FEDERAL EXCISE TAX XXIV
CURRENCY XXV
RESERVES AND FUNDING XXVI
SERVICE OF SUIT XXVII
INTERMEDIARY XXVIII
</TABLE>
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FIRST EXCESS CESSION REINSURANCE AGREEMENT
THIS AGREEMENT is made and entered into by and between the ILLINOIS STATE
MEDICAL INTER-INSURANCE EXCHANGE, Chicago, Illinois (hereinafter called the
"Company") of the one part, and the various Reinsurers as identified by the
attached Interests and Liabilities Agreements (hereinafter called the
"Reinsurers") of the other part.
WITNESSETH:
That in consideration of the mutual covenants hereinafter contained and upon the
terms and conditions hereinbelow set forth, the parties hereto agree as follows:
ARTICLE I
BUSINESS COVERED
Reinsurers will indemnify the Company, subject to the limits set forth in the
RETENTION AND LIMIT ARTICLE for losses to the Company in respect of Professional
Liability Policies (including Personal Injury Liability) and Extended Reporting
Endorsements attaching thereto, covering medical practitioners, and their
medical partnerships, clinics, and corporations with limits greater than
$1,000,000 any one loss, any one insured.
All reinsurance for which Reinsurers will be obligated by virtue of this
Agreement will be subject to the same terms, rates, conditions, interpretations,
waivers, modifications, and alterations as the respective Policies of the
Company to which this reinsurance applies, subject always to the terms and
conditions of this Agreement. Nothing herein will in any manner create any
obligations or establish any rights against Reinsurers in favor of any third
parties or any persons not parties to this Agreement except as provided in the
INSOLVENCY ARTICLE.
ARTICLE II
EXCLUSIONS
No reinsurance indemnity will be afforded under this Agreement for:
A. Loss or liability excluded by the attached Nuclear Incident Exclusion
Clause -Liability - Reinsurance - U.S.A. (NMA 1590).
B. All liability of the Company arising by contract, operation of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any 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
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<PAGE>
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.
C. Directors' and Officers' Liability when written as such.
D. Reinsurance assumed.
ARTICLE III
TERRITORY
The territorial scope of this Agreement will follow that of the Company's
Policies.
ARTICLE IV
TERM AND CANCELLATION
This Agreement will apply to all claims made on Policies written or renewed with
an effective date during the period extending from July 1, 1997, 12:01 a.m.
Central Standard Time, to July 1, 1999, 12:01 a.m. Central Standard Time,
including any losses arising from Extended Reporting Endorsements attaching to
said Policies. In the event this Agreement is not renewed, the Reinsurers will
remain liable for all losses under Policies in forces until their expiration or
renewal dates, whichever come first, but in no event will the Reinsurers'
liability extend for a run-off period longer than 12 months plus extensions and
odd time not to exceed 18 months in all from the date of cancellation.
Additionally, the Reinsurers will remain liable during any extended reporting
period that an insured may elect to invoke on a Claims Made Policy that expires
or is canceled during, or at the end of, the period of the Reinsurers' liability
hereunder.
Notwithstanding the other provisions in this Article, in the event the Company's
Policies are written in a jurisdiction where cancellation, renewal, or
nonrenewal is regulated by the insurance authorities, and the Company is bound
by such regulations and statutes of said jurisdiction or by a judicial decision,
the Reinsurers will remain liable on any such Policies in force at the
expiration date of this Agreement until the date each expires or until the first
renewal date when the Company can lawfully nonrenew said Policies, whichever
occurs first. If, however, the Company intends to hold the business net and for
its own account, or has other reinsurance agreements that would apply to such
business, the Reinsurers will not be liable for longer than the run-off period
set forth above.
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In the event that any Reinsurer hereon ceases to write Casualty business during
the term of this Agreement, said Reinsurer's participation, at the option of the
Company, may be canceled ab initio and each party will return to the other party
all transactions previously paid in respect of this Agreement within seven
working days. Upon the return of the previously paid transactions, the Reinsurer
will be relieved of all liabilities incurred under this Agreement. Furthermore,
if at any time during the term of this Agreement either party to this Agreement
is acquired or controlled by, merged with, or reinsures its entire business with
any other company, corporation, or individual or individuals not controlling
that party's operations at the inception of this Agreement, the other party will
have the right to cancel this Agreement by giving 30 days written notice by
certified or registered mail.
Notwithstanding the expiration (or cancellation) of this Agreement as herein
above provided, its provisions will continue to apply to all unfinished business
hereunder to the end that all obligations and liabilities incurred by each party
hereunder will be fully performed and discharged.
ARTICLE V
DEFINITIONS
The following definitions will be used in this Agreement:
A. The term "Ultimate Net Loss" as used in this Agreement will mean the
actual loss paid by the Company, or for which the Company becomes
liable to pay (including 90% of any Extra Contractual Obligation
amount as defined herein, 90% of any Excess Limits Liability amount
as defined herein and interest accrued prior to judgment where such
interest is made part of the judgment, but will exclude all other
interest and expenses which will be handled in accordance with the
NOTICE OF LOSS AND LOSS SETTLEMENTS ARTICLE), but salvages and all
recoveries, including recoveries under all reinsurance that inures
to the benefit of this Agreement whether recovered or not, will be
first deducted from such loss to arrive at the amount of liability
attaching hereunder.
All salvages, recoveries or payments recovered or received subsequent
to loss settlements hereunder will be applied as if recovered or
received prior to the aforesaid settlement and all necessary
adjustments will be made by the parties hereto.
Nothing in this definition will be construed to mean that losses are
not recoverable hereunder until the Company's Ultimate Net Loss has
been ascertained.
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B. The term "Policy in this Agreement will mean any binder, Policy,
certificate, contract, or agreement of insurance, whether written or
oral, issued, accepted, or held covered provisionally or otherwise, by
the Company or on behalf of the Company by Illinois State Medical
Insurance Services, Inc.
C. The term "Loss" as used in this Agreement will mean the definition of
"claim" as determined under the reinsured Policy.
D. The term "Claim Made" or "Claims Made" as used in this Agreement will
mean receipt by the Company of notice that a claim is being made or may
be made against an insured covered under a Policy affording coverage on
the basis of claims so made, provided that the nature of the notice
satisfies the requirements of the Policy involved. The date the claim
is considered to be first made, as provided for in the Company's
Policy, will be considered as the date of loss for this Agreement.
E. The term "Extended Reporting Endorsement" as used in this Agreement
will mean coverage for Claims Made after the cancellation, termination,
or expiration of the Company Policy on losses that would have been
covered under the Policy had the claims been made during the term of
that Policy.
As respects Extended Reporting Endorsements:
1. The reporting period is unlimited.
2. The limits of the original Policy are reinstated as of the
effective date of the Extended Reporting Endorsement and
annually thereafter.
3. For deceased, disabled, and retired insureds, coverage under
an Extended Reporting Endorsement is automatic with no further
charge as all original Policy rates include a charge for such
coverage. For all other insureds, the Company's premium for an
Extended Reporting Endorsement will be calculated at 150% of
the expiring Policy premium, and such premium will be
considered to be fully earned on the cancellation,
termination, or expiration date of the original Policy.
ARTICLE VI
RETENTION AND LIMIT
A. As respects Policies issued to individuals, partnerships, corporations,
and clinics:
1. The Reinsurers will be liable in respect of each and every
loss, each and every insured, for the Ultimate Net Loss over
and above an initial Ultimate Net Loss of $1,000,000 each and
every loss, each and every insured, subject to a limit of
liability to the Reinsurers of $1,000,000 each and every
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<PAGE>
2. The Company will aggregate that amount of Ultimate Net Loss
sustained by the Company for each insured during each Policy
period. The Reinsurers will then be liable for such aggregate
loss over and above an aggregate loss of $3,000,000 per
insured per Policy period, but the Reinsurers will not be
liable for more than $1,000,000 in the aggregate per insured
per Policy period. Recoveries under paragraph A. 1. will be
deducted in determining the Ultimate Net Loss for purposes of
paragraph A.2.
B. When the Company issues an Extended Reporting Endorsement to a Policy
reinsured hereunder, the Reinsurers' liability under this Agreement
will be limited to $3,000,000 per insured for all Claims Made under
both the original Policy and the Extended Reporting Endorsement.
C. Notwithstanding the limits of liability stated in the preceding
paragraphs, the Reinsurers' maximum liability for all losses
recoverable under the preceding paragraphs and for pro rata expenses
recoverable in accordance with the NOTICE OF LOSS AND LOSS SETTLEMENTS
ARTICLE will be limited to an amount equal to 300% of the net (i.e.,
after deduction of ceding commission) premium ceded in accordance with
the ACCOUNTS AND REMITTANCES ARTICLE.
ARTICLE VII
WARRANTY
It is hereby warranted that:
A. The maximum limits of liability on Policies and their Extended
Reporting Endorsements reinsured hereunder are as follows, or so
deemed.
1. As respects Policies issued to individuals:
(a) $2,000,000 any one loss, any one insured; and
(b) $4,000,000 in the aggregate per Policy period per
insured.
2. As respects Physician Clinic Policies:
(a) $2,000,000 any one loss, any one insured; and
(b) an amount equal to $4,000,000 multiplied by the
number of insureds, in the aggregate per Policy
period.
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3. As respects partnerships, corporations, and entity coverage provided
under Physicians Clinics Policies:
(a) $5,000,000 any one loss, any one insured; and
(b) $10,000,000 in the aggregate per Policy period per insured.
B. The Company will be the sole judge of what constitutes one insured for
all purposes of this Agreement.
ARTICLE VIII
PREMIUM
The Company will pay to the Reinsurers in accordance with the REPORTS AND
REMITTANCES ARTICLE the net ceded premium, being the gross ceded premium in
accordance with schedule A below, less the ceding commission as provided for in
this Agreement.
A. SCHEDULE A - Gross Excess Cessions Rates as % of Applicable Primary
Limit
<TABLE>
<CAPTION>
Territory
CLASSIFICATION I IA H III
<S> <C> <C> <C> <C>
1-11 25.0 25.0 25.0 25.0
12-13 28.6 28.6 28.6 28.6
14-19 34.2 31.5 31.5 31.5
20 37.3 34.3 34.3 34.3
</TABLE>
B. The rates above may be:
1. Discounted at the discretion of the Company. For example, an
respects newly practicing insureds, part time practicing
insureds, and insureds subject to a variant rating formula; or
2. Surcharged at the discretion of the Company. For example, as
respects additional insureds (locum tenens) or for other
underwriting considerations.
The net increased limits factors charged will not be less than 90% of the gross
increased limits factors shown above.
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ARTICLE IX
CEDING COMMISSION
The Reinsurers will allow the Company a, ceding commission of 10% of the gross
premium ceded hereunder. Return commission will be allowed on return premiums at
the same rate.
ARTICLE X
CONTINGENT
Three years following the expiration of this Agreement a contingent calculation
will be prepared by the Company in accordance with the following, and a
contingent, if any, paid to the Company by the Reinsurers.
A. INCOME
The Reinsurers' premium for this Agreement, being the gross ceded
premium less the ceding commission.
B. OUTGO
1. Loss and loss expense paid by the Reinsurers under this
Agreement, plus the outstanding reserve of the Reinsurers for
losses covered under this Agreement (as calculated by the
Company),
2. PLUS: The Reinsurers' expense allowance of 20% of the
Reinsurers' premium as in A. above,
3. PLUS: The Reinsurers' loss, if any, from the previous
contingent statement.
The contingent will be 10% of the amount by which Income exceeds Outgo.
The contingent calculation will be provisional until all losses covered
hereunder have been settled, closed, or commuted. In the interim, annual
adjustments will be made between the parties.
Should Outgo exceed Income, the difference will be considered as the Reinsurers'
loss and will be carried forward into the contingent calculation for the renewal
of this Agreement.
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ARTICLE XI
REPORTS AND REMITTANCES
A. Within 30 days following the end of each calendar quarter during the
term of this Agreement, the Company will render a net account to the
Reinsurers showing net ceded premium for the quarter as set forth in
the PREMIUM Article.
B. Within 45 days following the end of the quarter the Company will remit
to the Reinsurers the premium then shown to be due.
ARTICLE XII
NET RETAINED LIABILITY
This Agreement applies only to that portion of any insurance covered by this
Agreement that the Company retains net for its own account, and in calculating
the amount of any loss hereunder and also in computing the amount in excess of
which this Agreement attaches, only loss or losses in respect of that portion of
any insurance that the Company retains net for its own account will be included.
The amount of the Reinsurers' liability hereunder in respect of any loss or
losses will not be increased by reason of the inability of the Company to
collect from any other reinsurers, whether specific or general, any amounts that
may have become due from them, whether such inability arises from the insolvency
of such other reinsurers or otherwise.
ARTICLE XIII
NOTICE OF LOSS AND LOSS SETTLEMENTS
The Company will advise the Reinsurers of all claims which, in the opinion of
the Company may involve the Reinsurers, and of all subsequent developments on
these claims that may materially affect the position of the Reinsurers. Such
advices are to include any claim where the reserve is more than $750,000.
Such advices are to be furnished periodically to the Reinsurers through monthly
loss activity reports within 45 days of the end of the month. Inadvertent
omission in dispatching the aforementioned notices will in no way affect the
obligation of the Reinsurers of such omission promptly upon discovery.
The Reinsurers agree to abide by the loss settlements of the Company, provided
such loss settlements are within the terms and conditions of this Agreement,
however, when so
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proceeding involving this Agreement and the Company will cooperate with the
Reinsurers in every respect in the defense or control of such claim, suit, or
proceeding.
The Reinsurers will pay their share of loss settlements immediately upon receipt
of proof of loss hereunder from the Company.
All investigation, adjustment, legal expense, including expense incurred as a
result of a declaratory judgment action, and interest (other than interest
accrued prior to judgment where such interest becomes part of the judgment)
incurred by the Company (except office expenses and salaries of officials and
employees not classified as loss adjusters) will be divided between the Company
and the Reinsurers in proportion to their respective shares of the Ultimate Net
Loss as determined in the RETENTION AND LIMIT ARTICLE. Such expense will be in
addition to the limits stated in the RETENTION AND LIMIT ARTICLE, but will be
subject to the aggregate limit as stated therein.
However, if a verdict, judgment, or award is reversed or reduced, the Company
and the Reinsurers will share expenses incurred in securing such reversal or
reduction in the proportion that each benefits from the reversal or reduction.
Expenses incurred up to the time of the original verdict, judgment, or award
will be shared in proportion to what would have been each party's share.
ARTICLE XIV
INTEREST PENALTY
Overdue payments under this Agreement will be subject to interest penalties. The
sole purposes of this Article are: (1) to establish a point in time when a
payment will be considered overdue, and (2) to provide a method of calculating
interest penalties. The provisions of this Article will, therefore, not alter
the provisions contained within any other Article of this Agreement.
A. Payments from the Company to the Reinsurers will be considered overdue
60 days after the due dates of the quarterly premiums.
For purposes of this Paragraph A only, payments from the Company to the
Reinsurers will mean that the Reinsurers have actually received the
payments.
B. Payments from the Reinsurers to the Company will be considered overdue
45 days after the Reinsurers receive the request for payment, except:
1. If the information contained in the request for payment is
either not in accordance with the terms of this Agreement or
not complete enough to request such additional information,
and the payment will be considered overdue 45 days after
the Reinsurers receive the requested additional information.
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2. If the 45-day period noted above is 'exceeded because a
Reinsurer disputes the validity of the request for payment,
interest penalties will be payable for the entire overdue
period, but only on the final settlement amount of the
originally-disputed request for payment.
If, on such a disputed request for payment, the Company drew
funds from a letter of credit or from any other funding
vehicle established by a Reinsurer for the purposes of making
payments to the Company, the Company will incur interest
penalties from the time of the draw until the time of the
final settlement, but only on the difference between the
amount drawn and the amount of the final settlement, the
Company paying such difference and interest penalties to the
Reinsurer within 45 days of the final settlement.
For purposes of this Paragraph B only, payments received by the
Intermediary within the 45-day time period will not be considered
overdue.
C. Interest penalties, from the time a payment in considered overdue until
the time of payment, will be computed by using the prime rate, as
reported in the Wall Street Journal on the day on which the payment
becomes overdue, plus 1%.
D. An interest penalty may be waived by the party to which it is owed, but
'such a waiver will not alter the rights to other interest penalties
that may then be owed or owed in the future.
ARTICLE XV
SUBROGATION
Should the Company effect subrogation recovery or receive reimbursement on loss
subject to this Agreement, then such recovery, less all expenses incurred in
effecting the recovery (excluding salaries and expenses of officials and
employees of the Company not classified as loss adjusters) will be applied
between the parties having interest in the loss in the order inverse to that in
which their respective liability attached.
Should a recovery effort be unsuccessful, or should the expenses of making a
recovery exceed the recovery, then the Company and the Reinsurer will share such
expense in proportion to their interest in the loss.
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ARTICLE XVI
EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS LIMITS LIABILITY
This Agreement will extend to cover any losses arising from claims related extra
contractual obligations and/or excess limits liability.
"Extra contractual obligations" as used in this Agreement will mean those
liabilities not covered under any other provision of this Agreement, which arise
from the handling of any claim on business covered hereunder; such liabilities
arising because of, but not limited to, the following: failure to settle within
the policy limit, by reason of alleged or actual negligence, fraud, or bad faith
in rejecting an offer of settlement, in the preparation of the defense, in the
trial of any action against the insured, or in the preparation or prosecution of
an appeal consequent upon such action.
"Excess limits liability" as used in this Agreement will mean damages payable in
excess of the policy limit as a result of the Company's alleged or actual
negligence, fraud, or bad faith in failing to settle and/or rejecting a
settlement within the policy limit, in the preparation of the defense, in the
trial of any action against the insured, or in the preparation or prosecution of
an appeal consequent upon such action. Excess limits liability is any amount for
which the Company would have been contractually liable to pay had it not been
for the limits of the reinsured policy.
There will be no recovery hereunder where the extra contractual obligation or
excess limits liability has been incurred due to fraud committed by a member of
the Board of Directors or a corporate officer of the Company, acting
individually, collectively, or in collusion with a member of the Board of
Directors, a corporate officer, or a partner of any other corporation,
partnership, or organization involved in the defense or settlement of a claim on
behalf of the Company.
The date on which any extra contractual obligation and/or excess limits
liability is incurred by the Company will be deemed, in all circumstances, to be
the date of the original loss.
Nothing in this Article will be construed to create a separate or distinct loss
apart from the original covered loss that gave rise to the extra contractual
obligations and/or excess limits liability discussed in the preceding
paragraphs. In no event will the total liability of Reinsurers exceed their
aggregate limit of liability as set forth in the RETENTION AND LIMIT ARTICLE.
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ARTICLE XVII
OFFSET
In the event of insolvency, the parties hereto will be entitled to exercise
their rights to offset any monies or balances due from each party to the other
as the case may be in accordance with the provisions of the Illinois Insurance
Code governing offset entitlements.
ARTICLE XVIII
INSOLVENCY
A. In the event of the Company's insolvency, the reinsurance afforded
by this Contract shall be payable by the Reinsurer on the basis of
the Company's liability under the policies reinsured without
diminution because of the Company's insolvency or because its
liquidator, receiver, conservator or statutory successor has failed
to pay all or a portion of any claims, subject however to the right
of the Reinsurer to offset against such funds due hereunder, any sums
that may be payable to it by said insolvent Company in accordance
with the OFF SET ARTICLE. The reinsurance shall be payable by the
Reinsurer directly to the Company, its liquidator, receiver,
conservator or statutory successor except (a) where this Contract
specifically provides another payee of such reinsurance in the event
of the Company's insolvency or (b) where the Reinsurer, with the
consent of the direct insured or insureds, has assumed such policy
obligations of the Company as direct obligations of itself to the
payees under such policies in substitution for the Company's
obligation to such payees.
B. The Company's liquidator, receiver, conservator or statutory
successor shall give written notice of the pendency of a claim
against the Company under the policies reinsured within a reasonable
time after such claim is filed in the insolvency proceeding. During
the pendency of such claim, the Reinsurer may investigate said claim
and interpose in the proceeding where the claim is to be adjudicated,
at its own expense, any defense that it may deem available to the
Company, its liquidator, receiver, conservator or statutory successor.
The expense thus incurred by the Reinsurer shall be chargeable against
the Company, subject to court approval, as part of the expense of
conservation or liquidation to the extent that such proportionate
share of the benefit shall accrue to the Company solely as a result of
the defense undertaken by the Reinsurer.
C. In the event of insolvency of the Company, the Reinsurer under this
Contract will have all rights, as more hilly set forth in Section 173
of Illinois Insurance Code, as amended.
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ARTICLE XIX
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 shall 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 30 days after being requested to do so by
the other party, the latter after 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 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 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 Chicago, Illinois 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 Illinois. 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 make its decision considering the custom and practice
of the applicable insurance and reinsurance business as promptly as
possible following the termination of the hearings. Judgment upon the
award may be entered in any court having jurisdiction thereof
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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 XX
DELAYS, ERRORS, OR OMISSIONS
Inadvertent delays, errors, or omissions made in connection with this Agreement
or any transaction hereunder will not relieve either party from any liability
that would have attached had such delay, error, or omission not occurred,
provided always that such error or omission is rectified immediately upon
discovery.
ARTICLE XXI
ENTIRE AGREEMENT/AMENDMENTS
This Agreement constitutes the entire agreement between the parties. This
Agreement may be altered or amended in any of its terms and conditions by mutual
consent of the Company and the Reinsurers either by addenda hereto or by an
exchange of letters; such addenda or letters will then constitute a part of this
Agreement.
ARTICLE XXII
INSPECTION
The Company will place at the disposal of the Reinsurers at all reasonable
times, and the Reinsurers will have the right to inspect, through their
authorized representatives, all books, records and papers of the Company in
connection with any reinsurance hereunder, or claims in connection herewith. The
cost of such inspection will be borne by the Reinsurers.
ARTICLE XXIII
TAXES
The Company will pay all taxes (except Federal Excise Tax) on premiums reported
to Reinsurers on this Agreement.
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ARTICLE XXIV
FEDERAL EXCISE TAX
(This Article applies to Reinsurers domiciled outside the United States of
America, excepting Lloyd's London Underwriters and other Reinsurers exempt from
Federal Excise Tax.)
Reinsurers will allow for the purpose of paying 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 such tax. In the event of any return of premium, Reinsurers will deduct the
aforesaid percentage from the return premium payable hereon and the Company or
its agent will recover such tax from the United States Government.
ARTICLE XXV
CURRENCY
The use of the sign "$" in this Agreement is in reference to United States of
America Dollars. Therefore, premiums due Reinsurers and loss payments due the
Company hereunder will be in United States of America Dollars.
ARTICLE XXVI
RESERVES AND FUNDING
This clause is only applicable to those Reinsurers who cannot qualify for credit
by the State having jurisdiction over the Company's loss reserves.
As regards Policies issued by the Company coming within the scope of this
Agreement, when the Company files with the insurance department or sets up on
its books reserves for losses covered hereunder (including loss and loss expense
paid by the Company but not recovered from the Reinsurers and loss and loss
expense reported and outstanding), which it is required to set up by law, it
will forward to the Reinsurers a statement showing the proportion of such loss
reserves applicable to them.
The Reinsurers hereby agrees that they will apply for and secure delivery to the
Company a clean, irrevocable, and unconditional Letter of Credit, dated on or
before December 31 of the year in which the request is made, issued by CITIBANK,
N.A. of New York (through London branch), in an amount equal to the Reinsurers'
proportion of 75% of the difference between the ceded premium and the incurred
loss and loss expense, or the case reserve estimates, whichever is greater.
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The Letter of Credit will be "Evergreen," will be issued for a period of not
less than one year, and will be automatically extended for one year from its
date of expiration or any future expiration date (but not to be extended for
more than four years) unless 30 days prior to any expiration date, CITIBANK,
N.A. shall notify the Company by certified or registered mail that it elects not
to consider the Letter of Credit extended for any additional period.
The Company, or its successors in interest, undertakes to use and apply any
amounts it may draw upon such Credit pursuant to the terms of the Agreement
under which the Letter of Credit is held, for the following purposes only:
A. To pay the Reinsurers' share or to reimburse the Company for the
Reinsurers' share of any liability for loss reinsured by this
Agreement, the payment of which has been agreed by the Reinsurers and
which has not otherwise been paid.
B. To make refund and of any sum which is in excess of the actual amount
required to pay the Reinsurers' share of any liability reinsured by
this Agreement.
C. In the event the Company receives notice that the Letter of Credit
will not be extended beyond its expiration date as provided for above,
to establish deposit of the Reinsurers' share of loss reserves under
this Agreement. Such cash deposit will be held in an interest bearing
account separate from the Company's other assets, and interest thereon
will accrue to the benefit of the Reinsurers. This procedure will be
implemented only in exceptional circumstances, and if implemented, the
Company will ensure that a rate of interest is obtained for the
Reinsurers on such a deposit account that is at least equal to the
rate that would be paid by CITIBANK, N.A. in New York, and further
that the Company will account to the Reinsurers on an annual basis
for all interest accruing on the cash deposit account for the benefit
of the Reinsurers.
CITIBANK N.A. will have no responsibility whatsoever in connection with the
propriety of withdrawals made by the Company or the disposition of finds
withdrawn, except to ensure that withdrawals are made only upon the order of
properly authorized representatives of the Company.
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At annual intervals, or more frequently as agreed but never more frequently than
semiannually, the Company will prepare a specific statement, for the sole
purpose of amending the Letter of Credit, of the Reinsurers' share of loss
reserves. If the statement shows that the Reinsurers' share of loss reserves:
A. Exceeds the balance of credit as of the statement date, the Reinsurers
will, within 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.
B. Is less than the balance of credit as of the statement date, the
Company will, within 30 days after receipt of written request from the
Reinsurers, 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 excess credit.
All expenses incurred in the establishment or maintenance of such Letters of
Credit will be for the account of the Reinsurers.
ARTICLE XXVII
SERVICE OF SUIT
(This Article applies to Reinsurers domiciled outside the United States of
America and/or unauthorized in any state, territory, or district of the United
States of America that has jurisdiction over the Company and in which a subject
suit has been instituted. This Article is not intended to conflict with or
override the panics' obligation to arbitrate their disputes in accordance with
the ARBITRATION ARTICLE.)
In the event of the failure of any Reinsurer hereon to pay any amount claimed
to be due hereunder, such Reinsurer, at the request of the Company, will
submit to the jurisdiction of a court of competent jurisdiction within the
United States. Nothing in this Article constitutes or should be understood to
constitute a waiver of the Reinsurer's rights to commence an action in any
court of competent jurisdiction in the United States, to remove an action to
a United States District Court, or to seek a transfer of a case to another
court as permitted by the laws of the United States or of any state in the
United States. Service of process in such suit may be made upon Lord, Bissell
and Brook, 115 South LaSalle Street, Chicago, Illinois 60603, or another
party specifically designated in the applicable Interests and Liabilities
Agreement attached hereto. In any suit instituted against it upon this
Agreement, the Reinsurer will abide by the final decision of such court or of
any appellate court in the event of any appeal.
The above-named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of Company
to give a written undertaking to the Company that they will enter a general
appearance upon the Reinsurer~s behalf in the event such a suit will be
instituted.
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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 the successor or
successors in office, as its true and lawful attorney upon whom may be served
any lawful process in any action, suit or proceeding instituted by or on behalf
of the Company or any beneficiary hereunder, arising out of this Agreement, and
hereby designates the above-named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE XXVIII
INTERMEDIARY
Aon Re Inc., an Illinois corporation, or one of its affiliated
corporations duly licensed as a reinsurance intermediary, is hereby recognized
as the Intermediary negotiating this Agreement for all business hereunder. All
communications (including but not limited to notices, statements, premiums,
return premiums, commissions, taxes, losses, loss expenses, salvages, and loss
settlements) relating to this Agreement will be transmitted to the Company or
the Reinsurers through the Intermediary. Payments by the Company to the
Intermediary will be deemed payment to the Reinsurers. Payments by the
Reinsurers to the Intermediary will be deemed payment to the Company only to the
extent that such payments are actually received by the Company.
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U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE--LIABILITY--REINSURANCE
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 Ill 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, to INJURY, SICKNESS, DISEASE, DEATH OR DESTRUCTION bodily injury or
property damage with respect to which an insured under the policy is also 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.
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
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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:
I. 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 thereto under any agreement entered into by the United States of America,
or any agency thereto with any person or organization.
II. Under any Medical Payments Coverage, or under any Supplementary
Payments Provision relating to IMMEDIATE MEDICAL OR SURGICAL RELIEF,
first aid, to expenses incurred with respect
to BODILY INJURY, SICKNESS, DISEASE OR DEATH bodily injury resulting
from the hazardous properties of nuclear material and arising out of
the operation of a nuclear facility by any person or organization.
III. Under any Liability Coverage, to INJURY, SICKNESS, DISEASE, DEATH 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;
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(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
(c) the, INJURY, SICKNESS, DISEASE, DEATH OR DESTRUCTION bodily injury or
property damage arises out of 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, but if such facility
is located within the United States of America, its territories, or
possessions or Canada, this exclusion (c) applies only
to INJURY TO OR DESTRUCTION OF PROPERTY AT 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 materials" means source materials, 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 and (2) resulting from the operation by any person or organization of
any nuclear facility included within the definition of nuclear facility under
paragraph (a) or (b) thereof; "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" INCLUDES ALL
FORMS OF RADIOACTIVE CONTAMINATION OF PROPERTY. "property damage" 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.
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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 of 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.
N.M.A. 1590 (2 1/9/67)
Approved by Lloyd's Underwriters' Non-Marine Association.
AMENDMENT TO THE DEFINITION OF WASTE
It is agreed that the definition of "waste" contained in sub-paragraph IV above
is amended to read as follows:
"Waste" means any material
(a) containing byproduct material other than the tailings or waste produced
by the extraction or concentration of uranium or thorium from any ore processed
primarily for its source material content, and
(b) 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.
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FIRST EXCESS CESSION REINSURANCE AGREEMENT
ADDENDUM NO 1 TO THE FINAL PLACEMENT SLIP
COMPANY: Illinois State Medical Inter-Insurance Exchange Chicago,
Illinois
PROGRAM
INCEPTION: July 1, 1995, 12:01 a.m. Central Standard Time.
EFFECTIVE: 24 months commencing 12:01 a.rn. Central Standard Time,
July 1, 1997 covering policies attaching including extended
reporting endorsements.
IT IS HEREBY NOTED AND AGREED that, effective July 1, 1998 the following
revisions are made to this Agreement:
EFFECTIVE: The first sentence of the "EFFECTIVE section is amended to
read as follows:
36 months commencing 12:01 a.m. Central Standard Time, July
1, 1997 covering policies attaching including extended
reporting endorsements.
CONTINGENT
PROFIT
COMMISSION: As attached.
EXCLUSIONS:
- Directors and Officers Liability, when written as such.
- Reinsurance Assumed other than business retroceded to the
Company from Fronting arrangements for business written
in states where the Company is not licensed.
- Nuclear Incident Exclusion Clause - Liability - U.S.A.
(N.M.A. 1590).
- Insolvency Funds Exclusion Clause.
BUSINESS
COVERED: The last sentence of BUSINESS COVERED is amended to read as
follows:
As respects Claims Made policies only, this Agreement only
covers policies with limits greater than $1,000,000 any one
loss, any one insured.
LIMIT &
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ILLINOIS STATE MEDICAL INTER-INSURANCE EXCESS CESSION REINSURANCE
ADDENDUM NO. 1
RETENTION &
PREMIUM: The LIMIT AND RETENTION AND PREMIUM currently set out in
the placement slip shall now be referred to as "Part I".
This Agreement is extended to include subject business written in Wisconsin and
Indiana on an Occurrence basis (hereinafter called "Part II") as detailed below:
EFFECTIVE: 24 month period commencing 12:01 a.m. Central Standard Time
July 1, 1998 covering policies attaching, including
extended reporting periods.
In the event of non-renewal of this Agreement, if required
by the Company, any business in force at expiry to run-off
until their natural expiry dates. Furthermore, should any
regulatory authority bind the Company to continue coverage,
the Reinsurers will also be liable as provided herein until
the Company can lawfully non-renew such policies.
LIMIT &
RETENTION: 50% Quota Share of up to USD 1,000,000 each and every loss
and/or in the aggregate where applicable, any one insured.
PREMIUM: Pro Rata of Net Written Premium for limits attaching
hereto. Quarterly reports and remittances in arrears.
OTHER
PROVISIONS: The following is added to the Other Provisions Clause: ECO
100%/XPL 100% combined with original loss and subject to
Agreement limit. (Part II only).
CASH LOSS: Cash Loss Limit of $250,000 (100% basis).
Agreed by all reinsurers except RJH 122 and AXA Reinsurance S.A.
ALL OTHER TERMS AND CONDITIONS REMAIN CHANGED.
IT IS HEREBY NOTED AND AGREED that effective July 1, 1998 the following
revisions are made to this Agreement.
EXCLUSIONS:
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ILLINOIS STATE MEDICAL INTER-INSURANCE EXCESS CESSION REINSURANCE
ADDENDUM NO. 1
- Directors and Officers Liability, when written as such.
- Reinsurance Assumed other than claims made
business retroceded to the Company from
Fronting arrangements for business written
in states where the Company is not licensed.
- Nuclear Incident Exclusion Clause - Liability - U.S.A.
(N.M.A. 1590).
- Insolvency Funds Exclusion Clause.
Agreed by RJH 122 and AXA Reinsurance S.A. only.
ALL OTHER TERMS AND CONDITIONS REMAIN CHANGED.
In accordance with your instructions we have placed reinsurance with the
Reinsurer(s) listed hereon, subject to the terms and conditions hereinabove
stated. We ask that you promptly advise us if the terms conditions, or
Reinsurer(s) vary in any respect from your instructions. Aon Re Inc. will not be
responsible for the financial or other obligations of any Reinsurer(s). Should
you desire financial information regarding the Reinsurer(s) listed hereon,
please contact us and we will furnish it.
THE REINSURERS' OBLIGATIONS UNDER THIS AGREEMENT ARE SEVERAL AND NOT JOINT AND
ARE LIMITED SOLELY TO THE EXTENT OF THEIR INDIVIDUAL PARTICIPATIONS. THE
REINSURERS ARE NOT RESPONSIBLE FOR THE PARTICIPATION OF ANY CO-SUBSCRIBING
REINSURER WHO FOR ANY REASON DOES NOT SATISFY ALL OR PART OF ITS OBLIGATIONS.
