PAGE 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one) FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee required)
For the fiscal year ended.....December 31, 1996.................
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No fee required)
For the transition period from....................to...........
Commission file number 0-8641
SELECTIVE INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
New Jersey
------------------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization)
22-2168890
-------------------------------
(IRS Employer Identification No.)
40 Wantage Avenue, Branchville, New Jersey 07890
------------------------------------------ ------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 201-948-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
8 3/4% Convertible Subordinated Debentures due January 1, 2008
(Title of class)
Common Stock, par value $2 per share
(Title of class)
Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant based on last sale price on the Nasdaq National Market on
February 14, 1997.
Common Stock, par value $2 per share: $591,757,862
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of February 14, 1997.
Common Stock, par value $2 per share: 14,653,725
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Selective Insurance Group, Inc. 1996 Annual Report to
Stockholders ("1996 Annual Report") are incorporated by reference to Parts
I, II, III and IV of this report.
Portions of the definitive Proxy Statement for the 1997 Annual Meeting of
Stockholders ("Proxy Statement") are incorporated by reference to Part III
of this report.
PAGE 2
PART I
Item 1. Business.
General
Founded in 1925 and organized in 1977, Selective Insurance Group, Inc.
(the "Parent") is a regional insurance holding company which, through its
insurance subsidiaries, (collectively, "Selective" or the "Company") offers
a broad range of property and casualty insurance products. Selective's
commercial insurance products are directed to small- to medium-sized
service-oriented businesses, governmental entities and selected classes of
light industry, which together represent approximately 70% of net premiums
earned. Selective also offers personal insurance products to individuals
and families, which represent approximately 30% of net premiums earned. The
Company's commercial and personal products are distributed principally in
suburban and rural areas of New Jersey, Pennsylvania, New York, South
Carolina, Virginia, Maryland, Delaware and other Mid-Atlantic and
Southeastern states. In 1996, Selective began writing insurance in
Illinois, with additional expansion planned for other Midwestern states in
1997.
The Company offers its insurance products through Selective Insurance
Company of America ("SICA"), Selective Way Insurance Company ("SWIC"),
Selective Insurance Company of the Southeast ("SISE"), Selective Insurance
Company of South Carolina ("SISC") and Exchange Insurance Company ("EIC"),
(collectively, the "Insurance Subsidiaries"). During 1995, Charleston
Insurance Company ("CIC"), formerly an insurance subsidiary of the Company,
merged into SISC. In 1992, Selective acquired the outstanding capital
stock of Niagara Exchange Corporation ("Niagara"), a New York-based
insurance holding company, in order to geographically diversify its
customer base.
The following table shows the distribution of net premiums written by
state for the periods indicated:
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Year Ended December 31,
(dollars in millions) 1996 1995 1994
- ---------------------------------------------------------------------------
Net premiums written $692.2 757.0 697.9
Premium Distribution by State ===== ===== =====
New Jersey 59.7% 60.8 60.8
Pennsylvania 10.9 10.2 9.8
New York 7.1 6.8 6.1
South Carolina 4.9 4.8 4.9
Virginia 4.7 4.5 5.0
Maryland 4.3 4.8 5.1
Delaware 3.1 3.2 3.2
North Carolina 2.8 2.5 2.1
Georgia 2.1 2.2 2.0
Other states 0.4 0.2 1.0
----- ----- -----
Total 100.0% 100.0 100.0
===== ===== =====
For the ten years ended December 31, 1996, the Company's average
statutory loss and loss expense ratio and average statutory combined ratio
were 70.5% and 104.6%, respectively. The Company's average statutory loss
and loss expense ratio during this period outperformed the property and
casualty industry's average ratio, as reported by A.M. Best Company, Inc.
("A.M. Best"), by 10.4 points. The Company attributes its performance to
its strong relationships with its independent insurance agencies, its
expertise in underwriting commercial lines of insurance, its penetration
of suburban and rural market areas in the Mid-Atlantic and Southeastern
states and its conservative reserving practices. For the ten years ended
December 31, 1996, the Company's average statutory underwriting expense
ratio was 32.9% compared to 26.1% for the property and casualty insurance
industry. The Company's historical statutory underwriting expense ratio is
higher than the industry average, primarily due to the impact of taxes and
assessments in New Jersey (which accounted for approximately 1.6 points of
the average ratio) and labor costs (which accounted for approximately 8.1
points of the average ratio). The industry average expense ratio reflects
the inclusion of direct writers of insurance which generally have lower
distribution costs than the Company. The Company's average statutory
combined ratio outperformed the property and casualty industry average
statutory combined ratio, by 3.6 points for this ten-year period. The
Company's statutory combined ratio is not as favorable as the Company's
loss and loss expense ratio in comparison to the industry primarily due to
the impact of the Company's underwriting expense ratio as previously
described. The table on page 3 sets forth certain Company and industry
ratios:
PAGE 3
Simple
Average of
All Periods Years Ended December 31,
Presented 1996 1995 1994 1993
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Certain Company Ratios(1):
Loss 59.1% 60.6 60.4 60.6 60.3
Loss expense 11.4 10.8 10.8 11.1 11.5
Underwriting expense 32.9 30.8 29.4 31.6 35.5(2)
Policyholders' dividends 1.2 0.7 1.0 1.0 1.2
Combined ratio(3) 104.6 102.9 101.6 104.3 108.5(2)
Growth (decline)in net
premiums written 7.7 (8.6) 8.5 14.8 8.9
Certain Industry Ratios(1)(4):
Loss 68.2 67.0 65.7 68.1 66.7
Loss expense 12.7 12.8 13.2 13.0 12.8
Underwriting expense 26.1 26.2 26.1 26.0 26.3
Policyholders' dividends 1.3 1.0 1.4 1.3 1.1
Combined ratio(3) 108.2 107.0 106.4 108.5 106.9
Growth in net premiums written 4.3 3.6 3.6 3.8 6.2
Company Favorable
(Unfavorable) to Industry:
Combined ratio 3.6 4.1 4.8 4.2 (1.6)
Growth in net premiums written 3.4 (12.2) 4.9 11.0 2.7
(1) The ratios and percentages are based upon Statutory Accounting
Practices ("SAP").
(2) In 1993, this ratio includes the one-time restructuring charge of $9.0
million, which increased the ratio by 1.5 points.
(3) A combined ratio under 100% generally indicates an underwriting
profit and a combined ratio over 100% generally indicates an
underwriting loss. Because of investment income, a company may still
be profitable although its combined ratio exceeds 100%.
(4) Source: A.M. Best. The industry ratios for 1996 have been estimated
by A.M. Best.
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Simple
Average of
All Periods Years Ended December 31,
Presented 1992 1991 1990 1989
- ----------------------------------------------------------------------------
Certain Company Ratios(1):
Loss 59.1% 58.2 56.6 57.9 58.8
Loss expense 11.4 11.3 11.3 12.5 10.9
Underwriting expense 32.9 37.0 38.3 36.1 32.2
Policyholders' dividends 1.2 1.3 1.5 1.6 1.5
Combined ratio(3) 104.6 107.9 107.6 108.0 103.4
Growth in net premiums written 7.7 13.0 3.8 2.9 5.1
Certain Industry Ratios(1)(4):
Loss 68.2 74.7 68.5 69.4 69.2
Loss expense 12.7 13.4 12.6 12.9 12.7
Underwriting expense 26.1 26.6 26.4 26.0 26.0
Policyholders' dividends 1.3 1.2 1.3 1.2 1.3
Combined ratio(3) 108.2 115.7 108.8 109.6 109.2
Growth in net premiums written 4.3 2.0 2.4 4.5 3.2
Company Favorable
(Unfavorable) to Industry:
Combined ratio 3.6 7.8 1.2 1.6 5.8
Growth in net premiums written 3.4 11.0 1.4 (1.6) 1.9
(1) The ratios and percentages are based upon Statutory Accounting
Practices ("SAP").
(2) In 1993, this ratio includes the one-time restructuring charge of $9.0
million, which increased the ratio by 1.5 points.
(3) A combined ratio under 100% generally indicates an underwriting profit
and a combined ratio over 100% generally indicates an underwriting loss.
Because of investment income, a company may still be profitable
although its combined ratio exceeds 100%.
(4) Source: A.M. Best. The industry ratios for 1996 have been estimated
by A.M. Best.
- ---------------------------------------------------------------------------
Simple
Average of
All Periods Years Ended December 31,
Presented 1988 1987
- ---------------------------------------------------------------------------
Certain Company Ratios(1):
Loss 59.1% 59.1 58.6
Loss expense 11.4 11.2 12.4
Underwriting expense 32.9 29.6 28.4
Policyholders' dividends 1.2 1.2 0.9
Combined ratio(3) 104.6 101.1 100.5
Growth in net premiums written 7.7 10.0 18.5
Certain Industry Ratios(1)(4):
Loss 68.2 66.4 66.6
Loss expense 12.7 11.9 11.4
Underwriting expense 26.1 25.7 25.3
Policyholders' dividends 1.3 1.4 1.3
Combined ratio(3) 108.2 105.4 104.6
Growth in net premiums written 4.3 4.5 9.5
Company Favorable
(Unfavorable) to Industry:
Combined ratio 3.6 4.3 4.1
Growth in net premiums written 3.4 5.5 9.0
(1) The ratios and percentages are based upon Statutory Accounting
Practices ("SAP").
(2) In 1993, this ratio includes the one-time restructuring charge of $9.0
million, which increased the ratio by 1.5 points.
(3) A combined ratio under 100% generally indicates an underwriting profit
and a combined ratio over 100% generally indicates an underwriting loss.
Because of investment income, a company may still be profitable
although its combined ratio exceeds 100%.
(4) Source: A.M. Best. The industry ratios for 1996 have been estimated by
A.M. Best.
PAGE 4
Strategy
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The Company's primary focus has been on improving underwriting results
and generating profitable growth. The principal elements of these
strategies are to:
(i) generate an underwriting profit and increase premium volume;
(ii) reduce expenses and improve productivity through increased
automation and controlled legal expenses;
(iii) expand business in states outside New Jersey; and
(iv) continue to build and reward employees that are committed to the
Company's goals.