IT IS HEREBY NOTED AND AGREED that, effective July 1, 1999, Reinsurers Signed
lines are as follows:
<TABLE>
<CAPTION>
REINSURED WITH
DOMESTIC COMPANIES PERCENTAGE
- ----------------- ----------
<S> <C>
Chartwell Reinsurance Company 2.0000%
Everest Reinsurance Company 8.0000%
Kemper Reinsurance Company 8.0000%
NAC Reinsurance Corporation 8.0000%
Odyssey Reinsurance Corporation 4.0000%
Sydney Reinsurance Corporation 2.0000%
Transatlantic Reinsurance Company 23.0000%
--------
TOTAL DOMESTIC COMPANIES 55.0000%
</TABLE>
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ILLINOIS STATE MEDICAL INTER-INSURANCE EXCESS CESSION REINSURANCE
ADDENDUM NO. 1
<TABLE>
<CAPTION>
PLACEMENT THROUGH NICHOLSON LESLIE NORTH AMERICAN REINSURANCE BROKERS
UNDERWRITERS AT LLOYD'S, LONDON
- --------------------------------
<S> <C>
Lloyd's Syndicate #0122 RJH 0.7900%
Lloyd's Syndicate #0205 HGJ 1.8900%
Lloyd's Syndicate #0227 ROS 0.5200%
Lloyd's Syndicate #0376 JHV 0.8600%
Lloyd's Syndicate #0435 DPM 3.7800%
Lloyd's Syndicate #0991 AEG 0.3100%
Lloyd's Syndicate #1003 SJC 0.7200%
Lloyd's Syndicate #1007 SVH 2.8300%
Lloyd's Syndicate #1096 RAS 0.6300%
Lloyd's Syndicate #1212 SJB 0.7900%
Lloyd's Syndicate #2003 SJC 1.1700%
Lloyd's Syndicate #2227 CMP 0.1100%
Lloyd's Syndicate #2376 JHV 0.4000%
--------
TOTAL UNDERWRITERS AT LLOYD'S, LONDON 14.8000%
<CAPTION>
LONDON COMPANIES
- ----------------
<S> <C>
AXA Reinsurance UK plc 5.0000%
CNA International Reinsurance Company Limited 9.4600%
Unionamerica Insurance Company Limited 7.8700%
Zurich Re (UK) Limited 7.8700%
------
TOTAL LONDON COMPANIES 30.2000%
TOTAL PLACEMENT THRU NICHOLSON LESLIE NORTH AMERICAN REINSURANCE BROKERS 45.0000%
TOTAL ALL PARTICIPANTS 100.0000%
</TABLE>
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
Assuming that you find everything in order, please indicate your acceptance and
approval by signing and returning this Final Placement Slip to Aon Re Inc.
ACCEPTED &
APPROVED: ________________________________________________________________
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ILLINOIS STATE MEDICAL INTER-INSURANCE EXCESS CESSION REINSURANCE
ADDENDUM NO. 1
REFERENCE
NUMBER: ________________________ DATED:__________________________
(FOR PROCESSING PURPOSES IT IS IMPORTANT THAT YOU PROVIDE YOUR COMPANY'S
REFERENCE NUMBER FOR THIS PROGRAM.)
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ILLINOIS STATE MEDICAL INTER-INSURANCE EXCESS CESSION REINSURANCE
ADDENDUM NO. 1
ISMIE
$1,000,000 XS $1,000,000 CESSION
CONTINGENT PROFIT COMMISSION CLAUSE
FOR THE ADJUSTMENT PERIOD JULY 1, 1997 TO JUNE 30, 1999
Three years following June 30, 1999, a contingent calculation will be prepared
by the Company in accordance with the following, and a contingent, if any, paid
to the Company by the Reinsurers.
A. INCOME
The Reinsurers' premium for this Adjustment Period being the gross
ceded premium less the ceding commission.
B. OUTGO
1. Loss and loss expense paid by the Reinsurers under this
Adjustment Period, plus the outstanding reserve of the
Reinsurers for losses covered under this Agreement (as
calculated by the Company),
2. PLUS: The Reinsurers' expense allowance of 20% of the
Reinsurers' premium as in A. above.
3. PLUS: The Reinsurers' loss, if any, from the previous
contingent statement. The contingent will be 10% of the amount
by which Income exceeds Outgo.
The contingent calculation will be provisional until all losses covered
hereunder have been settled, closed, or commuted. In the interim, annual
adjustments will be made between the parties.
Should Outgo exceed Income, the difference will be considered as the Reinsurers'
loss and will be carried forward into the contingent calculation for the
adjustment period from July 1, 1999 to June 30, 2000. Furthermore, should the
income exceed outgo then the difference less any profit commission paid will be
carried forward into the contingent calculation for the Adjustment Period from
July 1, 1999 to June 30, 2000.
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ILLINOIS STATE MEDICAL INTER-INSURANCE EXCESS CESSION REINSURANCE
ADDENDUM NO. 1
FOR THE ADJUSTMENT PERIOD JULY 1, 1999 TO JUNE 30, 2000
Three years following the expiration of this Agreement a contingent calculation
will be prepared by the Company in accordance with the following, and a
contingent, if any, paid to the Company by the Reinsurers.
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ILLINOIS STATE MEDICAL INTER-INSURANCE EXCESS CESSION REINSURANCE
ADDENDUM NO. 1
ISMIE
$1,000,000 XS $1,000,000 CESSION
CONTINGENT PROFIT COMMISSION CLAUSE
A. INCOME
1. The Reinsurers' premium for this Adjustment Period being the
gross ceded premium less the ceding commission.
2. Any credit from previous adjustment period.
B. OUTGO
1. Loss and loss expense paid by the Reinsurers under this
Adjustment Period, plus the outstanding reserve of the
Reinsurers for losses covered under this Agreement (as
calculated by the Company),
2. PLUS: The Reinsurers' expense allowance of 20% of the
Reinsurers' premium as in A. above.
3. PLUS: The Reinsurers' loss, if any, from the previous
contingent statement.
The contingent will be 10% of the amount by which Income exceeds Outgo.
The contingent calculation will be provisional until all losses covered
hereunder have been settled, closed, or commuted. In the interim, annual
adjustments will be made between the parties.
Should Outgo exceed Income, the difference will be considered as the Reinsurers'
loss and will be carried forward into the contingent calculation for the renewal
of this Agreement.
For purposes of this Agreement, this adjustment period shall include the excess
of income less Outgo from the profit commission for the prior adjustment period,
with any profit commission due for this adjustment period to be after the
deduction of the profit commission paid for the prior profit commission.
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EXHIBIT 10.4
SECOND EXCESS CESSION REINSURANCE AGREEMENT
<TABLE>
<CAPTION>
ARTICLE PAGE
<S> <C> <C>
BUSINESS COVERED I
EXCLUSIONS II
TERRITORY III
TERM AND CANCELLATION IV
DEFINITIONS V
RETENTION AND LIMIT VI
WARRANTIES VII
PREMIUM VIII
REPORTS AND REMITTANCES IX
NET RETAINED LIABILITY X
NOTICE OF LOSS AND LOSS SETTLEMENTS XI
INTEREST PENALTY XII
SUBROGATION XIII
EXTRA CONTRACTUAL OBLIGATIONS AND
EXCESS LIMITS LIABILITY XIV
OFFSET XV
INSOLVENCY XVI
ARBITRATION XVII
DELAYS, ERRORS, OR OMISSIONS XVIII
ENTIRE AGREEMENT/AMENDMENTS XIX
INSPECTION XX
TAXES XXI
FEDERAL EXCISE TAX XXII
CURRENCY XXIII
RESERVES AND FUNDING XXIV
SERVICE OF SUIT XXV
INTERMEDIARY XXVI
</TABLE>
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SECOND EXCESS CESSION REINSURANCE AGREEMENT
THIS AGREEMENT is made and entered into by and between the ILLINOIS STATE
MEDICAL INTER-INSURANCE EXCHANGE, Chicago, Illinois (hereinafter called the
"Company") of the one part, and the various Reinsurers as identified by the
attached Interests and Liabilities Agreements (hereinafter called the
"Reinsurers") of the other part.
WITNESSETH:
That in consideration of the mutual covenants hereinafter contained and upon the
terms and conditions hereinbelow set forth, the parties hereto agree as follows:
ARTICLE I
BUSINESS COVERED
Reinsurers will indemnify the Company, subject to the limits set forth in the
RETENTION AND LIMIT ARTICLE for losses to the Company in respect of Professional
Liability Policies (including Personal Injury Liability) and Extended Reporting
Endorsements attaching thereto, covering medical partnerships, clinics, and
corporations.
All reinsurance for which Reinsurers will be obligated by virtue of this
Agreement will be subject to the same terms, rates, conditions, interpretations,
waivers, modifications, and alterations as the respective Policies of the
Company to which this reinsurance applies, subject always to the terms and
conditions of this Agreement. Nothing herein will in any manner create any
obligations or establish any rights against Reinsurers in favor of any third
parties or any persons not parties to this Agreement except as provided in the
INSOLVENCY ARTICLE.
ARTICLE II
EXCLUSIONS
No reinsurance indemnity will be afforded under this Agreement for:
A. Loss or liability excluded by the attached Nuclear Incident Exclusion
Clause -Liability - Reinsurance - U.S.A. (NMA 1590).
B. 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
guarantee fund, insolvency fund, plan, pool, association, fund, or
other arrangement, howsoever denominated, established, or governed,
which provides for any assessment of or payment or assumption by the
Company of part or all
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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.
C. Directors' and Officers' Liability when written as such.
D. Reinsurance assumed.
ARTICLE III
TERRITORY
The territorial scope of this Agreement will follow that of the Company's
Policies.
ARTICLE IV
TERM AND CANCELLATION
This Agreement will apply to all claims made on Policies written or renewed with
an effective date during the period extending from July 1, 1997, 12:01 a.m.
Central Standard Time, to July 1, 1999, 12:01 a.m. Central Standard Time,
including any losses arising from Extended Reporting Endorsements attaching to
said Policies. In the event this Agreement is not renewed, the Reinsurers will
remain liable for all losses under Policies in force until their expiration or
renewal dates, whichever come first, but in no event will the Reinsurers'
liability extend for a run-off period longer than 12 months plus extensions and
odd time not to exceed 18 months in all from the date of cancellation.
Additionally, the Reinsurers will remain liable during any extended reporting
period that an insured may elect to invoke on a Claims Made Policy that expires
or is canceled during, or at the end of the period of the Reinsurers' liability
hereunder.
Notwithstanding the other provisions in this Article, in the event the Company's
Policies are written in a jurisdiction where cancellation, renewal, or
nonrenewal is regulated by the insurance authorities, and the Company is bound
by such regulations and statutes of said jurisdiction or by a judicial decision,
the Reinsurers will remain liable on any such Policies in force at the
expiration date of this Agreement until the date each expires or until the first
renewal date when the Company can lawfully nonrenew said Policies, whichever
occurs first. If~ however, the Company intends to hold the business net and for
its own account, or has other reinsurance agreements that would apply to such
business, the Reinsurers will not be liable for longer than the run-off period
set forth above.
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In the event that any Reinsurer hereon ceases to write Casualty business during
the term of this Agreement, said Reinsurer's participation, at the option of the
Company, may be canceled ab initio and each party will return to the other party
all transactions previously paid in respect of this Agreement within seven
working days. Upon the return of the previously paid transactions, the Reinsurer
will be relieved of all liabilities incurred under this Agreement. Furthermore,
if at any time during the term of this Agreement either party to this Agreement
is acquired or controlled by, merged with, or reinsures its entire business with
any other company, corporation, or individual or individuals not controlling
that party's operations at the inception of this Agreement, the other party will
have the right to cancel this Agreement by giving 30 days written notice by
certified or registered mail.
Notwithstanding the expiration (or cancellation) of this Agreement as
hereinabove provided, its provisions will continue to apply to all unfinished
business hereunder to the end that all obligations and liabilities incurred by
each party hereunder will be fully performed and discharged.
ARTICLE V
DEFINITIONS
The following definitions will be used in this Agreement:
A. The term "Ultimate Net Loss" as used in this Agreement will mean the
actual loss paid by the Company, or for which the Company becomes
liable to pay (including 90% of any Extra Contractual Obligation
amount as defined herein, 90% of any Excess Limits Liability amount as
defined herein and interest accrued prior to judgment where such
interest is made part of the judgment, but will exclude all other
interest and expenses which will be handled in accordance with the
NOTICE OF LOSS AND LOSS SETTLEMENTS ARTICLE), but salvages and all
recoveries, including recoveries under all reinsurance that inures to
the benefit of this Agreement whether recovered or not, will be first
deducted from such loss to arrive at the amount of liability attaching
hereunder.
All salvages, recoveries or payments recovered or received subsequent
to loss settlements hereunder will be applied as if recovered or
received prior to the aforesaid settlement and all necessary
adjustments will be made by the parties hereto.
Nothing in this definition will be construed to mean that losses are
not recoverable hereunder until the Company's Ultimate Net Loss has
been ascertained.
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B. The term "Policy" as used in this Agreement will mean any binder,
Policy, certificate, contract, or agreement of insurance, whether
written or oral, issued, accepted, or held covered provisionally or
otherwise, by the Company or on behalf of the Company by Illinois State
Medical Insurance Services, Inc.
C. The term "Loss" as used in this Agreement will mean the definition of
"claim" as determined under the reinsured Policy.
D. The term "Claim Made" or "Claims Made" as used in this Agreement will
mean receipt by the Company of notice that a claim is being made or may
be made against an insured covered under a Policy affording coverage on
the basis of claims so made, provided that the nature of the notice
satisfies the requirements of the Policy involved. The date the claim
is considered to be first made, as provided for in the Company's
Policy, will be considered as the date of loss for this Agreement.
E. The term "Extended Reporting Endorsement" as used in this Agreement
will mean coverage for Claims Made after the cancellation, termination,
or expiration of the Company Policy on losses that would have been
covered under the Policy had the claims been made during the term of
that Policy.
As respects Extended Reporting Endorsements:
1. The reporting period is unlimited.
2. The limits of the original Policy are reinstated as of the
effective date of the Extended Reporting Endorsement and
annually thereafter.
3. For all insureds, the Company's premium for an Extended
Reporting Endorsement will be calculated at 150% of the
expiring Policy premium, and such premium will be considered
to be fully earned on the cancellation, termination, or
expiration date of the original Policy.
ARTICLE VI
RETENTION AND LIMIT
A. The Reinsurers will be liable in respect of each and every loss, each
and every insured, for the Ultimate Net Loss over and above an initial
Ultimate Net Loss of $2,000,000 each and every loss, each and every
insured, subject to a limit of liability to the Reinsurers of
$3,000,000 each and every loss, each and every insured.
B. The Company will aggregate that amount of Ultimate Net Loss sustained
by the Company for each insured during each Policy period. The
Reinsurers will then be liable for such aggregate loss over and above
an aggregate loss of $4,000,000 per insured per Policy period,
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<PAGE>
but the Reinsurers will not be liable for more than $6,000,000 in the
aggregate per insured per Policy period. Recoveries under paragraph A.
will be deducted in determining the Ultimate Net Loss for purposes of
paragraph B.
C. When the Company issues an Extended Reporting Endorsement to a Policy
reinsured hereunder, the Reinsurers' liability under this Agreement
will be limited to $6,000,000 per insured for all Claims Made under
both the original Policy and the Extended Reporting Endorsement.
D. Notwithstanding the limits of liability stated in the preceding
paragraphs, the Reinsurers' maximum liability for all losses
recoverable under the preceding paragraphs and for pro rata expenses
recoverable in accordance with the NOTICE OF LOSS ANT) LOSS SETTLEMENTS
ARTICLE will be limited to an annual amount equal to $15,000,000 or
350% of the net (i.e., after deduction of ceding commission) premium
ceded in accordance with the ACCOUNTS AND REMITTANCES ARTICLE,
whichever is greater.
ARTICLE VII
WARRANTIES
It is hereby warranted that:
A. The maximum limits of liability on Policies and their Extended
Reporting Endorsements reinsured hereunder are as follows, or so
deemed.
1. $5,000,000 any one loss, any one insured.
2. $10,000,000 in the aggregate per Policy period, per insured.
B. The Company will be the sole judge of what constitutes one insured.
C. For the purposes of reinsurance recovery, partnership, clinic, and
corporation entity coverage is deemed excess of all other applicable
Policies issued by the Company.
ARTICLE VIII
PREMIUM
The Company will pay to the Reinsurers in accordance with the REPORTS AND
REMITTANCES ARTICLE the net ceded premium, being the gross ceded premium in
accordance with the schedule below, less returned premium for cancellations and
reductions, and less premium paid for inuring reinsurance.
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<PAGE>
SCHEDULE - Gross Excess Cessions Rates as % of Applicable Primary Limit
Policy Limit
<TABLE>
<CAPTION>
POLICY LIMIT
-------------------------
<S> <C> <C> <C>
$5M/$5M $5M/$10M
PHYSICIAN POLICY LIMIT
$1M/3M 175.00% 218.75%
$2M/4M 100.00% 125.00%
</TABLE>
ARTICLE IX
REPORTS AND REMITTANCES
A. Within 30 days following the end of each calendar quarter during the
term of this Agreement, the Company will render a net account to the
Reinsurers showing net ceded premium for the quarter as set forth in
the PREMIUM Article.
B. Within 45 days following the end of the quarter the Company will remit
to the Reinsurers the premium then shown to be due.
ARTICLE X
NET RETAINED LIABILITY
This Agreement applies only to that portion of any insurance covered by this
Agreement that the Company retains net for its own account, and in calculating
the amount of any loss hereunder and also in computing the amount in excess of
which this Agreement attaches, only loss or losses in respect of that portion of
any insurance that the Company retains net for its own account will be included.
The amount of the Reinsurers' liability hereunder in respect of any loss or
losses will not be increased by reason of the inability of the Company to
collect from any other reinsurers, whether specific or general, any amounts that
may have become due from them, whether such inability arises from the insolvency
of such other reinsurers or otherwise.
ARTICLE XI
NOTICE OF LOSS AND LOSS SETTLEMENTS
The Company will advise the Reinsurers of all claims which, in the opinion of
the Company may involve the Reinsurers, and of all subsequent developments on
these claims that may materially affect the position of the Reinsurers. Such
advices are to include any claim where the reserve is more than $1,000,000.
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Such advices are to be furnished periodically to the Reinsurers through monthly
loss activity reports within 45 days of the end of the month. Inadvertent
omission in dispatching the aforementioned notices will in no way affect the
obligation of the Reinsurers of such omission promptly upon discovery.
The Reinsurers agree to abide by the loss settlements of the Company, provided
such loss settlements are within the terms and conditions of this Agreement,
however, when so requested the Company will afford the Reinsurers an opportunity
to be associated with the Company, at the expense of the Reinsurers in the
defense of any claim or suit or proceeding involving this Agreement and the
Company will cooperate with the Reinsurers in every respect in the defense or
control of such claim, suit, or proceeding.
The Reinsurers will pay their share of loss settlements immediately upon receipt
of proof of loss hereunder from the Company.
All investigation, adjustment, legal expense, including expense incurred as a
result of a declaratory judgment action, and interest (other than interest
accrued prior to judgment where such interest becomes part of the judgment)
incurred by the Company (except office expenses and salaries of officials and
employees not classified as loss adjusters) will be divided between the Company
and the Reinsurers in proportion to their respective shares of the Ultimate Net
Loss as determined in the RETENTION AND LIMIT ARTICLE. Such expense will be in
addition to the limits stated in the RETENTION AND LIMIT ARTICLE, but will be
subject to the aggregate limit as stated therein.
However, if a verdict, judgment, or award is reversed or reduced, the Company
and the Reinsurers will share expenses incurred in securing such reversal or
reduction in the proportion that each benefits from the reversal or reduction.
Expenses incurred up to the time of the original verdict, judgment, or award
will be shared in proportion to what would have been each party's share.
ARTICLE XII
INTEREST PENALTY
Overdue payments under this Agreement will be subject to interest penalties.
The sole purposes of this Article are: (I) to establish a point in time when
a payment will be considered overdue, and (2) to provide a method of
calculating interest penalties. The provisions of this Article will,
therefore, not alter the provisions contained within any other Article of
this Agreement.
A. Payments from the Company to the Reinsurers will be considered overdue
60 days after the due dates of the quarterly premiums.
For purposes of this Paragraph A only, payments from the Company to the
Reinsurers will mean that the Reinsurers have actually received the
payments.
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B. Payments from the Reinsurers to the Company will be considered overdue
45 days after the Reinsurers receive the request for payment, except:
1. If the information contained in the request for payment is
either not in accordance with the terms of this Agreement or
not complete enough to allow the Reinsurers to validate the
Company's request for payment, then, within 30 days of receipt
of the request for payment, the Reinsurers will request such
additional information, and the payment will be considered
overdue 45 days after the Reinsurers receive the requested
additional information.
2. If the 45-day period noted above is exceeded because a
Reinsurer disputes the validity of the request for payment,
interest penalties will be payable for the entire overdue
period, but only on the final settlement amount of the
originally-disputed request for payment.
If, on such a disputed request for payment, the Company drew
funds from a letter of credit or from any other funding
vehicle established by a Reinsurer for the purposes of making
payments to the Company, the Company will incur interest
penalties from the time of the draw until the time of the
final settlement, but only on the difference between the
amount drawn and the amount of the final settlement, the
Company paying such difference and interest penalties to the
Reinsurer within 45 days of the final settlement.
For purposes of this Paragraph B only, payments received by the
Intermediary within the 45- day time period will not be considered
overdue.
C. Interest penalties, from the time a payment in considered overdue until
the time of payment, will be computed by using the prime rate, as
reported in the Wall Street Journal on the day on which the payment
becomes overdue, plus 1%.
D. An interest penalty may be waived by the party to which it is owed, but
such a waiver will not alter the rights to other interest penalties
that may then be owed or owed in the future.
ARTICLE XIII
SUBROGATION
Should the Company effect subrogation recovery or receive reimbursement on loss
subject to this Agreement, then such recovery, less all expenses incurred in
effecting the recovery (excluding salaries and expenses of officials and
employees of the Company not classified as loss adjusters) will be applied
between the parties having interest in the loss in the order inverse to that in
which their respective liability attached.
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Should a recovery effort be unsuccessful, or should the expenses of making a
recovery exceed the recovery, then the Company and the Reinsurer will share such
expense in proportion to their interest in the loss.
ARTICLE XIV
EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS LIMITS LIABILITY
This Agreement will extend to cover any losses arising from claims related extra
contractual obligations and/or excess limits liability.
"Extra contractual obligations" as used in this Agreement will mean those
liabilities not covered under any other provision of this Agreement, which arise
from the handling of any claim on business covered hereunder; such liabilities
arising because of, but not limited to, the following: failure to settle within
the policy limit, by reason of alleged or actual negligence, fraud, or bad faith
in rejecting an offer of settlement, in the preparation of the defense, in the
trial of any action against the insured, or in the preparation or prosecution of
an appeal consequent upon such action.
"Excess limits liability" as used in this Agreement will mean damages payable
in excess of the policy limit as a result of the Company's alleged or actual
negligence, fraud, or bad faith in failing to settle and/or rejecting a
settlement within the policy limit, in the preparation of the defense, in the
trial of any action against the insured, or in the liability is any amount
for which the Company would have been contractually liable to pay had it not
been for the limits of the reinsured policy.
There will be no recovery hereunder where the extra contractual obligation or
excess limits liability has been incurred due to fraud committed by a member
of the Board of Directors or a corporate officer of the Company, acting
individually, collectively, or in collusion with a member of the Board of
Directors, a corporate officer, or a partner of any other corporation,
partnership, or organization involved in the defense or settlement of a claim
on behalf of the Company.
The date on which any extra contractual obligation and/or excess limits
liability is incurred by the Company will be deemed, in all circumstances, to
be part of the original loss.
Nothing in this Article will be construed to create a separate or distinct
loss apart from the original covered loss that gave rise to the extra
contractual obligations and/or excess limits liability discussed in the
preceding paragraphs. In no event will the total liability of Reinsurers
exceed their aggregate limit of liability as set forth in the RETENTION AND
LIMIT ARTICLE.
ARTICLE XV
In the event of insolvency, the parties hereto will be entitled to exercise
their rights to offset any monies or balances due from each party to the other
as the case may be in accordance with the
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provisions of the Illinois Insurance Code governing offset entitlements.
ARTICLE XVI
INSOLVENCY
A. In the event of the Company's insolvency, the reinsurance afforded by
this Contract shall be payable by the Reinsurer on the basis of the
Company's liability under the policies reinsured without diminution
because of the Company's insolvency or because its liquidator,
receiver, conservator or statutory successor has failed to pay all or
a portion of any claims, subject however to the right of the Reinsurer
to offset against such funds due hereunder, any sums that may be
payable to it by said insolvent Company in accordance with the OFFSET
ARTICLE. The reinsurance shall be payable by the Reinsurer directly to
the Company, its liquidator, receiver, conservator or statutory
successor except (a) where this Contract specifically provides another
payee of such reinsurance in the event of the Company's of itself to
the payees under such policies in substitution for the Company's
obligation to such payees.
B. The Company's liquidator, receiver, conservator or statutory successor
shall give written notice of the pendency of a claim against the
Company under the policies reinsured within a reasonable time after
such claim is filed in the insolvency proceeding. During the pendency
of such claim, the Reinsurer may investigate said claim and interpose
in the proceeding where the claim is to be adjudicated, at its own
expense, any defense that it may deem available to the Company, its
liquidator, receiver, conservator or statutory successor. The expense
thus incurred by the Reinsurer shall be chargeable against the Company,
subject to court approval, as part of the expense of conservation or
liquidation to the extent that such proportionate share of the benefit
shall accrue to the Company solely as a result of the defense
undertaken by the Reinsurer.
C. In the event of insolvency of the Company, the Reinsurer under this
Contract will have all rights, as more fully set forth in Section 173
of Illinois Insurance Code, as amended.
ARTICLE XVIII
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 shall 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
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party fails to appoint its arbitrator within 30 days after being
requested to do so by the other party, the latter after 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 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 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 Chicago, Illinois 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 Illinois. 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 make its decision considering the custom and practice
of the applicable insurance and reinsurance business as promptly as
possible 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 XVIII
DELAYS, ERRORS, OR OMISSIONS
Inadvertent delays, errors, or omissions made in connection with this Agreement
or any transaction hereunder will not relieve either party from any liability
that would have attached had such delay, error, or omission not occurred,
provided always that such error or omission is rectified immediately upon
discovery.
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ARTICLE XIX
ENTIRE AGREEMENT/AMENDMENTS
This Agreement constitutes the entire agreement between the parties. This
Agreement may be altered or amended in any of its terms and conditions by mutual
consent of the Company and the Reinsurers either by addenda hereto or by an
exchange of letters; such addenda or letters will then constitute a part of this
Agreement.
ARTICLE XX
INSPECTION
The Company will place at the disposal of the Reinsurers at all reasonable
times, and the Reinsurers will have the right to inspect, through their
authorized representatives, all books, records and papers of the Company in
connection with any reinsurance hereunder, or claims in connection herewith. The
cost of such inspection will be borne by the Reinsurers.
ARTICLE XXI
TAXES
The Company will pay all taxes (except Federal Excise Tax) on premiums reported
to Reinsurers on this Agreement.
ARTICLE XXII
FEDERAL EXCISE TAX
(This Article applies to Reinsurers domiciled outside the United States of
America, excepting Lloyd's London Underwriters and other Reinsurers exempt from
Federal Excise Tax.)
Reinsurers will allow for the purpose of paying 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 such tax. In the event of any return of premium, Reinsurers will deduct the
aforesaid percentage from the return premium payable hereon and the Company or
its agent will recover such tax from the United States Government.
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ARTICLE XXIII
CURRENCY
The use of the sign "$" in this Agreement is in reference to United States of
America Dollars. Therefore, premiums due Reinsurers and loss payments due the
Company hereunder will be in United States of America Dollars.
ARTICLE XXIV
RESERVES AND FUNDING
This clause is only applicable to those Reinsurers who cannot qualify for credit
by the State having jurisdiction over the Company's loss reserves.
As regards Policies issued by the Company coming within the scope of this
Agreement, when the Company files with the insurance department or sets up on
its books reserves for losses covered hereunder (including loss and loss expense
paid by the Company but not recovered from the Reinsurers and loss and loss
expense reported and outstanding), which it is required to set up by law, it
will forward to the Reinsurers a statement showing the proportion of such loss
reserves applicable to them, plus any amount in respect of Incurred But Not
Reported losses as per the formula to be agreed by the Reinsurers.
The Reinsurers hereby agrees that they will apply for and secure delivery to the
Company a clean, irrevocable, and unconditional Letter of Credit issued by
CITIBANK, N.A. of New York (through London branch), in an amount equal to the
Reinsurers' proportion of the loss reserves that have been reported to the
Reinsurers and loss expenses related thereto as shown in the statement prepared
by the Company.
The Letter of Credit will be "Evergreen," will be issued for a period of not
less than one year, and will be automatically extended for one year from its
date of expiration or any future expiration date unless 30 days prior to any
expiration date, CITIBANK, N.A. shall notify the Company by certified or
registered mail that it elects not to consider the Letter of Credit extended for
any additional period.
The Company, or its successors in interest, undertakes to use and apply any
amounts it may draw upon such Credit pursuant to the terms of the Agreement
under which the Letter of Credit is held, for the following purposes only:
A. To pay the Reinsurers' share or to reimburse the Company for the
Reinsurers' share of any liability for loss reinsured by this
Agreement, the payment of which has been agreed by the Reinsurers and
which has not otherwise been paid.
B. To make refund of any sum which is in excess of the actual amount
required to pay the
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Reinsurers' share of any liability reinsured by this Agreement.
C. In the event the Company receives notice that the Letter of Credit
will not be extended beyond its expiration date as provided for above,
to establish deposit of the Reinsurers' share of loss reserves under
this Agreement. Such cash deposit will be held in an interest bearing
account separate from the Company's other assets, and interest thereon
will accrue to the benefit of the Reinsurers. This procedure will be
implemented only in exceptional circumstances, and if implemented,
the Company will ensure that a rate of interest is obtained for the
Reinsurers on such a deposit account that is at least equal to the
rate that would be paid by CITIBANK., N.A. in New York, and further
that the Company will account to the Reinsurers on an annual basis for
all interest accruing on the cash deposit account for the benefit of
the Reinsurers.
CITIBANK N.A. will 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.
At annual intervals, or more frequently as agreed but never more frequently than
semiannually, the Company will prepare a specific statement, for the sole
purpose of amending the Letter of Credit, of the Reinsurers' share of loss
reserves. If the statement shows that the Reinsurers' share of loss reserves:
A. Exceeds the balance of credit as of the statement date, the
Reinsurers will, within 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.
B. Is less than the balance of credit as of the statement date,
the Company will, within 30 days after receipt of written
request from the Reinsurers, 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
excess credit.
All expenses incurred in the establishment or maintenance of such Letters of
Credit will be for the account of the Reinsurers.
ARTICLE XXV
SERVICE OF SUIT
(This Article applies to Reinsurers domiciled outside the United States of
America and/or unauthorized in any state, territory, or district of the United
States of America that has jurisdiction over the Company and in which a subject
suit has been instituted. This Article is not intended to conflict with or
override the parties' obligation to arbitrate their disputes in accordance with
the ARBITRATION ARTICLE.)
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In the event of the failure of any Reinsurer hereon to pay any amount claimed to
be due hereunder, such Reinsurer, at the request of the Company, will submit to
the jurisdiction of a court of competent jurisdiction within the United States.
Nothing in this Article constitutes or should be understood to constitute a
waiver of the Reinsurer's rights to commence an action in any court of competent
jurisdiction in the United States, to remove an action to a United States
District Court, or to seek a transfer of a case to another court as permitted by
the laws of the United States or of any state in the United States. Service of
process in such suit may be made upon Lord, Bissell and Brook, 115 South LaSalle
Street, Chicago, Illinois 60603, or another party specifically designated in the
applicable Interests and Liabilities Agreement attached hereto. In any suit
instituted against it upon this Agreement, the Reinsurer will abide by the final
decision of such court or of any appellate court in the event of any appeal.
The above-named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of Company to
give a written undertaking to the Company that they will enter a general
appearance upon the Reinsurers behalf in the event such a suit will be
instituted.
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 the successor or
successors in office, as its true and lawful attorney upon whom may be served
any lawful process in any action, suit or proceeding instituted by or on behalf
of the Company or any beneficiary hereunder, arising out of this Agreement, and
hereby designates the above-named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE XXVI
INTERMEDIARY
Aon Re Inc., an Illinois corporation, or one of its affiliated corporations duly
licensed as a reinsurance intermediary, is hereby recognized as the Intermediary
negotiating this Agreement for all business hereunder. All communications
(including but not limited to notices, statements, premiums, return premiums,
commissions, taxes, losses, loss expenses, salvages, and loss settlements)
relating to this Agreement will be transmitted to the Company or the Reinsurers
through the Intermediary. Payments by the Company to the Intermediary will be
deemed payment to the Reinsurers. Payments by the Reinsurers to the Intermediary
will be deemed payment to the Company only to the extent that such payments are
actually received by the Company.
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U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE--LIABILITY--REINSURANCE
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, to INJURY, SICKNESS, DISEASE, DEATH OR DESTRUCTION bodily injury or
property damage with respect to which an insured under the bodily injury or
property damage policy is also 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.
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
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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:
I. 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 there
under any agreement entered into by the United States of America, or any
agency thereof with any person or organization.
II. Under any Medical Payments Coverage, or under any Supplementary
Payments Provision relating to IMMEDIATE MEDICAL OR SURGICAL RELIEF, FIRST
AID, to expenses incurred with respect to BODILY INJURY, SICKNESS, DISEASE OR
DEATH bodily injury resulting from the hazardous properties of nuclear
material and arising out of the operation of a nuclear facility by any person
or organization.
III. Under any Liability Coverage, to INJURY, SICKNESS, DISEASE, DEATH 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
(c) the INJURY, SICKNESS, DISEASE, DEATH OR DESTRUCTION bodily injury or
property damage arises out of 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, but if such facility
is located within the United States of America, its territories, or
possessions or Canada, this exclusion (c) applies only to INJURY TO OR
DESTRUCTION OF PROPERTY AT SUCH NUCLEAR FACILITY. property damage to such
nuclear facility and any property threat.
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IV. As used in this endorsement:
"hazardous properties" include radioactive, toxic or explosive properties;
"nuclear materials" means source materials, 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 and (2) resulting from the operation by any person or organization of
any nuclear facility included within the definition of nuclear facility under
paragraph (a) or (b) thereof; "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 grains 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 fusion 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"
INCLUDES ALL FORMS OF RADIOACTIVE CONTAMINATION OF PROPERTY. "property
damage" 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 I 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 of 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.
AR 2225-97 -7/1/97
(10/08/97) 3
<PAGE>
N.M.A. 1590 (2 1/9/67)
Approved by Lloyd's Underwriters' Non-Marine Association.
AMENDMENT TO THE DEFINITION OF WASTE
It is agreed that the definition of "waste" contained in sub-paragraph IV
above is amended to read as follows: "Waste" means any material
(a) containing byproduct material other than the tailings or waste
produced by the extraction or concentration of uranium or thorium from any
ore processed primarily for its source material content, and
(b) 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.
AR 2225-97-7/1/97
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<PAGE>
SECOND EXCESS CESSION REINSURANCE AGREEMENT
ADDENDUM NO. 1 TO THE FINAL PLACEMENT SLIP
COMPANY: Illinois State Medical Inter-Insurance Exchange Chicago,
Illinois
PROGRAM
INCEPTION: July 1, 1995, 12:01 a.m. Central Standard Time.
EFFECTIVE: 24 months commencing 12:01 a.m. Central Standard Time,
July 1, 1997 covering policies attaching including
extended reporting endorsements.
IT IS HEREBY NOTED AND AGREED that, effective July 1, 1998 the following
revisions are made to this Agreement:
EFFECTIVE: The first sentence of the "EFFECTIVE" section is amended to
read as follows:
36 month period commencing 12:01 a.m. Central
Standard Time, July 1, 1997 covering policies
attaching including extended reporting endorsements.
EXCLUSIONS: - Directors and Officers Liability, when written as such.
- Reinsurance Assumed other than business retroceded to the
Company from Fronting arrangements for business written
in states where the Company is not licensed.
- Nuclear Incident Exclusion Clause - Liability - U.S.A.
(N.M.A. 1590).
- Insolvency Funds Exclusion Clause.
Agreed to by all reinsurers except RJH 122.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
IT IS HEREBY NOTED AND AGREED that, effective July 1, 1998 the following
revisions are made to this Agreement:
EXCLUSIONS:
AR 2225-97 -- Effective 7/1/97
Chicago
(Issued 9/24/98) DS/wp
1
<PAGE>
ILL. STATE MEDICAL INTER-INS. EXCHANGE 2ND EXCESS CESSION
ADDENDUM NO. 1
- Directors and Officers Liability, when written as
such.
- Reinsurance Assumed other than claims made
business retroceded to the Company from
Fronting arrangements for business written
in states where the Company is not licensed.
- Nuclear Incident Exclusion Clause - Liability
- U.S.A. (N.M.A.1590).
- Insolvency Funds Exclusion Clause.
Agreed to by RJH 122 only.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
in accordance with your Instructions we have placed reinsurance with the
Reinsurer(s) listed hereto subject to the terms and conditions hereinabove
stated. We ask that you promptly advise us if the term conditions, or
Reinsurer(s) vary in any respect from your instructions. Aon Re Inc. will not be
responsible for the financial or other obligations of any Reinsurer(s). Should
you desire financial information regarding the Reinsurer(s) listed hereon,
please contact us and we will furnish it.
THE REINSURERS' OBLIGATIONS UNDER THIS AGREEMENT ARE SEVERAL AND NOT JOINT AND
ARE LIMITED SOLELY TO THE EXTENT OF THEIR INDIVIDUAL PARTICIPATIONS. THE
REINSURERS ARE NOT RESPONSIBLE FOR THE PARTICIPATION OF ANY CO-SUBSCRIBING
REINSURER WHO FOR ANY REASON DOES NOT SATISFY ALL OR PART OF ITS OBLIGATIONS.
IT IS HEREBY NOTED AND AGREED that, effective July 1, 1999, Reinsurers Signed
lines are follows:
<TABLE>
<CAPTION>
REINSURED WITH PERCENTAGE
- -------------- ----------
<S> <C>
DOMESTIC COMPANIES
- ------------------
Chartwell Reinsurance Company 5.0000%
Everest Reinsurance Company 5.0000%
Kemper Reinsurance Company 9.0000%
NAC Reinsurance Corporation 12.0000%
Odyssey Reinsurance Corporation 4.0000%
Sydney Reinsurance Corporation 2.0000%
Transatlantic Reinsurance Company 18.0000%
--------
TOTAL DOMESTIC COMPANIES 55.0000%
</TABLE>
AR 2225-97 -- Effective 7/1/97
Chicago
(Issued 9/24/98) DS/wp
2
<PAGE>
ILL. STATE MEDICAL INTER-INS. EXCHANGE 2ND EXCESS CESSION
ADDENDUM NO. 1
PLACEMENT THROUGH NICHOLSON LESLIE NORTH AMERICAN REINSURANCE BROKERS
<TABLE>
<CAPTION>
UNDERWRITERS AT LLOYD'S, LONDON
- -------------------------------
<S> <C>
Lloyd's Syndicate #0122 RJH 0.3200%
Lloyd's Syndicate #0205 HGJ 1.9000%
Lloyd's Syndicate #0362 WEH 6.3400%
Lloyd's Syndicate #0376 JHV 1.2900%
Lloyd's Syndicate #0435 DPM 3.8000%
Lloyd's Syndicate #1003 SJC 0.9600%
Lloyd's Syndicate #1007 SVH 6.3400%
Lloyd's Syndicate #1212 SJB 1.2700%
Lloyd's Syndicate #2003 SJC 1.5700%
Lloyd's Syndicate #2376 JHV 0.6100%
--------
TOTAL UNDERWRITERS AT LLOYD'S, LONDON 24.4000%
LONDON COMPANIES
- ----------------
CNA International Reinsurance Company Limited 9.5100%
Unionamerica Insurance Company Limited 6.3400%
Zurich Re (UK) Limited 4.7500%
--------
TOTAL LONDON COMPANIES 20.6000%
TOTAL PLACEMENT THRU NICHOLSON LESLIE NORTH AMERICAN
REINSURANCE BROKERS 45.0000%
TOTAL ALL PARTICIPANTS 100.0000%
</TABLE>
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
Assuming that you find everything in order, please indicate your acceptance and
approval by signing and returning this Final Placement Slip to Aon Re Inc.
ACCEPTED &
APPROVED: ________________________________________________________________
REFERENCE
NUMBER: _________________________ DATED:________________________
AR 2225-97 -- Effective 7/1/97
Chicago
(Issued 9/24/98) DS/wp
3
<PAGE>
ILL. STATE MEDICAL INTER-INS. EXCHANGE 2ND EXCESS CESSION
ADDENDUM NO. 1
(FOR PROCESSING PURPOSES IT IS IMPORTANT THAT YOU PROVIDE YOUR COMPANY'S
REFERENCE NUMBER FOR THIS PROGRAM.)
AR 2225-97 -- Effective 7/1/97
Chicago
(Issued 9/24/98) DS/wp
4
<PAGE>
EXHIBIT 10.5
PHYSICIANS' BUSINESS PRACTICE LIABILITY
QUOTA SHARE REINSURANCE AGREEMENT
<TABLE>
<CAPTION>
ARTICLE PAGE
------- ----
<S> <C> <C>
BUSINESS COVERED I
EXCLUSIONS II
TERRITORY III
TERM AND CANCELLATION IV
DEFINITIONS V
PREMIUM VI
REPORTS AND REMITTANCES VII
OTHER REINSURANCE VIII
SETTLEMENTS IX
INTEREST PENALTY X
SUBROGATION XI
EXTRA CONTRACTUAL OBLIGATIONS AND
EXCESS LIMITS LIABILITY XII
OFFSET XIII
INSOLVENCY XIV
ARBITRATION XV
ERRORS OR OMISSIONS XVI
ENTIRE AGREEMENT/AMENDMENTS XVII
INSPECTION XVIII
TAXES XIX
FEDERAL EXCISE TAX XX
CURRENCY XXI
RESERVES AND FUNDING XXII
SERVICE OF SUIT XXIII
INTERMEDIARY XXIV
</TABLE>
AR 2495-97 -- 7/1/97
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<PAGE>
PHYSICIANS' BUSINESS PRACTICE LIABILITY
OUOTA SHARE REINSURANCE AGREEMENT
THIS AGREEMENT is made and entered into by and between the ILLINOIS STATE
MEDICAL INTER-INSURANCE EXCHANGE, Chicago, Illinois (hereinafter called the
"Company") of the one part, and the various Reinsurers as identified by the
attached Interests and Liabilities Agreements (hereinafter called the
"Reinsurers") of the other part.
WITNESSETH:
That in consideration of the mutual covenants hereinafter contained and upon
the terms and conditions herein below set forth, the parties hereto agree as
follows:
ARTICLE I
BUSINESS COVERED
The Company will cede to the Reinsurers, and the Reinsurers will accept, a
90% quota share participation in respect to all business underwritten by
Transatlantic Reinsurance Company on behalf of the Company and classified by
the Company as:
PHYSICIANS' BUSINESS PRACTICE LIABILITY POLICIES (WRITTEN ON A
CLAIMS MADE BASIS) AND EXTENDED REPORTING ENDORSEMENTS
ATTACHING THERETO, COVERING MEDICAL PARTNERSHIPS, CLINICS, AND
CORPORATIONS.
The limit of liability to the Reinsurers will not exceed an Ultimate Net Loss
of $4,500,000, (i.e., 90% of $5,000,000) each and every loss, and/or in the
aggregate where applicable, any one insured, plus their proportionate share
of declaratory judgment expense, if applicable.
All reinsurance for which Reinsurers will be obligated by virtue of this
Agreement will be subject to the same terms, rates, conditions,
interpretations, waivers, modifications, and alterations as the respective
Policies of the Company to which this reinsurance applies, subject always to
the terms and conditions of this Agreement. Nothing herein will in any manner
create any obligations or establish any rights against Reinsurers in favor of
any third parties or any persons not parties to this Agreement except as
provided in the INSOLVENCY ARTICLE.
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<PAGE>
ARTICLE II
EXCLUSIONS
No reinsurance indemnity will be afforded under this Agreement for:
A. Loss or liability excluded by the attached Nuclear Incident
Exclusion Clause Liability - Reinsurance - U.S.A. (NMA 1590).
B. 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 guarantee fund, insolvency fund, plan, pool,
association, fund, or other arrangement, howsoever
denominated, established, or governed, which provides for any
assessment of or payment or assumption by the Company of part
or all of any claim, debt, charge, fee, or other obligation
of an insurer, or its successors or assigns, which has been
declared by any competent authority to be insolvent, or which
is otherwise deemed unable to meet any claim, debt, charge,
fee, or other obligation in whole or in part.
C. Reinsurance assumed.
ARTICLE III
TERRITORY
The territorial scope of this Agreement will follow that of the Company's
Policies.
ARTICLE IV
TERMS AND CANCELLATION
This Agreement will apply to all claims made on Policies written or renewed
with an effective date during the period extending from July 1, 1997, 12:01
a.m. Central Standard Time, to July 1, 1999, 12:01 a.m. Central Standard
Time, including any losses arising from Extended Reporting Endorsements
attaching to said Policies. In the event this Agreement is not renewed, the
Reinsurers will remain liable for all losses under Policies in force until
their expiration or renewal dates, whichever come first. Additionally, the
Reinsurers will remain liable during any extended reporting period that an
insured may elect to invoke on a Claims Made Policy that expires or is
canceled during, or at the end of, the period of the Reinsurers' liability
hereunder.
Notwithstanding the other provisions in this Article, in the event the
Company's Policies are written in a jurisdiction where cancellation, renewal,
or nonrenewal is regulated by the
AR 2495-97 -- 7/1/97
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<PAGE>
insurance authorities, and the Company is bound by such regulations and
statutes of said jurisdiction or by a judicial decision, the Reinsurers will
remain liable on any such Policies in force at the expiration date of this
Agreement until the date each expires or until the first renewal date when
the Company can lawfully nonrenew said Policies, whichever occurs first. If,
however, the Company intends to hold the business net and for its own
account, or has other reinsurance agreements that would apply to such
business, the Reinsurers will not be liable for longer than the run-off
period set forth above.
In the event that any Reinsurer hereon ceases to write Casualty business
during the term of this Agreement, said Reinsurer's participation, at the
option of the Company, may be canceled ab initio and each party will return
to the other party all transactions previously paid in respect of this
Agreement within seven working days. Upon the return of the previously paid
transactions, the Reinsurer will be relieved of all liabilities incurred
under this Agreement. Furthermore, if at any time during the term of this
Agreement either party to this Agreement is acquired or controlled by, merged
with, or reinsures its entire business with any other company, corporation,
or individual or individuals not controlling that party's operations at the
inception of this Agreement, the other party will have the right to cancel
this Agreement by giving 30 days written notice by certified or registered
mail.
Notwithstanding the expiration (or cancellation) of this Agreement as herein
above provided, its provisions will continue to apply to all unfinished
business hereunder to the end that all obligations and liabilities incurred
by each party hereunder will be filly performed and discharged.
ARTICLE V
DEFINITIONS
The following definitions will be used in this Agreement:
A. The term "Ultimate Net Loss" as used in this Agreement will mean the
actual loss paid by the Company, or for which the Company becomes
liable to pay (including loss expense arising from the settlement of
claims, 100% of any Extra Contractual Obligation amount as defined
herein, 100% of any Excess Limits Liability amount as defined herein,
and interest accrued prior to judgment where such interest is made
part of the judgment, but will exclude all declaratory judgment
expense which will be handled in accordance with the SETTLEMENTS
ARTICLE), but salvages and all recoveries, including recoveries wider
all reinsurance that inures to the benefit of this Agreement whether
recovered or not, will be first deducted from such loss to arrive at
the amount of liability attaching hereunder.
All salvages, recoveries or payments recovered or received subsequent
to loss settlements hereunder will be applied as if recovered or
received prior to the aforesaid settlement and
AR 2495-97 -- 7/1/97
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<PAGE>
all necessary adjustments will be made by the parties hereto.
Nothing in this definition will be construed to mean that losses are
not recoverable hereunder until the Company's Ultimate Net Loss has
been ascertained.
B. The term "Policy" as used in this Agreement will mean any binder,
Policy, certificate, contract, or agreement of insurance, whether
written or oral, issued, accepted, or held covered provisionally or
otherwise, by the Company or on behalf of the Company by Transatlantic
Reinsurance Company.
C. The term "Loss" as used in this Agreement will mean the definition of
"claim" as determined under the reinsured Policy.
D. The term "Claim Made" or "Claims Made" as used in this Agreement will
mean receipt by the Company of notice that a claim is being made or
may be made against an insured covered under a Policy affording
coverage on the basis of claims so made, provided that the nature of
the notice satisfies the requirements of the Policy involved. The date
the claim is considered to be first made, as provided for in the
Company's Policy, will be considered as the date of loss for this
Agreement.
E. The term "Extended Reporting Endorsement" as used in this Agreement
will mean coverage for Claims Made after the cancellation,
termination, or expiration of the Company Policy on losses that would
have been covered under the Policy had the claims been made during the
term of that Policy.
As respects Extended Reporting Endorsements:
1. The reporting period is unlimited.
2. The limits of the original Policy are reinstated as of the
effective date of the Extended Reporting Endorsement and
annually thereafter.
3. For all insureds, the Company's premium for an Extended
Reporting Endorsement will be calculated as a percentage of
the expiring Policy premium, and such premium will be
considered to be filly earned on the cancellation,
termination, or expiration date of the original Policy.
The Company will be the sole judge of what constitutes any one claim, loss,
insured, and/or policy and/or endorsement.
AR 2495-97 -- 7/1/97
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<PAGE>
ARTICLE VI
PREMIUM
The Company will pay to the Reinsurers in accordance with the REPORTS AND
REMITTANCES ARTICLE their proportionate share of the net written premium,
being the gross written premium for the first $5,000,000 in limits, less
returned premium for cancellations and reductions, and less premium for
reinsurance as set forth in the OTHER REINSURANCE ARTICLE.
ARTICLE VII
REPORTS AND REMITTANCES
Within 30 days after the close of each quarter, the Company will furnish the
Reinsurers with a report summarizing the net written premium as set forth in
the PREMIUM ARTICLE, losses paid, loss expense paid, monies recovered, and
net balance due either party. Amounts due the Reinsurers will be remitted
with said report. Amounts due the Company will be remitted within 15 days
following receipt of the report.
In addition, the Company will furnish the Reinsurers with a quarterly
statement showing the unearned premium, the total reserves for outstanding
losses including loss expense, and such other information as may be required
by the Reinsurers for completion of their NAIC interim and/or annual
statements.
Should payment due from the Reinsurers exceed $250,000 as respects any one
loss, the Company may give the Reinsurers notice of payment made or its
intention to make payment on a certain date. If the Company has paid the
loss, payment will be made by the Reinsurers immediately. If the Company
intends to pay the loss by a certain date and has submitted a proof of loss
or similar document, payment will be due from the Reinsurers 24 hours prior
to that date, provided the Reinsurers have a period of five working days
after receipt of said notice to dispatch the payment. Cash loss amounts
specifically remitted by the Reinsurers as set forth herein will be credited
to their next quarterly account.
ARTICLE VIII
OTHER REINSURANCE
The Company is permitted to have other treaty reinsurance. The premium for
any such reinsurance that inures to the benefit of this Agreement will not be
included within the subject premium hereunder. Additionally, the Company may
purchase facultative reinsurance on any subject risk it deems advisable, and
the premium for that portion of the Company's policy
AR 2495-97 -- 7/1/97
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<PAGE>
reinsured elsewhere will not be included within the subject premium hereunder.
ARTICLE IX
SETTLEMENTS
The Reinsurers agree to abide by the loss settlements of the Company,
provided such loss settlements are within the terms and conditions of this
Agreement, however, when so requested the Company will afford the Reinsurers
an opportunity to be associated with the Company, at the expense of the
Reinsurers in the defense of any claim or suit or proceeding involving this
Agreement and the Company will cooperate with the Reinsurers in every respect
in the defense or control of such claim, suit, or proceeding.
All expense incurred as a result of a declaratory judgment action will be
divided between the Company and the Reinsurers in proportion to their
respective shares of the Ultimate Net Loss as determined in the BUSINESS
COVERED ARTICLE. Such expense will be in addition to the limit stated in the
BUSINESS COVERED ARTICLE. In no event will the Reinsurers be subject to such
expense, unless the Reinsurers have been made aware of and have concurred
with the declaratory judgment action to be taken.
ARTICLE X
INTEREST PENALTY
Overdue payments under this Agreement will be subject to interest penalties.
The sole purposes of this Article are: (1) to establish a point in time when
a payment will be considered overdue, and (2) to provide a method of
calculating interest penalties. The provisions of this Article will,
therefore, not alter the provisions contained within any other Article of
this Agreement.
A. Payments from the Company to the Reinsurers will be considered overdue
60 days after the due dates of the quarterly premiums.
For purposes of this Paragraph A only, payments from the Company to
the Reinsurers will mean that the Reinsurers have actually received
the payments.
B. Payments from the Reinsurers to the Company will be considered overdue
45 days after the Reinsurers receive the request for payment, except:
1. If the information contained in the request for payment is
either not in accordance with the terms of this Agreement or
not complete enough to allow the Reinsurers to validate the
Company's request for payment, then, within 30 days of
receipt of the request for payment, the Reinsurers will
request such additional information,
AR 2495-97 -- 7/1/97
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<PAGE>
and the payment will be considered overdue 45 days after the
Reinsurers receive the requested additional information.
2. If the 45-day period noted above is exceeded because a
Reinsurer disputes the validity of the request for payment,
interest penalties will be payable for the entire overdue
period, but only on the final settlement amount of the
originally-disputed request for payment.
If, on such a disputed request for payment, the Company drew
funds from a letter of credit or from any other funding
vehicle established by a Reinsurer for the purposes of making
payments to the Company, the Company will incur interest
penalties from the time of the draw until the time of the
final settlement, but only on the difference between the
amount drawn and the amount of the final settlement, the
Company paying such difference and interest penalties to the
Reinsurer within 45 days of the final settlement.
For purposes of this Paragraph B only, payments received by the
Intermediary within the 45-day time period will not be considered
overdue.
C. Interest penalties, from the time a payment in considered overdue
until the time of payment, will be computed by using the prime rate,
as reported in the Wall Street Journal on the day on which the payment
becomes overdue, plus 1%.
D. An interest penalty may be waived by the party to which it is owed,
but such a waiver will not alter the rights to other interest
penalties that may then be owed or owed in the future.
ARTICLE XI
SUBROGATION
Should the Company effect subrogation recovery or receive reimbursement on
loss subject to this Agreement, then such recovery, less all expenses
incurred in effecting the recovery (excluding salaries and expenses of
officials and employees of the Company not classified as loss adjusters) will
be borne by each party in proportion to its benefit from the recovery.
Should a recovery effort be unsuccessful, or should the expenses of making a
recovery exceed the recovery, then the Company and the Reinsurer will share
such expense in proportion to their interest in the loss.
AR 2495-97 -- 7/1/97
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<PAGE>
ARTICLE XII
EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS LIMITS LIABILITY
This Agreement will extend to cover any losses arising from claims related
extra contractual obligations and/or excess limits liability.
"Extra contractual obligations" as used in this Agreement will mean those
liabilities not covered under any other provision of this Agreement, which
arise from the handling of any claim on business covered hereunder; such
liabilities arising because of, but not limited to, the following: failure to
settle within the policy limit, by reason of alleged or actual negligence,
fraud, or bad faith in rejecting an offer of settlement, in the preparation
of the defense, in the trial of any action against the insured, or in the
preparation or prosecution of an appeal consequent upon such action.
"Excess limits liability" as used in this Agreement will mean damages payable
in excess of the policy limit as a result of the Company's alleged or actual
negligence, fraud, or bad faith in failing to settle and/or rejecting a
settlement within the policy limit, in the preparation of the defense, in the
trial of any action against the insured, or in the preparation or prosecution
of an appeal consequent upon such action. Excess limits liability is any
amount for which the Company would have been contractually liable to pay had
it not been for the limits of the reinsured policy.
There will be no recovery hereunder where the extra contractual obligation or
excess limits liability has been incurred due to fraud committed by a member
of the Board of Directors or a corporate officer of the Company, acting
individually, collectively, or in collusion with a member of the Board of
Directors, a corporate officer, or a partner of any other corporation,
partnership, or organization involved in the defense or settlement of a claim
on behalf of the Company.
The date on which any extra contractual obligation and/or excess limits
liability is incurred by the Company will be deemed, in all circumstances, to
be part of the original loss. Nothing in this Article will be construed to
create a separate or distinct loss apart from the original covered loss that
gave rise to the extra contractual obligations and/or excess limits liability
discussed in the preceding paragraphs. In no event will the total liability
of Reinsurers exceed their limit of liability as set forth in the BUSINESS
COVERED ARTICLE.
ARTICLE XIII
OFFSET
In the event of insolvency, the parties hereto will be entitled to exercise
their rights to offset any monies or balances due from each party to the
other as the case may be in accordance with the
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<PAGE>
provisions of the Illinois Insurance Code governing offset entitlements.
ARTICLE XIV
INSOLVENCY
A. In the event of the Company's insolvency, the reinsurance afforded by
this Contract shall be payable by the Reinsurer on the basis of the
Company's liability under the policies reinsured without diminution
because of the Company's insolvency or because its liquidator,
receiver, conservator or statutory successor has failed to pay all or
a portion of any claims, subject however to the right of the Reinsurer
to offset against such funds due hereunder, any sums that may be
payable to it by said insolvent Company in accordance with the OFFSET
ARTICLE. The reinsurance shall be payable by the Reinsurer directly to
the Company, its liquidator, receiver, conservator or statutory
successor except (a) where this Contract specifically provides another
payee of such reinsurance in the event of the Company's insolvency or
(b) where the Reinsurer, with the consent of the direct insured or
insureds, has assumed such policy obligations of the Company as direct
obligations of itself to the payees under such policies in
substitution for the Company's obligation to such payees.
B. The Company's liquidator, receiver, conservator or statutory successor
shall give written notice of the pendency of a claim against the
Company under the policies reinsured within a reasonable time after
such claim is filed in the insolvency proceeding. During the pendency
of such claim, the Reinsurer may investigate said claim and interpose
in the proceeding where the claim is to be adjudicated, at its own
expense, any defense that it may deem available to the Company, its
liquidator, receiver, conservator or statutory successor. The expense
thus incurred by the Reinsurer shall be chargeable against the
Company, subject to court approval, as part of the expense of
conservation or liquidation to the extent that such proportionate
share of the benefit shall accrue to the Company solely as a result of
the defense undertaken by the Reinsurer.
C. In the event of insolvency of the Company, the Reinsurer under this
Contract will have all rights, as more fully set forth in Section 173
of Illinois Insurance Code, as amended.
ARTICLE XV
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 shall be in writing and sent certified or
registered mail, return receipt requested.
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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 falls to
appoint its arbitrator within 30 days after being requested to do so
by the other party, the latter after 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 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 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 Chicago, illinois
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 Illinois. 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 make its decision considering the custom and practice
of the applicable insurance and reinsurance business as promptly as
possible following the tennination 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 XVI
ERRORS OR OMISSIONS
The Company will not be prejudiced in any way by any omission, through
clerical error, accident, or oversight, to cede to the Reinsurers any
reinsurance correctly falling to their share
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<PAGE>
under the terms of this Agreement. Neither will the Company be prejudiced by
erroneous cancellation (either partial or total) of any cession, by omission
to report or erroneously reporting any losses, or by any other error or
omission. Further, errors or omissions inadvertently made will not invalidate
the liability of the Reinsurers. Any such error or omission, however, will be
corrected immediately upon discovery.
ARTICLE XVII
ENTIRE AGREEMENT/AMENDMENTS
This Agreement constitutes the entire agreement between the parties. This
Agreement may be altered or amended in any of its terms and conditions by
mutual consent of the Company and the Reinsurers either by addenda hereto or
by an exchange of letters; such addenda or letters~will then constitute a
part of this Agreement.
ARTICLE XVIII
INSPECTION
The Company will place at the disposal of the Reinsurers at all reasonable
times, and the Reinsurers will have the right to inspect, through their
authorized representatives, all books, records and papers of the Company in
connection with any reinsurance hereunder, or claims in connection herewith.
The cost of such inspection will be borne by the Reinsurers.
ARTICLE XIX
TAXES
The Company will pay all taxes (except Federal Excise Tax) on premiums
reported to
Reinsurers on this Agreement.
ARTICLE XX
FEDERAL ENCISE TAX
(This Article applies to Reinsurers domiciled outside the United States of
America, excepting Lloyd's London Underwriters and other Reinsurers exempt
from Federal Excise Tax.)
Reinsurers will allow for the purpose of paying 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 such tax. In the event of any return of premium,
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<PAGE>
Reinsurers will deduct the aforesaid perdentage from the return premium
payable hereon and the Company or its agent will recover such tax from the
United States Government.
ARTICLE XXI
CURRENCY
The use of the sign "$" in this Agreement is in reference to United States of
America Dollars. Therefore, premiums due Reinsurers and loss payments due the
Company hereunder will be in United States of America Dollars.
ARTICLE XXII
RESERVES AND FUNDING
(This Article is only applicable to Reinsurers who cannot qualify for credit
by each governmental authority having jurisdiction over the Company's
reserves.)
As regards policies issued by the Company coming within the scope of this
Agreement, the Company agrees that, when it files with the Insurance
Department or sets up on its books reserves for losses (including loss and
loss expense paid by the Company but not recovered from the Reinsurers, loss
and loss expense reported and outstanding, and an allowance for IBNR as
determined by the Company) and/or unearned premium, which it is required by
law to set up, it will forward to the Reinsurers a statement showing the
proportion of such reserves applicable to them. The Reinsurers hereby agree
that they will fund such reserves by cash advances, Trust Agreements, escrow
accounts for the benefit of the Company, Letters of Credit, or a combination
thereof The Reinsurers will have the option of determining the method of
funding referred to above, provided it is acceptable to the Company and the
applicable regulatory authorities.
If a Reinsurer's choice of funding is or includes a Letter of Credit, it will
apply for and secure delivery to the Company of a clean, 'irrevocable,
unconditional Letter of Credit, dated on or before December 31 of the year in
which the request is made, issued by a member of the Federal Reserve System
or any bank approved for use by the NAIC Securities Valuation Office, and
containing provisions acceptable to the insurance regulatory authorities
having jurisdiction over the Company's reserves in an amount equal to that
Reinsurer's proportion of said reserves. The Letter of Credit will be issued
for a period of not less than one year, and will be automatically extended
for one year from its date of expiration or any future expiration date unless
30 days prior to any expiration date the issuing bank notifies the Company by
registered mail that the issuing 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 the state of domicile of the
Company, will provide 60 days notice to the Company prior to any expiration
in the event of nonextension.
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Notwithstanding any other provisions of this Agreement, the Company or its
court-appointed successor in interest may draw upon the cash advances, Trust
Agreements, escrow accounts and/or Letters of Credit at any time without
diminution because of the insolvency of the Company or of any Reinsurer for
one or more of the following purposes only:
A. To reimburse the Company for the Reinsurer's share of unearned premium
on policies reinsured hereunder on account of cancellations of such
policies.
B. To pay the Reinsurer's share or to reimburse the Company for the
Reinsurer's share of any loss reinsured by this Agreement, which has
not been otherwise paid.
C. To make refund of any sum in excess of the actual amount required to
pay the Reinsurer's share of any liability reinsured by this
Agreement.
D. In the event of nonextension of Letters of Credit as provided for
above, to establish deposits of the Reinsurer's share of reserves for
losses and/or unearned premium under this Agreement.
E. To pay any other amounts the Company claims are due under this
Agreement.
The issuing bank will 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.
At annual intervals, or more frequently as agreed but never more frequently
than semiannually, the Company will prepare and forward to the Reinsurers a
statement to reflect the Reinsurers' share of reserves for losses and/or
unearned premium. If the statement shows that the Reinsurers' share of such
reserves exceeds the balance available through cash advances, Trust
Agreements, escrow accounts and/or Letters of Credit as of the statement
date, then the Reinsurers will, within 30 days after receipt of notice of
such excess, make an adjustment to increase the amount available. If,
however, the statement shows that the Reinsurers' share of such reserves is
less than the balance available through the chosen method of funding as of
the statement date, then the Company will, within 30 days after receipt of
written request from the Reinsurers, release such excess by making the
appropriate adjustment.
ARTICLE XXIII
SERVICE OF SUIT
(This Article applies to Reinsurers domiciled outside the United States of
America and/or unauthorized in any state, territory, or district of the
United States of America that has jurisdiction over the Company and in whidh
a subject suit has been instituted. This Article is not
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intended to conflict with or override the parties' obligation to arbitrate
their disputes in accordance with the ARBITRATION ARTICLE.)
In the event of the fallure of any Reinsurer hereon to pay any amount claimed
to be due hereunder, such Reinsurer, at the request of the Company, will
submit to the jurisdiction of a court of competent jurisdiction within the
United States. Nothing in this Article constitutes or should be understood to
constitute a waiver of the Reinsurer's rights to commence an action in any
court of competent jurisdiction in the United States, to remove an action to
a United States District Court, or to seek a transfer of a case to another
court as permitted by the laws of the United States or of any state in the
United States. Service of process in such suit may be made upon Lord, Bissell
and Brook, 115 South LaSalle Street, Chicago, illinois 60603, or another
party specifically designated in the applicable Interests and Liabilities
Agreement attached hereto. In any suit instituted against it upon this
Agreement, the Reinsurer will abide by the final decision of such court or of
any appellate court in the event of any appeal.
The above-named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of Company
to give a written undertaking to the Company that they will enter a general
appearance upon the Reinsurer's behalf in the event such a suit will be
instituted.
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 the successor or
successors in office, as its true and lawful attorney upon whom may be served
any lawful process in any action, suit or proceeding instituted by or on
behalf of the Company or any beneficiary hereunder, arising out of this
Agreement, and hereby designates the above-named as the person to whom the
said officer is authorized to mail such process or a true copy thereof.
ARTICLE XXIV
INTERMEDIARY
Aon Re Inc., an Illinois corporation, or one of its affiliated
corporations duly licensed as a reinsurance intermediary, is hereby
recognized as the Intermediary negotiating this Agreement for all business
hereunder. All communications (including but not limited to notIces,
statements, premiums, return premiums, commissions, taxes, losses, loss
expenses, salvages, and loss settlements) relating to this Agreement will be
transmitted to the Company or the Reinsurers through the Intermediary.
Payments by the Company to the Intermediary will be deemed payment to the
Reinsurers. Payments by the Reinsurers to the Intermediary will be deemed
payment to the Company only to the extent that such payments are actually
received by the Company.
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U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE--LIABILITY--REINSURANCE
I. 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 I 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,
to INJURY, SICKNESS, DISEASE, DEATH OR DESTRUCTION bodi1y injury or property
damage with respect to which an insured under the policy is also 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.
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
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3. Except for those classes of policies specified in Clause H 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:
I. 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 thereoC 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 thereoC under any agreement entered into by the United States of
America, or any agency thereof, with any person or organization.
II. Under any Medical Payments Coverage, or under any Supplementary Payments
Provision relating to IMMEDIATE MEDICAL OR SURGICAL RELIEF, first aid to
expenses incurred with respect to nuclear material and arising out of the
operation of a nuclear facility by any person or organization.
III. Under any Liability Coverage, to INJURY, SICKNESS, DISEASE, DEATH 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;
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(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
(c) the INJURY, SICKNESS, DISEASE, DEATH OR DESTRUCTION bodily injury or
property damage arises out of 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, but if such facility
is located within the United States of America, its territories, or
possessions or Canada, this exclusion (c) applies only
to INJURY TO OR DESTRUCTION OF PROPERTY AT SUCH NUCLEAR FACILITY.
property damage to such nuclear facility and any property threat.
IV. As used in this endorsement:
"hazardous properties" include radioactive, toxic or explosive properties;
"nuclear materials" means source materials, 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 and (2) resulting from the operation by any person or
organization of any nuclear facility included within the definition of
nuclear facility under paragraph (a) or (b) thereof~ "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 thereoC 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" INCLUDES ALL FORMS OF RADIOACTIVE CONTAMINATION OF PROPERTY.
"property damage" includes all forms of radioactive contamination of property.
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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 I 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 of 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.
N.M.A. 1590 (21/9/67)
Approved by Lloyd's Underwriters' Non-Marine Association.