Generate an Underwriting Profit and Increase Premium Volume
- -----------------------------------------------------------
In 1996, the Company's net premiums written volume decreased. This
decrease was reflective of several significant factors, including a highly
competitive commercial lines marketplace and a move toward self-insurance
programs, which particularly impacts the Company's public entities
business.
Strategic Business Units. The Company's customer-focused Strategic
Business Units ("SBUs") define market groups that the Company believes
offer growth potential. The SBUs evaluate the marketplace and provide
products and services specifically developed to meet the needs of agents
and insureds in a particular market or territory.
The SBUs also provide a variety of services to the Company's branch
offices, agency management specialists ("AMSs") and agents, such as leads
for new accounts, technical training, analysis of underwriting results
and other specialized resources. Focusing on profitability is a principal
strategy for each SBU. The SBUs analyze the results by business class,
territory and agency to determine profitability, thereby allowing the
Company to be more attuned to areas of opportunity.
Alignment of Agents' Interests. Selective is working to align the
interests of the agents with the Company's strategic direction. The Company
has reviewed the quality of business and profitability of every agent,
reinforcing strong relationships with agents who maintained the Company's
underwriting standards and commitment to profitable growth and terminating
those who did not. Selective has maintained a strong relationship with its
agency network by providing superior service and a stable marketplace as
well as applying consistent underwriting standards. One economic incentive
for the agents is profit sharing commissions, through which profitable
agents have an opportunity to earn additional commissions of up to 15% of
their direct premiums written. In addition, agents can purchase Selective
common stock at a 5% discount with no broker fees through the agents' stock
purchase plan.
Field Operations - Underwriting. Since its inception in 1995,
Selective's field underwriting program has become an integral, dynamic
part of the agent-company relationship. AMSs are experienced underwriters
with strong marketing and communication skills. Working in the field
with a specific group of agents, the AMSs can respond quickly to new
commercial business submissions and make timely decisions that can result
in writing desirable accounts.
Each AMS is backed by a team of underwriters and technical specialists
in the branches - or in the corporate office for the Midwest operation.
The AMSs also drive the development and review of growth and profitability
objectives for each agency.
Field Operations - Claims. The Company's strategic plan ("Claims 2000")
for Selective's claims organization by the year 2000, is parallel to the
Company's field underwriting strategy. Claims 2000 creates a partnership
between branch office and field operations. Claims management specialists
("CMSs") work directly with agents, insureds, AMSs and claimants. On-site
inspections, personal interviews and face-to-face negotiations are
expected to result in more accurate loss settlements and increased fraud
detection. Working in the field, the CMSs gains knowledge about potential
exposure, and expand the role of Selective's claims staff in the areas
of loss control and risk management. During 1996, every branch office
restructured its claim operation and put CMSs in the field, with more CMSs
scheduled for early 1997.
Reduce Expenses and Improve Productivity through Increased Automation and
Controlled Legal Expenses
- -----------------------------------------------------------------------------
The Company's objective continues to be the reduction of expenses
through increased efficiency and automation. This objective is designed to
reduce the Company's underwriting and loss adjustment expense ratios while
improving the productivity and efficiency of internal operations. During
1996, the Company reduced its work force by 50 employees to 1,600 by year
end. Productivity, as measured by net premiums written per employee, in
1996 was $433,000 down from $458,000 in 1995. The decrease was due to the
lower levels of net premiums written. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations." However,
over the past five-year period net premiums written per employee increased
by almost 70%.
PAGE 5
The following table shows net premiums written per employee for the
three-year period ended December 31, 1996 and the number of employees
during such period:
Net Premiums
($ in thousands) Written Per No. of EE's Decrease in
Year Net Premiums Written Employee (EE) at Dec. 31, No. of EE's
- --------------------------------------------------------------------------
1996 $692,239 $433 1,600 (50)
1995 $757,021 $458 1,650 (160)
1994 $697,941 $386 1,810 (110)
Controlled Legal Expenses. The Company's loss expense ratio has averaged
10.9% for the three-year period ended December 31, 1996. The Company plans
to reduce this ratio by reducing the legal fees paid in the course of the
claim settlement process. In 1996, these legal expenses totaled
approximately $23 million, or 3% of net premiums earned. The litigation
plan is a four-pronged approach to achieve savings without sacrificing the
quality of legal advice and representation to Selective's insureds. The
program involves expansion of the Company's staff counsel operations
(attorneys employed by the Company to represent the interests of insureds)
where the Company has an average suit cost about 60% lower than outside
counsel. The program also includes: (i) the introduction of fixed fee
schedules for cases handled by outside counsel for states
other than New Jersey; (ii) greater use of arbitration services to avoid
higher costs associated with going to trial; and (iii) the use of a legal
fee audit review service to help identify billing errors.
Automation. Insurance is a detailed, paper-intensive business.
Available computer technology offers significant potential for utilizing
automation to support the Company's objectives to reduce expenses.
The Commercial Lines Automated System ("CLAS"), originally implemented
in 1995 and completed in 1996, eliminates a number of manual steps,
reducing the time it takes to process commercial business. With instant
access to the information, underwriters and claim adjusters are readily
able to answer questions, process changes quickly, verify coverages and
work more efficiently with agents to quote new business.
Rating and product information is available for Selective agents on
CD-Rom. Using Selective-specific software in their offices, the agents
can obtain initial pricing on accounts. That information can be
transferred electronically between the agent, AMS and branch office,
thus enabling Selective to provide faster turnaround on policy issuance
and coverage revisions.
Claims management specialists, equipped with laptop computers, have
electronic access to current claim information and can input log notes
from the field and authorize claim payment quickly and easily. A project
team is developing a new system - targeted for 1998 - that will
enhance the claims adjusting process via laptop computer by enabling
complete claims entry and access to database information from the field.
Expand Business Outside New Jersey
- ----------------------------------
Geographic Diversification. One of the Company's strategies
is to improve the geographic balance of its business through long-term
diversification strategy. Geographic diversification safeguards
against exposure to the regulatory environment and weather related
catastrophes of any one jurisdiction. Currently 60% of the Company's
business is written in New Jersey, a decrease of approximately 1 percentage
point from 1995, with most of the remaining business written in Pennsylvania,
New York, South Carolina, Virginia, Maryland, Delaware, North Carolina
and Georgia. In 1992, the Parent acquired Niagara. Niagara's principal
insurance subsidiary, EIC, writes most of its business in New York,
which in 1996 accounted for approximately 7% of the Company's overall
net premiums written. The Company continues to focus on increasing its
market share in the other Eastern states where it currently does business,
as well as completing its six-state expansion into the Midwest.
Midwest Expansion. In 1996, the Company began writing business in
Illinois, the first state of a six-state expansion into the Midwest, which
is expected to include Iowa, Indiana, Wisconsin, Michigan and Ohio in 1997.
The Company believes that these areas offer growth opportunities in the
middle-market segments targeted by the Company. This region experiences
fewer natural catastrophes than Mid-Atlantic and Southern states and
offers, for the most part, a stable regulatory and legal environment.
In addition, population is spread outside of major metropolitan areas,
a factor that suits the Company's underwriting philosophy and operation.
With no branch offices planned for the Midwestern states, the Company
will utilize its evolving automation capabilities to facilitate field
underwriting as well as field claims adjusting.
Employee Rewards
- ----------------
The Company's rewards programs are based on the achievement of specific
business objectives and on individual and team performance measured by
business performance goals related to increasing profitability and
increasing geographic diversification. These goals were developed from
the Company's overall strategy for growth and profitability. Employees
have set individual and team targets that have gone beyond their normal
responsibilities. Total incentive compensation (including payroll taxes)
amounted to $5 million, $6 million and $5 million for 1996, 1995
and 1994, respectively.
PAGE 6
Industry Segments
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The Insurance Subsidiaries are engaged in writing property and casualty
insurance. The SBUs market and sell the insurance products to specific
customer groups. The products marketed encompass several lines of
insurance. Accordingly, the Company has classified its business into two
principal segments: commercial and personal insurance. For Financial
Information pertaining to the Company's industry segments, see Note 19 to
the Company's Consolidated Financial Statements on page 52 of the 1996
Annual Report, incorporated herein by reference.
Commercial Insurance
- --------------------
The Company's commercial insurance coverages consist of the following:
Workers' Compensation coverage insures employers against employee claims
resulting from work-related injuries. Compensation is payable regardless
of who was at fault. There are four types of benefits payable under
workers' compensation policies: medical benefits, vocational
rehabilitation benefits, disability benefits and death benefits. Because
the Insurance Subsidiaries write voluntary workers' compensation, they
are also required to write involuntary coverage. Involuntary workers'
compensation business is written through the National Workers'
Compensation Reinsurance Pool ("NCCI"). Effective January 1, 1995,
Selective withdrew from the New Jersey NCCI and chose to accept direct
assignments of involuntary workers' compensation coverage in an effort
to reduce processing costs and improve the loss experience of this
business through better loss control, managed care and risk management.
Commercial Automobile coverage insures policyholders against losses
incurred from bodily injury, bodily injury to third parties, property
damage to an insured's vehicle (including fire and theft) and property
damage to other vehicles and property as a result of automobile accidents
involving commercial vehicles. These policies may include uninsured
motorist coverage. Because the Insurance Subsidiaries write voluntary
commercial automobile insurance, they are also required by law to write
involuntary coverage through the Commercial Automobile Insurance Procedure
("CAIP").
Liability coverage insures policyholders against third party liability
for bodily injury and property damage, including liability for products
sold, and the defense of claims alleging such damages. The liability
lines continue to reflect the potential exposure to environmental claims.
The emergence of these claims is slow and highly unpredictable.
Environmental liabilities are contingent on very complex legal and
coverage issues making reliable estimation of the exposure difficult,
if not impossible. For additional information about the Company's exposure
to environmental liabilities, see the section entitled "Environmental
Reserves" on pages 30 through 32, inclusive in the 1996 Annual Report, and
note 15(a) to the Consolidated Financial Statements on pages 49 and 50 of
the 1996 Annual Report, all of which are incorporated herein by reference.
Property coverage insures policyholders against commercial property
damage caused by fire, wind, hail, water, theft and vandalism, and other
perils.
Umbrella coverage affords policyholders liability protection
supplemental to that provided under primary liability policies and
insures against catastrophic losses. Umbrella coverage normally is
written in conjunction with other commercial insurance to provide a
complete insurance package for commercial accounts.