AMENDMENT TO THE DEFINITION OF WASTE
It is agreed that the definition of "waste" contained in sub-paragraph IV
above is amended to read as follows:
"Waste" means any material
(a) containing byproduct material other than the tailings or waste
produced by the extraction or concentration of uranium or thorium from any
ore processed primarily for its source material content and
(b) 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.
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PHYSICIANS BUSINESS PRACTICE LIABILITY QUOTA SHARE AGREEMENT
ADDENDUM NO. 1 TO THE FINAL PLACEMENT SLIP
COMPANY: Illinois State Medical Inter-Insurance Exchange
Chicago, Illinois
PROGRAM
INCEPTION: January 1, 1996, 12:01 a.m. Central Standard Time.
EFFECTIVE: Twenty four (24) months commencing July 1, 1997, 12:01 a.m.
Central Standard Time, July 1, 1997, covering policies
attaching including extended reporting endorsements. Run-off
until natural expiry.
IT IS HEREBY NOTED AND AGREED that, effective July 1, 1998 the following
revisions are made to this Agreement:
EFFECTIVE: The first sentence of the "EFFECTIVE" section is amended to
read as follows:
36 month period commencing 12:01 a.m. Central Standard Time,
July 1, 1997 covering policies attaching, including extended
reporting endorsements.
EXCLUSIONS:
- Directors and Officers Liability, when written as
such.
- Reinsurance Assumed other than business retroceded to
the Company from Fronting arrangements for business
written in states where the Company is not licensed.
- Nuclear Incident Exclusion Clause - Liability -
U.S.A. (N.M.A. 1590).
- Insolvency Funds Exclusion Clause.
Agreed by all reinsurers except RJH 122.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
IT IS HEREBY NOTED AND AGREED that, effective July 1, 1998 the following
revisions are made to this Agreement:
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ILLINOIS STATE MEDICAL INTER-INS PHYSICIANS BUSINESS PRACTICE QS
ADDENDUM NO. 1
EXCLUSIONS:
- Directors and Officers Liability, when written as
such.
- Reinsurance Assumed other than claim made business
retroceded to the Company from Fronting arrangements
for business written in states where the Company is
not licensed.
- Nuclear Incident Exclusion Clause - Liability -
U.S.A. (N.M.A. 1590).
- Insolvency Funds Exclusion Clause.
Agreed by RJH 122 only.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
In accordance with your instructions we have placed reinsurance with the
Reinsurer(s) listed hereon, subject to the terms and conditions hereinabove
stated. We ask that you promptly advise us if the terms, conditions, or
Reinsurer(s) vary in any respect from your instructions. Aon Re Inc. will not be
responsible for the financial or other obligations of any Reinsurer(s). Should
you desire financial information regarding the Reinsurer(s) listed hereon,
please contact us and we will furnish it.
THE REINSURERS' OBLIGATIONS UNDER THIS AGREEMENT ARE SEVERAL AND NOT JOINT AND
ARE LIMITED SOLELY TO THE EXTENT OF THEIR INDIVIDUAL PARTICIPATIONS. THE
REINSURERS ARE NOT RESPONSIBLE FOR THE PARTICIPATION OF ANY CO-SUBSCRIBING
REINSURER WHO FOR ANY REASON DOES NOT SATISFY ALL OR PART OF ITS OBLIGATIONS.
T IS HEREBY NOTED AND AGREED that, effective July 1, 1999, Reinsurers Signed
lines are as follows:
<TABLE>
<CAPTION>
REINSURED WITH
DOMESTIC COMPANIES PERCENTAGE
- ------------------ ----------
<S> <C>
Chartwell Reinsurance Company 4.0000%
Everest Reinsurance Company 10.0000%
NAC Reinsurance Corporation 10.0000%
Odyssey Reinsurance Corporation 3.0000%
Sydney Reinsurance Corporation 3.0000%
Transatlantic Reinsurance Company 25.0000%
--------
TOTAL DOMESTIC COMPANIES 55.0000%
</TABLE>
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ILLINOIS STATE MEDICAL INTER-INS PHYSICIANS BUSINESS PRACTICE QS
ADDENDUM NO. 1
PLACEMENT THROUGH NICHOLSON LESLIE NORTH AMERICAN REINSURANCE BROKERS
<TABLE>
<CAPTION>
UNDERWRITERS AT LLOYD'S, LONDON
- -------------------------------
<S> <C>
Lloyd's Syndicate #0122 RJH 1.0500%
Lloyd's Syndicate #0205 HGJ 2.6300%
Lloyd's Syndicate #0362 WEH 2.1100%
Lloyd's Syndicate #0376 JHV 1.7800%
Lloyd's Syndicate #0435 DPM 5.2700%
Lloyd's Syndicate #1003 SJC 1.0000%
Lloyd's Syndicate #1007 SVH 5.2600%
Lloyd's Syndicate #1096 RAS 1.0500%
Lloyd's Syndicate #1212 SJB 5.2600%
Lloyd's Syndicate #2003 SJC 1.6300%
Lloyd's Syndicate #2376 JHV 0.8500%
-------
TOTAL UNDERWRITERS AT LLOYD'S, LONDON 27.8900%
</TABLE>
<TABLE>
<CAPTION>
LONDON COMPANIES
- ----------------
<S> <C>
CNA International Reinsurance Company Limited 7.9000%
Unionamerica Insurance Company Limited 3.9500%
Zurich Re (UK) Limited 5.2600%
-------
TOTAL LONDON COMPANIES 17.1100%
TOTAL PLACEMENT THRU NICHOLSON LESLIE NORTH AMERICAN 45.0000%
REINSURANCE BROKERS
TOTAL ALL PARTICIPANTS 100.0000%
</TABLE>
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
Assuming that you find everything in order, please indicate your acceptance and
approval by signing and returning this Final Placement Slip to Aon Re Inc.
ACCEPTED &
APPROVED: ________________________________________________________________
REFERENCE
NUMBER: _________________________________ DATED:__________________________
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ILLINOIS STATE MEDICAL INTER-INS PHYSICIANS BUSINESS PRACTICE QS
ADDENDUM NO. 1
(FOR PROCESSING PURPOSES IT IS IMPORTANT THAT YOU PROVIDE YOUR COMPANY'S
REFERENCE NUMBER FOR THIS PROGRAM.)
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EXHIBIT 10.8
OFFICE LEASE
1. BASIC LEASE PROVISIONS AND IDENTIFICATION OF EXHIBITS
1.01 BASIC LEASE PROVISIONS
A. BUILDING AND PREMISES ADDRESS:
FLOORS 6 and 7
20 NORTH MICHIGAN AVENUE
CHICAGO, ILLINOIS 60602
B. LANDLORD AND ADDRESS:
U.S. EQUITIES REALTY, INC.
840 North Michigan Avenue
Suite 600
Chicago, Illinois 60611
as Agent for the beneficiary of LaSalle National
Bank, not personally, but as Trustee under Trust
Agreement dated March 1, 1983, and known as Trust
No. 106020.
C. TENANT AND CURRENT ADDRESS:
Illinois State Medical Inter-Insurance Exchange
------------------------------------------------
55 East Monroe Street
------------------------------------------------
Chicago, Illinois 60603
------------------------------------------------
Attention: Lawrence W. Deidrick
------------------------------------------------
D. DATE OF LEASE EXECUTION: July 29 , 1983
---------------- --
E. LEASE TERM: Ten Years and Two (2) Five (5) Year
------------------------------------
Options
F. COMMENCEMENT DATE OF TERM: Section 2.02
---------------------
G. EXPIRATION DATE OF TERM: November 30, 1994
-----------------------
H. MONTHLY BASE RENT: Sixty Three Thousand Two
Hundred Eight and 24/100 Dollars---($63,208.34)
------------------------------------------------
(subject to adjustment as
provided herein)
I. RENTABLE AREA OF THE PREMISES: 41,000 square feet
------
J. SECURITY DEPOSIT: None
-------------------------------
($ )
--------------------------
<PAGE>
K. ANNUAL BASE OPERATING EXPENSE Five and 50/100
Dollars-----------------------------($5.50)
-------------------------------------------
per square foot of rentable area
1.02 ENUMERATION OF EXHIBITS
The exhibits set forth below and attached to this Lease are
incorporated in this Lease by this reference:
EXHIBIT A -- Plan of Premises
EXHIBIT B -- Legal Description
EXHIBIT C -- Rules and Regulations
EXHIBIT D -- Non-Disturbance Agreement
EXHIBIT E -- Permitted Exceptions
2. PREMISES AND TERM
2.01. LEASE OF PREMISES
Landlord hereby leases to Tenant and Tenant hereby accepts the premises
(the "Premises") shown on Exhibit A which are contained in the commercial
building (the "Building") situated on the premises ("Land") legally
described in Exhibit B and commonly known as 20 North Michigan Avenue,
Chicago, Illinois, 60602 for the term and upon the conditions provided in
this lease ("Lease").
2.02 TERM
The term of this Lease (the "Term") shall commence on the date (the
"Commencement Date") which is the earlier to occur of:
(i) the date the Premises are "ready for
occupancy" (as hereinafter defined); The Premises will be
deemed "ready for occupancy" under the terms of this Lease
when the Landlord has substantially completed all work to be
performed pursuant to the: (i) Work Letter of even date
herewith and attached hereto "Work Letter"); and (ii) plans
and specifications dated July 18, 1983 and prepared by Nagle
Hartrey Associates (the "Building Plans and Specifications")
to the extent of exterior work to the Building and lobby area
on the ground floor of the Building and operatability of
elevators. The Landlord covenants that the Premises shall be
ready for occupancy not later than December 1, 1984. In the
event a dispute arises as to whether or not the Premises are
ready for occupancy, the joint decision of Landlord's
architect and Tenant's architect or space planner shall be
final and binding on the parties. If Landlord's architect and
Tenant's architect or space planner cannot agree, then the
decision shall be submitted to arbitration as herein after.
provided in Section 3.3 of the Rider to this Lease. Landlord
shall, prior to notifying Tenant that the Premises are ready
for occupancy, make the Premises available to Tenant for the
commencement of its work at Tenant's sole risk and so
2
<PAGE>
long as such work does not interfere with the construction of
the Premises by Landlord. The license to enter the Premises
by Tenant for construction purposes or for occupancy prior to
December 1, 1984 shall not, however, affect the Commencement
Date hereunder; or,
(ii) December 1, 1984.
If the Premises are ready for occupancy prior to December 1, 1984,
Tenant may occupy all or any part of the Premises on a rent-free basis
for periods prior to December 1, 1984 as long as Tenant furnishes to
Landlord evidence that it is concurrently paying rent for space
elsewhere in connection with its business. If the Premises are ready
for occupancy after December 1, 1984, Tenant shall, subject to its
right to terminate this Lease as set forth in Section 7.01 hereof,
occupy the Premises and the term shall commence on the date the
Premises are ready for occupancy. Tenant shall not be obligated in any
manner to occupy all or any part of the Premises nor shall the term
commence until such time as the Premises are ready for occupancy in
accordance with the provisions hereof and in no event shall the
Commencement Date be prior to December 1, 1984.
The Term shall expire on the date (the "Expiration Date") specified in
Subsection 1.01G, unless sooner terminated as otherwise provided
elsewhere in this Lease.
3. RENT
Tenant agrees to pay to Landlord at the office of the managing agent (the
Manager) of the beneficiaries of Landlord (the "Beneficiaries), or at
such other place designated by Landlord, without any prior demand
therefor and without any deduction whatsoever, (except as herein
permitted), base rent at the initial monthly rate specified in Subsection
l.01H ("Monthly Base Rent). Monthly Base Rent is subject to adjustment
pursuant to Sections 4.02 and 6.03, and as adjusted is hereinafter called
"Adjusted Monthly Base Rent". Unless otherwise provided to the contrary
in this Lease, Adjusted Monthly Base Rent shall be paid monthly in
advance on the first day of each month of the Term. Tenant shall not be
obligated to pay Rent for the first 3 months and 5 days of the term
hereof with the obligation to commence the payment of Rent beginning on
the sixth day of the fourth month of the term. The first installment of
Rent shall be paid by Tenant to Landlord on the Commencement Date.
Adjusted Monthly Base Rent shall be prorated f or partial months within
the Term. All charges, costs and sums required to be paid by Tenant to
Landlord under this Lease in addition to Adjusted Monthly Base Rent shall
be deemed additional rent, and Adjusted Monthly Base Rent and additional
rent shall hereinafter be collectively called "Rent." Tenant's covenant
to pay Rent shall be independent of every other covenant in this Lease.
Tenant shall pay a late charge for delinquent Rent in accordance with the
provisions of Section 26.01. In addition to the Premises demised
hereunder, during the term hereof and any option term, Landlord hereby
leases to Tenant and Tenant hereby accepts from Landlord space in the
basement of the Building which: Ci) comprises 2,000 square feet; (ii)
shall be used solely for purposes of storage in connection with Tenant's
business within the Premises; and (iii) location shall be mutually agreed
upon by Landlord
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and Tenant prior to the Commencement Date and enclosed by the Landlord,
at its expense .("Original. Storage Space").
Tenant may, at its sole option, to be exercised by the 'delivery of a
written notice to the Landlord at least 180 days prior to the expiration
of the third year of the Term of this Lease, rent an additional 3,000
square feet in the basement for purposes of storage to be designated by
Landlord at the time of the exercise of the option with the understanding
that such space (the "Option Storage Space") need not be contiguous to
the Original Storage Space.
The Landlord will enclose the Original Storage Space and Option Storage
Space, at its expense, and construct such demising walls and doors
necessary in order for Tenant to secure its personal property therein.
The annual rent for the Original Storage Space shall be $12,000.00 for
the term and option terms, if any, payable in equal monthly installments
at the time Monthly Base Rent is due under the terms of this Lease. The
annual rent for the Option Storage Space for the term and option terms,
if any, shall be a "Market Rent" which is defined herein as the bona fide
annual rent per square foot of net rentable area being offered by
Landlord to prospective tenants for space in the basement for a lease
term commencing on or after the date rent is to begin for the Option
Storage Space ("Option Rent"). The annual Option Rent shall be paid in
equal monthly installments payable at the time of and with Monthly Base
Rent.
In no event shall rent payable for the Original Storage Space and Option
Storage Space have an effect on or be adjusted by Section 4.02 of this
Lease.
4. ADJUSTMENTS TO MONTHLY BASE RENT
4.01 DEFINITIONS
For the purposes of this Article 4, the following words and phrases shall
have the following meanings:
A. "Adjustment Date" shall mean the Commencement Date and each
January 1 falling within the Term.
B. "Adjustment Year" shall mean each calendar year during which
an Adjustment Date falls.
C. "Consumer Price Index" shall mean the Consumer Price Index for
All Urban Consumers, All Items, issued by the Bureau of Labor
Statistics of the United States Department of Labor. It the
manner in which the Consumer Price Index is determined by the
Bureau of Labor Statistics shall be substantially revised, an
adjustment shall be made in such revised index which would
produce results equivalent, as nearly as possible, to those
which would have been obtained if the
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Consumer Price Index had not been so revised. If the 1967
average shall no longer be used as an index of 100, such
change shall constitute a substantial revision. It the
Consumer Price Index shall become unavailable to the public
because publication is discontinued, or otherwise, Landlord
will substitute therefor a comparable index based upon
changes in the cost of living or purchasing power of the
consumer dollar published by any other governmental agency
or, if no such index shall be available, then a comparable
index published by a major bank or other financial
institution or by a university or a recognized financial
publication or alternatively, an Index generally used by
other first-class downtown commercial office buildings
for the determination of Consumer Price Index escalation.
D. "Operating Expenses" shall mean and include all
those costs, expenses and disbursements of every kind and
nature which Landlord shall pay or become obligated to pay in
connection with the management (including management fees),
ownership, operation, maintenance, replacement and repair of
the Building and the land upon which the Building is situated
("the Land") and of the personal property, fixtures,
machinery, equipment, systems and apparatus located in or used
in connection with the Building or Land, including without
limitation, Taxes (as defined herein), utility expenses and
current amortization, including interest, of capital
improvements reasonably necessary for the operation and
maintenance of the Building. Operating Expenses shall not
include the following: costs of capital improvement which
increase the size of the Building; costs of alterations to
premises of other tenants of the Building; charges for
depreciation of the Building; interest and principal payments
on mortgages (except for the financing of capital expenditures
as provided hereinabove); real estate brokerage and leasing
commissions. expenses for repairs or other work occasioned
by a casualty; legal expenses in enforcing the terms of any
lease; wages, salaries or other compensation paid to any
executive or employee above the grade of Building Manager;
wages, salaries or other compensation paid for clerks or
attendants in concessions or newsstands operated by the
Landlord; the cost of relocating tenants to other premises in
the Building; the cost of any electric current furnished to
the Premises demised to Tenant under this Lease or to any
tenant in the Building, except the cost of any electric
current furnished to the common areas and facilities of the
Building shall not be excluded from Operating Expenses; the
cost of any work or service performed for or facilities
furnished to any tenant (including Tenant) at such tenant's
cost; the cost of correcting defects in the renovation of
the Building performed pursuant to the Building Plans and
Specifications and charges and additions thereto or in the
Building equipment, except that conditions (not occasioned by
construction defects) resulting from ordinary wear and tear
shall not be deemed defects; the cost of any repair made by
Landlord pursuant to or as a result of condemnation; the cost
of installing, operating and maintaining an observatory,
broadcasting facilities, luncheon club, athletic or
recreational club, cafeteria or dining facility; the cost of
any other items for which Landlord is specifically reimbursed
to the extent reimbursed; any cost or expense representing
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an amount paid to a related corporation, partnership, person
or other legal entity which is in excess of the amount which
would be paid in the absence of such relationship; ground
rental payments, if any, made by Landlord; advertising and
promotion expenses relating to the leasing of space within the
Building; space planner and architect fees related to the
construction or remodeling of other tenants' space within the
Building; cost of alterations and improvements of Tenant's
Premises, including painting, redecorating and other work
which the Landlord performs at its expense for the Tenant or
any tenant in tenant areas of the Building, other than
painting, redecorating or other work which is standard for or
periodically performed in common areas of the Building.
"Taxes", included in Operating Expenses, shall mean all
federal, state and local governmental taxes, assessments and
charges (including transit or transit district taxes or
assessments) of every kind or nature, whether general,
special, ordinary or extraordinary, which Landlord shall pay
or become obligated to pay because of or in connection with
the ownership, leasing, management, control or operation of
the Building and the Land, or of the personal property,
fixtures, machinery, equipment, systems and apparatus located
therein or used in connection therewith (including any rental
or similar taxes levied in lieu of or in addition to general
real and/or personal property taxes); To the extent that such
item would be payable if the land and Building were the only
property of Landlord (or the only property of the
beneficiaries under the Trust, if Landlord is a Trustee) and
the rent and other income received by Landlord from the land
and Building were the only income of Landlord (or the only
income of the beneficiaries under the Trust, if the Landlord
is a Trustee). For purposes hereof, Taxes for any year shall
be Taxes which are assessed or become a lien during such year,
even though not due or payable until a subsequent year. There
shall be included in Taxes for any year the amount of all
fees, costs and expenses (including reasonable attorneys'
fees) paid by Landlord during such year in seeking or
obtaining any refund or reduction of Taxes. Taxes in any year
shall be reduced by the net amount of any tax refund received
by Landlord during such year. If a special assessment payable
in installments is levied against the Land, Taxes for any year
shall include only the installment of such assessment and any
interest payable or paid during such year. Taxes shall not
include any federal, state or local sales, use, franchise,
capital stock, inheritance, general income, gift or estate
taxes.
E. Per Square Foot Operating Expenses" shall mean the amount of
Operating Expenses for any Adjustment Year divided by 160,000
square feet (the rentable area of the Building).
4.02 ADJUSTMENTS TO MONTHLY BASE RENT
Effective as of the Commencement Date of Term and as of each Adjustment
Date, Monthly Base Rent shall be increased by an amount equal to 1/12 of
the sum of: (i) The product of the rentable area of the Premises (as
specified in Subsection 1.01I), multiplied by the amount by which the Per
Square Foot Operating Expenses for the Adjustment Year in
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which such Adjustment Date falls exceeds the Base Operating
Expenses, specified in Subsection 1.01K herein, plus (ii) a sum
equal to 25% of the Monthly Base Rent multiplied by the percentage
increase, it any, in the Consumer Price Index on the Adjustment
Date over the Consumer Price Index on January 1 of the year in
which the Term commences (or January 1, 1985 if the term of this
Lease commences in 1984 in which event the adjustment to Monthly
Base Rent for 1986 on account of an increase in the Consumer Price
Index will also include 25% of the Monthly Base Rent payable in
1984 multiplied by the percentage increase, if any, in the Consumer
Price Index on January 1, 1985 over the Consumer Price Index on
January 1, 1984.) The rental as computed hereunder including
adjustments for projections under Section 4.03 hereinbelow shall be
referred to as Adjusted Monthly Base Rent. The Adjusted Monthly
Base Rent shall never be less than the Monthly Base Rent specified
in Subsection l.01H herein. For purposes of computing adjustments
to Monthly Base Rent pursuant to Subparagraph (ii) of this
Paragraph 4.02, only the Monthly Base Rent as specified in Section
l.01H shall be taken into account for purposes of such adjustment
without including any other item which could be characterized as
"Rent." Notwithstanding anything herein contained to the contrary,
Monthly Base Rent will not be adjusted for the first full year of
the term after the obligation to pay rent commences hereunder on
account of an increase in the Consumer Price Index.
4.03 PROJECTIONS
For purposes of calculating Operating Expenses for any Adjustment Year,
Landlord may make reasonable estimates, forecasts or projections
(collectively, the "Projections") of Operating Expenses for such
Adjustment Year. Landlord shall deliver to Tenant a written statement (i)
setting forth, the Projections of Operating Expenses for the Adjustment
Year in which such Adjustment Date falls, and (ii) providing a
calculation of the increase in installments of Monthly Base Rent to
become effective as of the Adjustment Date; provided, however, that the
failure of Landlord to provide any such statement shall not relieve
Tenant from its obligation to continue to pay Adjusted Monthly Base Rent
at the rate then in effect under this Lease, and it and when Tenant
receives such statement from Landlord, Tenant shall pay any increase in
Monthly Base Rent reflected thereby effective retroactively to the most
recent preceding Adjustment Date; provided, further, in the event that
Tenant does not receive such Projections within 180 days of the
Adjustment Date to which such Projections apply, then Tenant shall not be
obligated to pay any increase specified in any statement thereafter
received from Landlord for such Adjustment Year.
4.04 READJUSTMENTS
On or about April 1st following the end of each Adjustment Year, or at
such later time as Landlord shall be able to determine the actual amounts
of Operating Expenses for the Adjustment Year last ended, Landlord shall
notify Tenant in writing of such actual amounts. If the total Adjusted
Monthly Base Rent paid by Tenant during such Adjustment Year exceeds the
amount thereof payable for such year based upon actual Operating Expenses
for such Adjustment Year, then Landlord shall credit such excess to
installments of Adjusted Monthly Base Rent payable after the date of
Landlords notice until such excess
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has been exhausted, or if this Lease shall expire prior to full
application of such excess, Landlord shall pay to Tenant the
balance thereof not theretofore applied against Rent. If such
actual amounts exceed the Projections for such Adjustment Year,
then Tenant shall, within thirty (30) days after the date of such
written notice from Landlord, pay to Landlord an amount equal to
the excess of the Adjusted Monthly Base Rent payable for the
Adjustment Year last ended based upon actual Operating Expenses for
such year over the total Adjusted Monthly Base Rent paid by Tenant
during such Adjustment Year. The obligation to make such payments
shall survive the expiration or earlier termination of the Term. No
interest or penalties shall accrue on any amounts which Landlord is
obligated to credit or pay to Tenant by reason of this Section
4.04. Landlord's notification of actual amounts required under this
Paragraph 4.04 shall be in the form of a report, certified by an
officer or agent of Landlord, setting forth the amount of the
actual expenses for the Adjustment Year and the resulting increase,
if any, in Tenant's Monthly Base Rent and Adjusted Monthly Base
Rent. Landlord agrees to keep books and records showing Operating
Expenses in accordance with a generally accepted system of
accounting practices consistently applied and maintained on a
year-to-year basis. If Tenant shall not dispute in writing any
specific item or items on the report submitted by Landlord
hereunder within 30 days after said report has been submitted to
Tenant, then said report shall be deemed approved by Tenant and, if
the expenses specified therein are in excess of the. Projections
for such Adjustment Year, payment shall be made forthwith in
accordance with the terms of this Paragraph 4.04. If within said
30-day period, Tenant shall dispute in writing any specific item or
items in the report submitted by Landlord hereunder and such
dispute is not settled within 60 days following such 30-day period,
Tenant may refer such disputed item or items for arbitration as
hereinafter provided as long as it deposits with Landlord the
amount in dispute pending the outcome of the arbitration
proceedings. Landlord agrees to reimburse to Tenant all or any part
of such disputed amount decided by such arbitrator to be due and
owing to Tenant together with interest thereon at the prime
interest rate being charged by Continental Illinois National Bank
and Trust Company of Chicago to its commercial customers from time
to time or 10%, whichever is greater. To the extent that Landlord
does not so reimburse Tenant, Tenant shall be entitled to offset
all such amounts (together with interest thereon) against the next
payment of rent accruing thereafter.
4.05 PARTIAL OCCUPANCY
For the purposes of determining adjustments to installments of Monthly
Base Rent for any Adjustment Year, the amount of Operating Expenses for
such Adjustment Year shall be increased to the amount that would have
been payable had there been 100% occupancy in the Building during such
Adjustment Year and/or 100% of the tenants had received the same services
as Tenant.
4.06 BOOKS AND RECORDS
Landlord shall maintain books and records showing Operating Expenses in
accordance with sound accounting and management practices, which records
shall be available to Tenant for inspection at the offices of the
Building upon reasonable prior notice; provided, however,
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that Tenant must exercise .its right hereunder within fifteen (15) days
after receipt from Landlord of notice of increased rentals or sums due
hereunder.
4.07 NO DECREASES IN MONTHLY BASE RENT
Notwithstanding anything to the contrary contained in this Lease, Monthly
Base Rent shall not be adjusted or decreased below the amount set forth
in Subsection 1.01H.
5. SECURITY DEPOSIT
[INTENTIONALLY DELETED]
6. SERVICES
6.01 LANDLORD'S GENERAL SERVICES
Landlord shall provide the following services during business hours: (a)
heat and air-conditioning (as permitted by law) in the Premises, Monday
through Friday from 8:00 A.M. to 6:00 P.M. and Saturdays from 8:00 A.M.
to 1:00 P.M., (hereinafter "Normal Business Hours"), Sundays and legal
holidays excepted, all in accordance with the following design condition
standards so as to provided a temperature condition required for the
comfortable occupancy of the Premises, subject to such temperatures being
regulated by applicable governmental law:
(i) cooling - inside 76 DEG. F DB, 55% RH maximum when outside
95 DEG. F DB, 75 DEG. F WB
(ii) Heating - inside 72 DEG. F DB when outside 10 DEG. F DB;
(b) city water, in common with other tenants of the Building, from
the regular Building fixtures for drinking, lavatory and toilet
purposes only; (c) customary cleaning and janitorial services in
the Premises substantially similar to those provided in other first
class office buildings in the City of Chicago, Monday through
Friday, excluding national holidays (Tenant shall not provide or
permit any other janitorial services to the Premises without the
Landlord's written consent); and (d) adequate passenger elevator
service in common with other tenants of the Building and from the
Premises on a twenty-four (24) hour basis and freight elevator
service (manual by Tenant operation) subject to scheduling by
Landlord. Whenever heat generating machines or equipment are used
by Tenant in the Premises, which affect the temperature otherwise
maintained by the air cooling system Landlord reserves the right to
install supplementary air conditioning units in the Premises or the
Building, and the expense of installation and cost of such machines
shall be paid by Tenant. The expense resulting from the operation
and maintenance of the supplementary air conditioning system shall
be paid by the Tenant to the Landlord as Additional Rent at rates
fixed by the Landlord. Prior to the installation of such
supplementary air conditioning units, Landlord shall notify Tenant
of the cost and need for such installation and shall give Tenant an
opportunity to eliminate the need to install such supplementary air
conditioning
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units in the Premises. If Tenant does not eliminate such need or
does not respond to Landlord within ten (10) days after Landlord's
notice to Tenant, Landlord shall install the supplementary air
conditioning units as heretofore provided. Landlord shall furnish,
install and operate security services at all times on the main
floor of the Building and alarm devices or other security
arrangements at exterior doors and accesses to the Building. It is
understood that the Building shall be open for access (ingress and
egress) and use by Tenant, its agents, employees and invitees
through the Building's main lobby at all times subject to security
procedures established by Landlord from time to time for the
benefit of all the tenants in the Building.
6.02 LANDLORD'S ELECTRICITY SERVICES
Tenant shall pay for the use of all electrical service to the Premises
(other than the electrical service necessary for Landlord to fulfill its
obligation to provide heating, air cooling, air distribution and elevator
service as herein provided). Landlord shall separately meter the Premises
at its expense and Tenant shall be billed directly by such utility
company and Tenant agrees to pay each bill promptly in accordance with
its terms. In the event that for any reason Tenant cannot be billed
directly, Landlord shall forward each bill received by it with respect to
the Premises to Tenant specifying the amount of electrical consumption
specifically allocable to the Premises and the manner in which the amount
payable by Tenant was determined and, if Tenant does not dispute the
amount or method of consumption of such bill, Tenant shall pay it
promptly in accordance with its terms and the obligation to cause such
bill to be paid shall be deemed as additional rent hereunder.
6.03 ADDITIONAL AND AFTER-HOUR SERVICES
Landlord shall in no event be obligated to furnish any services or
utilities, other than those specified in Sections 6.01 and 6.02 above. If
Tenant requests Landlord to furnish services or utilities, in addition to
those specified in Sections 6.01 and 6.02 above (including utility
services at times other than those specified in said Sections), Landlord
shall furnish the same and Tenant shall pay to Landlord Landlord's then
prevailing rates for such services and utilities (including a reasonable
charge for Landlord's overhead) within ten (10) days after receipt of
Landlord's invoices therefore; except, however, Tenant shall only be
required to pay Landlord's actual cost relative to the furnishing of
electricity, heating and cooling. If Tenant shall fail to make any such
payment, Landlord may, without notice to Tenant and in addition to
Landlord's other remedies under this Lease, discontinue any or all of the
additional services. No discontinuance of any service pursuant to this
Section 6.03 shall result in any liability of Landlord to Tenant or be
deemed to be in eviction or a disturbance of Tenant's use of the
Premises.
6.04 TENANT'S UTILITIES
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Tenant shall make arrangements directly with the telephone company
servicing the Building for telephone service to the Premises. Tenant
shall pay tar the maintenance and replacement of all light fixtures,
electrical switches, electrical outlets and lamps located in the Premises
and all bulbs, tubes, ballasts and starters utilized in the Premises.
6.05 Notwithstanding anything to the contrary in this Section 6.05 or
elsewhere in this Lease, Landlord shill have the right to institute such
policies, programs and measures as may be necessary or desirable, in
Landlord's discretion, for the conservation and/or preservation of energy
or energy related services provided, however, that the same to not
reasonably interfere with the continued business operation of Tenant
within the Premises, or as may be required to comply with any applicable
codes, rules and regulations, whether mandatory or voluntary.
7. POSSESSION, USE AND ENJOYMENT OF PREMISES
7.01 POSSESSION AND USE OF PREMISES
Tenant shall be entitled to possession of the Premises on the
Commencement Date. In the event of the failure of the Landlord to deliver
the Premises ready for occupancy on December 1, 1984 or at any time
thereafter for any reason including, without limitation, Landlord's
failure to timely perform any term, covenant and condition of this Lease
on Landlord's part to be performed on account of a strike, lockout, labor
trouble (whether legal or illegal), civil disorder, inability to procure
materials, failure of power, restrictive governmental laws and
regulations, riots, insurrections, war, fuel shortages, accidents, acts
of God or any other cause beyond the control of Landlord (except for
delays caused by Tenant), Landlord shall be liable for damages caused
thereby to the extent of the actual out-of-pocket expenses payable by
Tenant as a result of: (a) relocating to alternate comparable premises
(including moving expenses and cost of installing telephone systems) and
comparable rent and other charges and expenses (however designated)
payable under a lease or other possessory agreement thereat or under a
lease or other possessory agreement for its current premises during the
period covered by such lease or possessory agreement during the period of
delay, (provided, however, that if Tenant is required to commit o
temporary lease agreements which extend beyond the period of delay, then
Landlord and Tenant shall equally bear the cost for such a lease for such
extended period) (not to exceed 12 months) or, if this Lease is
terminated on December 3, 1983 or June 1, 1985, as hereinafter provided,
for the period from December 1, 1984 to December 1, 1985 (the "Waiting
Period"); (b) storage charges required for Tenant's personal property
during the Waiting Period necessitated by the Premises not being ready
for occupancy on December 1, 1984; (c) employment of temporary services
to aid in the conduct of Tenant's business during the Waiting Period
necessitated by the Premises not being ready for occupancy on December 1,
1984; and (d) costs and expenses (including reasonable attorneys fees)
incurred in connection with the matters specified in (a), (b) and (c)
(including those expended in respect of such matters prior to December 1,
1984) less the Monthly Base Rent payable during the Waiting Period as
specified in Section 1.01H which, for purposes hereof, shall be
calculated as if Monthly Base Rent had been paid for the first three
months
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and five days of the term; provided, if this Lease is terminated
pursuant to the terms hereof, then the matters specified in (a), (b), (c)
and (d) will not be reduced by the Monthly Base Rent but rather by rental
payable at the rate of $16.75 per square foot of rentable area in the
Premises (hereinafter collectively referred to as "Damages"). The Damages
shall be Tenant's sole remedy and Tenant shall not be entitled to any
other damages, including but not limited to, consequential or punitive
damages.
Notwithstanding anything to the contrary contained herein, Tenant may,
at its sole option, terminate this Lease, which right shall be exercised
by written notice to Landlord within ten (10) days after December 1, 1983
if Tenant has not been furnished on or before December 1, 1983 with
reasonable evidence that: (a) a construction loan has been obtained to
accomplish the work to be performed by Landlord pursuant to the Building
Plans and Specifications ("Landlord's Work"); (b) a construction contract
for the performance of Landlord's Work with a reputable contractor has
been fully executed and approved by Landlord's lender; and (c) Landlord
has commenced performance of Landlord's Work and is diligently proceeding
with respect to the same for reasons other than the failure to obtain a
building permit from the Building Department of the City of Chicago (the
"Building Permit"). In the event of such termination, Tenant shall be
entitled to Damages in the definition of "Damages" except for those
Damages defined in Subsections (b) and (c) of such definition for the
Waiting Period only and such Damages shall be Tenant's sole remedy and
Tenant shall be entitled to no other damages.
Notwithstanding anything herein contained to the contrary, in the
event that Landlord has furnished to Tenant on or before December
1, 1983, reasonably satisfactory evidence that: (a) a construction
loan has been obtained to accomplish Landlord's Work; and (b) a
construction contract for the performance of landlord's Work with a
reputable contractor has been fully executed and approved by
Landlord's lender and Landlord is unable to commence the
performance of Landlord's Work on or before December 1, 1983
because Landlord has not, after using its best efforts and all due
diligence, obtained the Building Permit in order to accomplish
Landlord's Work, then either Landlord or Tenant may, at their
option, upon notice to the other within ten (10) days after
December 1, 1983, terminate this Lease in which event Tenant shall
not be entitled to Damages or any other damages and neither party
shall have any liability to the other in connection with this Lease.
In the event Landlord fails to deliver possession of the Premises ready
for occupancy to Tenant on June 1, 1985, Tenant may terminate this Lease
by written notice to Landlord within ten (10) days after such date and
Tenant shall thereupon be entitled to Damages from the Landlord for the
Waiting Period only and such Damages shall be Tenant's sole remedy and
Tenant shall not be entitled to other damages.
Landlord shall deliver a copy of the Building Permit to Tenant within
five (5) days after the same is obtained from the Building Department of
the City of Chicago.
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In the event the Premises are not ready for occupancy on December 1,
1984 and Tenant thereafter takes possession of the Premises and commences
the payment of Rent hereunder, such taking of possession shall not be
deemed as a waiver of a claim for Damages that Tenant may have against
the Landlord in respect of the costs and expenses incurred during the
Waiting Period. In the event Landlord does not reimburse Tenant to the
extent of its Damages and Tenant obtains a judgment against Landlord
therefor then, Tenant shall have the right, upon 30 days from and after
the entry of a final non-appealable court order against Landlord ordering
Landlord to pay Tenant Damages, to offset against the next payments of
Rent accruing hereunder the amount of the Damages specified in the
judgment together with interest thereon at the legal rate from the date
of the judgment. The Premises shall not be deemed to be unready for
Tenant's occupancy or incomplete if only minor or insubstantial details
of construction, decoration or mechanical adjustments remain to be done
in the Premises or any part thereof, or if the delay in the availability
of the Premises for occupancy shall be due to special work, changes,
alterations or additions required or made by Tenant in the layout or
finish of the Premises or any part thereof, or shall be caused in whole
or in part by Tenant through the delay of Tenant in submitting plans,
supplying information, approving plans, specifications or estimates,
giving authorizations or otherwise or shall be caused in whole or in part
by delay and/or default on the part of Tenant and/or its agents,
subtenant or subtenants. In the event of any dispute as to whether the
Premises are ready for Tenant's occupancy, the decision of Landlord's
architect shall be final and binding on the parties. Tenant shall occupy
and use the Premises f or general office purposes only and any use
incidental or ancillary thereto (including therein use for a kitchen,
private dining room, exercise facilities, employee cafeteria and other
amenities, but excluding any general public use of said facilities;
provided the use of any of the foregoing will: (i) not interfere
with other tenants in the Building; (ii) comply with all applicable
laws pertaining to the same; and (iii) be constructed at Tenant's
sole cost and expense, except to the extent shown in the Work
Letter. Tenant shall not occupy or use the Premises (or permit the
use or occupancy of the Premises) for any purpose or in any manner
which: (a) is unlawful or in violation of any applicable legal,
governmental or quasi-governmental requirement, ordinance or rule
(including the Board at Fire Underwriters); (b) may be dangerous to
persons or property; (c) may invalidate or increase the amount of
premiums for any policy of Insurance affecting the Building, and if
any additional amounts of insurance premiums are so incurred,
Tenant shall pay to Landlord the additional amounts on demand; or
(d) may create a nuisance, disturb any other tenant of the Building
or the occupants of neighboring property or injure the reputation
of the Building. Except for Landlord's obligations with respect to
the Premises, latent defects and defects as to which Landlord is
notified in writing within 60 days after Tenant takes possession
hereunder, Tenant's acceptance of possession of the Premises shall
be presumed to be Tenant's acknowledgment that the Premises are in
satisfactory condition, Tenant has waived all claims relating to
the condition of the Premises, and that no further changes in the
condition of the Premises shall be the obligation of the Landlord.
7.02 QUIET ENJOYMENT
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So long as Tenant shall not be in default under this Lease, Tenant shall
be entitled to peaceful and quiet enjoyment of the Premises, subject to
the terms of this Lease.
8. CONDITION OF PREMISES
No agreement of Landlord to alter, remodel, decorate, clean or improve
the Premises or the Building, and no representation regarding the
condition of the Premises or the Building has been made by or on behalf
of landlord to Tenant, except as stated in this Lease.
9. ASSIGNMENT AND SUBLETTING
9.01 ASSIGNMENT
Tenant shall not assign, mortgage, pledge, hypothecate or otherwise
transfer or permit the transfer of this Lease or the interest of Tenant
in this Lease, in whole or in part, by operation of law or otherwise If
Tenant or the beneficiary of Tenant is a partnership, a withdrawal or
change, voluntary, involuntary or by operation of law, of any partner or
partners owning 51%, whether by a single transaction or event or by
cumulative transactions or events, or more of the partnership interest,
or the dissolution of the partnership shall be deemed an assignment of
this Lease. If Tenant is an Illinois land trust or other trust, a change
in the beneficial ownership shall be deemed an assignment of this Lease.
If Tenant, or the beneficiary of Tenant is a corporation, any
dissolution, merger, consolidation, or reorganization of the Tenant or
the sale or transfer of a controlling percentage of the capital
stock of the Tenant, whether by a single transaction or event or by
cumulative transactions or events, shall be deemed an assignment of
this Lease only if more than 25% of the Premises is devoted to a
use different than Tenant's current use as a result thereof. If the
Tenant consists of more than one person, a purported assignment,
voluntary, involuntary, or by operation of law, from a majority of
such persons to any or all of the others shall be deemed an
assignment at this Lease.
9.02 SUBLETTING
Tenant shall not sublet the whole or any part of the Premises without
Landlord's prior written consent, Ln the event Tenant intends to sublease
all or any portion of the Premises, Tenant shall take the following
actions:
A. Tenant shall first notify Landlord in writing of its intention
prior to any advertising of same, hiring of brokers or
contacting of potential subtenants. Such notice shall identify
the space proposed to be sublet, which space must be a legally
leaseable unit in compliance with all applicable ordinances
and codes, and shall state the date on which Tenant requests
that the sublet commence, which date shall be no less than one
hundred eighty (180) after the date of Tenant's notice.
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B. Landlord shall have thirty (30) days following the receipt of
such notice to notify Tenant whether it elects to recapture
the space Tenant has proposed to sublet. Landlord's failure to
send such notice within such thirty (30) day PERIOD shall be
deemed to mean Landlord has not elected to recapture the
space.
C. In the event the Landlord elects to recapture the space, it
shall notify Tenant of its intent by service of a written
notice of cancellation terminating that portion of the
Lease covering the space Landlord has chosen to
recapture, which may include all or any lesser portion of
the space Tenant has proposed to sublet. In such event
Landlord agrees that the space not recaptured by Landlord
shall be a legally leaseable unit. Tenant shall pay all
costs or any construction necessary to accomplish the
division of the space. The termination of the Lease as to
the recaptured space shall be effective on the oat.
specified by Landlord in its notice which shall be no
later than the date on which Tenant requests that the
sublet commence in accordance with paragraph 9.02A hereof.
D. In the event that Landlord elects to recapture any proposed
sublet space under these provisions, the Adjusted Monthly Base
Rent shall be adjusted as of the termination date designated
in the cancellation notice on the basis or the number of
square feet of rentable area retained by Tenant in proportion
to the number of square feet or rentable area contained in the
Premises, as described in this Lease, and this Lease as so
amended shall continue thereafter in full force and effect.
E. In the event that Landlord elects not to recapture part or all
of the proposed sublet space, Landlord shall so notify Tenant
as set forth in Subsection 9.02B above. Provided Tenant is not
in default under the Lease and not fully complied with all of
the terms of this Section 9.02, Tenant may then proceed to
contact potential subtenants and shall have the option to
sublet the non-recaptured space in accordance with the
following provisions:
(I) Tenant shall bear all costs and expenses associated with the
subletting, including, without limitation, any and all costs
and expenses incurred by Landlord (if any).
(ii) Upon locating a suitable potential subtenant, Tenant shall
notify Landlord in writing. Such notice snail state the
name and address at the proposed subtenant and shall
include a true and complete copy Or the proposed
sublease. Tenant also Shall deliver to Landlord copies of
all financial statements, credit reports and other Such
information in its possession relating to the prospective
subtenant. At Landlord's requests Tenant shall promptly
secure and deliver any additional information Landlord
deems necessary in order to evaluate the potential
subtenant.
(iii) Landlord shall have fifteen (15) days from the date of its
receipt of the last information provided by Tenant on the
proposed subtenant during which to evaluate such
subtenant and decide whether to consent to the sublease
which
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consent shall not be unreasonably withheld. Landlord
shall notify Tenant of its decision in writing, and, in
the event that Landlord does not consent to the sublease,
its notice thereof to Tenant shall include an explanation
at its reasons for denying consent. In the event that
Landlord consents to the sublease, Tenant may execute the
sublease and collect all rents due thereunder subject to
the provisions of Subsection 9.02E(iv) below.
(iv) Following the execution of any sublease to which Landlord
has consented and throughout the term thereof Tenant
shall pay Landlord twenty-five percent (25%) of all
amounts received by Tenant in connection with such
subletting in excess of the Rent Tenant is obligated to
pay Landlord hereunder after appropriate deduction is
made for expenses incurred by Tenant in sub-leasing such
space, which expenses are limited to: (I) brokerage
commissions at the then prevailing market rate; (ii)
reasonable advertising for subtenant; and (iii) the
actual costs incurred by Tenant in making any
improvements or substitutions in the Premises required by
a subtenant not related to or affiliated with Tenant or
Tenant's subtenant as provided in Paragraph 9.02F
hereinbelow.
(v) The use for which the Premises or any part thereof may be
sublet shall be only for lawful office use which is in keeping
with the general character of the Building.
(vi) The granting of consent by Landlord to Tenant's subletting of
the Premises or any part thereof shall not release Tenant from
direct and primary liability under this Lease for the
performance of all of the covenants, duties and obligations of
Tenant hereunder, the Landlord shall retain its rights to
enforce the provisions of this Lease against Tenant or any
subtenant without demand upon or proceeding in any way against
any other person. Consent to a particular sublease shall not
be deemed a consent to any other or subsequent transaction.
F. Without Landlord's consent and without the same being subject
to the provisions of this Lease with respect to
subletting, Tenant shall have the right to sublet all or
any portion of the Premises to the Illinois State Medical
society, an Illinois not-for-profit corporation or
(provided, landlord is notified within 120 days of the
date hereof) any corporation which is a wholly-owned
subsidiary of the Illinois State Medical Society
("Society Subletting"); provided, however, that any such
sublease shall include all the terms and conditions of
this Lease except for those regarding payment of Rent.
Tenant shall, nevertheless, be directly and primarily
liable under this Lease for the performance of all of the
covenants, duties and obligations of Tenant hereunder
notwithstanding such subletting. Notwithstanding the
Society Subletting, Tenant shall: (I) continue to be
served in connection with all notices to be delivered
hereunder; and (ii) continue to exercise all options
exercisable hereunder.
10. MAINTENANCE
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10.01 LANDLORD'S MAINTENANCE
Landlord shall maintain and make necessary repairs to the structural
elements of the Building and the electrical, plumbing, heating,
ventilating and air-conditioning systems in the Building and exterior
windows except that: (1) the cost of repairing any damage to any of the
foregoing caused by the act or neglect of Tenant, any subtenant of
Tenant, or their respective agents, employees, guests or invitees shall
be paid by Tenant; and (ii) Landlord shall not be responsible for
maintenance or repair of electrical or plumbing fixtures located within
the Premises. Landlord, at its own cost and expense, will correct any:
(I) latent defects in the Building and Premises discovered during the
term hereof; and (ii) defects in material and workmanship and work
originally installed or performed by Landlord in the Premises pursuant to
the Building Plans and Specifications and Work Letter or installed by
Landlord at the request of Tenant for a period of one (1) year beginning
with the Commencement Date. As used herein, "for a period of one (1)
year" means Landlord's receipt of a written notice from Tenant within one
(1) year from the Commencement Date advising of a defect(s). Tenant shall
notify Landlord promptly in writing when defects are ascertainable by
Tenant in the Premises and Landlord shall promptly correct the same.
Landlord shall: (i) clean, maintain and operate and make all repairs
and replacements to the Building and elevators and mechanical systems
necessary to keep the same in good order and repair in a safe and
tenantable condition; (ii) make all repairs, replacements, alterations or
additions to the Building (other than the Premises) and those portions of
the Premises which have equipment, wires, conduit or other facilities in
common with other tenants or other parts of the Building required to be
made by any governmental authority having jurisdiction or by a local fire
insurance rating organization or any similar body; (iii) clean, maintain,
operate, repair and make replacements to the Building, Building lobby and
entrances, private sidewalks and other building systems in accordance
with generally accepted principals of sound and prudent management
consistently applied to the operation and maintenance of first class
office buildings.
10.02 TENANT'S MAINTENANCE
Except as required under Section 10.01 hereof, Tenant, at its expense,
shall keep and maintain the Premises in good order, condition and repair
(including the keeping of the Premises in clean and orderly condition)
and in accordance with all applicable legal, governmental and
quasi-governmental and insurance carrier requirements, ordinances and
rules. If Tenant fails to perform any of its obligations set forth in
this Section 10.02. Landlord, in addition to its other remedies with
respect to Tenant's breach of a covenant hereunder, may, in its sole
discretion, perform the same, and Tenant shall pay to Landlord the cost,
including a percentage of the cost thereof sufficient to reimburse
Landlord for all overhead, general conditions, fees and other costs and
expenses arising from Landlord's involvement with such repairs and
replacements, therefor upon demand. The Tenant shall pay the Landlord for
overtime and for any other expenses incurred in the event repairs,
alterations, decorating or other work on the Premises are not made during
ordinary business hours at the Tenant's request.
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11. ALTERATIONS AND IMPROVEMENTS
11.01 TENANT'S ALTERATIONS
Tenant shall not, without the prior written consent of Landlord )which
consent may require: (I) Tenant to furnish to landlord terms of
payment; (ii) supervision of work by Landlord; and (iii) removal of
improvements at end of lease term by Tenant) do any painting or
decorating, or erect any partitions, make any alterations or repairs
in or additions to the Premises or do any nailing, boring, or screwing
into the ceiling, walls or floors. The Landlord's decision to refuse
such consent shall be conclusive. If Landlord so consents, before
commencement of any such work or delivery of any materials into the
Premises or the Building, Tenant shall furnish to Landlord for
approval architectural plans and specifications, names and addresses
of all contractors, contracts, necessary permits and licenses,
certificates of insurance and instruments of indemnification against
any and all claims, costs, expenses, damages and liabilities which may
arise in connection with such work, all in such form and amount as may
be satisfactory to Landlord. Tenant agrees to hold Landlord, the
Beneficiaries, the Manager and their respective agents and employees
forever harmless against all claims and liabilities of every kind,
nature and description which may arise out of or in any way be
connected with such work. All such work shall be done only by
contractors or mechanics approved by Landlord (which approval shall
not be unreasonably withheld) and at such time and in such manner as
Landlord may from time to time designate. Tenant shall pay the cost at
all such work and the cost of decorating the Premises and the Building
occasioned thereby. Upon completion of such work, Tenant shall furnish
Landlord with contractor's affidavits and full and final waivers of
lien and receipted bills covering all labor and materials expended and
used in connection therewith. All such work shall be in accordance
with all applicable legal, governmental and quasi-governmental
requirements, ordinances and rules (including the Board at Fire
Underwriters), and all requirements of applicable insurance companies.
All such work shall be done in a good and workmanlike manner and with
the use of good grades of materials. All alterations, improvements,
additions and installations to or on the Premises shall, become part
of the Premises at the time of the expiration or termination of this
Lease, or termination of Tenant's right of possession of the Premises,
without compensation or credit to Tenant. Tenant shall not pledge,
mortgage, hypothecate or in any way create a security improvements
provided for herein to any creditor or third party without the prior
written consent of Landlord. Notwithstanding anything herein contained
to the contrary, Tenant may, without the consent of landlord, make any
alternations, improvements or additions to the Premises the cost of
which is less than $5,000.00. Tenant may remove any improvement
installed in the Premises at its expense provided it restores all
damage to the Premises resulting from any removal thereof. Nothing
herein shall give landlord any interest in Tenant's personal property,
office, furniture, trade fixtures, office equipment, data processing
equipment and appliances, which shall remain the property of Tenant.
11.02 LIENS
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Tenant shall not permit any lien or claim for lien of any mechanic,
laborer or supplier or any other lien to be filed against the Building,
the Land, the Premises, or any part thereof arising out of work
performed, or alleged to have been performed by, or at the direction of,
or on behalf of Tenant. If any such lien or claim for lien is filed,
Tenant shall immediately either have such lien or claim for lien released
of record or shall deliver to Landlord a bond in form, content, amount,
and issued by surety, satisfactory to Landlord indemnifying Landlord, the
Beneficiaries and others designated by Landlord against all costs and
liabilities resulting from such lien or claim for lien and the
foreclosure or attempted foreclosure thereof. If Tenant fails to have
such lien or claim for lien so released or to deliver such bond to
Landlord, Landlord, without investigating the validity of such lien, may
pay or discharge the same, and Tenant shall reimburse Landlord upon
demand for the amount so paid by Landlord, including Landlord's expenses
and attorneys' fees.
11.03 ACCESS.
Subject to Landlord's covenant not to unreasonably interfere with
Tenant's business within the Premises the Tenant shall permit the
Landlord to erect, use and maintain pipes, ducts, wiring and conduits in
and through the Premises and the Landlord or Landlord's agents shall have
the right to enter upon the Premises, after giving reasonable notice to
inspect the same, and to make such decorations, repairs, alternations,
improvements or additions to the Premises or the Building as the Landlord
may deem necessary or desirable, and the Landlord shall be allowed to
take all material into and upon said Premises that may be required
therefor without the same constituting an eviction of the Tenant in whole
or in part and the Rent reserved shall not abate (except as provided in
Section 16.03) while said decorations, repairs, alternations or
improvements are being made, by reason of loss or interruption of
business of the Tenant, or otherwise. If the Tenant shall not be
personally present to permit an entry into the Premises, when for any
reason an entry therein shall be necessary or desirable, the Landlord or
Landlord's agents may enter the same by a master key, or may forcibly
enter the same, without rendering the landlord or such agents liable
therefor (if during such entry landlord or Landlord's agent shall not
have been negligent in the performance of any work performed while in the
Premises), and without in any manner affecting the obligations and
covenants of this Lease. Nothing herein contained, however, shall be
deemed or construed to impose upon the Landlord any obligations,
responsibility or liability whatsoever, for the care, supervision or
repair of the Building or any part thereof, other than as herein
provided. The Landlord shall not, without obtaining the prior written
consent of Tenant, change the arrangement and/or location of entrances or
passageways, doors and doorways and corridors, elevators, stairs,
toilets, close entrances, doors, corridors, elevators or other facilities
in the Premises or on the ground floor of the Building. The landlord
shall not be liable to the Tenant for any expense, injury, loss or damage
resulting from work done in or upon, or the use or, any adjacent or
nearby building, land, street or alley.
12. WAIVER OF CLAIMS AND INDEMNITY
12.01 WAIVER
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To the extent permitted by law, and except for the negligence of the
Landlord and its agents or a breach by landlord of any of its
obligations hereunder, the Tenant releases the landlord, its
beneficiaries, and their respective agents and servants from, ana
waives all claims for, damage to person or property sustained by the
Tenant or any occupant of the Building or Premises resulting from the
Building or Premises or any part of either or any equipment or
appurtenance becoming out of repair, or resulting from any accident in
or about the Building, or resulting directly or indirectly from any
act or neglect of any tenant or occupant of the Building or of any
other person, including Landlord's agents and servants. Without
limiting the generality of the foregoing, this Section 12.01 shall
apply to the flooding of basements or other subsurface areas, and to
damage caused by refrigerators, sprinkling devices, air-conditioning
apparatus, water, snow, frost, Steam, excessive heat or cold, tailing
plaster, broken glass, sewage, gas, odors or noise, or the bursting or
leaking or pipes or plumbing fixtures, ana shall apply equally whether
any such damage results from the act or neglect or the Landlord or of
other tenants, occupants or servants in the Building or of any other
person, and whether such damage re caused or result from any thing or
circumstance above mentioned or referred to, or any other thing or
circumstance whether of a like nature or of a wholly different nature.
If any such damage, whether to the Premises or to the Building or any
part thereof, or whether to the Landlord or to other tenants in the
Building, results from any act or neglect on the Tenant, its
employees, agents, invitees and customers, the Tenant shall be liable
therefore and the Landlord may, at the Landlord's option, repair such
damage and the Tenant shall, upon demand by Landlord, reimburse the
Landlord forthwith for the total cost of such repairs. The Tenant
shall not be liable for any damage caused by its act or neglect if the
Landlord or a tenant has recovered the full amount of the damage from
insurance and the insurance company has. waived its right of
subrogation against the Tenant. All property belonging to the Tenant
or any occupant of the Premises that is in the building or the
Premises shall be there at the risk of the Tenant or other person
only, and the Landlord shall not be liable for damage thereto/or theft
or misappropriation thereof.
12.02 INDEMNIFICATION
Tenant agrees to indemnify and hold harmless Landlord, the Beneficiaries,
the Manager and their respective agents and employees, against any and
all claims, demands, costs and expenses of every kind and nature
(including attorneys' fees), including those arising from any injury or
damage to any person, property or business: (a) sustained in or about the
Premises, (b) resulting from the negligence of Tenant, its employees,
agents, servants, invitee, licensees or subtenants, or (c) resulting from
the failure of Tenant to perform its obligations under. this Lease;
provided, however, Tenant's obligations under this Section shall not
apply to injury or damage resulting from the sole negligence of Landlord,
the Beneficiaries, the Manager or their respective agents and employees,
or the failure of Landlord to perform its obligations hereunder. If any
such proceeding is brought against Landlord, the Beneficiaries, the
Manager or their respective agents .or employees, Tenant covenants to
defend such proceeding at its sole cost by legal counsel reasonably
satisfactory to Landlord.
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13. LANDLORD'S REMEDIES
13.01 All rights and remedies of the Landlord herein enumerated shall be
cumulative and none shall exclude any other right or remedy allowed by
law.
A. If the Tenant defaults in the payment of Rent, and the Tenant
does not cure the default within five (5) days after demand
for payment of such Rent or if the Tenant defaults in the
prompt and full performance of any other provisions of this
Lease, and, the Tenant does not cure the default within thirty
(30) days after written demand by the Landlord that the
default be cured (unless the default involves a hazardous
condition, which shall be cured forthwith) or unless such
failure requires work to be performed, acts to be done or
conditions to be removed which cannot be their nature
reasonably be performed, done or removed, as the case may be,
within the 30-day period, in which event Tenant will not be
in default hereunder as long as Tenant shall have commenced
curing the same within such 30-day period and shall diligently
and continuously prosecute the same to completion within six
(6) months after Tenant first became aware of such cause
giving rise to the claimed default or if the leasehold
interest of the Tenant be levied upon under execution or
be attached by process of law, of if the Tenant makes an
assignment for the benefit of creditors or admits its
inability to pay its debts generally, or if a receiver be
appointed for any property of the Tenant, or if the
Tenant abandons the Premises, then, and in any such
event, the Landlord may, if the Landlord so elects but
not otherwise, and with or without notice of such
election, and with or without any demand whatsoever,
either forthwith terminate this Lease and the Tenant's
right to possession of the Premises or, without
terminating this Lease, forthwith terminate the Tenant's
right to possession of the Premises.
B. Upon termination of this Lease, whether by lapse of time or
otherwise, or upon any termination of the Tenant's right
to possession without termination of the Lease, the
Tenant shall surrender possession and vacate the Premises
immediately, and deliver possession thereof to the
Landlord, and hereby grants to the Landlord full and tree
license to enter into and upon the Premises in such event
with or without process of law and to repossess the
Landlord of the Premises as of the Landlord's former
estate and to expel or remove the Tenant and any others
who may be occupying or be within the Premises and to
remove any and all property therefrom, using such force
as may be necessary, without being deemed in any manner
guilty of trespass, eviction or forcible entry or
detainer, and without relinquishing the Landlord's rights
to Rent or any other right given to the Landlord
hereunder or by operation of law.
C. If the Landlord elects to terminate the Tenant's right to
possession only, without terminating the Lease, the
Landlord may, at the Landlord's option, enter into the
Premises, remove the Tenant's sign and other evidences of
tenancy, and take and hold possession thereof as in
Subsection 13.01B, without such entry and
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possession terminating the Lease or releasing the Tenant,
in whole or in part, from the Tenant's obligation to pay
the Rent hereunder for the full Term, and in any such
case the Tenant shall pay forthwith to the Landlord, if
the Landlord so elects, a sum equal to the entire amount
of the Rent for the remainder of the Term plus any other
sums then due hereunder. Upon and after entry into
possession without termination of the Lease, the Landlord
may, but need not, relet the Premises or any part thereof
for the account of the Tenant to any person, firm or
corporation other than the Tenant for such rent, for such
time and upon such terms as the Landlord in the
Landlord's sole discretion shall determine, and the
Landlord shall not be required to accept any tenant
offered by the Tenant or to observe any instructions
given by the Tenant about such reletting. In any such
case, the Landlord may make repairs, alterations and
additions in or to the Premises and redecorate the same
to the extent deemed by the Landlord necessary or
desirable, and the Tenant shall, upon demand, pay the
cost thereof, together with the Landlord's expenses of
the reletting. It the consideration collected by the
Landlord upon any such reletting for the Tenant's account
is not sufficient to pay monthly the full amount or the
Rent reserved in this Lease, together with the Cost of
repairs, alterations, additions, redecorating and the
Landlord's expenses, the Tenant shall pay to the Landlord
the amount of each monthly deficiency upon demand.
D. If any involuntary action or proceeding under any section or
sections of any bankruptcy act in any court or tribunal
shall adjudge or declare Tenant insolvent or unable to
pay Tenant's debts, or if any voluntary petition or
similar proceeding under any section or sections of any
bankruptcy act shall be filed by Tenant in any court or
tribunal to declare Tenant insolvent or unable to pay
Tenant's debts, then and in any such event Landlord may,
if Landlord so elects but not otherwise, and with or
without notice of such election, and with or without
entry or other action by Landlord, forthwith terminate
this Lease, and notwithstanding any other provision of
this Lease, Landlord shall forthwith upon such
termination be entitled to recover damages in an amount
equal to the then present value of the Rent for the
remainder of the Term, less the fair rental value of the
Premises for the remainder or the Term.
E. Any and all property which may be removed from the Premises
by the Landlord pursuant to the authority of the Lease or
of law, to which the Tenant is or may be entitled, may be
handled, removed or stored by the Landlord at the risk,
cost and expense of the Tenant, and the Landlord shall in
no event be responsible for the value, preservation or
safekeeping thereof. The Tenant shall pay to the
Landlord, upon demand, any and all expenses incurred in
such removal and all storage charges against such
property so long as the same shall be to the Landlord's
possession or under the Landlord's control. Any such
property of the Tenant not retaken from storage by the
Tenant within thirty (30) days after the end of the Term,
however terminated, shall be conclusively presumed to
have been conveyed
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by the Tenant to the Landlord under this Lease as a bill of
sale without further payment or credit by the Landlord to the
Tenant.
F. Tenant hereby grants to Landlord a first lien upon the
interest of Tenant under this Lease to secure the payment of
moneys due under this Lease, which lien may be enforced in
equity, and Landlord shall be entitled as a matter of right to
have a receiver appointed to take possession of the Premises
and relet the same under order of court.
G. The Tenant shall pay upon demand all the Landlord's costs,
charges and expenses, including the reasonable fees of
counsel, agents and others retained by the Landlord, incurred
in enforcing the Tenant's obligations hereunder or incurred by
the Landlord in any litigation, negotiation or transaction in
which the Tenant causes the Landlord, without the Landlord's
fault, to become involved or concerned; provided, it is
determined that the Tenant was at fault or Landlord prevails
in any such action.
14. SURRENDER OF PREMISES
Upon expiration or termination of this Lease or termination of Tenant's
right of possession of the Premises, or any part thereof, Tenant shall
surrender and vacate the Premises immediately and deliver possession
thereof to Landlord in a clean, good and tenantable condition, ordinary
wear and tear excepted. Upon any termination which occurs other than by
reason of Tenant's default, Tenant shall be entitled to remove from the
Premises all movable personal property of Tenant, provided Tenant shall
immediately repair all damage resulting from such removal and shall
restore the Premises to its original condition, ordinary wear and tear
excepted. In the event possession of the Premises is not immediately
delivered to Landlord or if Tenant shall fail to remove all of Tenant's
movable personal property, as aforesaid, Landlord may remove any of such
property therefrom without any liability to Tenant, and at Tenant's
expense. All movable personal property which may be removed from the
Premises by Landlord shall be conclusively presumed to have been
abandoned by Tenant, and title thereto shall pass to Landlord without any
cost or credit therefor, and Landlord may, at its option and at Tenant's
expense, store and/or dispose of such property.
15. HOLDING OVER
Tenant shall pay Landlord double the latest Adjusted Monthly Base Rent
then applicable for each month or portion thereof Tenant retains
possession of the Premises, or any portion thereof, after the expiration
or termination of this Lease, and also shall pay all damages (excluding,
however, damages payable for a period of 90 days from and after the
expiration sustained by Landlord by reason of such retention of
possession. The provisions of this Article shall not constitute a waiver
by Landlord of any re-entry rights of Landlord hereinbefore or by law
provided. If Tenant retains possession of the premises, or any part
thereof, for thirty (30) days after the expiration or termination of this
Lease, then at the sole
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option of landlord expressed by written notice to Tenant, but not
otherwise, such holding over shall constitute a renewal of this
Lease for a period of one year (or less if specified by landlord at
Landlord's option) on the same terms and conditions, except that
the Monthly Base Rent shall be increased to 125% of the latest Monthly
Base Rent, plus any subsequent escalations.
16. DAMAGE BY FIRE OR OTHER CASUALTY
16.01 SUBSTANTIAL UNTENANTABILITY
The term "substantial untenantability" shall be defined for purposes of
section 16.01 as: damage or other casualty to more than 25% of the
Building or Premises; provided, that such damage, in landlord's
reasonable opinion, will not permit Tenant to carry on its normal
pre-existing business in the remainder of the Premises.
If the Building (including machinery or equipment used in its operation)
or the Premises are made substantially untenantable by fire or other
casualty, Landlord may elect either to: (I) terminate this Lease as of
the date of the fire or other casualty by giving Tenant written notice
thereof within ninety (90) days after said date; or (ii) proceed to
repair or restore the Building or the Premises, including the leasehold
improvements initially constructed by Landlord pursuant to the Work
Letter excluding leasehold improvements and personal property paid for or
installed by Tenant.
If Landlord elects to proceed pursuant to Subsection (ii) immediately
above, Landlord shall notify Tenant thereof within ninety (90) days after
the date of such fire or other casualty, which notice shall contain
Landlord's reasonable estimate or the time required to substantially
complete such repair or restoration. In the event such estimate indicates
that the time so required will exceed one hundred eighty (180) days from
the date of the casualty, then Tenant shall have the right to terminate
this Lease as of the date of such casualty by giving written notice
thereof to Landlord not later than twenty (20) days after the date of
Landlord's notice. If Landlord's estimate indicates that the repair or
restoration can be substantially completed within one hundred eighty
(180) days, or if Tenant fails to exercise its right to terminate this
Lease, as aforesaid, this Lease shall remain in force and effect.
Tenant's right to terminate as set forth herein during the time periods
specified is subject to extensions of said time periods based upon the
provisions set forth in Section 26.07 hereinbelow.
16.02 INSUBSTANTIAL UNTENANTABILITY
If the Premises or the Building are damaged by fire or other casualty but
neither is rendered substantially untenantable, then Landlord shall
proceed to repair and restore the Building or the Premises, other than
the leasehold improvements and personal property paid for or installed by
Tenant, unless such damage occurs during the last twelve (12) months of
the
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Term, in which event Landlord shall have the right to terminate this
Lease as of the date of such fire or other casualty by giving written
notice thereof to Tenant within thirty (30) days after the date of
such fire or other casualty. In any event, if such restoration or
repair required in Sections 16.01 and 16.02 is not substantially
completed within 270 days of the date of casualty, then, upon
notice to landlord within 30 days after the lapse of said 270-day
period, Tenant may terminate this Lease effective as of the date of
the notice.
16.03 RENT ABATEMENT
If all or any part of the Premises are rendered substantially
untenantable by fire or other casualty, or if all or any part of the
Building is damaged by fire or other casualty which makes the Premises
substantially untenantable, and this Lease is not terminated, Adjusted
Monthly Base Rent shall abate for all or that part of the Premises which
is untenantable on a per diem basis from the date of the fire or other
casualty until Landlord has substantially completed the repair and
restoration work in the Premises which it is required to perform,
provided that as a result of such fire or other casualty, Tenant does not
occupy the portion of the Premises which is untenantable during such
period.
16.04 DAMAGE BY TENANT
In the event the Premises are damaged or destroyed by fire or other
casualty resulting from the act or neglect of Tenant, its agents,
contractors, employees or invitees, Tenant shall not be released from its
obligation to restore the Premises (excluding leasehold improvements and
other items initially constructed by Landlord pursuant to the Work
Letter) and pay Rent, which Rent shall not be abated. Notwithstanding the
provisions of this Paragraph 16.04, Tenant shall be relieved of its
obligation under the first sentence hereof with respect to the payment of
Rent as long as Landlord obtains insurance satisfactory to Landlord
covering rental loss in the event of a Tenant-caused fire or other
casualty and the cost of the premium therefor in excess of that which
would normally be paid for such coverage had Tenant been liable to
Landlord for damages caused by such fire or other casualty shall be paid
by Tenant to Landlord. Landlord shall use its best efforts to obtain such
coverage and shall notify Tenant from time to time in the event that
landlord is unable to obtain such coverage or such coverage is
unobtainable whereupon Tenant shall have the right to obtain such
coverage on behalf of Landlord.