Bonds is responsible for writing fidelity and surety, including but not
limited to: bid, performance, maintenance, supply, site plan and
subdivision bonds.
PAGE 7
In 1996, Selective's commercial insurance products were developed and
marketed through six SBUs. The following table sets forth, by commercial
strategic business unit, the Company's net premiums written, net premiums
earned, underwriting income or loss on a GAAP basis and the statutory
combined ratio for the periods indicated:
1996 Commercial SBU Highlights (1)
(dollars in thousands)
- ----------------------------------
Net Net GAAP Statutory
Premiums Premiums Underwriting Combined
Written Earned Income (Loss) Ratio(2)
- ------------------------------------------------------------------------
All Commercial SBUs 1996 $475,104 477,506 (24,832) 105.3%
1995 535,050 521,196 (18,475) 103.1
1994 489,797 472,218 (23,784) 103.8
Contractors 1996 157,722 158,317 (6,813) 104.5
1995 178,126 170,486 (9,531) 104.9
1994 159,292 150,977 (1,330) 99.7
Mercantile and Service 1996 148,280 148,122 (11,948) 108.3
1995 167,832 163,741 (5,576) 102.7
1994 150,738 148,398 (9,892) 105.2
Public Entities 1996 86,673 91,513 (4,508) 104.8
1995 106,802 106,702 (4,556) 103.7
1994 105,231 101,961 (8,987) 107.3
Habitational and 1996 46,870 44,395 (3,188) 107.5
Recreational 1995 45,547 44,832 (1,660) 103.9
1994 42,100 40,468 (4,063) 108.1
Manufacturing and 1996 28,006 27,638 375 98.9
Processing 1995 29,236 28,138 2,230 92.5
1994 26,134 23,881 (1,210) 103.2
Bonds 1996 6,965 6,815 1,142 78.7
1995 6,756 6,493 1,974 69.0
1994 6,336 5,584 527 97.0
Other (3) 1996 588 706 108 N/M
1995 751 804 (1,356) N/M
1994 (34) 949 1,171 N/M
(1) Certain amounts in prior years' Commercial SBU highlights have been
reclassified to conform with the 1996 presentation. Such
reclassifications had no effect on the Company's net income or
stockholders' equity.
(2) Industry standard not generally accepted accounting principles.
(3) The calendar year results reflect loss and loss expense savings
(development) for accident years prior to 1993 (the year in which the
SBUs were formed).
N/M Not meaningful
The commercial SBUs' net premiums written represented approximately 70%
of the total net premiums earned in 1996. Most commercial SBUs experienced
a decline in net premiums written for 1996, primarily due to: (i) higher
premiums recorded in 1995 as a result of the reduction in premium
processing backlog of $25 million; (ii) lower premium volume of
approximately $20 million due to agency terminations; (iii) a reduction
in existing business (renewal retention) attributable to a highly
competitive commercial lines marketplace as well as non-renewals
resulting from the Company's reunderwriting (reevaluating) of certain
business classes, and/or accounts; (iv) workers' compensation rate
decreases, which lowered premiums written by $8 million; and (v) a trend
towards self-insurance mechanisms and other alternative markets,
particularly in the public entities SBU, which reduced net premiums
written by approximately $5 million. For the three-year period ended
December 31, 1996, the Commercial SBUs, in total, average statutory
combined ratio was 104.1%. The combined ratio for 1996 was 105.3% and
reflected the numerous weather-related storm losses, which increased the
ratio by 3.0 points. Excluding these storm losses, the combined ratio
improved by .8 points, which reflected several factors, such as a sound
underwriting approach, reunderwriting of certain business classes and
active loss control preventions. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company's commercial SBUs consist of the following:
The Contractors SBU focuses on providing commercial insurance coverage
for the building, carpentry and electrical trades, as well as grading,
excavation and other construction businesses. In 1996, the Contractors
SBU's net premiums earned represented 33% of the Company's total net
premiums earned for commercial insurance. For the three-year period ended
December 31, 1996, the Company's average statutory combined ratio for this
SBU was 103.0%. Contractors generated a statutory combined ratio of 104.5%
in 1996, down from 104.9% in 1995. During 1996, improvement was seen in the
building construc-...
PAGE 8
...tion business class, as well as in the New Jersey involuntary workers'
compensation results. Conversely, the heavy construction business class,
represented 3% of this SBUs net premiums earned, and generated approximately
40% (excluding storm losses), or $3 million, of its total underwriting loss.
Loss development on older claims has negatively impacted underwriting results
in this business class.
The Mercantile and Service SBU focuses on providing commercial insurance
coverage to retail stores, offices, religious institutions, wholesalers
and service businesses. In 1996, the Mercantile and Service SBU's net
premiums earned represented 31% of the Company's total net premiums earned
for commercial insurance. For the three-year period ended December 31,
1996, the Company's average statutory combined ratio for this SBU was
105.4%. Mercantile and Service generated a statutory combined ratio of
108.3% in 1996 up from 102.7% in 1995. The increase in the combined ratio
reflected the numerous weather-related storm losses, which increased the
1996 ratio by 4.4 points. Excluding these storm losses, the combined
ratio increased by 1.2 points. Also contributing to the higher ratio was
unfavorable underwriting results in its business owners policy ("BOP")
product, which represented 15% of this SBU's net premiums earned, and
generated approximately 25% (excluding storm losses), or $3 million, of
its total underwriting loss. A major effort is under way to improve BOP
results, including pricing analysis, reunderwriting, revisions to
underwriting guidelines, and an enhanced program to update property to
current market values.
The Public Entities SBU focuses on providing commercial insurance
coverage for public entities including: municipalities, school boards and
volunteer fire departments and rescue squads. In 1996, the Public
Entities SBU's net premiums earned represented 19% of the Company's total
net premiums earned for commercial insurance. For the three-year period
ended December 31, 1996, the Company's average statutory combined ratio
for this SBU was 105.3%. Public Entities generated a statutory combined
ratio of 104.8% in 1996, up from 103.7% in 1995. The increase in the
combined ratio reflected the numerous weather-related storm losses, which
increased the 1996 ratio by 2.5 points. Excluding these storm losses, the
combined ratio improved by 1.4 points. The improved results reflected:
(i) the ongoing efforts to reevaluate the existing book of business and
obtaining rate increases where needed, (ii) improved New Jersey involuntary
workers' compensation results and (iii) reduced exposure to highly
specialized errors and omissions type-claims.
The Habitational and Recreational SBU focuses on providing commercial
insurance coverage to hotels and motels, condominiums, property owner
associations, golf courses, country clubs, restaurants, membership
organizations and other miscellaneous types of recreational industries. In
1996, this SBU's net premiums earned represented 9% of the Company's total
net premiums earned for commercial insurance. For the three-year period
ended December 31, 1996, the Company's average statutory combined ratio for
this SBU was 106.5%. Habitational and Recreational generated a statutory
combined ratio of 107.5% in 1996 up from 103.9% in 1995. The increase in
the combined ratio reflected the numerous weather-related storm losses,
which increased the 1996 ratio by 6.5 points. Excluding these storm losses,
the combined ratio improved 2.9 points due to the reunderwriting of
certain business classes and active loss control prevention. However,
this business unit still continues to be negatively affected by results in
the apartment business class, which represented 14% of this SBU's net
premiums earned, and generated approximately 40% (excluding storm losses),
or $1 million, of its total underwriting loss. The Company is tightening
underwriting standards for apartment business, as well as for lodging, and
eating and drinking establishments in New York.
The Manufacturing and Processing SBU focuses on providing commercial
Insurance coverage for light industrial and processing businesses with low
product liability exposures. In 1996, the Manufacturing and Processing
SBU's net premiums earned represented 6% of the Company's total net
premiums earned for commercial insurance. For the three-year period ended
December 31, 1996, the Company's average statutory combined ratio for this
SBU was 98.2%. Manufacturing and Processing generated a statutory combined
ratio of 98.9% in 1996 up from 92.5% in 1995. The increase in the combined
ratio reflected the numerous weather-related storm losses, which increased
the ratio by 5.7 points. Excluding these storm losses, the combined ratio
increased by .7 points. The favorable underwriting results reflect high
underwriting standards and this SBUs focus on light industrial and
processing businesses with low product liability exposures.
The Bonds SBU focuses on providing commercial insurance coverage for
fidelity and surety, including but not limited to: bid, performance,
maintenance, supply, site plan and subdivision bonds. In 1996, the Bonds
SBU's net premiums earned represented 2% of the Company's total net
premiums earned for commercial insurance. For the three-year period ended
December 31, 1996, the Company's average statutory combined ratio for this
SBU was 81.6%. Twenty out of the last twenty-one years have been
profitable for bonds.
The Selective Risk Managers SBU was established in early 1997 and is
the Company's seventh commercial SBU. This SBU is structured to focus on
business opportunities in alternative insurance markets and to lead
underwriting and sales efforts for large account, self-insured, group,
association, and fee-for-service business as well as reinsurance.
Developed several years ago in anticipation of this trend, Selective
Technical Administrative Resources, Inc. ("SelecTech"), which is now part
of this ...
PAGE 9
...SBU, generates fee income by providing third party administrative ("TPA")
services to self-insured accounts. SelecTech is also responsible
for administering a comprehensive managed care program, which facilitates
quality care and case management while managing costs on all medical
claims.
Personal Insurance
- ------------------
The following table sets forth, by personal lines coverages, the
Company's net premiums written, net premiums earned, underwriting
income or loss on a GAAP basis and the statutory combined ratio for the
periods indicated:
Personal Lines SBU Highlights (1)
(dollars in thousands)
- --------------------------------
Net Net GAAP Statutory
Premiums Premiums Underwriting Combined
Written Earned Income (Loss) Ratio (2)
Total 1996 $217,167 217,473 4,819 97.5%
Personal 1995 221,935 221,587 1,762 98.2
Lines SBU 1994 208,080 207,988 (11,567) 105.9
Automobile 1996 194,118 193,721 4,261 97.5
1995 197,902 197,398 5,494 96.8
1994 185,077 184,062 (2,380) 100.8
Homeowners 1996 15,611 16,245 (3,005) 118.9
1995 15,325 15,412 (5,993) 131.1
1994 13,980 14,982 (10,287) 183.3
Flood 1996 - - 1,955 -
1995 - - 756 -
1994 - - 653 -
Other 1996 7,438 7,507 1,608 79.2
1995 8,708 8,777 1,505 82.6
1994 9,023 8,944 447 91.1
(1) Certain amounts in prior years' Personal lines SBU highlights have been
reclassified to conform with the 1996 presentation. Such
reclassifications had no effect on the Company's net income or
stockholders' equity.
(2) Industry standard not generally accepted accounting principles.
Personal Lines net premiums written decreased 2% in 1996 over 1995. The
decline occurred in New Jersey, which accounted for 84% of personal lines
net premiums written.
The Personal Lines SBU represented approximately 30% of the total net
premiums earned in 1996. The Personal Lines SBU underwriting results have
improved significantly over the past two years, resulting in an
underwriting gain of $5 million and $2 million in 1996 and 1995,
respectively, compared to an underwriting loss of $12 million in 1994. See
Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations." For the three-year period ended December 31, 1996,
the Personal Lines SBU average statutory combined ratio was 100.5%. The
combined ratio for 1996 was 97.5% and reflected the numerous weather-
related storm losses, which increased the ratio by 1.9 points. Excluding
these storm losses, the combined ratio improved by 2.6 points, which
reflected several factors, such as a low underwriting expense ratio, a
sound underwriting approach, aggressive homeowners inspection programs
o ensure that all property values reflect the amount necessary to replace
the home in the event of loss, continued emphasis on fraud detection, and
modest base rate changes as well as favorable loss experience in automobile.
The Company's personal insurance coverages consist of the following:
Personal Automobile coverage insures individuals against losses incurred
from personal bodily injury, bodily injury to third parties, property
damage to an insured's vehicle (including fire and theft), property damage
to other vehicles and other property as a result of automobile accidents
involving personal vehicles. These policies may include uninsured motorist
coverage. In 1996, personal automobile net premiums earned represented 89%
of the Company's total net premiums earned for personal insurance. For the
three-year period ended December 31, 1996, the Company's average statutory
combined ratio for this coverage was 98.4%. Since January 1, 1990, the
Company has been successful in obtaining personal automobile rate increases
and individual surcharges that amounted to 55.8% on a compounded basis.
Growth in net premiums earned due to higher rates was approximately $5
million, $8 million and $4 million for 1996, 1995 and 1994, respectively.
In addition to personal automobile rate adequacy improving, the Company is
seeing important fundamental changes within this marketplace, including
safer cars, greater fraud detection and increased public awareness of the
costs associated with reckless and drunk driving. The 1996 portion of the
New Jersey Unsatisfied Claim and Judgment Fund ("UCJF") premium assessment...
PAGE 10
....charged to the personal automobile line of insurance was $5 million as
compared to $1 million in 1995 and $7 million in 1994. The significant
increase in the 1996 UCJF assessment over 1995, reflected the one-time
benefit in 1995 of lower ceded premiums recorded for the UCJF.
Homeowners coverage insures individuals for losses to their residences
and personal property such as those caused by fire, wind, hail, water
damage, theft and vandalism and against third party liability claims.
Additional coverage for specific personal property items can be purchased
on a scheduled personal property basis. In 1996, homeowners net premiums
earned represented 7% of the Company's total net premiums earned for
personal insurance. For the three-year period ended December 31, 1996, the
Company's average statutory combined ratio for this coverage was 144.4%.
On a statutory basis, homeowners coverage generated a combined ratio of
118.9% in 1996, down from 131.1% in 1995. Underwriting results also
improved in the homeowners line of insurance despite $3 million in
catastrophe losses resulting from the numerous weather-related storm losses
in 1996. Excluding these storm losses, the combined ratio improved by
30.8 points. Improvements in this line were attributable to an aggressive
homeowners inspection program that was completed to ensure that all
property values reflect the amount necessary to replace the home in the
event of a loss, reduced catastrophe reinsurance costs and improving rate
adequacy.
Personal Catastrophe Liability coverage, included in the "Other" category
in the personal lines table, affords policyholders liability protection
supplemental to that provided under automobile and homeowners policies and
insures against catastrophic losses. This coverage normally is written in
conjunction with other personal insurance. In 1996, net premiums earned for
personal catastrophe liability coverage represented 2% of the Company's
total net premiums earned for personal insurance. For the three-year period
ended December 31, 1996, the Company's average statutory combined ratio for
this coverage was 67.1%.
Flood coverage, which is provided through the personal lines SBU, is
ceded 100% to the National Flood Insurance Program. The Company is a
servicer and not an underwriter of this type of insurance and therefore
bears no risk of policyholder loss. The Company receives a servicing fee
from which it pays agency commissions and other related expenses. The
flood business generated a profit of $2 million, $1 million and $1 million
in 1996, 1995 and 1994, respectively.
Marketing and Distribution
- --------------------------
In 1996, the Company's products were developed and marketed through the
Company's seven SBUs. These customer-focused SBUs evaluate the marketplace
and provide a broad range of products and services specifically developed
to meet the needs of the Company's agents and insureds in a particular
market or territory. Selective Risk Managers, formed in 1997, provides to
the Company and its agents business opportunities in the insurance
alternative markets. This is an important addition to Selective's product
portfolio, giving the agents an outlet for creative, nontraditional ways
to meet the coverage and risk financing needs of their customers.
The Insurance Subsidiaries sell their insurance products through a network
of approximately 760 independent insurance agencies supported by seven
full-service branch offices. The Company has maintained a strong relationship
with its agency network by providing superior service, a stable marketplace
and applying consistent underwriting standards. Over the past three years,
the Company's agency force, in total, decreased by approximately 300 agencies
reflecting terminations, as well as consolidations within the agency
population. Agency terminations accounted for about 270 of the overall
reduction. In 1996, the Company began writing business in Illinois. That
was the first step of a six-state expansion into the Midwest, which is
expected to include Iowa, Indiana, Wisconsin, Michigan and Ohio in 1997.
The Company is entering these Midwestern states utilizing a virtual office
concept, a "no walls" field operation. Under the direction of a field
manager, the Company's underwriting, claims and loss control specialists
work from offices in their homes, with support and processing handled in
Selective's corporate office in New Jersey via computers and data lines.
The Company's continuing focus on profitable premium growth is closely
linked to the quality of the Company's relationships with the independent
agents who sell its products and services. The Company believes that the
SBUs enhance its level of service to independent insurance agents and that
the AMSs and CMSs will further enhance the level of service.
Underwriting
- ------------
Commercial insurance underwriting activities are conducted by branch AMSs
who apply the Company's underwriting guidelines for particular policies
and types of customers. In addition, home office staff specialists and
the SBUs provide additional technical support to the branch offices when
needed. Substantially all of the personal insurance underwriting
activities are conducted at the home office under supervision of the
centralized Personal Lines SBU.
PAGE 11
The branch offices and the SBUs work together to develop pricing, growth
and profitability objectives. The branch AMSs deal directly with Selective's
independent insurance agencies, and their frequent communication provides
the Company with information as to the agencies' needs for products and
pricing. This information is used by the branch offices and SBUs to develop
the necessary products, pricing and applicable underwriting guidelines.
For certain classes of business and policy limits (with the exception of
umbrella policies), certain agencies have the authority to bind the
Insurance Subsidiaries. The Insurance Subsidiaries have a period,
generally 60 days after the effective date of coverage, during which they
can cancel undesirable risks. During the 60 day period, the Insurance
Subsidiaries are required to pay any claim which would be covered under
such policies. The Company's agents' handbook sets forth underwriting
criteria for particular policies and insureds. When a risk falls outside of
the established guidelines, the agencies must contact their respective
branch AMS to obtain authorization to bind coverage. Any underwriting that
exceeds the branch AMS's authority requires home office approval. Policies
that are accepted become subject to regulatory limitations on policy
cancellations and, except for nonpayment of premiums, generally may not be
cancelled after the first 60 days other than at renewal upon prescribed
prior notice of cancellation.
Claims
- ------
Claims on policies are investigated and settled primarily by CMSs who are
in the field and assigned to key agents. Losses are reported directly by
the agent to its CMS who investigates and resolves the claim in person
with the Company's policyholder. This enables Selective to physically
inspect and settle losses in person promptly and accurately. In locales
where there is insufficient claims volume to justify the cost of an
internal claims staff, or when a particular claims expertise is required,
the Insurance Subsidiaries use independent adjusters to investigate and
resolve claims.
The Company's claims policy emphasizes the timely investigation and
settlement of meritorious claims for appropriate amounts, maintenance of
adequate reserves for claims, and the cost-effective delivery of claims
services by controlling loss expenses.
Claims settlement authority levels are established for each adjustor and
supervisor based on their expertise and experience. The setting of
reserves and disposition of property and liability claims in excess of
$100,000 field authority, per claim, requires home office review and
approval. The Company refers all environmental claims to a centralized
environmental claims unit which specializes in the claim management of
these exposures.
The Company has instituted internal procedures to screen claims for
potential fraud. When fraud is suspected, the claim is reviewed by the
Company or outside fraud investigator to determine the appropriate action
before payment is authorized. The Company's automated claims system
enables tracking of claims suspected to be fraudulent to determine the
savings of nonpayment of such claims. In addition, the Company has
introduced antifraud training and educational programs for its
employees.
Reinsurance
- -----------
The Insurance Subsidiaries follow the customary industry practice of
ceding a portion of their risks and paying to reinsurers a portion of the
premiums received under the policies. This reinsurance program permits
greater diversification of business and the ability to write large
policies while limiting maximum net losses. The Insurance Subsidiaries
are parties to reinsurance contracts under which certain types of policies
are automatically reinsured without the need for approval by the reinsurer
of individual risks covered ("treaty reinsurance"), reinsurance contracts
handled on an individual policy or per-risk basis requiring the agreement
of the reinsurer as to each risk insured ("facultative reinsurance") and
certain automatic facultative arrangements that permit the Company to
automatically reinsure risks within certain specified limits ("automatic
facultative reinsurance"). Reinsurance does not legally discharge an
insurer from its liability for the full face amount of its policies, but
does make the reinsurer liable to the insurer to the extent of the
reinsurance ceded.
The Company has a Reinsurance Security Committee ("Reinsurance Committee")
that reviews and approves all reinsurers who do business with the Company.