17. EMINENT DOMAIN
17.01 TAKING OF WHOLE
In the event the whole or any substantial part or the Building or the
Premises is taken or condemned by any competent authority for any public
use or purpose, or conveyed under
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threat of such condemnation, this Lease shall terminate as of the date
title vests in such authority, and Adjusted Monthly Base Rent shall be
apportioned as of said date.
17.02 TAKING OF PART
If 10% or less of the Premises in the Building shall be taken in any
proceeding by condemnation or otherwise, or be acquired for public or
quasi-public purposes (hereinafter "Condemnation"), Tenant shall have no
right to terminate this Lease. In the event that more than 10% and less
than 25% of the Premises are taken by Condemnation, Tenant shall have the
right to terminate this Lease provided such Condemnation will not permit
Tenant to carry on its normal pre-existing business in the remainder of
the Premises. In the event that 25% or more of the Premises shall be
taken by Condemnation, Landlord or Tenant shall have the option of
terminating the term of this Lease. In the event that all or a portion of
the common areas and facilities of the Building shall be taken, Tenant
shall have the right to terminate this Lease in the event: (I) safe
access is denied to the Premises; or (ii) there is substantial
interference with the normal pre-existing business of Tenant. If either
party, pursuant to the preceding sentences, desires to exercise its
option of terminating the term of this Lease, such termination shall be
effective by the party desiring to terminate giving written notice to the
other party provided that such notice shall be given not more than 30
days subsequent to the date on which Tenant shall have been deprived
possession of the part so taken and the rent and other charges payable by
Tenant shall be adjusted as of such termination date; provided, however,
if Tenant exercises its right to terminate the Lease because of a taking
of all or a portion of the common areas and facilities of the Building,
Landlord shall have the right to cure or take whatever steps it deems
advisable to cure (but shall not be obligated to do so) the conditions
which give rise to Tenant's right to terminate within 30 days from
receipt of Tenant's notice to terminate and if Landlord has cured or
corrected such conditions, or commences to cure or correct such
conditions and is pursuing same with all due diligence, then the Lease
shall remain in full force and effect and Tenant's notice to terminate
shall be null and void.
In the event of a Condemnation and this Lease is not terminated, Adjusted
Monthly Base Rent shall be reduced by an amount which bears the same
ratio to Adjusted Monthly Base Rent then in effect as the number of
square feet of rentable area in the Premises so taken or condemned bears
to the number of square feet of rentable area specified in Subsection
1.011. Landlord, upon receipt of and to the extent of the award in
condemnation or proceeds of sale, shall make necessary repairs and
restorations (exclusive of Tenant's leasehold improvement and personal
property paid for or installed by Tenant) but including the leasehold
improvements initially constructed by landlord pursuant to the Work
Letter to restore the Premises remaining to as near its former condition
as circumstances will permit, and to the Building to the extent necessary
to constitute the portion of the Building not so taken or condemned as a
complete architectural unit. In the event of a partial taking or
condemnation of the Premises and/or the Building as herein provided, the
rentable area of the Premises specified in Subsection 1.011 and/or the
rentable area at the Building as specified in this Lease, respectively,
shall be reduced for all purposes under this Lease by
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the number of square feet of rentable area of the Premises and/or the
Building, respectively, so taken or condemned or rendered useless by
such condemnation.
17.03 COMPENSATION
Except for Tenant's right to make a claim to the condemning authority for
the unamortized value of any improvements, alterations or additions to
the Premises paid for by Tenant and for the unamortized value of any of
its personal property, trade fixtures and equipment which cannot be
removed without causing damage thereto, Landlord shall be entitled to
receive the entire price or award from any such sale, taking or
condemnation without any payment to Tenant, and Tenant hereby assigns to
Landlord Tenant's interest, if any, in such award; provided, however,
Tenant shall have the right to separately pursue against the condemning
authority an award in respect of the loss, if any, to leasehold
improvements paid for by Tenant, and for Tenant's cost of relocation
without any credit or allowance from Landlord.
18. TENANT'S INSURANCE
18.01 Tenant, at Tenant's expense, agrees to purchase and maintain in force
during the Term: (I) Comprehensive General Liability Insurance on an
occurrence basis with minimum limits of liability in an amount of
$3,000,000 for bodily injury, personal injury or death to any one
person and $3,000,000 for bodily injury, personal injury or death to
more than one person, and $1,000,000 with respect to damage to
property, including water and sprinkler, damage; and (ii) Fire
Insurance, with extended coverage and vandalism and malicious mischief
endorsements, in an amount adequate to cover the full replacement value
of all leasehold improvements and all fixtures, contents and wall and
paid floor coverings in the Premises paid for and install by Tenant.
Such insurance shall. for and be written on an "all risks" of physical
loss or damage basis, for full replacement cost value of the install
covered items and in amounts that meet any coinsurance by Tenant
clauses of policies of insurance.
18.02 The policy referred to in Section 18.01(I) shall name Landlord, the
Beneficiaries, the Manager and their respective agents and employees as
additional insureds and shall not provide for deductible amounts. The
policy referred to in Section 18.01(ii) shall not provide for
deductible amounts in excess of $5,000.00. Each policy referred to in
Section 18.01 shall be issued by one or more responsible insurance
companies reasonably satisfactory to Landlord and shall contain the
following provisions and endorsements: (I) that such insurance may not
be canceled or amended without thirty (30) days' prior written notice
to Landlord, the Beneficiaries and the Manager; (ii) an express waiver
of any right of subrogation by the insurance company against Landlord,
the beneficiaries, the Manager and their respective agents and
employees; and (iii) that the policy shall not be invalidated should
the insured waive in writing prior to a loss, any or all rights of
recovery against any other party for losses covered by such policies.
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18.03 Tenant shall deliver to Landlord, certificates of insurance of all
policies ana renewals thereof to be maintained by Tenant hereunder, not
less than ten (10) days prior to the Commencement Date and not less
than ten (10) days prior to the expiration date of each policy.
Provided that the insurance policies of Tenant will not be invalidated
nor will the right of the insured to collect the proceeds payable under
such policies be adversely affected by the waiver contained in the
following portion of this sentence, Tenant hereby expressly waives all
rights of recovery which it might otherwise have against Landlord, the
Beneficiaries, the Manager or their agents, and employees, for loss or
damage to person, property or business to the extent that such loss or
damage is covered by valid and collectible insurance policies,
notwithstanding that such loss or damage may result from the negligence
of Landlord, the Beneficiaries, the Manager or their agents or
employees. Tenant shall use its best efforts to obtain from its insurer
the right to waive claims as set forth in the preceding sentence
without thereby invalidating its insurance or affecting its right to
proceeds payable thereunder.
18A. LANDLORD'S INSURANCE
18A.01 Landlord shall maintain insurance policies covering the
Building against loss or damage by boiler explosion, fire and the
perils specified in the standard extended coverage endorsement in
an amount required from time to time by the holder of the first
mortgage on the land and Building but not less than 80% of the
actual cash value of the Building (less depreciation) and such
other risks, if any, as similar office buildings are at the time
customarily insured against in the City of Chicago. The term
"Building" shall include, for the purposes of the foregoing
policies, the Building and all fixtures, equipment and
appurtenances constituting a part thereof, including the Premises,
and any and all improvements, alternations or additions thereto
made by the Landlord. The proceeds of such insurance in case of
loss or damage shall, subject to the rights of the holder of the
first mortgage on the Land and Building, be applied on account of
the obligation to repair and/or rebuild the Building.
Except as set forth in Section 16.04 and notwithstanding anything
in the Lease contained to the contrary, Tenant shall not be liable
to Landlord or to any insurance company, insuring landlord for any
los or damage to the premises, including any and all improvements,
alterations or additions thereto, whether made by Landlord, Tenant
or otherwise, and to the Building which was or could have been
covered by policies of insurance coverage the risks in the Building
even though such loss or damage may have been occasioned by the
negligence of Tenant, its agents, employees, licensees, contractors
or invitees.
19. RULES AND REGULATIONS
Tenant agrees for itself and for its subtenants, employees, agents. and
invitees to comply with the Rules and Regulations attached hereto as
Exhibit C and with all reasonable modifications, amendments, and
additions thereto which Landlord may from time to time make so long as
said modifications, amendments, and additions do not unreasonably
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restrict Tenant's use of the Premises as set forth by Section 7.01
hereinabove. Landlord shall not be responsible for any violation at the
Rules and Regulations by other tenants of the Building and shall have no
obligation to enforce the same against other tenants.
20. LANDLORD'S RIGHTS
Landlord shall have the following rights exercisable without notice
(except as expressly provided to the contrary in this Lease), without
liability to Tenant for damage or injury to persons, property or business
and without being deemed an eviction or disturbance of Tenant's use or
possession of the Premises or giving rise to any claim for setoff or
abatement of Rent: (I) To change the Building's name or Street address
upon thirty (30) days' prior written notice to Tenant; (ii) To install,
affix and maintain all signs on the exterior and/or interior of the
Building, provided, such signs are designed and displayed in good taste
and consistent with the first class character of the Building. (iii) To
designate and/or approve prior to installation, all types of signs,
window shades, blinds, drapes, awnings or other similar items, and all
internal lighting that may be visible from the exterior of the Premises
or the public corridors of the Building; (iv) To display the Premises to
prospective tenants at reasonable hours during the last eighteen (18)
months of the Term, (v) Subject to the consent of Tenant required under
Section 11.03 hereunder as to the premises and ground floor of the
Building. To change the arrangement of entrances, doors, corridors,
elevators and stairs in the Building, provided that no such change will
materially adversely affect access to the Premises (vi) To grant to any
party the exclusive right (to the extent permitted by law) to conduct any
business or render any service in or to the Building, provided such
exclusive right shall not operate to prohibit Tenant from using the
Premises for the purposes permitted hereunder; (vii) To prohibit the
placing of vending or dispensing machines of any kind in or about the
Premises; (viii) To have access for Landlord and other tenants of the
Building to any mail chutes and boxes located in or on the Premises
according to the rules of the United States Post Office; (ix) To close
the Building after normal business hours, except that Tenant and its
employees and invitees shall be entitled to admission at all times, under
such regulations as Landlord prescribes for security purposes; (x) To
take any and all reasonable measures, including inspections and repairs
to the Premises or to the Building, as may be necessary or desirable in
the operation or protection thereof; (xi) To retain at all times master
keys or pass keys to all doors in and to the Premises; (xii) To install,
operate and maintain a building security system which monitors, by closed
circuit television or otherwise, all persons entering and leaving the
Building and all public areas of the Building including, but not limited
to, elevators and staircases; and (xiii) To install and maintain pipes,
ducts, conduits, wires and structural elements located in the Premises
which serve other parts of the Building.
21. ESTOPPEL CERTIFICATE
Tenant shall from time to time, upon not less than 10 days prior written
request by Landlord or any mortgagee holding a mortgage on the Land,
deliver to Landlord or such mortgagee a statement in writing certifying:
(i) That this Lease is unmodified and in full
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force and effect or, it there have been modifications, that this
Lease, as modified, is in full force and effect; (ii) The amount of
Adjusted Monthly Base Rent then payable hereunder and the date to
which Rent has been paid; (iii) to the best knowledge of the
Tenant, that Landlord is not in default under this Lease or, if in
default, a detailed description of such default(s); (iv) That
Tenant is or is not in possession of the Premises, as the case may
be; and (v) Such other information as landlord may request.
22. RELOCATION OF TENANT
[INTENTIONALLY DELETED]
23. REAL ESTATE BROKERS
Landlord and Tenant represents that neither, except for Sudler & Co.
(whose commission shall be paid by Landlord) has not dealt with any real
estate broker, sales person, or finder in connection with this Lease, and
no such person initiated or participated in the negotiation of this
lease, or showed the Premises to Tenant. Landlord and Tenant hereby agree
to indemnify and hold harmless Landlord, Tenant, the Beneficiaries and
the Manager from and against any and all liabilities and claims for
commissions and fees arising out of a breach of the foregoing
representations.
24. MORTGAGE - GROUND LEASE
24.01 Landlord may execute and deliver a mortgage(s) or trust
deed(s) in the nature of a mortgage, both sometimes hereinafter
referred to as "Mortgage" against the Building and/or Land or any
interest therein, and may sell and lease back the Land. This Lease
and the rights of Tenant hereunder shall be and are hereby made
expressly subject and subordinate at all times to any such Mortgage
and/or ground lease, now or hereafter existing and all amendments,
modifications and renewals thereof and extensions, consolidations
or replacements thereof, and to all advances made or hereafter to
be made upon the security thereof; provided, Tenant is in receipt
of a Non-Disturbance Agreement from such mortgagee and/or ground
lessor to the effect that Tenant's rights hereunder and to
possession of the Premises will not be disturbed as long as it is
not in default under the Lease. Tenant agrees to execute and
deliver such further instruments subordinating this Lease to said
Mortgage or ground lease as may be requested in writing by Landlord
from time to time within twenty (20) day of Landlord's request.
Notwithstanding the foregoing, landlord shall have the option to
make this Lease superior to any Mortgage on the Building and/or
Land.
Should any Mortgage or financing affecting true Building or the Land be
foreclosed or if any ground or underlying lease be terminated:
(i) The liability of the mortgagee, trustee or purchaser at such
foreclosure sale or the liability of a subsequent owner
designated as Landlord under this Lease shall exist only so
long as such trustee, mortgagee, purchaser or owner is the
owner of the
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Building or Land and such liability shall not continue or
survive after further transfer of ownership.
(ii) Upon request of the mortgagee or trustee, Tenant will attain,
as Tenant. under this Lease, to the purchaser at any
foreclosure sale thereunder, or if any ground or underlying
lease be terminated for any reason, Tenant will attorn as
tenant under this Lease to the ground lessor under the ground
lease and will execute such reasonable instruments as may be
necessary or appropriate to evidence such attainment.
Tenant covenants and agrees to give any Mortgagee and/or Trust Deed
Holder and/or Ground Lessor, by Registered Mail, a copy of any notice of
default served upon the Landlord, provided that prior to such notice
Tenant has been notified, in writing (by way or notice of Assignment of
Rents and Leases, or otherwise) of the address of such Mortgagee and/or
Trust Deed Holder and/or Ground Lessor. Tenant ( further covenants and
agrees that (except in emergency situation if Landlord shall except have
failed to cure such default within the time in provided for in the Lease,
then the Mortgagee and/or emergency Trust Deed Holder and/or Ground
Lessor shall have an situation: additional thirty (30) days within which
to cure such default or if such default cannot be cured within that time,
then such additional time as may be necessary if within such thirty (30)
days, any Mortgagee and/or Trust Deed Holder and/or Ground Lessor has
commenced and is diligently pursuing the remedies necessary to cure such
default (including but not limited to commencement of foreclosure
proceedings, if necessary to effect such cure), in which event the Lease
shall not be terminated while such remedies are being so diligently
pursued.
25. NOTICES
All notices required or permitted to be given hereunder shall be in
writing and shall be deemed given and delivered, whether or not received,
when deposited in the United States Mail, postage prepaid and properly
addressed, certified mail, return receipt requested, at the following
addressees: (I) To Landlord: U.S. EQUITIES REALTY, INC., Managing Agent,
840 NORTH MICHIGAN AVENUE, SUITE 600, CHICAGO, ILLINOIS 60611, Attention:
Vice President/Commercial Properties, or such other address as Landlord
shall designate by written notice to Tenant; and (ii) To Tenant: At the
address specified in Subsection l.01C prior to the Commencement Date, and
at the Premises after the Commencement Date, or such other address as
Tenant shall designate by written notice to Landlord.
26. MISCELLANEOUS
26.01 LATE CHARGES
All delinquent Rent and other payments due from Tenant to Landlord (1)
shall bear interest at the maximum rate permitted by law or at the prime
interest rate being charged by Continental Illinois National Bank and
Trust Company OF Chicago to its commercial
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customers from time to time, whichever is less, from the date due until
paid, or (ii) Tenant shall pay a late charge penalty of l0% of the
delinquent rent, whichever is greater.
26.02 ENTIRE AGREEMENT
This Lease and the Exhibits attached hereto contain the entire agreement
between Landlord and Tenant concerning the Premises and there are no
other agreements, either oral or written.
26.03 NO OPTION
The execution of this Lease by Tenant and delivery of same to Landlord or
the Manager does not constitute a reservation of or option for the
Premises or an agreement to enter into a Lease, and this Lease shall
become effective only if and when Landlord executes and delivers same to
Tenant; provided, however, the execution and delivery by Tenant of this
Lease to Landlord or the Manager shall constitute an irrevocable otter by
Tenant to lease the Premises on the terms and conditions herein
contained, which offer may not be withdrawn or revoked for thirty (30)
days after such execution and delivery. If Tenant is a corporation, it
shall deliver to Landlord, concurrently with the delivery to Landlord of
an executed Lease, certified resolutions of Tenant's directors
authorizing execution and delivery of this Lease and the performance by
Tenant of its obligations hereunder.
26.04 ACCORD AND SATISFACTION
No payment by Tenant or receipt by Landlord of a lesser amount than any
installment or payment of Rent due shall be deemed to be other than on
account of the amount due, and no endorsement or statement on any check
or any letter accompanying any check or payment of Rent shall be deemed
an accord and satisfaction, and Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance of such
installment or payment of Rent or pursue any other remedies available to
Landlord. No receipt of money by Landlord from Tenant after the
termination of this Lease or Tenant's right of possession of the Premises
shall reinstate, continue or extend the Term.
26.05 LANDLORD'S OBLIGATIONS ON SALE OF BUILDING
In the event of any sale or other transfer of the Building, Landlord and
the seller or transferor (and the beneficiaries of any selling or
transferring land trust) shall be entirely freed and relieved of all
agreements and obligations of Landlord hereunder accruing or to be
performed after the date of such sale or transfer; provided the
obligations of Landlord hereunder are assumed by such transferee and
Tenant is in receipt of such written assumption.
26.06 BINDING EFFECT
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This Lease shall be binding upon and inure to the benefit of Landlord and
Tenant arid their respective heirs, legal representatives, successors and
permitted assigns.
26.07 FORCE MAJEURE
Except with respect to Landlord's obligations to cause the Premises and
Building to be ready for occupancy on December 1, 1984, Landlord shall
not be deemed in default with respect to any of the terms, covenants and
conditions of this Lease on Landlord's part to be performed, if Landlord
fails to timely perform same and such failure is due in whole or in part
to any strike, lockout, labor trouble (whether legal or illegal), civil
disorder, inability to procure materials, failure of power, restrictive
governmental laws and regulations, riots, insurrections, war, fuel
shortages, accidents, casualties, acts of God, acts caused directly or
indirectly by Tenant (or Tenant's agents, employees or invitees) or any
other cause beyond the reasonable control of Landlord.
26.08 CAPTIONS
The Article and Section captions in this Lease are inserted only as a
matter of convenience and in no way define, limit, construe, or describe
the scope or intent of such Articles and Sections.
26.09 APPLICABLE LAW
This Lease shall be construed in accordance with the laws of the State of
Illinois.
26.10 TIME
Time is of the essence of this Lease and the performance of all
obligations hereunder.
26.11 LANDLORD'S RIGHT TO PERFORM TENANT'S DUTIES
If Tenant fails to timely perform any OF its duties under this Lease,
Landlord shall have the right (but not the obligation) , after the
expiration of any grace period elsewhere under this Lease expressly
granted to Tenant f or the performance of such duty, to perform such duty
on behalf and at the expense of Tenant without further prior notice to
Tenant, and all sums expended or expenses incurred by Landlord in
performing such duty shall be deemed to be additional Rent under this
Lease and shall be due and payable upon demand by Landlord.
26.12 LIMITATION OF LIABILITY
The term Landlord as used herein means the partnership which owns the
beneficial interest in LaSalle National Bank Trust No. 106020, which
holds legal title to the Building and the Land, and any obligation or
liability of Landlord hereunder shall be limited to its partnership
assets and no partners of said partnership shall be individually or
personally
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liable for any claim arising out of this Lease. A deficit capital
account of any such partner shall not be deemed an asset or property
of said partnership.
26.13 PARTIAL INVALIDITY
If any term, covenant, or condition of this Lease or the application
thereof to any person or circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this Lease, or the application of such
term, covenant or condition to persons or circumstances other than those
as to which it is held invalid or unenforceable, shall not be affected
thereby and each term, covenant and condition of this Lease shall be
valid and be enforced to the fullest extent permitted by law.
26.14 RIDERS
All Riders attached hereto and executed both by Landlord and Tenant shall
be deemed to be a part hereof and hereby incorporated herein.
IN WITNESS WHEREOF, this Lease has been executed as of the date set forth
in Subsection 1.01D hereof.
LANDLORD:
U.S. EQUITIES REALTY, INC., as
Agent for the beneficiary
of LASALLE NATIONAL BANK
not personally, but as
Trustee under Trust
Agreement dated March 1,
1983, and known as Trust
No. 106020
ATTEST:
By: /s/ By: /s/
------------------------------------ ----------------------------
Title President
ATTEST: TENANT: ILLINOIS STATE MEDICAL
BY: ILLINOIS STATE MEDICAL INTER-INSURANCE EXCHANGE
INSURANCE SERVICES, INC.,
ATTORNEY IN FACT By: /s/
-----------------------------
Title Chairman of the Board
By: /s/
-------------------------------------
Secretary-Treasurer
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RIDER ATTACHED TO AND MADE A PART OF THAT
CERTAIN LEASE DATED JULY____, 1983 WITH
RESPECT TO 20 NORTH MICHIGAN AVENUE,
CHICAGO, ILLINOIS
1. NAME OF AND ON BUILDING. Within 30 days of the Commencement Date,
Landlord shall install and thereafter maintain during the term hereof and
option terms, if any, at its sole cost and expense, two (2) stone plaques
with approximate dimensions of l8"x24" naming Tenant (or the designee as to
which Landlord is notified within 30 days of the date hereof) in such
location on the front of the Building and such style and fashion as shall be
reasonably acceptable to Landlord and Tenant. Following the execution of this
Lease and during the term and option terms, if any, Landlord may not name the
Building or change the name of the Building to a name which is, in fact, a
direct competitor of the Tenant (and designee) or perceived by the public to
be a direct competitor of the Tenant (and designee).
2. PUBLIC IMAGE OF THE BUILDING. Landlord recognizes that the
characterization of other tenants' businesses within the Building is vital so
as to not adversely affect the business of the Tenant within the Building. As
an inducement and condition precedent to Tenant's execution hereof, Landlord
shall not subsequent to the execution hereof and during the term and option
term(s), if any: (a) enter into any lease or other arrangement for a term
commencing prior to the expiration of the term of this Lease and option
terms, if any respecting the use of space on the ground floor, mezzanine (not
intended to include the second floor of the Building) and lower concourse of
the Building, if any, for the purpose of: (i) a game room or other type of
amusement arcade containing coin or token-operated amusement devices either
as its primary business or incidental to another business. As used herein ,
an "amusement arcade" shall mean more than three amusement devices; (ii) a
"fast-food" type restaurant such as, without limiting the generality of the
foregoing, Burger King, McDonald's, Wendy's, Popeye's, Kentucky Fried Chicken
or Brown's Fried Chicken Restaurant wherein sit-down table service is not
available to patrons; (iii) a discount, wholesale, outlet or surplus store
selling any type of tangible personal property or operated in a manner
inconsistent with the first class character of the Building; (iv) barber shop
and beauty shop except to the extent operated in conjunction with a business
otherwise acceptable to Tenant but nevertheless occupying no more than 25% of
the premises demised to such business; or (v) medical insurance sales or
claims office (except in conjunction with a bank or realty company; provided,
at no time may signs advertising such aspect of the business be posted in or
on the Building in any manner); or (b) enter into any lease or other
possessory arrangement for a term commencing prior to the expiration of the
term of this Lease and option terms, if any respecting the use of space on
any floor within the Building for the: (x) practice of any type of medicine,
dentistry or fields related thereto; or as a (y) city or state agency or U.S.
or foreign embassy; or (c) enter into any lease or other possessory
arrangement for a term commencing prior to the expiration of the term of this
Lease and option terms, if any for space within the Building for a purpose
inconsistent with the first class characterization of the Building. Landlord
may, at any time after the execution hereof, deliver a written notice to
Tenant and its counsel, Stephen L. Berger, Esq., Friedman & Koven, 208 South
LaSalle Street, Suite 900, Chicago, Illinois 60604 specifying a tenant, its
business and proposed use for space within the Building and such other
information as Tenant may request. Tenant shall have thirty (30)
1
<PAGE>
days from and after its receipt of such notice to consent to the proposed
tenant and use, which consent shall not be unreasonably withheld. In the
event Tenant does not respond to such notice, then such failure to respond
shall be deemed consent by Tenant to the proposed tenancy.
Landlord represents and warrants to Tenant that as of the date hereof
it has not entered into a lease or arrangement for space in the Building or
the name of the Building in violation of Sections 1 and 2 above.
In the event Tenant fails to exercise the Options to renew granted in
Section 11 of this Rider, then the prohibitions specified and rights granted
in this Section 2 to Tenant shall be waived effective as of the commencement
of the tenth and fifteenth year of the term hereof, as the case may be.
3. NON-DISTURBANCE AGREEMENT. Notwithstanding anything in the Lease
contained to the contrary, if the Building or Land is subject to a mortgage
or deed of trust in the nature Of a mortgage or ground lease (hereinafter
collectively referred to as the "Mortgage"), then Landlord shall on or before
ninety (90) days from the date hereof deliver to Tenant a Non-Disturbance
Agreement in substantially the form attached hereto as Exhibit "D" from the
holder of such Mortgage, which Agreement shall expressly recognize Tenant's
rights under this Lease and permit Tenant's continued possession of the
Premises herein demised so long as Tenant is not in default under this Lease
notwithstanding any such action by such mortgagee to foreclose or otherwise
pursue its remedies thereunder. In the event that Landlord does not furnish
to Tenant such Non-Disturbance Agreement within such 90-day period, then by
written notice to Landlord, Tenant may terminate this Lease upon thirty (30)
days' written notice to Landlord. Tenant agrees that it will, by appropriate
instrument, subordinate this Lease to any future Mortgage imposed upon the
Land or Building; provided and concurrently therewith the holder of such
Mortgage shall deliver to Tenant a Non-Disturbance Agreement in the form
required hereunder.
4. CONSTRUCTION AND COMMENCEMENT DATE. Landlord and Tenant agree to
perform all of their respective covenants under the Work Letter and to pay
the respective portions of the cost and expenses incurred therein in
accordance with the terms of such Work Letter. In the event that the
Commencement Date occurs later than December 1, 1984, then the expiration of
the Lease shall automatically be extended so that the term of the Lease is
ten (10) years. The parties agree that this Lease shall not be recorded, but
upon written request of Landlord or Tenant, a memorandum of lease prepared by
Landlord shall be promptly executed by both parties. Any cost of recording
the memorandum of lease shall be borne by the party recording the same.
5. LANDLORD TO PAY TAXES. Subject to Landlord's right to protest to
applicable governmental authorities, Landlord shall pay all real estate
taxes, assessments, water rates and sewer rates and other charges which may
be levied, assessed or charged against the land and Building and shall make
all payments required to be made by named landlord under the terms of
any mortgage or deeds of trust or underlying ground lease which is now or
hereafter a lien on the Building or land, superior to this Lease and shall
promptly remove or bond to the reasonable satisfaction of any mortgagee any lien
of mechanic's or materialmen pieced against the land or Building or any part
thereof. Landlord shall, at Tenant's request, protest the applicable governing
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<PAGE>
authority the imposition of all Taxes assessed or imposed against the land and
Building. The cost of such protest (including reasonable attorneys fees) will be
deducted from any resulting deduction to determine taxes. In the event Tenant
requests Landlord to protest Taxes and Landlord fails to either respond with a
statement of Landlord's counsel that, in its opinion, the Taxes are not capable
of further reduction or initiate a protest within 180 days of the date of such
request, Landlord shall permit Tenant to file such protest and initiate such
proceedings as are necessary in connection therewith and, for such purpose,
appoints Tenant as attorney in fact for Landlord with full power and authority
to execute and deliver in the name of Landlord, any instrument required to be
executed or filed in connection with such protest proceedings.
6. INDEMNITY. Except for the negligence of Tenant, its contractors,
agents and employees, Landlord shall indemnify and hold Tenant harmless of, from
and against all claims, demands, costs and expenses, including reasonable
attorneys fees and the defense thereof arising from Landlord's or Landlord's
agents, management of the Building or from any act or negligence of Landlord,
its agents, servants or employees, in or about the Building and Premises or from
any breach or default on the part of Landlord in the performance of any covenant
on the part of Landlord to be performed pursuant to the terms of this Lease. In
case of any action or proceeding brought against Tenant by reason of any such
claim, upon notice from Tenant, Landlord covenants to defend such action or
proceeding by counsel reasonably satisfactory to Tenant.
7. ATTORNEYS FEES. Either party shall pay upon demand, all reasonable
costs and expenses, including reasonable attorneys fees incurred by the
successful party in accordance with an order of court in enforcing the
observance and performance by such party of all covenants, conditions and
provisions of this Lease and the exhibits attached hereto, including, but not
limited to, the Work Letter or resulting from the other party's fault under this
Lease.
8. ORDINANCES. Subject to either party's right to protest to applicable
governmental authorities, Landlord shall comply, at Landlord's expense, with all
federal, state, county and municipal laws and ordinances and all rules and
regulations affecting the Building, except that Tenant shall comply with such
laws and ordinances, rules, regulations and orders which specifically relate to
Tenant's use or occupancy of the Premises. Landlord covenants that on the
Commencement Date the Premises shall comply with any applicable legal,
governmental or quasi- governmental requirement, ordinance or rule (including
the Board of Fire Underwriters) and thereafter, for the balance of the term, the
Premises shall be in compliance with all such laws or ordinances to allow
Tenant's continued occupancy hereunder.
9. BUILDING CONSTRUCTION. The Building shall be remodeled pursuant to
the Building Plans and Specifications. Tenant shall have the right to be
advised by Landlord of any changes or revisions ("Changes") made to the
Building Plans and Specifications which shall substantially affect: (a) the
layout of the Premises; (b) the finishes in the lobby area and to the
exterior of the Building; (c) the number of elevators which are to service
the Premises; and (d) the mechanical systems insofar as such Changes
substantially reduce the quantity or quality of the heating, ventilating, air
conditioning and electricity to be furnished to the Premises in accordance
with the
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Lease and/or the Work Letter. Landlord will advise Tenant and Tenant's space
planner (when Landlord has been advised of the same) of such Changes within
five (5) days after Landlord has confirmed with its architect that such
Changes will be made. Such Changes shall be subject to approval by Tenant,
which approval shall not be unreasonably withheld. If Tenant does not .object
to such Changes within five (5) days after notice of same, Landlord may
effectuate such Changes and Tenant shall be deemed to have accepted them as
if Tenant consented to them in writing.
10. EXPANSION OPTION. Tenant shall have the right, privilege and option
to be exercised by Tenant, in its sole and unconfined discretion and provided it
is not in default hereunder at the exercise of the option or commencement of
the- term of the lease for the Expansion Space (as hereinafter defined), to rent
for a period coterminous with the term hereof (including option periods, if any)
not to exceed 50% of the contiguous rentable space on a floor(s) within the
Building to be designated by Landlord within 90 days of the exercise of the
option ("Expansion Space") subject to the following terms and conditions:
A. Tenant shall give written notice to Landlord on or before
the expiration of the fourth year of the term hereof that it
desires to rent Expansion Space; and
B. Whether or not Tenant has exercised the option granted under
Paragraph 10A above, Tenant shall give written notice to Landlord on or
before the expiration of the ninth lease year that it desires to lease
additional Expansion Space (which need not be contiguous to the portion
leased under Paragraph 10A above.)
If the Expansion Space allocated to Tenant pursuant tot the foregoing options
has not been previously leased to other tenants, then Landlord, at its sole cost
and expense, shall construct the Expansion Space in accordance with building
standards prevailing in the Building as of the date hereof ("Expansion Work")
and deliver the same to Tenant on the commencement date of the sixth or tenth
year of the term, as the case may be ("Delivery Date") and rent therefor shall
commence as of the Delivery Date provided Landlord has substantially completed
the Expansion Work. If the Expansion Space designated by Landlord has been
previously leased to other tenants and such tenants are currently occupying such
space, then Landlord shall, at its sole cost and expense, relocate such tenants
and make the Premises available to Tenant in a broom clean condition but
otherwise on an "as is" basis ("Relocation Work") on the Delivery Date and rent
therefor shall commence as of the Delivery Date; provided, Landlord has
completed the Relocation Work. Any dispute as to the completion of either the
Expansion Work or Relocation Work shall be referred to arbitration as set forth
in Section 13.
The Monthly Base Rent for the Expansion Space shall be 1/12th of the
product obtained by multiplying: (i) the square feet of rentable area of the
Expansion Space by (ii) the annual per square foot "market rate" rent (as
hereinafter defined), as adjusted pursuant to the terms of this Lease for
each such space. Market rate is defined for any Expansion Space as the bona
fide annual rent per square foot of net rentable area being offered by
Landlord to prospective tenants (excluding existing tenants under renewal
options) for a lease term commencing on or after the date rent is to begin
for the Expansion Space or the beginning date of any other portion of the
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term under a lease for Expansion Space which requires an increase to the then
market rate rent, for comparable office area in the Building and for leases
containing comparable terms and conditions for "as is" space reduced by the
amount, if any, by which operating expenses included in such annual rental
exceeds the Base Operating Expenses under this Lease. One-twelfth of the
amount so calculated multiplied by the rentable area of the space, shall be
the Monthly Base Rent applicable to such space and shall be subject to
adjustment in the manner provided in this Lease.
Landlord shall notify Tenant 45 days prior to the date rental is to
begin under an Expansion Space Lease of the market rate applicable to such
space. If, within 15 days after receipt of such notice, Tenant fails to
notify Landlord, in writing, of Tenant's objections to the market rate
submitted by Landlord, Tenant shall be deemed to have accepted such market
rate. If, within said 15-day period, Tenant notifies Landlord of its
objections to the proposed market rate, the parties agree to negotiate in
good faith their differences within 30 days immediately following Tenant's
notice of objections to the market rate, and failing agreement within said
period of time, the matter shall be submitted for appraisal in a manner
hereinafter provided.