The analysis includes a review of the financial condition of the reinsurer
as well as applicable company ratings from: (i) A.M. Best; (ii) Insurance
Solvency International; and (iii) Standard & Poor's Insurance Rating
Services ("Standard & Poor's"). Further information is obtained from the
Company's reinsurance brokers, direct reinsurers and market information
sources. Company guidelines require a reinsurer to have an "A-" or better
rating by A.M. Best. However, the Reinsurance Committee may approve
reinsurers who have ratings below "A-" or who have not yet been assigned a
rating.
The Company continuously monitors the reinsurance program to determine
that its protection is not excessive, but adequate to ensure the
availability of funds to provide for losses while maintaining adequate
funds for business growth. The Company's primary reinsurers are American
Re-Insurance Company, Zurich Reinsurance Company of America, St. Paul...
PAGE 12
...Reinsurance Management Corporation and First Excess & Reinsurance
Corporation. In addition, the Company cedes no-fault claims for medical
benefits in excess of $75,000 to the UCJF.
Effective July 1, 1996, the Company revised certain reinsurance programs
from a surplus share and facultative arrangement to a treaty excess of loss
arrangement in order to reduce reinsurance costs and retain more of its
premium volume. The new treaty excess of loss programs cover each property
occurrence in excess of $400,000 up to $10 million and each casualty
occurrence in excess of $1 million up to $50 million, except for commercial
umbrella which is reinsured up to $10 million. In certain instances where
greater capacity is needed for a larger property or casualty risk,
facultative reinsurance is purchased.
The Company's property catastrophe reinsurance program is in five layers
and covers 95% of the losses in excess of $10 million up to $125 million.
In addition to the catastrophe program, the Company maintains a New Jersey
Homeowners Quota Share Program ("Homeowners Quota Share Program"). Under
this program, the Company cedes 85.0% of the direct New Jersey premiums
written and earned and 85.0% of the direct losses and allocated loss
expenses incurred to its reinsurers and receives from the reinsurers a
commission of 37%. In New Jersey, when the property catastrophe program is
combined with the $95 million per occurrence limits of the Homeowners Quota
Share Program, the Company has a total catastrophe cover of $210 million
(excluding the 5% participation) in excess of $1 million.
Effective January 1, 1997, the Company revised its property catastrophe
program. The new program is in three layers and covers 95% of losses in
excess of $10 million up to $55 million and 95% of losses in excess of $75
million up to $135 million. In New Jersey, when combined with the per
occurrence limits of the Homeowners Quota Share Program of $95 million, the
Company has a total catastrophe program of $140 million (excluding the 5%
participation) in excess of $1 million and $60 million (excluding the 5%
participation) in excess of $161 million. For the most part, the new
program increases the Company's net retention in New Jersey (the largest
catastrophe exposure) from $1 million to $21 million, with $20 million of
the net retained amount to be incurred only in the event of losses in
excess of $141 million. Over the past 124 years, New Jersey has had little
historical incidence of catastrophe experience.
Pooling Arrangements
- --------------------
The Insurance Subsidiaries participate in intercompany pooling and
expense sharing arrangements ("pool" or "pooling agreement"). The pool
permits each Insurance Subsidiary to rely on the capacity of the entire
pool, rather than only its own capital and surplus and it prevents any one
from suffering any undue losses, as all Insurance Subsidiaries share
underwriting profits and losses in proportion to their pool participation
percentages. Finally, the pool permits all Insurance Subsidiaries to obtain
a uniform rating from A.M. Best and Standard & Poor's.
The pool participation percentage of each Insurance Subsidiary reflects
the ratio of that subsidiary's policyholders' surplus to the Company's
aggregate policyholders' surplus. The percentages are as follows:
SICA...............55.5%
SWIC...............21.5%
SISC................9.0%
SISE................7.0%
EIC.................7.0%
Through the pool, SICA assumes from the other Insurance Subsidiaries, net
of applicable reinsurance, all of their combined premiums, losses, loss
expenses and underwriting expenses, and SICA cedes to the other Insurance
Subsidiaries 44.5% of the Insurance Subsidiaries' combined premiums,
losses, loss expenses and underwriting expenses. Through the pool, the
Insurance Subsidiaries also share underwriting and administration expenses.
Accounts are rendered within forty five days after the end of the calendar
quarter and are settled within sixty days after the end of the calendar
quarter. The pool may be terminated at the end of any calendar month by
any Insurance Subsidiary giving ninety days prior notice of termination.
Reserves for Net Losses and Loss Expenses
- -----------------------------------------
For information about reserves for net losses and loss expenses, see (i)
the section entitled "Analysis of Reserves for Losses and Loss Expenses" on
pages 28 through 30, inclusive, of the 1996 Annual Report, (ii)
the section entitled "Environmental Reserves" on pages 30 through 32,
inclusive, of the 1996 Annual Report and (iii) notes 15(a) and 17 to the
Consolidated Financial Statements on pages 49 through 51 of the 1996 Annual
Report, all of which are incorporated herein by reference.
PAGE 13
Investments and Investment Policy
- ---------------------------------
For information about investments and investment policy, see the section
entitled "Investments" on pages 18 and 19, of the 1996 Annual Report,
incorporated herein by reference.
Regulation
- ----------
General
- -------
Insurance companies are subject to supervision and regulation in the
states in which they are domiciled and in which they transact business.
Such supervision and regulation relate to numerous aspects of an insurance
company's business and financial condition. The primary purpose of such
supervision and regulation is the protection of policyholders. The extent
of regulation varies but generally is derived from state statutes which
delegate regulatory, supervisory and administrative authority to state
insurance departments. The Company believes that it is in compliance with
applicable regulatory requirements in all material respects as of the date
of this report. Although the U.S. Federal government does not directly
regulate the insurance industry, Federal initiatives from time to time can
have an impact on the industry.
State Regulation
- ----------------
The authority of the state insurance departments extends to such matters
as the establishment of standards of solvency, which must be met and
maintained by insurers, the licensing of insurers and agents, the
imposition of restrictions on investments, premium rates for property and
casualty insurance, the payment of dividends and distributions, the
provisions which insurers must make for current losses and future
liabilities, the deposit of securities for the benefit of policyholders
and the approval of policy forms. State insurance departments also conduct
periodic examinations of the financial and business affairs of insurance
companies and require the filing of annual and other reports relating to
the financial condition of insurance companies. Regulatory agencies
require that premium rates not be excessive, inadequate or unfairly
discriminatory. In general, the Insurance Subsidiaries must file all
rates for personal and commercial insurance with the insurance department
of each state in which they operate. In recent years, state regulatory
agencies have generally been slow to approve proposed rate changes for
personal lines and workers' compensation.
All states have enacted legislation that regulates insurance holding
company systems. Each insurance company in a holding company system is
required to register with the insurance supervisory agency of its state of
domicile and furnish information concerning the operations of companies
within the holding company system that may materially affect the operations,
management or financial condition of the insurers. Pursuant to these laws,
the respective departments may examine the Parent and the Insurance
Subsidiaries at any time, require disclosure or prior approval of material
transactions of the Insurance Subsidiaries with any affiliate and require
prior approval or notice of certain transactions, such as dividends or
distributions from the Insurance Subsidiary domiciled in that state to the
Parent.
NAIC Guidelines
- ---------------
The Insurance Subsidiaries are subject to the general statutory
accounting practices and reporting formats established by the National
Association of Insurance Commissioners ("NAIC"). The NAIC also promulgates
model insurance laws and regulations relating to the financial and
operational regulation of insurance companies, which includes the Insurance
Regulating Information System ("IRIS"). IRIS identifies eleven industry
ratios and specifies "usual values" for each ratio. Departure from the
usual values on four or more of the ratios can lead to inquiries from
individual state insurance commissioners as to certain aspects of an
insurer's business. The Insurance Subsidiaries on a consolidated basis
have, in recent years, met all of the IRIS test ratios.
NAIC rules and regulations generally are not directly applicable to an
insurance company until they are adopted by applicable state legislatures
and departments of insurance. NAIC model laws and regulations have become
increasingly important in recent years, due primarily to the NAIC's
Financial Regulations Standards and Accreditation Program. Under this
program, states which have adopted certain required model laws and
regulations and meet various staffing and other requirements are
"accredited" by the NAIC. Such accreditation reflects an eventual
nationwide regulatory network of accredited states. All of the states that
the Insurance Subsidiaries are domiciled in are accredited.
The NAIC Model Act was adopted by the NAIC to, among other things,
enhance the regulation of insurer insolvency. This act includes certain
risk-based capital ("RBC") requirements for property and casualty insurance
companies. These requirements are designed to assess capital adequacy and
to raise the level of protection that statutory surplus provides for
policyholders. The NAIC Model Act measures major areas of risk facing
property and casualty insurers: (i) asset risk, which is the risk of
default and decline in market value of assets; (ii) credit risk, which is
the risk that ceded reinsurance and other receivables might not be
collected; (iii) underwriting risk, which is the risk that prices or
reserves are inadequate; and (iv) off balance sheet risk, which includes
excessive premium growth and contingent liabilities. Insurers having less
total adjusted capital than required by the act are subject to varying
degrees of regulatory action depending on the level of capital inadequacy.
PAGE 14
The model law establishes four levels of regulatory action. The extent of
regulatory intervention and action increases as the ratio of an insurer's
total adjusted capital, as defined in the model law, to its Authorized
Control Level ("ACL"), as calculated under the model law, decreases. The
first action level, the Company Action Level, requires an insurer to submit
a comprehensive financial plan of corrective actions to the insurance
regulators if total adjusted capital falls below 200% of the ACL amount.
The second action level, the Regulatory Action Level, requires an insurer
to submit a plan containing corrective actions and permits the insurance
regulators to perform an examination or other analysis and issue a
corrective order if total adjusted capital falls below 150% of the ACL
amount. The Authorized Control Level, the third action level, allows the
regulators to take any action they deem necessary, including placing the
insurer under regulatory control or rehabilitate or liquidate an insurer,
in addition to the aforementioned actions if total adjusted capital falls
below the ACL amount. The fourth action level is the Mandatory Control
Level which requires the regulators to place the insurer under regulatory
control if total adjusted capital falls below 70% of the ACL amount. Based
upon the 1996 statutory financial statements for the Insurance Subsidiaries,
each Insurance Subsidiary's total adjusted capital exceeded the Company
Action Level, and the risk-based capital ratios are as follows:
SICA..............481%
SWIC..............536%
SISE..............475%
SISC..............525%
EIC...............450%
Automobile Insurance Regulation
- -------------------------------
New Jersey insurance regulations presently require insurers to write all
personal automobile coverage presented to them from drivers with eight
points or less on their driving record. While SICA is required to write
such coverage, the rates charged by SICA reflect the insured's motor
vehicle record and incidence of at-fault accidents. Drivers whose poor
driving record makes them ineligible to otherwise obtain insurance must
purchase insurance from the Personal Automobile Insurance Plan ("PAIP").
SICA receives its proportionate share of PAIP business based on its
voluntary personal automobile writings. Premiums and losses under PAIP are
borne by the Company. Pennsylvania, Delaware, District of Columbia,
Virginia, Georgia and New York also maintain assigned risk plans. Each
plan requires a company to accept its proportionate share of this business
based upon its share of the voluntary market.
Because the Company writes voluntary commercial automobile insurance in
New Jersey, the Company is also required by New Jersey law to write
involuntary coverage through a CAIP for those insureds who are otherwise
unable to obtain insurance in the marketplace. Participation in the CAIP is
based on the Company's share of the voluntary commercial automobile market.
Pennsylvania, Delaware, Virginia, South Carolina, Georgia and New York also
maintain assigned risk plans. Each plan requires a company to accept its
proportionate share of this business based upon its share of the voluntary
market.
South Carolina insurance regulations require insurers to write all
personal and certain commercial automobile coverage presented to them by
drivers. Although the Company is required to write all new applications,
the Company is able to cede up to 35% to the South Carolina Reinsurance
Facility ("SCRF"). This ceding mechanism allows the Company to cede less
desirable risks to the SCRF. The SCRF operates on a
no-profit, no-loss basis through a surcharge on all automobile policies
written in South Carolina.
The UCJF provides for an insurance fund to reimburse auto insurers paying
no fault claims for medical benefits in excess of $75,000 without limit for
claims against policies issued or renewed prior to January 1, 1991 and up
to a maximum of $250,000 per claim against policies issued or renewed
thereafter. Supplementally, the UCJF compensates persons not required by
law to carry automobile insurance who are injured in accidents with
uninsured or unidentified motorists. The UCJF is funded through assessments
on auto insurers in proportion to net direct written personal and commercial
auto premiums. UCJF assessments are treated as ceded reinsurance premiums,
and recoveries are treated as reinsurance recoverables.
Excess Profits
- --------------
There is an excess profits law in New Jersey, which sets a maximum profit
level on personal automobile insurance. Under New Jersey regulations, an
insurer's excess profits earned on direct insurance written in New Jersey
on private passenger automobiles, as determined pursuant to an actuarial
formula set forth in applicable regulations, are subject to refund or credit
to policyholders. An excess profits calculation must be made by an insurer
for this purpose and submitted to the New Jersey Department of Insurance
each year for the three-year period including such year and the two calendar
years immediately preceding such year. The Company estimates that excess
profits are incurred at combined ratios below approximately 99%, and
management evaluates profitability levels with respect to potential
exposure to such required refunds. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
PAGE 15
Homeowners Insurance Regulation
- -------------------------------
The New Jersey Department regulations prohibit the cancellation or
non-renewal of homeowners insurance policies for any underwriting reason
or guideline which is arbitrary, capricious or unfairly discriminatory or
without adequate notice to insured.
Among the areas of regulatory mechanisms to which the Company is subject
are those designed to address problems in the homeowners property insurance
marketplace. These mechanisms are designed to address perceived problems in
the availability and affordability of such insurance. These mechanisms take
two forms, voluntary and involuntary.
Voluntary mechanisms such as the recently adopted New Jersey Windstorm
Market Assistance Program ("Program") generally do not result in
assessments to the Company. The Program is designed to assist property
owners in New Jersey coastal areas in obtaining homeowners insurance. The
Company has the option to accept or decline to write insurance offered to
it through the Program. Offerings are made to the Company on a random
basis according to its percentage of homeowners writings in the entire
state of New Jersey. If accepted by the Company, such business would be
treated as would any other property business written by the Company.
Involuntary mechanisms such as the New Jersey Fair Access to Insurance
Requirements ("NJFAIR") generally result in assessments to the Company.
NJFAIR writes fire and extended coverage on homeowners for those
individuals otherwise unable to secure insurance. Policies are issued by
NJFAIR and the deficit, if any, is assessed to those companies writing
homeowners insurance in the state based on the Company's share of the
voluntary property market. Similar involuntary plans exist in the District
of Columbia and most other states in which the Company operates including:
Delaware, Georgia, Maryland, New York, North Carolina, Pennsylvania and
Virginia.
Workers' Compensation Insurance Regulation
- ------------------------------------------
Because the Insurance Subsidiaries write voluntary workers' compensation
insurance, they also are required by state law to write involuntary
coverage, which is coverage for those insureds which are otherwise unable
to obtain insurance in the marketplace. Insurance companies that underwrite
voluntary workers' compensation insurance can either write involuntary
coverage assigned by state regulatory authorities or participate in the
NCCI, which is a sharing arrangement among carriers for involuntary risks.
The Company participates in the NCCI; however, effective January 1, 1995,
the Company withdrew from the New Jersey NCCI and commenced accepting direct
assignments.
Environmental Regulation
- ------------------------
Although the U.S. Federal government does not directly regulate the
insurance industry, Federal environmental initiatives can have an impact on
the industry. Authorization for funding for the hazardous substances
superfund under the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund") expired on December 31, 1995. Despite the
expiration of funding, currently there are still funds remaining in
Superfund from prior years. At this time, the Company is unable to predict
whether, or in what form Superfund will be reauthorized; and what the
possible impact on the Company will be.
Other Assessments
- -----------------
All states require insurers licensed to do business in their state to bear
a portion of the loss suffered by insureds as a result of the insolvency of
other licensed insurers. Insurers can be assessed, on the basis of a
percentage of premiums written for the relevant lines of insurance in that
state each year, to pay the claims of insureds of insolvent insurers.
Generally, most of these assessments are recoverable either in the form of
policy surcharges, premium tax reductions or, since such assessments are a
component of the rate structure, in the form of rate increases. In New
Jersey, contingent upon approval by the Commissioner of Insurance, these
assessments are recoverable through policy surcharges. Consequently, the
impact of these assessments to the Company is not significant.
Regulation of Dividends and Distributions
- -----------------------------------------
The Parent is an insurance holding company whose principal assets consist
of the stock of the Insurance Subsidiaries. The Insurance Subsidiaries are
subject to supervision and regulation in the states in which they are
domiciled and in which they transact business. The Parent's ability to
declare and pay dividends on common stock is affected by the ability of the
Insurance Subsidiaries to declare and distribute dividends under the
regulatory limitations of such states. See Item 5. "Market For Registrant's
Common Equity and Related Stockholder Matters."
PAGE 16
Legislative and Regulatory Proposals
- ------------------------------------
The Governor of New Jersey, in her 1997 State of the State address, set
forth a proposed agenda for personal automobile insurance reform intended to
reduce personal automobile insurance rates in the state. The Governor's
proposals also include, among other things: (i) eliminating automatic annual
cost of living premium increases; (ii) eliminating policyholder surcharges;
(iii) modifying rights of insurers to decline renewal of policies; and (iv)
providing insureds with a range of policy options encompassing varying
levels of coverage. The Company is unable to predict whether or in what form
such initiatives might be implemented or the effect, if any, on the Company.
Senate Bill, S-254 has passed the South Carolina Senate. This bill would
sunset the South Carolina Reinsurance Facility and establish an assigned
risk pool. The effect of this legislation is to eliminate the current
system under which insurers are assessed costs for the operation of the
SCRF and subsequently recoup such costs from insureds. The Company is
unable to predict the likelihood of passage of such bill, the form in which
it may be enacted, or the effect, if any, on the Company.
Competition
- -----------
The Company competes with other regional and national insurance companies,
self-insurers and direct writers of insurance coverages. Many of these
competitors are larger than the Company with greater economic resources.
The property and casualty insurance industry is highly competitive on the
basis of both price and service. There are numerous companies competing for
this business in the geographic areas in which the Insurance Subsidiaries
operate, particularly outside of New Jersey. The Company's competitors
could undertake actions which could adversely affect the Company's
underwriting results, such as pricing premiums more aggressively. The
insurance industry is currently experiencing pricing competition, which
impacted the Company's commercial business. Selective is unwilling to
sacrifice its underwriting standards and profitability by competing solely
on the basis of price. In addition, because the Company's insurance products
are marketed through independent insurance agencies, most of which represent
more than one insurance company, the Company faces competition within each
agency. However, the Company believes that the loss of any particular
independent insurance agency would not have a material adverse effect on the
Company's financial position and operating results.
The Company believes that as a regional company it has certain
competitive advantages over national companies in the states, such as New
Jersey, in which its insurance businesses are concentrated, including a
closer relationship with its agents and a better knowledge of its
operating territories. The Company believes that the branch offices,
SBUs, AMSs and CMSs further enhance its relationship with agents and
policyholders by enabling the Company to provide competitive service and
underwriting.
The Company also faces competition from the implementation of self-
insurance, as many insureds are examining the risks of self-insuring
as an alternative to traditional insurance. Another competitive factor in
the industry involves banks stepping up efforts to break the barriers
between various segments of the financial services industry, including
insurance. These efforts pose new challenges to insurance companies and
agents from industries traditionally outside the insurance business.
In response to these alternatives to traditional insurance, in 1993, the
Company developed SelecTech, now part of the Selective Risk Managers SBU,
to provide TPA services to these customers. Services include workers'
compensation claims administration, loss control and risk management. Within
SelecTech, the Company created SelectCare, a comprehensive managed care
program which is responsible for workers' compensation referrals through all
SBUs, facilitating quality medical care and case management while managing
costs. SelectCare develops a partnership among the coordinating care
physician, the nurse case manager, health care providers, the employer and
claims representative. SelectCare's focus is to facilitate quality medical
care and case management while controlling costs so that injured workers are
rehabilitated and can successfully return to work.