In the event the parties fail to agree on a market rate, Landlord and
Tenant shall, within 10 days after the expiration of said 30-day period for
negotiation, each appoint an appraiser who is a member of the American
Institute of Real Estate Appraisers, or if it shall not be in existence, a
member of the most nearly comparable organization, and each party shall
notify the other as to the name and address of the appraiser selected. The
two appraisers shall, during the next 15 days, meet and attempt to agree on
the market rate within the definitions set forth herein. In determining
market rate, the appraiser shall use, as a basis for confirming whether
Landlord's offer is bona fide, the actual leases made by Landlord for
comparable space in the Building for a lease term commencing within the
6-month period immediately preceding or at any date after the date of the
commencement of rent for the Expansion Space.
If, upon the expiration of said 15-day period, the appraisers fail to
agree on a market rate, they shall select a third appraiser, also a member of
the American Institute of Real Estate Appraisers, and notify Landlord and
Tenant of such appraisers, name and selection. If the two appraisers are
unable to agree on a third appraiser, either party, by giving 5 days' written
notice to the other, may apply to the then president of the Chicago Bar
Association for the selection of a third appraiser who meets the
qualifications stated hereinabove. Within 15 days after the selection of a
third appraiser, a majority of the appraisers shall set the market rate. If a
majority of the appraisers are unable to set the market rate within the
stipulated period of time, the three appraisers' decision on market rate
shall in each instance be added together and their total divided by three
with the resulting quotient consisting the market rate.
In the event the parties hereto fail to agree upon the market rate
hereunder, and until the market rate is determined in the manner provided
herein, the Tenant agrees to pay market rate- rent ,"Temporary Monthly Market
Rate Rent" until the parties agree on the market rate. Upon the termination
of the market rate, the Landlord shall, within 10 days of such determination,
refund to the Tenant or the Tenant shall, within 10 days of such
determination, pay to Landlord the difference between the temporary monthly
market rate rent paid by Tenant and the finally determined market rate.
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Notwithstanding anything to the contrary contained herein, the Market
Rate Rent for any Expansion Space shall never be less than the then Adjusted
Monthly Rental under this Lease reduced by the difference between the then
estimated operating expenses and the Base Operating Expenses under this Lease.
11. OPTION TO RENEW. Tenant may, at its option, renew this Lease for two
(2) consecutive additional 5-year periods by giving not less than one (1) year's
written notice to Landlord prior to the expiration of the original term and
first option term; provided, that Tenant shall not be in default of any of the
terms and conditions to be kept, observed and performed hereunder at the
exercise of each option or at the commencement of each new term. For purposes
hereof, any Expansion Space shall constitute a portion of the Premises and be
included in the option term(s). Upon the exercise of each option, this Lease
shall continue for the extended period of time, upon the same terms and
conditions as in this Lease set forth, with the exception of this paragraph, and
at a Market Rate Rent (as hereinafter defined).
The Monthly Base Rent for each option term shall be 1/12th of the product
obtained by multiplying: (i) the square feet of rentable area of the Premises by
(ii) the annual per square foot Market Rate Rent, as adjusted pursuant to the
terms of this Lease. Market rate is defined for any option term as the bona fide
annual rent per square foot of net rentable area being offered by Landlord to
prospective tenants (excluding existing tenants under renewal options) for a
lease term commencing on or after the date rent is to begin for an option period
for comparable office area in the Building reduced by the amount, if any, by
which operating expenses including in such annual rental exceed the base
Operating Expenses under this lease. One-twelfth of the amount so calculated
multiplied by the rentable area of the space, shall be the Monthly Base Rent
applicable to such space for each option period.
Landlord shall notify Tenant 45 days prior to the date rental is to
begin for each option period of the Market Rate applicable to the Premises.
If, within 15 days after receipt of such notice, Tenant fails to notify
Landlord, in writing, of Tenant's objections to the Market Rate submitted by
Landlord, Tenant shall be deemed to have accepted such Market Rate. If,
within said 15-day period, Tenant notifies Landlord of its objections to the
proposed Market Rate, the parties agree to negotiate in good faith their
differences within 30 days immediately following Tenant's notice of
objections to the Market Rate and, failing agreement within said period of
time, the matter shall be submitted for appraisal in a manner hereinafter
provided.
In the event the parties fail to agree upon a Market Rate, Landlord and
Tenant shall, within 10 days after the expiration of said 30-day period for
negotiation, each appoint an appraiser who is a member of the American Institute
of Real Estate Appraisers or if it shall not be in existence, a member of the
most nearly comparable organization, and each party shall notify the other as to
the name and address of the appraiser selected. The two appraisers shall, during
the next 15 days, meet and attempt to agree on the Market Rate within the
definition set forth herein. In determining Market Rate, the appraiser shall
use, as a basis for confirming whether Landlord's offer is bona fide, the actual
leases made by Landlord for comparable space in the Building for a
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lease term commencing within the 6-month period immediately preceding or at
any date after the date of the commencement of rent for each option term.
If, upon the expiration of said 15-day period, the appraisers fail to
agree on a Market Rate, they shall select a third appraiser, also a member of
the American Institute of Real Estate Appraisers, and shall notify Landlord and
Tenant of such appraisers, name and selection. If the two appraisers are unable
to agree on a third appraiser, either party, by given 5 days' written notice to
the other, may apply to the then president of the Chicago Bar Association for
the selection of a third appraiser who meets the qualifications stated
hereinabove. Within 15 days after the selection of a third appraiser, a majority
of the appraisers shall set the Market Rate. If a majority of the appraisers are
unable to set the Market Rate within the stipulated period of time, the three
appraisers' decision on Market Rate shall in each instance be added together and
their total divided by three with the resulting quotient constituting the Market
Rate.
In the event the parties hereto fail to agree upon the Market Rate
hereunder, and until the Market Rate is determined in the manner provided
herein, Tenant agrees to pay Temporary Market Rate Rent until the parties agree
on a Market Rate. Upon determination of the Market Rate, the Landlord shall,
within 10 days of such determination, refund to the Tenant or the Tenant shall,
within 10 days of such a determination, pay to Landlord the difference between
the Temporary Market Rate Rent paid by Tenant the finally determined Market
Rate.
Notwithstanding anything to the contrary contained herein, the Market
Rate Rent for any option period shall never be less than the then Adjusted
Monthly Rental under this Lease reduced by the difference between the then
estimated operating expenses and the Base Operating Expenses under this Lease.
12. DEMOLITION. In no event may this Lease be terminated by Landlord
during the term hereof or the first option term on account of a proposed
demolition of the Building. During the second option term only, Landlord may
elect "to demolish the Building" provided it strictly complies with the
following: (a) Landlord shall send to Tenant not less than 18 months' prior
written notice of the date it intends to terminate this Lease, as provided
herein; and (b) Landlord shall pay to Tenant at the time it sends its notice
to terminate the Lease the "unamortized cost" (as hereinafter defined) of all
leasehold improvements, alterations, additions and fixtures paid for or
incurred by Tenant in or about the Expansion Space and Premises.
The term "to demolish the Building" is defined for these purposes to
mean that the Building will be demolished and razed completely within a
reasonable time of the effective date of Landlord's notice to terminate the
Lease as provided in Landlord's notice to Tenant.
The term "unamortized cost" is defined for these purposes to mean the
unamortized cost of all leasehold improvements, alterations, additions and
fixtures paid for or incurred by Tenant in or about the Expansion Space and
Premises and based upon a 7-1/2 year straight line amortization of such costs
and expenses starting with the commencement date(s) of the lease(s) for the
Expansion Space and/or date of improvements to the Premises.
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13. ARBITRATION. Arbitration shall only be involved where the Lease or
the Rider explicitly states that the parties may arbitrate such matter and/or
dispute.
The parties shall endeavor to choose persons qualified to render a
decision with respect to such matters; provided, that neither party shall
have the right to challenge the other party's choice on the basis of such
qualification. If such dispute is not settled within sixty (60) days after
written notice from one party to the other informing the other party of the
existence of such dispute, then either party may within thirty (30) days
following the expiration of the said 60-day period refer such dispute to
arbitration in the manner herein provided by the giving of notice by one
party to the other that it desires arbitration. Two arbitrators shall be
chosen, one by the Landlord and one by the Tenant, and within ten (10) days
thereafter a third arbitrator shall be selected by the two thus chosen. If
either of the parties hereto shall fail to make such choice within the time
herein provided, or the then two arbitrators shall fail to choose a third
arbitrator within the time herein provided, then the party not in default in
selecting an arbitrator, or either party in the event that the two
arbitrators so chosen shall have failed to select a third, may upon five (5)
days' notice to the other party, request the residing of the district court
of the United States for the district in which the Building is located,
acting in his private and non-judicial capacity, .to choose an arbitrator or
arbitrators to fill the vacancy or vacancies. Such judge may thereupon
appoint an arbitrator or arbitrators. If such judge fail or refuse to make
such appointment, the same shall be made in accordance with the prevailing
provisions of the rules of the American Arbitration Association. The three
arbitrators, when duly appointed, shall investigate the facts, shall hold
hearings and permit the parties to present evidence and arguments thereat,
and they shall render a decision by a majority vote within thirty (30) days
after the date upon which the last arbitrator is appointed, which decision
shall be final and binding upon the parties hereto. Judgment upon the award
rendered in such arbitration may be entered by any court having jurisdiction
thereof. No party shall he considered in default hereunder during the
pendency of arbitration proceedings relating to the matter in dispute. If the
arbitrators shall fail to render a decision within said period of thirty (30)
days, then either party shall have the right to institute such .action or
proceeding in such court as shall be appropriate in the circumstances. The
expenses of such determination shall be borne by the party against whom a
decision is rendered; provided that if more than one (1) item is disputed and
a decision shall be rendered each party in respect of item or number of
items, then the expense shall be equitably apportioned between the parties.
During the pendency of the arbitration proceedings, Tenant shall pay the
Landlord the amount if any, in dispute; provided, however, if a decision is
rendered in favor of Tenant, Landlord shall forthwith refund to Tenant the
amount due Tenant in accordance with the decision of the arbitrators plus
interest on said amount for the period commencing on the date of payment by
Tenant to Landlord of said amount and ending on the date of receipt by Tenant
of said refund at 2% over the prime rate of interest prevailing on that date
at the First National Bank of Chicago.
14. WARRANTY. Landlord represents and warrants that: (i) LaSalle National
Bank Trust Number 106020 is the fee simple owner of the Land and Building; (ii)
Landlord is the duly authorized agent for the beneficiaries thereunder; (iii)
except as set forth on Exhibit E, there are no recorded covenants, conditions,
encumbrances or restrictions respecting the Land and Building.
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Should any term, provision or condition of this Rider conflict with any
term, provision or condition of the Lease, the term, provision or condition of
this Rider shall control.
LANDLORD: TENANT:
U.S. EQUITIES REALTY, INC., ILLINOIS STATE MEDICAL
as agent for the beneficiary INTER-INSURANCE EXCHANGE
of LA SALLE NATIONAL BANK
not personally, but as
Trustee under Trust Agree- By /s/
ment dated March 1, 1983 -------------------------
and known as Trust No. Chairman of the Board
106020 ATTEST:
BY: ILLINOIS STATE MEDICAL
INSURANCE SERVICES, INC.,
ATTORNEY IN FACT
By /s/
---------------------------
ATTEST: By /s/
----------------------------
Secretary-Treasurer
By: /s/
---------------------------
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FIRST AMENDMENT TO LEASE DATED JULY 29, 1983
BY AND BETWEEN U. S. EQUITIES REALTY, INC. AS
AGENT FOR THE BENEFICIARY OF LASALLE NATIONAL
BANK, NOT PERSONALLY, BUT AS TRUSTEE UNDER TRUST
AGREEMENT DATED MARCH 1, 1983, AND KNOWN AS TRUST
NO. 106020, AS LANDLORD, AND ILLINOIS STATE MEDICAL
INTER-INSURANCE EXCHANGE, AS TENANT
FOR AND IN CONSIDERATION of Ten ($10.00) Dollars arid other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
The above-captioned Lease is hereby amended effective as of July 29,
1983 as follows:
1. Section 4.02 is hereby amended by inserting the words
"annual rate of the" after the words "a sum equal to 25% of the" in the tenth
line of Section 4.02(u).
2. The second full paragraph of Paragraph 10 of the Rider is
hereby amended by deleting the word "tenth" in the seventh line thereof arid
substituting therefore the word eleventh".
3. The first sentence of the fourth full paragraph of Paragraph 10 of
the Rider is deleted in its entirety and the following is substituted
therefore:
"Landlord shall notify Tenant 45 days prior to the date rental is to
begin under an Expansion Space Lease of the market rate applicable to
such space ("Temporary Monthly Market Rate rent")."
4. The first sentence of the seventh full paragraph of Paragraph 10 of
the Rider is deleted in its entirety and the following is substituted
therefore:
"In the event the parties hereto fail to agree upon the market rate
hereunder, and until the market rate is determined in the manner
provided herein, the Tenant
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agrees to pay Monthly Market Rate rent until the parties agree on the
market rate."
5. The first sentence of the third full paragraph of Paragraph 11 of the
Rider is deleted in its entirety and the following is substituted therefore:
"Landlord shall notify Tenant 45 days prior to the date rental is to
begin for each option period of the Market Rate applicable to the
Premises ("Temporary Market Rate rent")."
6. The first sentence of the sixth full paragraph of Paragraph 11 of the
Rider is deleted in its entirety and the following is substituted therefore:
"In the event the parties hereto fail, to agree upon the Market Rate
hereunder, and until the Market Rate is determined in the manner
provided herein, Tenant agrees to pay Temporary Market Rate rent until
the parties agree on a Market Rate."
IN WITNESS WHEREOF, the parties hereto have set their hands and seals as
of the 29th day of July, 1983.
LANDLORD:
U.S. EQUITIES REALTY, INC., as
Agent for the beneficiary of
LASALLE NATIONAL BANK not
personally, but as Trustee
under Trust Agreement dated
March 1, 1983, and known as
ATTEST: Trust No. 106020
By: /s/ By: /s/
------------------------------ ------------------------------
Title: Chairman
TENANT:
ILLINOIS STATE MEDICAL
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<PAGE>
INTER-INSURANCE EXCHANGE
By: /s/
-------------------------------
Title: Chairman of the Board
ATTEST:
ILLINOIS STATE MEDICAL INSURANCE
SERVICES, INC., Attorney in Fact
By: /s/
-------------------------------
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Second Amendment To Lease dated July 29, 1983 with
First Amendment dated as of July 29, 1983 by and
between Illinois State Medical Inter-Insurance
Exchange, as Tenant ("Tenant") and U. S. Equities
Realty, Inc. as Agent, for beneficiary of LaSalle
National Bank as Trustee under Trust Agreement dated
March 1, 1983 and known as Trust No. 106020, as
Landlord ("Landlord") for the 6th and 7th Floors
("Premises") of the Building commonly known as 20
North Michigan Avenue, Chicago, Illinois ("Lease")
--------------------------------------------------
FOR AND IN CONSIDERATION of the parties entering into the Lease and of
the mutual covenants hereinafter contained, Landlord and Tenant agree as
follows:
1. The Lease is hereby further amended effective July 12, 1984
as follows:
1. TENANT'S IMPROVEMENTS.
Landlord and Tenant hereby amend the Lease by deleting Exhibit A and
the Work Letter attached thereto, and substituting this Amendment and Exhibit
A hereto therefor (including all references thereto in the Lease).
(a) Landlord shall complete the improvements requested by Tenant
within the Premises ("Tenant's Improvements"), as set forth in the plans
prepared by Joel Scheckerman Associates, Limited, and identified as Job
83-113, which plans dated January 30, 1984 and last revised July 12, 1984,
and consisting of pages A-l through A-9, and floor covering plans dated June
1, 1984 consisting of pages FC-l and FC-2, an computer room plan dated May 1,
1989 consisting of page C-l all of which are attached as Exhibit A hereto and
incorporated by reference herein (the "Construction Plans").
1
<PAGE>
(b) Landlord is entering into a contract to complete the Tenant's
Improvements with W. E. O'Neil Construction Company ("Contractor") for the
contract price ("Contract Price") of $752,454.00. Tenant hereby acknowledges and
agrees that Tenant shall pay to Landlord on January 2, 1985 as Tenant's share of
the cost of Tenant's Improvements the sum of $119,354.00 ("Tenant's
Contribution").
(i) The parties acknowledge that the Contract Price includes a
carpeting allowance of $44,618.00. In the event that the cost of the
carpeting selected by Tenant and installed by Contractor exceeds
$44,618.00, any such excess shall be paid by Tenant to Landlord on
January 2, 1985 in addition to the Tenant's Contributions.
(ii) The Tenant's Contribution shall also be increased by an amount
equal to 50% of the cost of structural support required for Tenant's
movable files as determined by Contractor, but any increase in Tenant's
Contribution under this Paragraph l(b)(ii) shall not exceed $7,500.00.
(c) All work to be done in the Premises shall be subject to the
approval of Landlord and no work shall be undertaken in the Premises until
such approval is given in writing.
2. COMPLETION OF TENANT'S IMPROVEMENTS.
Landlord estimates (but does not represent and warrant to Tenant) that
the Tenant's Improvements will be completed, and the Premises will be ready
for occupancy as hereinafter defined on or before September 29, 1984
("Estimated Possession Date") and Tenant agrees to accept the Premises from
the Landlord on or before the Estimated Possession Date if the Premises are
ready for occupancy as hereinafter defined. In no event shall Landlord be
liable to Tenant for any damages of any kind for failure to complete the
Tenant's Improvements or to deliver the Premises to Tenant on the Estimated
Possession Date.
2
<PAGE>
(a) In the event that the Premises are not ready for occupancy on the
Estimated Possession Date, Tenant shall have no obligation to accept the
Premises from Landlord until December 1, 1984. Tenant shall have the right,
however, to accept possession of the Premises from Landlord at any time after
the Estimated Possession Date and before December 1, 1984. In the event that,
pursuant to the lease, tenant is required to pay rent for any period prior to
December 1, 1984, tenant shall receive a credit in an amount equal to its
prorata share of $16,250 per month for any such period.
(b) In the event that the Premises are not ready for occupancy on the
Estimated Possession Date, Tenant's Contribution shall be reduced by the sum
of $525.00 per day for each day after the Estimated Possession Date until the
first to occur of either (i) Tenant's acceptance of possession from the
Landlord, or (ii) November 30, 1984.
(c) The determination as to when the Premises are "ready for
occupancy" shall be made in accordance with Section 2.02 of the Lease
(provided, however, that the Premises shall be deemed "ready for occupancy"
even though, after having used its best efforts, Contractor has not completed
installation of: 1.) the moveable partitions (folding doors) in the
conference room; and/or 2.) the latch sets specified in the Construction
Plans), and the following shall be deleted from Section 7.01 of the Lease:
"In the event of any dispute as to whether the Premises are ready for
Tenant's occupancy, the decision of Landlord's architect shall be final
and binding on the parties."
3. RENT ABATEMENT PERIOD.
The parties hereto acknowledge and reaffirm that Tenant has been granted
by Landlord under Section 3 of the Lease a rent abatement period of three (3)
months and five (5) days.
3
<PAGE>
Notwithstanding the provisions of Section 3 of the Lease to the contrary, the
parties hereto amend said Section to provide that such rental abatement shall
commence on the 1st day of July, 1985, and continue through the 5th day of
October, 1985.
4. MISCELLANEOUS.
(a) All Tenant's Improvements shall be done by Landlord, or its
designers, contractors or subcontractors, in accordance with the terms,
conditions and provisions herein contained, incorporated by reference, or
otherwise agreed to in writing by the parties.
(b) With respect to all payments provided for herein, Landlord shall
have all of the rights and remedies granted to it in the Lease in connection
with the enforcement of the collection of Rent owing thereunder.
(c) Time is of the essence in this Amendment.
(d) In the event of a conflict between the provisions of the Lease and
a provision of this Amendment to Lease, the provisions hereof shall prevail.
(e) All other terms and conditions of the Lease remain unchanged.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands and seals
this 18th day of July, 1984.
LANDLORD:.
U.S. EQUITIES, INC., as
Agent for the beneficiary of
LASALLE NATIONAL BANK not
personally, but as Trustee under
Trust Agreement dated March 1, 1983,
and known as Trust No 106020
Attest:
By: /s/ By: /s/
-------------------------------- --------------------------------
Title: Chairman
TENANT:
ILLINOIS STATE MEDICAL
INTER-INSURANCE EXCHANGE
By: /s/
--------------------------------
Title: Chairman of the Board
ATTEST:
ILLINOIS STATE MEDICAL INSURANCE
SERVICES, INC., Attorney in Fact
By: /s/
--------------------------------
5
<PAGE>
[U.S. EQUITIES GROUP]
840 North Michigan Avenue,
Suite Six Hundred Chicago, Illinois 60611
(312) 951.8000
October 30, 1984
Mr. Lawrence W. Diedrick
Illinois State Medical Society
20 North Michigan Avenue
Chicago, Illinois 60602
Dear Larry:
As we discussed, [am writing this letter to document various oral
agreements which we have made and to summarize the amounts which are due to us
pursuant to the lease and the aforementioned oral agreements.
CHANGE ORDERS
The attached schedule summarizes the change orders submitted to date
along with my understanding as to which of us is responsible for payment.
Assuming you agree with this schedule, the Illinois State Medical Society
currently owes the following amount:
Total ISMS change orders: $63,554.42
Less: amounts due in
January, 1985
CC#200 < $27,958.00 >
CC#201 < $ 6,743.50 >
CC#202 < $ 2,600.00 >
1
<PAGE>
Amount already paid: < $19,640.00 >
-----------
Current Amount Due: $ 6,612.92
-----------
-----------
Please toward a check in this amount payable to Chicago Title and Trust
Company as soon as possible.
AMOUNT DUE IN JANUARY, 1985
Base amount due per lease amendment $119,354.00
Plus:
a) CC#200 27,958.00
b) CC#201 6,743.50
c) CC#202 2,600.00
d) Structural Engineering fee for
Movable files (1,680 x .5) 820.00
Less:
a) Credit for late completion of
construction - 19 days x $525/day < 9,975.00 >
b) Excess of CC # 201 and engineering
fees over $7,500 < 63.50 >
-----
$147,437.00
-----------
-----------
Please note that the above assumes that you accepted the premises as
being substantially complete as of October 20, 1984, as I believe we had agreed.
Please call me if you have any questions regarding the above. Otherwise,
please indicate your acceptance of this letter as an accurate documentation of
our agreements by signing on the enclosed duplicate copy of this letter where
indicated.
Very truly yours,
U.S. EQUITIES GROUP
BY /s/
--------------------------------
John A. Garbossa
Vice president
AGREED AND ACCEPTED THIS 5 DAY OF NOVEMBER, 1984
ILLINOIS STATE MEDICAL SOCIETY
2
<PAGE>
BY: /s/
-------------------------------
Lawrence W. Diedrick
JAG:cmo
Enclosure
cc: Allen Schuh
3
<PAGE>
AMENDMENT TO LEASE DATED JULY 29, 1983 FOR
FLOORS 6 AND 7, 20 NORTH MICHIGAN AVENUE, CHICAGO,
ILLINOIS, FROM U.S. EQUITIES REALTY, INC. AS
AGENT FOR THE BENEFICIARY OF LASALLE NATIONAL BANK,
NOT PERSONALLY, BUT AS TRUSTEE UNDER TRUST AGREEMENT
DATED MARCH 1, 1983 AND KNOWN AS TRUST NO. 106020,
AS LANDLORD, AND ILLINOIS STATE MEDICAL
INTER-INSURANCE EXCHANGE, AS TENANT
This Amendment dated as of June 13, 1986, amends that certain lease
dated July 29, 1983 between the above-named Landlord and Tenant, for certain
Premises in the Building commonly known as 20 North Michigan Avenue, Chicago,
Illinois, as amended by First Amendment dated July 29, 1983; and as further
amended by Second Amendment dated July 18, 1984 and effective July 12, 1984;
and as further amended by letter dated October 30, 1984 from John A.
Garbossa, Vice President of U.S. Equities Group to Lawrence W. Diedrick,
Illinois State Medical Society. Said lease, together with all of said
amendments are hereinafter collectively referred to as the "Lease." Except as
otherwise provided in this Amendment, all terms used in this Amendment shall
have the same meaning as when used in the Lease. To the extent of any
inconsistencies between the provisions of the Lease and the provisions of
this Amendment, the former is hereby amended.
In consideration of the mutual covenants, promises and agreements
contained herein, and for Ten Dollars ($10.00) and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Landlord and Tenant agree as follows:
1. Effective as of July 1, 1986, Landlord hereby leases to Tenant and
Tenant hereby leases from Landlord the premises (the "Expansion Premises")
shown on Exhibit A to this Amendment, consisting of 9,750 rentable square
feet which are located on the eighth floor of the Building, for a term
coterminous with the Term of the Lease, and otherwise upon all the terms and
conditions contained in the Lease, except as hereinafter provided.
2. In addition to the adjusted Monthly Base Rent due pursuant to the
Lease for the 41.000 rentable square feet comprising the Premises initially
demised to Tenant under the Lease (the "Original Premises"). Tenant shall pay
Monthly Base Rent, subject to adjustment as provided in the Lease, in the
initial amount of Fifteen Thousand Four Hundred Thirty-Seven and 50/l00ths
Dollars ($15,437.50) per month. The Annual Base Operating Expense applicable
to the Expansion Premises only, shall be Six and no/100ths Dollars ($6.00)
per square foot of rentable area. Nothing contained in this paragraph shall
be construed so as to alter Tenant's Rent obligations with respect to the
Original Premises. However, with respect to all of Tenant's obligations
regarding the Premises, the term "Premises" as used in the Lease and
Amendments shall hereafter be deemed to include the Original Premises, the
Expansion Premises, the Original Storage Space, the "1986 Storage Space" as
defined in Section 3 of this Amendment, and all
1
<PAGE>
other space in the Building leased to or occupied by Tenant, or so many of
the foregoing as the context logically allows.
3. In addition to the Expansion Premises demised hereunder, effective
July 1, 1986, Landlord hereby leases to Tenant and Tenant hereby accepts from
Landlord, Option Storage Space and additional storage space in the basement
comprising a total of 3,226 square feet of basement space in the Building,
located in the area shown on Exhibit B to this Amendment (the "1986 Storage
Space"). As soon as reasonably possible, Landlord will enclose the 1986
Storage Space, at its expense, and construct such demising walls and doors as
are necessary in prder for Tenant to secure its personal property therein.
Landlord will also, at its expense, provide an electrical connection to the
1986 Storage Space adequate for enabling Tenant to have light fixtures
installed for the 1986 Storage Space. The cost of such fixtures and the
installation thereof shall be borne solely by Tenant. The 1986 Storage Space
shall be used solely for the purpose of storage in connection with Tenant's
business in the Premises. In consideration of the foregoing, Tenant
acknowledges that its leasing of the 1986 Storage Space constitutes
satisfaction of its option to rent Option Storage Space (as defined on page
2-A of the Lease), pursuant to Article 3 of the Lease, which option was
contemplated by the original terms of the Lease to be exercisable no later
than 180 days before the end of the third year of the Term. Accordingly,
Tenant does hereby irrevocably waive, surrender and release any rights,
privilege and option it may have to rent, additional Storage Space pursuant
to the Lease. To the extent that the provisions of this Amendment conflict
with any provision of said Article 3 of the Lease, the provisions of this
Amendment shall prevail.
In addition to all other obligations to pay rent under the Lease,
Tenant will pay, as Additional Rent, rent for the 1986 Storage Space as
follows. For each month falling within the period commencing July 1, 1986 and
ending October 31, 1986, Tenant shall pay as rental for the 1986 Storage
Space the sum of Seven Hundred Sixty-Eight and no/100ths Dollars ($768.00)
per month. Said amount shall not be subject to adjustment under Article 4 of
the Lease. On and after November 1, 1986, for each month during the remainder
of the initial Term of the Lease, Tenant shall pay as rental for the 1986
Storage Space the sum of One Thousand Six Hundred Thirteen and no/l00ths
Dollars ($1,613.00) per month. Said amount shall riot be subject to
adjustment under Article 4 of the Lease. Rent during the Extension Terms if
Tenant shall duly exercise its option to extend, shall be at the Market Rate
for such space, as determined by applied provisions of this Lease. Nothing
contained in this paragraph shall be construed so as to alter Tenant's Rent
obligations with respect to the Original Storage Space.
4. Landlord will construct building standard improvements to the
Expansion Premises, as soon as reasonably possible, in accordance with the
provisions of the Work Letter that is attached hereto as Exhibit C, and
Landlord shall bear Ninety-Three Thousand Dollars ($93,000.00) of the cost
thereof, as further detailed in said Work Letter. In addition, in the
Premises located on the seventh floor of the Building, Landlord will, no
later than the Estimated Possession Date (as defined in the Work Letter), at
Landlord's cost and expense, remove carpeting as necessary to repair existing
floor defects of which Landlord has knowledge and repair such defects.
Carpeting so removed shall be replaced by Tenant at Tenant's sole cost and
expense.
2
<PAGE>
5. In consideration of the foregoing, Tenant acknowledges that its
leasing of the Expansion Premises constitutes satisfaction of its option to
expand which was contemplated by the original terms of the Lease to become
effective as of the first day of the sixth year of the Term. Accordingly,
Tenant does hereby irrevocably waive, surrender, and release all of its
rights, privilege and option to add Expansion Space to its Premises as of the
commencement of the sixth year of the Term pursuant to Section 10 of the
Rider to the Lease. To the extent that the provisions of this Amendment
conflict with any provision of said Rider Section 10, the provisions of this
Amendment shall prevail. However, this waiver and release shall not affect
Tenant's further option to expand as of the first day of the eleventh year of
the Term, pursuant to Section 10 of the Rider.
6. Neither the parties' execution of this Amendment, nor any provision
contained herein, shall be deemed to revive, resurrect or renew any right or
option that has heretofore expired or been waived, released, discharged or
satisfied, nor to enlarge any party's rights or obligations with respect to
the Original Premises or the Original Storage Space, except as is expressly
provided by the terms of this Amendment. Without limiting the generality of
the foregoing, the parties specifically acknowledge that the rights and
Options set forth at pages 2-A and 8-A of the Lease, arid in Section 9 of the
Rider to the Lease, shall have no further force or effect, and that the Work
Letter executed by the parties in connection with the Original Premises,
shall have no applicability to the Expansion Space or the 1986 Storage Space.
7. All exhibits to this Amendment and all the terms thereof are hereby
incorporated in this Amendment as though fully set forth herein.
Executed as of the date first above written.
LANDLORD:
U.S. EQUITIES REALTY, INC., as
Agent for the beneficiary of
LASALLE NATIONAL BANK not
personally, but as Trustee
under Trust Agreement dated
March 1, 1983, and known as
Trust No. 106020
ATTEST:
By: /s/ By: /s/
-------------------------------- ---------------------------------
Title:President
ATTEST:
BY: ILLINOIS STATE MEDICAL TENANT: ILLINOIS STATE MEDICAL
3
<PAGE>
INSURANCE SERVICES, INC., INTER-INSURANCE EXCHANGE
ATTORNEY IN FACT
By: /s/
---------------------------------
By: /s/ Title: Chairman of the Board
-----------------------------------------
4
<PAGE>
AMENDMENT TO LEASE DATED JULY 29, 1983 FOR
FLOORS 6 AND 7, 20 NORTH MICHIGAN AVENUE, CHICAGO,
ILLINOIS, FROM U.S. EQUITIES REALTY, INC. AS
AGENT FOR THE BENEFICIARY OF LASALLE NATIONAL BANK,
PERSONALLY, BUT AS TRUSTEE UNDER TRUST AGREEMENT
DATED MARCH 1, 1983 AND KNOWN AS TRUST NO. 106020,
AS LANDLORD, AND ILLINOIS STATE MEDICAL
INTER-INSURANCE EXCHANGE, AS TENANT
This Amendment dated as of June 4, 1987, amends that certain lease
dated July 29, 1983 between the above-named Landlord and Tenant, for certain
Premises in the Building commonly known as 20 North Michigan Avenue, Chicago,
Illinois, as amended by First Amendment dated July 29, 1983; and as further
amended by Second Amendment dated July 18, 1984 and effective July 12, 1984;
and as further amended by letter dated October 30, 1984 from John A.
Garbossa, Vice President of U.S. Equities Group to Lawrence W. Diedrick,
Illinois State Medical Society; and as further amended by Amendment dated as
of June 13, 1986. Said lease, together with all of said amendments are
hereinafter collectively referred to as the "Lease." Except as otherwise
provided in this Amendment, all terms used in this Amendment shall have the
same meaning as when used in the Lease. To the extent of any inconsistencies
between the provisions of the Lease and the provisions of this Amendment, the
former is hereby amended.
In consideration of the mutual covenants, promises and agreements
contained herein, and for Ten Dollars ($10.00) and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Landlord and Tenant agree as follows:
1. Effective as of July 1, 1987, Landlord hereby leases to Tenant and
Tenant hereby leases from Landlord the premises (the "New Expansion
Premises") shown on Exhibit A to this Amendment, consisting of 11,000
rentable square feet which are located on the eighth floor of the Building,
for a term coterminous with the Term of the Lease, and otherwise upon all the
terms and conditions contained in the Lease, except as hereinafter provided.
2. In addition to the adjusted Monthly Base Rent due pursuant to the
Lease for the 41,000 rentable squire feet comprising the Premises initially
demised to Tenant under the Lease and for the 9,750 rentable square feet
located on the eighth floor of the Building demised to Tenant under Amendment
dated as of June 13, 1986 (collectively called the "Existing Premises"),
Tenant shall. pay Monthly Base Rent (subject to adjustment for Operating
Expenses and increases in the Consumer Price Index on the basis set forth in
the Lease), in the initial amount of Seventeen Thousand Four Hundred Sixteen
and 67/l00ths Dollars ($17,416.67) per month. The Annual Base Operating
Expense applicable to the New Expansion Premises shall be Six and no/l00ths
Dollars ($6.00) per square foot of rentable area. Monthly Base Rent and that
portion of Adjusted Monthly Base Rent which is based on the Consumer Price
Index shall abate for the first twelve months that this Amendment is in
effect. Adjustments based on Operating Expenses shall not abate. Nothing
contained in this paragraph shall be construed so as to alter
1
<PAGE>
Tenant's Rent obligations with respect to the Existing Premises or any
Storage Space. However, with respect to all of Tenant's obligations regarding
the Premises, the term "Premises" as used in the Lease and Amendments shall
be deemed to include the Existing Premises, the New Expansion Premises, the
Original Storage Space, the "1986 Storage Space" as defined in Section 3 of
the Amendment dated as of June 13, 1986, and all other space in the Building
leased to or occupied by Tenant, or so many of the foregoing as the context
logically allows.
3. Tenant shall accept possession of the New Expansion Premises in
their present condition, excepting ordinary wear and tear occurring between
the date hereof and the date upon which Tenant accepts possession of the New
Expansion Premises. In no event shall Landlord be required to make any
improvement or alteration in or to the New Expansion Premises, or to perform
any construction work or decorating therein. In the event that Landlord does
not deliver possession of the New Expansion Premises to Tenant on July 1,
1987, then this Amendment shall not thereby become void or voidable, nor
shall Landlord be liable to Tenant for any damages suffered by Tenant as a
result of any delay by Landlord in tendering possession of the New Expansion
Premises to Tenant, but the commencement of Tenant's obligations with respect
to the New Expansion Premises, including without limitation, Tenant's
obligation to pay Rent for the New Expansion Premises, shall be postponed by
one day for each day of such delay in Landlord's tendering possession.
However, in no event shall any delay in such tender of possession, or in
Tenant's acceptance of the New Expansion Premises, extend the Term of this
Lease.
4. In consideration of the foregoing, Tenant acknowledges that its
leasing of the New Expansion Premises constitutes satisfaction of its option
to expand which was contemplated by the original terms of the Lease to become
effective as of the first day of the eleventh year of the Term. Accordingly,
Tenant does hereby irrevocably waive, surrender, and release all of its
rights, privilege and option to add Expansion Space to its Premises as of the
commencement of the eleventh year of the Term pursuant to Section 10 of the
Rider to the Lease. To the extent that the provisions of this Amendment
conflict with any provision of said Section 10, the provisions of this
Amendment shall prevail.
5. Neither the parties' execution of this Amendment, nor any provision
contained herein, shall be deemed to revive, resurrect or renew any right or
option that has heretofore expired or been waived, released, discharged or
satisfied, nor to enlarge any party's rights or obligations with respect to
the Existing Premises or the Original Storage Space or the 1986 Storage
Space, except as is expressly provided by the terms of this Amendment.
Without limiting the generality of the foregoing, the parties specifically
acknowledge that the rights and options set forth at pages 2-A and 8-A of the
Lease, and in Section 9 of the Rider to the Lease, shall have no further
force or effect, and that neither the Work Letter executed by the parties in
connection with the Original Premises nor the Work Letter executed by the
parties in connection with the Amendment to Lease dated as of June 13, 1986,
shall have any applicability to the New Expansion Space.
6. All exhibits to this Amendment and all the terms thereof are hereby
incorporated in this Amendment as though fully set forth herein.
2
<PAGE>
Executed as of the date first above written.
LANDLORD:
U.S. EQUITIES REALTY, INC., as
Agent for the beneficiary of
LASALLE NATIONAL BANK not
personally, but as Trustee
under Trust Agreement dated
March 1, 1983, and known as Trust No. 106020
ATTEST:
By: /s/ By: /s/
----------------------------- --------------------------------------
Title: Chairman
ATTEST:
BY: ILLINOIS STATE MEDICAL TENANT: ILLINOIS STATE MEDICAL
INSURANCE SERVICES, INC., INTER-INSURANCE EXCHANGE
ATTORNEY IN FACT
By: /s/
---------------------------------------
By: Title: Chairman of the Board
---------------------------------
3
<PAGE>
AMENDMENT TO LEASE DATED JULY 29, 1983,
20 NORTH MICHIGAN AVENUE, CHICAGO, ILLINOIS FROM
U.S. EQUITIES REALTY, INC. AS AGENT FOR THE BENEFICIARY
OF LASALLE NATIONAL BANK, NOT PERSONALLY, BUT AS TRUSTEE
UNDER TRUST AGREEMENT DATED MARCH 1, 1983 AND KNOWN AS
This Amendment, dated as of the 14th day of April, 1992 amends that
certain lease dated July 29, 1983, between the above-named Landlord and
Tenant, f or certain Premises in the Building commonly known as 20 N.
Michigan Avenue, Chicago, Illinois, as amended by First Amendment dated July
29, J.983; and as further amended by Second Amendment dated July 18, 1984 and
effective July 12, 1984; and as further amended by letter dated October 30,
1984, from John A. Garbossa of U.S. Equities Group to Lawrence W. Diedrick,
Illinois State Medical Society; and as further amended by Amendment dated as
of June 13, 1986; and as further amended by Amendment dated June 4, 1987.
Said Lease, together with p.11 of said amendments are hereinafter
collectively referred to as the "Lease." Except as otherwise provided in this
Amendment, all terms used in this Amendment shall have the same meaning as
when used in the Lease. To the extent of any inconsistencies between the
provisions of the Lease and the provisions of this Amendment, the former is
hereby amended.
In consideration of the mutual covenants, promises and agreements
contained herein, and for Ten Dollars ($10.00) and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Landlord and Tenant agree as follows:
1. To the best of Landlord's knowledge, no default has occurred or
presently exists under the Lease.
2. Article 11 of the Lease entitled "Alternations and Improvements"
shall be amended to add paragraph 11.01A entitled SIGNS. Tenant shall have
the exclusive right:
(i) to change the Building name to the Illinois State Medical Society
Building upon ninety (90) days' prior written notice to Landlord;
(ii) to approve any change of the Building's street address;
(iii) to approve the installation, affixation and maintenance of all
signs on the exterior and/or interior of the ground floor lobby area of
the Building; and
(iv) to approve prior to installation all types of exterior signage
visible from Michigan Avenue.
3. To the extent that new paragraph 11.01A is inconsistent with
paragraph 20, LANDLORD'S RIGHTS, of the Lease, paragraph 20 is hereby amended.
1
<PAGE>
4. Except as expressly modified by this Amendment, all terms of the
Lease are hereby ratified and confirmed, and the same remain unchanged and in
full force and effect.
Executed as of the date first written above.
LANDLORD:
U.S. EQUITIES REALTY, INC., as Agent for the
BENEFICIARY of LASALLE NATIONAL BANK,
not personally, but as Trustee under Trust
Agreement dated march 1, 1983, and known as
Trust No. 106020
By: /s/
--------------------------------------
Title: Chairman
ATTEST:
By: /s/
--------------------------------
TENANT:
ILLINOIS STATE MEDICAL INSURANCE
EXCHANGE
By: /s/
--------------------------------------
Title: Secretary-Treasurer
ATTEST:
ILLINOIS STATE MEDICAL
INSURANCE SERVICES, INC.,
ATTORNEY-IN-FACT
By: /s/
--------------------------------
2
<PAGE>
AMENDMENT TO LEASE DATED JULY 29, 1983 FOR
PREMISES AT 20 NORTH MICHIGAN AVENUE, CHICAGO, ILLINOIS,
BETWEEN U.S. EQUITIES REALTY, INC., AS AGENT FOR THE
BENEFICIARY OF LASALLE NATIONAL BANK, NOT PERSONALLY,
BUT AS TRUSTEE UNDER TRUST AGREEMENT DATED MARCH 1, 1983
AND KNOWN AS TRUST NO. 106020, AS LANDLORD, AND
ILLINOIS STATE MEDICAL INTER-INSURANCE EXCHANGE, AS TENANT
This Amendment, dated as of May 28, 1992, amends that certain lease
dated July 29, 1983, between the above-named landlord and Tenant, for certain
Premises in the Building commonly known as 20 N. Michigan Avenue, Chicago,
Illinois, as amended by First Amendment dated July 29, 1983; and as further
amended by Second Amendment dated July 18, 1984 and effective July 12, 1984;
and as further amended by letter dated October 30, 1984, from John A.
Garbossa of U.S. Equities Group to Lawrence W. Diedrick, Illinois State
Medical Society; and as further amended by Amendment dated as of June 13,
1986; and as further amended by Amendment dated June 4, 1987. Said Lease,
together with all of said amendments are hereinafter collectively referred to
as the "Lease." Except as otherwise provided in this Amendment, all terms
used in this Amendment shall have the same meaning as when used in the Lease.
To the extent of any inconsistencies between the provisions of the Lease and
the provisions of this Amendment, the former is hereby amended.
In consideration of the mutual covenants, promises and agreements
contained herein, and for Ten Dollars ($10.00) and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Landlord and Tenant agree as follows:
1. Effective as of June 1, 1992, Landlord hereby leases to Tenant
and Tenant hereby leases from Landlord the Premises (the "New Expansion
Premises") shown on Exhibit A to this Amendment, consisting of 5,165 rentable
square feet which are located on the fifth (5th) floor Ste. 550 of the
Building, for a term continuous with the remaining Term of the Lease, and
otherwise upon all the terms and conditions contained in the Lease, except as
hereinafter provided.
2. In addition to the New Expansion Premises, Landlord hereby leases
to Tenant 979 square feet of basement storage space described in Exhibit B
attached hereto and incorporated herein ("1992 Storage Space"), effective as
of June 1, 1992. Landlord shall, at its expense, construct demising walls and
doors f or the 1992 Storage Space, if not already in place. All lighting,
fixtures and other improvements to such space shall be performed by Tenant,
at Tenant's expense. All property kept by Tenant in the 1992 Storage Space or
any other storage space shall be at Tenant's sole risk. Landlord bears no
responsibility to protect such property or for any loss or damage thereto by
fire, theft, flood or otherwise.
3. In addition to the adjusted Monthly Base Rent due pursuant to the
Lease for the 41,000 rentable square feet comprising the Premises initially
demised to Tenant under the Lease and for other rentable area in the
Building, whether for office or storage purposes, demised to
1
<PAGE>
Tenant under amendments to the Lease (collectively called the "Existing
Premises"), Tenant shall pay Monthly Base-Rent (subject to Operating Expense
adjustments on the basis set forth in the Lease, as modified below), in the
initial amount of Seven Thousand Three Hundred Seventy-Six Dollars
($7,376.00) per month for the period June 1, 1992 through May 31, 1993, and
thereafter Seven Thousand Five Hundred Fourteen Dollars ($7,514.00) per month
through the Expiration Date of the Term. The Annual Base Operating Expense
applicable to the New Expansion Premises shall mean the Per Square Foot
Operating Expenses for the Building for the 1992 Adjustment Year. Nothing
contained in this paragraph shall be construed so as to alter Tenant's Rent
obligations with respect to the existing Premises. However, with respect to
all of Tenant's obligations regarding the Premises, the term "Premises" as
used in the Lease and the amendments thereto shall hereafter be deemed to
include the Existing Premises, the New Expansion Premises, and the 1992
Storage Space.
4. Tenant shall accept possession of the New Expansion Premises in
their present condition, excepting ordinary wear and tear. occurring between
the date hereof and the date upon which Tenant accepts possession of the New
Expansion Premises. In no event shall Landlord be required to make any
improvement or alteration in or to the New Expansion Premises, or to perform
any construction work or decorating therein. In the event that Landlord does
not deliver possession of the New Expansion Premises to Tenant on or before
June 1, 1992, then this Amendment shall not thereby become void or voidable,
nor shall Landlord be liable to Tenant for any damages suffered by Tenant as
a result of any delay by Landlord in tendering possession of the New
Expansion Premises to Tenant, but the commencement of Tenant's obligations
with respect to the New Expansion Premises, including without limitation,
Tenant's obligation to pay Rent for the New Expansion Premises, shall be
postponed by one day for each day of such delay in Landlord's tendering
possession. However, in no event shall any delay in such tender of
possession, or in Tenant's acceptance of the New Expansion Premises, extend
the Term of this Lease or release Tenant of its obligation to pay Rent for
the Existing Premises.
5. Neither the parties' execution of this Amendment, nor any
provision contained herein, shall be deemed to revive, resurrect or renew any
right or option that has heretofore expired or been waived, released,
discharged or satisfied, nor to enlarge any party's rights or obligations
with respect to the Existing Premises, except as is expressly provided by the
terms of this Amendment.
6. All exhibits to this Amendment and all terms thereof are hereby
incorporated in this Amendment as though fully set forth herein.
TENANT LANDLORD:
ILLINOIS STATE MEDICAL U.S. EQUITIES REALTY, INC., as Agent
INSURANCE EXCHANGE for the beneficiary of LASALLE
NATIONAL BANK, not personally, but as
By /s/ Trustee under Trust Agreement dated
---------------------------------- March 1, 1983, and known as Trust No.
Title Secretary/Treasurer 106020
2
<PAGE>
By: /s/
------------------------------------
Title: Executive V.P.
ATTEST:
ATTEST:
By: ILLINOIS STATE MEDICAL
INSURANCE SERVICE, INC.
ATTORNEY-IN-FACT
By /s/ By /s/
--------------------------- -----------------------------------
3
<PAGE>
AMENDMENT TO LEASE
This Amendment to Lease ("Eighth Amendment to Lease") made this 4th
day of April, 1994, by and between U.S. EQUITIES REALTY, INC., an Illinois
corporation, as Agent for the Beneficiary of LA SALLE NATIONAL BANK, not
personally, but as Trustee under Trust Agreement dated march 1, 1983 and
known as Trust No. 106020 ("Landlord"), and ILLINOIS STATE MEDICAL
INTER-INSURANCE EXCHANGE ("Tenant").
WITNESSETH:
WHEREAS, landlord and Tenant entered into a lease ("Original
Lease"), dated July 29, 1983, whereby the Tenant leased form the landlord the
sixth and seventh floors in the building ("Building") on the property located
at 20 N. Michigan Avenue, Chicago, Illinois for a term ("Term") commencing on
October 20, 1984 and expiring November 30, 1994 with options to extend the
Term for two 92) additional five (5) year periods; and
WHEREAS, the original Lease was amended by the following amendments:
A. First Amendment to Lease ("First Amendment to Lease"), dated
as of July 29, 1983, by and between Landlord and Tenant;
B. Second Amendment to Lease ("Second Amendment to Lease") dated
July 18, 1984, by and between Landlord and Tenant;
C. Letter ('Third Amendment to Lease"), dated October 30, 1984
from John Garbossa of U.S. Equities Realty, Inc. to
Lawrence W. Diedrick;
D. Amendment to Lease ('Fourth Amendment to Lease"), dated as of
June 13, 1986, by and between landlord and Tenant;
E. Amendment to Lease ("Fifth Amendment to Lease"), dated as of
June 4, 1987, by and between Landlord and Tenant;
F. Amendment to Lease ("Sixth Amendment to Lease") dated as of
April 14, 1992, by and between Landlord and Tenant;
G. Amendment to lease ("Seventh Amendment to Lease"), dated as of
May 28, 1992, by and between landlord and Tenant;
(The original Lease, together with the First Amendment to
Lease, Second Amendment to lease, Third Amendment to Lease,
Fourth Amendment to Lease, Fifth Amendment to lease, Sixth
Amendment to lease and Seventh Amendment to Lease are
hereinafter collectively referred to as the 'Existing
Lease"); and
<PAGE>
WHEREAS, Landlord and Tenant have agreed on Terms for the extension
of the Existing Lease Term; and
WHEREAS, landlord and Tenant desire to amend the Existing Lease to
document their agreement.
NOW, THEREFORE, in consideration of the above premises, which by
this reference are incorporated herein, the mutual covenants herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. All capitalized terms used herein which are not defined
herein shall have the meanings ascribed to such Terms in the
Existing Lease. The Existing Lease as amended by this Eighth
Amendment to lease is hereinafter referred to as the "Lease".
2. The Term of the Existing Lease is extended for an additional
ten 910) year period ("Extended Term") commencing December 1,
1994 and ending on November 30, 2004 on all the Terms and
conditions set forth in the Existing Lease as amended by this
Eighth Amendment to Lease.
3. Landlord and Tenant agree that he Premises for the balance of
the Term of the Lease and for the Extended Term consists of
the premises located on the entire eighth, seventh and sixth
floors of the Building, a portion of the fifth floor of the
Building and storage areas located in the basement of the
Building, all as shown as Collective Exhibit A attached
hereto and by this reference incorporated herein.
4. The Rent payable by Tenant from April 1, 1994 through
November 30, 1994 shall be the Rent payable pursuant to the
Terms of the Existing Lease.
2
<PAGE>
5. During the Extended Term the Rent payable by the Tenant is
as follows:
A. Adjust Monthly Base Rent
<TABLE>
<CAPTION>
Base Rent Annual Base
Period Sq. Ft. Per Sq. Ft. Rent Monthly Base Rent
------ ------- ----------- ---- -----------------
<S> <C> <C> <C> <C>
12/1/94 - 11/30/95 66,665 $21.00 $1,339,965.00 $116,663.75
12/1/95 - 11/30/96 66,665 $21.42 $1,427,964/36 $118,997.03
12/1/96 - 11/30/97 66,665 $21.85 $1,456.630.20 $121,385.85
12/1/97 - 11/30/98 66,665 $22.29 $1,485,962.88 $123,830.24
12/1/98 - 11/30/99 66,665 $22.74 $1,515,962.04 $126,330.17
12/1/99 - 11/30/00 66,665 $23.19 $1,545,961.32 $128,830.11
12/1/00 - 11/30/01 66,665 $23.65 $1,576,627.20 $131,385.60
12/1/01 - 11/30/02 66,665 $24.12 $1,607,959.80 $133,996.65
12/1/02 - 11/30/03 66,665 $24.60 $1,639,959.00 $136,663.25
12/1/03 - 11/30/04 66,665 $25.09 $1,672,624.80 $139,385.40
</TABLE>
The Monthly Base Rent is subject to adjustment
pursuant to Sections 4.02 (as amended by this Eighth
Amendment to Lease) and 6.03, and as adjusted shall
be the Adjusted Monthly Base Rent.
B. ADDITIONAL RENT
All charges, costs and sums required to be paid by
the Tenant to landlord pursuant to the Lease,
including but not limited to rent for storage space
of 6,511 square feet at a monthly rent of $3,255.00
and an annual rent of $39,066.00
6. Between the date of this Eight Amendment to Lease and
November 30, 1994, Section 4.02 as set forth in the Existing
Lease shall remain in full force and effect. Effective
December 1, 1994 and for the Extended Term only, Section 4.02
shall be deemed deleted in its entirety and substituted by
the following:
Effective as of December 1, 1994 and for the Extended Term
only, Monthly Base Rent shall be increased by an amount equal
to 1/12 of sum of the rentable area of the Premises
multiplied by the amount by which Per Square Foot Operating
Expenses for the Adjustment Year in which such Adjustment
Date falls exceeds the 1994 Per Square Foot Operating
Expenses. The rental as computed hereunder, including
adjustments for projections under Section 4.03 hereinbelow
shall be referred to as Adjusted Monthly Base Rent. The
Adjusted Monthly Base Rent shall never be less than the
Monthly Base Rent specified in paragraph 5 of this Eighth
Amendment to Lease."
3
<PAGE>
7. The Tenant, upon not less than twelve (12) months prior
written notice to the Landlord, shall have the right to
cancel the Lease with respect to the 5,165 square foot
portion of the Premises ("Canceled Premises") located on the
fifth floor of the Building effective on the last of any
calendar month commencing after November 30, 1999, provided
(1) the Tenant is not in default under the Terms of the Lease
at the time of giving the notice of cancellation and at any
time between the date of such notice through the effective
date of the cancellation, and 92) the Tenant shall have fully
compiled with the provisions of paragraph 18 of the lease
with respect to the surrender of the Canceled Premises. From
and after the effective date of such cancellation Tenants
Adjusted Monthly Base Rent shall be reduced by the portion
of the Monthly Base Rent attributable to the Canceled
Premises.
8. The Tenant's option to renew the Existing Lease for two (2)
consecutive additional five (5) year period, as set forth in
Paragraph 11 of the Rider to the Original Lease, is hereby
canceled and deleted from the Lease.
9. Landlord and Tenant warrant to each other that they have
dealt directly and only with U.S. Equities Realty, Inc. as
broker in connection with this Eighth Amendment to Lease and
that insofar as they know no other broker negotiated the
Eighth Amendment to Lease or is entitled to any commission in
connection therewith. Landlord shall be solely responsible
for any commission in connection therewith. Landlord shall be
solely responsible for any commissions due U.S.
Equities Realty, Inc.
10. The Terms, covenants and conditions contained in this Eighth
Amendment to Lease shall be binding upon and inure to the
benefit of the parties and their respective successors and
assigns.
11. This Eighth Amendment to Lease supersedes all prior
negotiations, representations, understandings and agreements
of, by or between the parties, which shall be deemed fully
merged therein; shall be construed and governed by the laws
of the State of Illinois, and may not be changed or
terminated orally.
12. Except for the provisions of this Eighth Amendment to Lease,
all of the Terms, covenants, and conditions of the Existing
Lease, and all of the rights and obligations of Landlord and
Tenant thereunder, shall remain in full force and effect
during the Extended Term and are not otherwise altered,
amended, or changed.
13. The term Landlord as used herein means the partnership which
owns the beneficial interest in LaSalle National Bank Trust
No. 106020, which holds legal title to the Building and the
land upon which it is located, and any obligation or
liability of the Landlord hereunder shall be limited to its
partnership assets and no partners of said partnership shall
be individually or personally liable for any claim
4
<PAGE>
arising out of the lease. A deficit capital account of any
such partnership shall not be deemed an asset or property of
said partnership.
IN WITNESS WHEREOF, this Eighth Amendment to Lease has been executed
as of the date first written above.
LANDLORD:
U.S. EQUITIES REALTY, INC., as Agent for
the Beneficiary of LASALLE NATIONAL BANK,
not personally, but as Trustee under Trust
Agreement dated March 1, 1983 and known as
Trust No. 106020
ATTEST: By: /s/
---------------------------------------
Its: Chairman
By: /s/
-----------------------------------
TENANT:
ILLINOIS STATE MEDICAL INTER-
INSURANCE EXCHANGE
By: Illinois State Medical Services, Inc.
Attorney in Fact
/s/
- ------------------------------------
Chairman of the Board /s/
-----------------------------------------
Secretary-Treasurer
5
<PAGE>
AMENDMENT TO LEASE
This Amendment to Lease ("Ninth Amendment") made this 14 day of
October 1996, by and between U.S. EQUITIES REALTY, INC., an Illinois
corporation, as Agent for the Beneficiary of LA SALLE NATIONAL BANK, .not
personally, but as Trustee under Trust Agreement dated March 1, 1983 and
known as Trust No. 106020 ( "Landlord"), and ILLINOIS STATE MEDICAL INTER-
INSURANCE EXCHANGE ("Tenant").
WITNESSETH:
WHEREAS, Landlord and Tenant entered into a lease ("Original
Lease"), dated July 29, 1983, whereby the Tenant leased from the Landlord the
sixth and seventh floors in the building ("Building") on the property located
at 20 N. Michigan Avenue, Chicago, Illinois; and
WHEREAS, the original Lease was amended by the following amendments:
A. First Amendment to Lease ("First Amendment"), dated as of
July 29, 1983, by and between Landlord and Tenant;
B. Second Amendment to Lease ("Second Amendment"), dated
July 18, 1984, by and between Landlord and Tenant;
C. Letter ("Third Amendment"), dated October 30, 1984 from John
Garbossa of U.S. Equities Realty, Inc. to Lawrence W.
Diedrick;
D. Amendment to Lease ("Fourth Amendment"), dated as of June 13,
1986, by and between Landlord and Tenant;
E. Amendment to Lease ("Fifth Amendment"), dated as of June 4,
1987, by and between Landlord and Tenant;
F. Amendment to Lease ("Sixth Amendment"), dated as of April 14,
1992, by and between Landlord and Tenant;
G. Amendment to Lease ("Seventh Amendment"), dated as of May 28,
1992, by and between Landlord and Tenant;
H. Amendment to Lease ("Eight Amendment') dated as of April 4,
1994, by and between Landlord and Tenant;
(The original Lease, together with the First Amendment,
Second Amendment, Third Amendment, Fourth Amendment, Fifth
Amendment, Sixth Amendment, Seventh Amendment and Eight
Amendment are hereinafter collectively referred to as the
"Existing Lease"); and
<PAGE>
WHEREAS, the Lease currently expires on November 30, 2004 and
Landlord and Tenant desire to extend the Term of the Existing Lease Term as
set forth below;
NOW, THEREFORE, in consideration of the above premises, which by
this reference are incorporated herein, the mutual covenants herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. All capitalized terms used herein which are not otherwise
defined herein shall have the meanings ascribed to such terms
in the Existing Lease. The Existing Lease as amended by this
Ninth Amendment is hereinafter referred to as the Lease."
2. The Term of the Existing Lease is extended for an additional
period commencing December 1, 2004 and ending on October 31,
2011 on all the Terms and conditions set forth in the
Existing Lease except as amended by this Ninth Amendment.
"Expiration Date of Term" as set forth in Section 1.01 of the
Lease is amended to mean October 31, 2011. As used in the
Lease (and in particular, Paragraph 6 of the Eight
Amendment) "Extended Term" is amended to mean the period from
December 1, 1994 to the Expiration Date of Tern.
3. The Rent payable by Tenant from the date hereof through
November 30, 1996 shall be the Rent payable pursuant to the
provisions of the Existing Lease.
4. The Rent payable by Tenant from December 1, 1996 through
October 31, 2011 is as follows:
2
<PAGE>
A. ADJUSTED MONTHLY BASE RENT
The following Monthly Base Rent:
<TABLE>
<CAPTION>
Base Rent Per Annual Base Monthly Base
Period Sq. Ft. Sq. Ft. Rent Rent
------ ------- ------- ---- ----
<S> <C> <C> <C> <C> <C>
12/1/95 11/30/96 66,665 $21.42 $1,427,964.30 $118,997.03
12/1/96 11/30/97 66,665 $21.74 $1,449,383.76 $120,781.98
12/1/97 11/30/98 66,665 $22.07 $1,471,124.52 $122,593.71
12/1/98 11/30/99 66,665 $22.40 $1,493,191.39 $124,432.62
12/1/99 11/30/00 66,665 $22.73 $1,515,589.26 $126,299.10
12/1/00 11/30/01 66,665 $23.08 $1,538,323.10 $128,193.59
12/1/01 11/30/02 66,665 $23.42 $1,561,397.94 $130,116.50
12/1/02 11/30/03 66,665 $23.77 $1,584,818.91 $132,068.24
12/1/03 11/30/04 66,665 $24.13 $1,608,591.20 $134,049.27
12/1/04 11/30/05 66,665 $24.49 $1,632,720.07 $136,060.01
12/1/05 11/30/06 66,665 $24.86 $1,657,210.87 $138,100.91
12/1/06 11/30/07 66,665 $25.23 $1,682,069.03 $140,172.42
12/1/07 11/30/08 66,665 $25.61 $1,707,300.07 $142,275.01
12/1/08 11/30/09 66,665 $25.99 $1,732,909.57 $144,409.13
12/1/09 10/31/10 66,665 $26.38 $1,758,903.21 $146,575.27
12/1/10 10/31/11 66,665 $26.78 $1,785,286.76 $148,773.90
</TABLE>
The Monthly Base Rent is subject to adjustment pursuant to
Sections 4.02 (as amended) and 6.03 and other applicable
sections of the Lease, and as adjusted shall be the Adjusted
Monthly Base Rent.
B. ADDITIONAL RENT
All charges, costs and sums required to be paid by the Tenant
to Landlord pursuant to the Lease, including but not limited
to rent for storage space of 6,511 square feet at a monthly
rent of $3,255.00 and an annual rent of $39,066.00.
3
<PAGE>
5. Paragraph 7 of the Eighth Amendment (Tenant's partial
termination rights) is hereby deleted.
6. In Paragraph 9.02 F of the Lease (on page 11A thereof),
delete the words: "(provided, Landlord is notified within
120 days of the date hereof)".
7. Except as amended hereby, the Lease shall remain in full
force and effect.
IN WITNESS WHEREOF, this Ninth Amendment has been executed as of the
date first written above.
LANDLORD:
U.S. EQUITIES REALTY, INC., as Agent for
the Beneficiary of LASALLE NATIONAL BANK,
not personally, but as Trustee under Trust
Agreement dated March 1, 1983 and known as
Trust No. 106020
By: /s/
------------------------------------------
Its: President
TENANT:
ILLINOIS STATE MEDICAL INTER-
INSURANCE EXCHANGE
By: /s/
------------------------------------------
Chairman
4
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Experts" and
"Selected Financial and Operating Data" and to the use of our reports dated
March 1, 1999 (except Note 12, as to which the date is May 5, 1999), and April
14, 1999, included in the Proxy Statement of Illinois State Medical
Inter-Insurance Exchange that is made a part of Amendment No. 2 to the
Registration Statement (Form S-4 No. 333-78539) and Prospectus of ISMIE Holdings
Inc. for the registration of 10,100,000 shares of its common stock.
ERNST & YOUNG LLP
Chicago, Illinois
October 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 785,090
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 24,021
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 819,219
<CASH> 35,181
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 1,185,419
<POLICY-LOSSES> 887,055
<UNEARNED-PREMIUMS> 18,979
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 228,759
<TOTAL-LIABILITY-AND-EQUITY> 1,185,419
69,820
<INVESTMENT-INCOME> 24,246
<INVESTMENT-GAINS> 388
<OTHER-INCOME> 0
<BENEFITS> 77,728
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 8,647
<INCOME-PRETAX> 8,079
<INCOME-TAX> 716
<INCOME-CONTINUING> 7,363
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,363
<EPS-BASIC> .74
<EPS-DILUTED> .74
<RESERVE-OPEN> 673,516 <F1>
<PROVISION-CURRENT> 77,728 <F1>
<PROVISION-PRIOR> 0 <F1>
<PAYMENTS-CURRENT> 144 <F1>
<PAYMENTS-PRIOR> 80,947 <F1>
<RESERVE-CLOSE> 670,153 <F1>
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Amounts are net if reinsurance recovered/recoverable.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99.1
PROXY CARD
ILLINOIS STATE MEDICAL INTER-INSURANCE EXCHANGE
SPECIAL MEETING OF MEMBERS
____________, 1999
PROXY SOLICITED ON BEHALF OF THE BOARD OF GOVERNORS
The undersigned hereby revokes all proxies heretofore given and hereby appoints
___________ or any one or more of them in the absence of the others, with full
power of substitution, as the true and lawful attorneys, proxies and agents of
the undersigned, to attend, represent and vote on behalf of the undersigned at
the special meeting of Members of the Illinois State Medical Inter-Insurance
Exchange, or ISMIE, to be held at ______________ on _________, 1999, at ___
p.m., local time, and any postponements or adjournments thereof, with all the
powers the undersigned would have if personally present at such meeting, upon
the following proposal described in the accompanying proxy statement/prospectus
dated __________, 1999.
[CONTROL NUMBER]
YOUR BOARD OF GOVERNORS BELIEVES THE CONVERSION IS IN THE BEST
INTERESTS OF ISMIE AND ITS MEMBERS. THE BOARD HAS APPROVED THE MERGER AGREEMENT
AND RECOMMENDS THAT YOU VOTE FOR ITS APPROVAL.
<TABLE>
<CAPTION>
Indicate your vote: Proposal:
- ------------------- ---------
<S> <C>
/ / FOR
To approve the Plan and Agreement of Merger
dated as of May 5, 1999, among ISMIE, ISMIE
Indemnity Company and ISMIE Holdings
Inc.
/ / AGAINST
/ / ABSTAIN
</TABLE>
Please vote by placing an X in one of the boxes above, and sign your name at the
bottom of the card. You must place an X in one, and only one, of the boxes in
order for your vote to be counted.
<PAGE>
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATION MADE.
IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR THE APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
----------------------------------
Signature
Dated: _______________, 1999
Please sign exactly as your name appears to the left. If a
corporation, please sign in full corporate name by the
president or other authorized officer. If a partnership,
please sign in partnership name, by an authorized person.
PLEASE MARK, SIGN, DATE AND MAIL THIS PROXY CARD PROMPTLY,
USING THE ENCLOSED ENVELOPE.
[REVERSE SIDE]
CHANGE OF ADDRESS
[CONTROL NUMBER]
Name and Address of Record: New Address/corrections:
--------------------------------------------
Signature Date
<PAGE>
EXHIBIT 99.2
TAXPAYER IDENTIFICATION CARD
[CONTROL NUMBER]
PLEASE SIGN AND RETURN THIS CARD EVEN IF THE TAXPAYER IDENTIFICATION NUMBER*
SHOWN BELOW IS CORRECT. If you do not return the card, you may be subject to a
$50 Internal Revenue Service penalty and we may be required to withhold and pay
to the IRS 31% of any cash payment to which you may be entitled.
*For individuals, your taxpayer identification number is your social security
number. For other entities, it is your employer identification number.
ALL PERSONS ARE REQUIRED TO SIGN AND RETURN THIS CERTIFICATION.
Is this your correct taxpayer If not, please correct in
identification number? the space provided.
[NUMBER] _________________________
CERTIFICATION - UNDER PENALTIES OF PERJURY, I CERTIFY THAT
<TABLE>
<CAPTION>
<S> <C>
1) (Mark the appropriate box in item 1.)
/ / the number shown on this form is my correct taxpayer
identification number; or
/ / I am waiting for a number to be issued to me, and will provide
it to you within 10 days of receiving the number.
2) (Cross out item 2 if you ARE subject to backup withholding.)
I am not subject to backup withholding because
(i) I am exempt from backup withholding, or
(ii) I have not been notified by the IRS that I am subject to backup
withholding as a result of a failure to report all interest or
dividends, or
(iii) the IRS has notified me that I am no longer subject to backup
withholding.
</TABLE>
- ----------------------------------------- ------------------------
Signature of Taxpayer Date
Please refer to the instructions included with the Proxy Statement/Prospectus.
PLEASE MARK, SIGN, DATE AND MAIL THIS TAXPAYER IDENTIFICATION CARD PROMPTLY,
USING THE ENCLOSED ENVELOPE.
<PAGE>
EXHIBIT 99.3
MEMBER RECORD CARD
[CONTROL NUMBER]
If the conversion is approved by the members and goes into effect, it is
estimated that you will receive the number of shares of ISMIE Holdings Inc. as
indicated above.
PLEASE READ THE IMPORTANT INFORMATION ON THE BACK OF THIS CARD.
Please retain for your records
[REVERSE SIDE]
MEMBER RECORD CARD
ILLINOIS STATE MEDICAL INTER-INSURANCE EXCHANGE
IMPORTANT - INFORMATION ABOUT YOUR CONSIDERATION
Our records show that you were a member of ISMIE on May 5, 1999. Based on such
membership, and provided the Plan and Agreement of Merger is approved and
adopted at the special meeting and the conditions set forth therein are
satisfied or waived, you will be eligible to receive a number of shares of ISMIE
Holdings Inc. common stock.
Details of the Plan and Agreement of Merger's provisions for the amount and form
of consideration are in the section on "The Conversion-Consideration" in the
Proxy Statement/Prospectus.