Ratings
- -------
The Company is rated "A+ (Superior)" by A.M. Best. Ratings by A.M. Best
for the insurance industry range from "A++ (Superior)" to "F (in
Liquidation)." According to A.M. Best, an insurer with an "A++" or "A+"
rating has demonstrated superior overall performance. During 1996, A.M.
Best reaffirmed the Company's A+ rating, which A.M. Best advised "reflects
the Company's high-quality balance sheet, strong local market focus,
continued improvement in operating results and strengthened capital
position."
According to A.M. Best, the objective of the rating system is to evaluate
factors affecting the overall performance of an insurance company in order
to provide an opinion of the company's financial strength, operating
performance and ability to meet its obligations to policyholders. The
procedures include quantitative and qualitative evaluations of the
company's financial condition and operating performance. The quantitative
evaluation is based on an analysis of each company's reported financial
performance for at least the previous five fiscal years. These tests
measure a company's performance in the areas of....
PAGE 17
... profitability, capitalization (leverage) and liquidity. A.M. Best also
reviews the following qualitative data: (i) spread of risk;(ii) quality and
appropriateness of reinsurance programs; (iii) quality and diversification
of assets; (iv) adequacy of policy or loss reserves; (v)adequacy of
surplus; (vi) capital structure; and (vii) management's experience and
objectives.
The Company also has an A+ claims-paying rating from Standard & Poor's.
According to Standard & Poor's, insurers with this rating offer good
financial security, but their capacity to meet policyholder obligations is
somewhat susceptible to adverse economic and underwriting conditions.
Claims-paying ability ratings by Standard & Poor's for the industry range
from "AAA (Superior)" to "R (Regulatory Action)," and insurers with a
rating of "BBB-" or better are considered to have a secure claims-paying
ability.
According to Standard & Poor's, a claims-paying ability rating represents
its opinion of an insurance company's financial capacity to meet the
obligations of its insurance policies in accordance with their terms. This
opinion is not specific to any particular insurance policy or contract, nor
does it address the suitability of a particular insurance policy or contract
for a specific purpose or purchaser. Furthermore, the opinion does not take
into account deductibles, surrender or cancellation penalties, the
timeliness of payment, or the likelihood of the use of a defense such as
fraud to deny claims. Claims-paying ability ratings are assigned by
Standard & Poor's at the request of the insurer. Ratings are based on
current information furnished by the insurer or obtained by Standard &
Poor's from other sources it considers reliable and on extensive
quantitative and qualitative analysis. The rating process also includes
meetings with the insurer's management. Standard & Poor's does not perform
an audit in connection with any rating and may rely on unaudited financial
information.
Insurance companies are rated by rating agencies to provide both industry
participants and insurance consumers meaningful information on specific
insurance companies. Higher ratings generally indicate financial stability
and a strong ability to pay claims. Ratings are assigned by rating
agencies to insurers based upon factors relevant to policyholders and are
not directed toward protection of investors. Such ratings are neither
ratings of securities nor recommendations to buy, hold or sell any security.
Item 2. Properties.
Information required under this item is incorporated herein by reference
to the sections entitled "Subsidiaries," "Branch Offices," "Field Offices,"
"Information Systems Office" and "Properties" on page 57 of the 1996 Annual
Report. The Company's facilities are substantially fully utilized and are
adequate for the conduct of the Company's business.
Item 3. Legal Proceedings.
Information required under this item is incorporated herein by reference
to note 15(a) to the consolidated financial statements on pages 49 and 50
of the 1996 Annual Report.
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Information required under this item regarding the principal market on
which the Company's common stock is traded and the number of holders
thereof is incorporated herein by reference to the section entitled
"Common Stock Information" on page 57 of the 1996 Annual Report.
Information required under this item regarding the price range of the
Company's common stock and frequency and amount of dividends is
incorporated herein by reference to the section entitled "Quarterly
Financial Information" on page 53; and the section entitled "Financial
condition; liquidity and capital resources" on page 26 up to the sixth
full paragraph on that page of the 1996 Annual Report.
Item 6. Selected Financial Data.
Information required under this item is incorporated herein by reference
to page 20 and the first column and related notes on page 21 of the 1996
Annual Report.
PAGE 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Information required under this item is incorporated herein by reference
to the section entitled "Results of Operations" on pages 22 through page 25,
inclusive; the section entitled "Federal Income Taxes" on page 25; the
section entitled "Impact of Inflation" on page 32; and the section entitled
"Financial condition; liquidity and capital resources" on pages 26 through
27, inclusive, of the 1996 Annual Report.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and supplementary data of the
Company are incorporated herein by reference to pages 33 through 52,
inclusive, of the 1996 Annual Report. An index to the consolidated
financial statements is contained in Item 14 (a)(1) of this report, and
the Quarterly Financial Information is incorporated herein by reference to
page 53 of the 1996 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
The Company will file with the Securities and Exchange Commission,
within 120 days after the end of the fiscal year covered by this report,
a definitive Proxy Statement pursuant to Regulation 14A under the
Securities Exchange Act of 1934 in connection with its 1996 Annual Meeting
of Stockholders ("Proxy Statement"), which meeting includes the election of
directors. In accordance with General Instruction G(3) of Form 10-K, the
information required by Items 10, 11, 12 and 13 below is incorporated
herein by reference to the Proxy Statement.
Item 10. Directors and Executive Officers of the Registrant.
Incorporated herein by reference to the sections entitled: (i) "Election
of Directors," "Candidates," "Continuing Directors" and "Notes to Table of
Candidates and Continuing Directors" in the Proxy Statement; (ii)
"Executive Compensation and Other Information - Executive Officers of the
Company;" and (iii) "Section 16(a) Beneficial Ownership Reporting Compliance"
in the Proxy Statement.
Item 11. Executive Compensation.
Incorporated herein by reference to the sections entitled: (i)
"Compensation of Directors," "Compensation Committee Interlocks and Insider
Participation," and "Report of the Selective Insurance Group, Inc. Salary
and Employee Benefits Committee" in the Proxy Statement; and (ii) "Summary
Compensation Table," "Footnotes to Summary Compensation Table," "Stock
Options and Stock Appreciation Rights," "Options and SAR Exercises and
Holdings" and "Pension Plans" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated herein by reference to the sections entitled: (i) "General
Matters" in the Proxy Statement; and (ii) "Candidates," "Continuing
Directors" and "Notes to Table of Candidates and Continuing Directors" in
the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
Incorporated herein by reference to the section entitled "Interest of
Management and Others in Certain Transactions" in the Proxy Statement.
PAGE 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as a part of (or incorporated by
reference) in this report:
(1) Consolidated financial statements:
The consolidated financial statements of the Company, with Independent
Auditors' Report thereon, listed below are incorporated herein by reference
to pages 33 through 53, inclusive, of the 1996 Annual Report.
1996
Annual
Report
Page
Independent Auditors' Report........................................ 33
Consolidated Balance Sheets at December 31, 1996 and 1995............ 34
Consolidated Statements of Income for the years
ended December 31, 1996, 1995 and 1994............................ 35
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994.............. 36
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994............................ 37
Notes to Consolidated Financial Statements............................38-52
(2) Financial statement schedules:
The financial statement schedules required to be filed are listed below
by page number as filed in this report. All other schedules are omitted as
the information required is inapplicable, immaterial, or the information is
presented in the consolidated financial statements or related notes.
Form
10-K
Page
Independent Auditors' Report..................................... 21
Schedule I Summary of Investments - Other than
Investments in Related Parties at
December 31, 1996............................................ 22
Schedule II Condensed Financial Information of
Registrant at December 31, 1996
and 1995, and for the years ended
December 31, 1996, 1995 and 1994............................. 23-25
Schedule III Supplementary Insurance Information
for the years ended December 31,
1996, 1995 and 1994.......................................... 26-28
Schedule IV Reinsurance for the years ended
December 31, 1996, 1995 and 1994............................. 29
PAGE 20
Schedule V Allowance for Uncollectible Premiums
and Other Receivables for the years
ended December 31, 1996, 1995 and 1994....................... 30
Schedule VI Supplemental Information for the
years ended December 31, 1996, 1995
and 1994..................................................... 31
(3) Exhibits:
The exhibits required by Item 601 of Regulation SK are listed in the
Exhibit Index, which immediately precedes the exhibits filed with this
Form 10-K or incorporated in this report by reference, and is
incorporated herein by this reference.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the last quarter of the
period covered by this report.
PAGE 21
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Selective Insurance Group, Inc.
Under date of January 17, 1997, we reported on the consolidated balance
sheets of Selective Insurance Group, Inc. and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996, as contained in the annual report
on Form 10-K for the year 1996. These consolidated financial statements and
our report thereon are incorporated by reference in the annual report on
Form 10-K for the year 1996. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedules as listed in the
accompanying index. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our
audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed in note 1 to the consolidated financial statements, the
company adopted the provisions of the Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 115, "Accounting for
certain Investments in Debt and Equity Securities" in 1994.
KPMG Peat Marwick LLP
Short Hills, New Jersey
January 17, 1997
PAGE 22
SCHEDULE I
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1996
Type of investment Cost or Fair Carrying
(in thousands) amortized cost value amount
Debt securities:
Held-to-maturity:
U.S. government and government
agencies $ 16,184 16,855 16,184
Obligations of states and
political subdivisions 371,799 383,149 371,799
Mortgage-backed securities 44,809 45,269 44,809
Total debt securities, --------- --------- ---------
held-to-maturity 432,792 445,273 432,792
Available-for-sale:
U.S. government and government
agencies 159,382 165,245 165,245
Obligations of states and
political subdivisions 287,006 293,955 293,955
Corporate securities 430,387 436,083 436,083
Asset-backed securities 61,797 62,298 62,298
Mortgage-backed securities 27,393 27,791 27,791
Total debt securities, --------- --------- ---------
available-for-sale 965,965 985,372 985,372
Equity securities, available-for-sale:
Common stocks:
Public utilities 2,573 5,663 5,663
Banks, trust and insurance
companies 8,685 10,821 10,821
Industrial, miscellaneous
and all other 88,125 144,612 144,612
Total equity securities, --------- --------- ---------
available-for-sale 99,383 161,096 161,096
Short-term investments 33,924 XX,XXX 33,924
Other investments 10,530 XX,XXX 10,530
--------- --------- ---------
Total investments $1,542,594 XX,XXX 1,623,714
========= ========= =========
PAGE 23
SCHEDULE II
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Balance Sheets
(dollars in thousands) December 31,
1996 1995
- ----------------------------------------------------------------------------
Assets
- ------
Equity securities, available-for-sale
- at fair value (cost: $2,471) $ 2,468 2,413
Short-term investments 5,287 6,806
Cash 27 33
Investment in subsidiaries 571,539 541,437
Deferred Federal income tax 2,928 2,621
Other assets 852 888
------- -------
Total assets $ 583,101 554,198
======= =======
Liabilities and Stockholders' Equity
- ------------------------------------
Convertible subordinated debentures $ 6,912 7,292
Notes payable 96,857 104,000
Current Federal income tax 488 779
Other liabilities 4,545 5,378
------- -------
Total liabilities 108,802 117,449
------- -------
Stockholders' equity:
Common stock of $2 par value per share:
Authorized shares: 90,000,000
Issued: 17,911,087 1996;
17,647,178 1995 35,822 35,294
Additional paid-in capital 53,882 46,071
Net unrealized gains on securities,
available-for-sale, net of deferred
income tax effect 52,728 56,740
Retained earnings 386,601 347,318
Treasury stock at cost
(shares: 3,366,631 1996;
3,247,189 1995) (50,680) (46,429)
Deferred compensation expense and notes receivable
from stock sales (4,054) (2,245)
------- -------
Total stockholders' equity 474,299 436,749
------- -------
Total liabilities and stockholders' equity $ 583,101 554,198
======= =======
Information should be read in conjunction with the notes to consolidated
financial statements of Selective Insurance Group, Inc. and Consolidated
Subsidiaries in the 1996 Annual Report.
PAGE 24
SCHEDULE II (Cont'd)
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Statements of Income
(in thousands) Year ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------
Revenues:
Dividends from subsidiaries $ 28,006 13,483 3,349
Net investment income earned 548 429 377
Miscellaneous income 22 44 2
------ ------ ------
28,576 13,956 3,728
------ ------ ------
Expenses:
Interest 9,185 9,297 6,552
Other operating 1,407 2,028 707
------ ------ ------
10,592 11,325 7,259
------ ------ ------
Income (loss) before Federal income tax
and equity in undistributed income of
subsidiaries 17,984 2,631 (3,531)
------ ------ ------
Federal income tax expense (benefit):
Current (3,012) (3,289) (2,494)
Deferred (326) (220) 432
------ ------ ------
(3,338) (3,509) (2,062)
------ ------ ------
Income (loss) before equity in undistributed
income of subsidiaries, net of tax 21,322 6,140 (1,469)
Equity in undistributed income of
subsidiaries, net of tax 34,229 46,902 39,745
------ ------ ------
Net income $ 55,551 53,042 38,276
====== ====== ======
Information should be read in conjunction with the notes to consolidated
financial statements of Selective Insurance Group, Inc. and Consolidated
Subsidiaries in the 1996 Annual Report.
PAGE 25
SCHEDULE II (Cont'd)
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Statements of Cash Flows
(in thousands) Year ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------
Operating Activities:
Net income $ 55,551 53,042 38,276
------ ------ ------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed income of
subsidiaries, net of tax (34,229) (46,902) (39,745)
Increase (decrease) in net Federal
income tax (618) 792 2,408
Other, net 389 900 1,189
------ ------ ------
Net adjustments (34,458) (45,210) (36,148)
------ ------ ------
Net cash provided by operating
activities 21,093 7,832 2,128
------ ------ ------
Investing Activities:
Purchase of equity securities,
available-for-sale - (2,471) -
Financing Activities:
Proceeds from note payable - - 54,000
Principal payment on note payable (7,143) - -
Capital contributions to subsidiaries - (3) (33,680)
Dividends to stockholders (16,268) (15,996) (15,549)
Acquisition of treasury stock (4,251) (285) (122)
Net proceeds from dividend
reinvestment plan 1,147 1,164 1,166
Net proceeds from stock purchase and
compensation plans 6,812 5,940 2,272
Increase in deferred compensation
expense and notes receivable from
stock sale (2,915) (1,686) (992)
Net cash (used in) provided by ------ ------ ------
financing activities (22,618) (10,866) 7,095
------ ------ ------
Net (decrease) increase in cash and
short-term investments (1,525) (5,505) 9,223
Cash and short-term investments at
beginning of year 6,839 12,344 3,121
Cash and short-term investments at ------ ------ ------
end of year $ 5,314 6,839 12,344
====== ====== ======
Information should be read in conjunction with the notes to consolidated
financial statements of Selective Insurance Group, Inc. and Consolidated
Subsidiaries in the 1996 Annual Report.
PAGE 26
SCHEDULE III
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1996
Deferred Reserve for
Segment policy losses and Net
acquisition loss Unearned premiums
(in thousands) costs expenses premiums earned
- ---------------------------------------------------------------------------
Commercial $ 65,515 789,213 227,074 477,506
Personal 17,635 245,227 74,153 217,473
Other - 5,145 - (32)
Reinsurance recoverable
on unpaid losses
and loss expenses
at end of year - 150,208 - -
Prepaid reinsurance
premiums - - 30,813 -
Interest and general
corporate expenses - - - -
------ --------- ------- -------
Total $83,150 1,189,793 332,040 694,947
====== ========= ======= =======
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1996
Losses and Amortization
Segment loss of deferred Other Net
expenses policy Acqui- Operating premiums
(in thousands) incurred sition costs expenses written
- ---------------------------------------------------------------------------
Commercial $ 338,523 143,788 18,837 475,104
Personal 157,174 48,464 7,433 217,167
Other (32) 14 1 (32)
Reinsurance recoverable
on unpaid losses
and loss expenses
at end of year - - - -
Prepaid reinsurance
premiums - - - -
Interest and general
corporate expenses - - 10,646 -
------- ------- ------ -------
Total $ 495,665 192,266 36,917 692,239
======= ======= ====== =======
NOTE: A meaningful allocation of net investment income of $96,952 and net
realized gains on investments of $2,786 is considered impracticable because
the Company does not maintain distinct investment portfolios for each
segment.
PAGE 27
SCHEDULE III (Cont'd)
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1995
Deferred Reserve for
Segment policy losses and Net
acquisition loss Unearned premiums
(in thousands) costs expenses premiums earned
- ---------------------------------------------------------------------------
Commercial $ 64,475 765,040 229,476 521,196
Personal 17,725 237,468 74,459 221,587
Other - 5,175 - 34
Reinsurance recoverable
on unpaid losses
and loss expenses
at end of year - 121,369 - -
Prepaid reinsurance
premiums - - 39,952 -
Interest and general
corporate expenses - - - -
------ --------- ------- -------
Total $82,200 1,120,052 343,887 742,817
====== ========= ======= =======
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1995
Losses and Amortization
Segment loss of deferred Other Net
expenses policy Acqui- Operating premiums
(in thousands) incurred sition costs expenses written
- ---------------------------------------------------------------------------
Commercial $ 366,936 149,737 17,416 535,050
Personal 161,935 52,054 6,636 221,935
Other 30 16 1 36
Reinsurance recoverable
on unpaid losses
and loss expenses
at end of year - - - -
Prepaid reinsurance
premiums - - - -
Interest and general
corporate expenses - - 11,909 -
------- ------- ------ -------
Total $ 528,901 201,807 35,962 757,021
======= ======= ====== =======
NOTE: A meaningful allocation of net investment income of $91,640 and net
realized gains on investments of $900 is considered impracticable because
the Company does not maintain distinct investment portfolios for each
segment.
PAGE 28
SCHEDULE III (Cont'd)
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1994
Losses Amortization
Segment Net and loss of deferred Other Net
premiums expenses policy acqui- operating premiums
(in thousands) earned incurred sition costs expenses written
- -------------------------------------------------------------------------
Commercial $ 472,218 327,366 147,210 16,702 489,797
Personal 207,988 161,915 52,151 6,323 208,080
Other 64 (1,293) 432 46 64
Interest and
general corporate
expenses - - - 7,174 -
------- ------- ------- ------ -------
Total $ 680,270 487,988 199,793 30,245 697,941
======= ======= ======= ====== =======
NOTE: A meaningful allocation of net investment income of $80,657 and net
realized gains on investments of $4,230 is considered impracticable
because the Company does not maintain distinct investment portfolios for
each segment.
PAGE 29
SCHEDULE IV
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
REINSURANCE
Years ended December 31, 1996, 1995 and 1994
% of
Ceded to Assumed amount
Gross other from other Net assumed
(in thousands) amount companies companies amount to net
- ------------------------------------------------------------------------------
1996
Premiums earned:
Accident and health ins. $ 799 - - 799 -
Property and liability ins. 760,557 95,765 29,356 694,148 4.2
------- ------ ------ -------
Total premiums earned $ 761,356 95,765 29,356 694,947 4.2
======= ======= ====== =======
1995
Premiums earned:
Accident and health ins. $ 1,925 - - 1,925 -
Property and liability ins. 785,773 94,429 49,548 740,892 6.7
------- ------ ------ -------
Total premiums earned $ 787,698 94,429 49,548 742,817 6.7
======= ====== ====== =======
1994
Premiums earned:
Accident and health ins. $ 2,244 - - 2,244 -
Property and liability ins. 727,466 104,722 55,282 678,026 8.2
------- ------- ------ -------
Total premiums earned $ 729,710 104,722 55,282 680,270 8.1
======= ======= ====== =======
PAGE 30
SCHEDULE V
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
ALLOWANCE FOR UNCOLLECTIBLE PREMIUMS AND OTHER RECEIVABLES
Years ended December 31, 1996, 1995 and 1994
(in thousands)
- ----------------------------------------------------------------------------
1996 1995 1994
Balance, January 1 $ 3,450 2,501 2,072
Additions 3,502 2,847 1,547
Deletions (3,650) (1,898) (1,118)
----- ----- -----
Balance, December 31 $ 3,302 3,450 2,501
===== ===== =====
PAGE 31
SCHEDULE VI
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTAL INFORMATION
Years ended December 31, 1996, 1995 and 1994
Losses and loss expenses
incurred related to Paid
Affiliation with Registrant (1) (2) losses
current prior and loss
(in thousands) year years expenses
- ---------------------------------------------------------------------------
Consolidated Property/
Casualty Subsidiaries:
Year ended Dec. 31, 1996 $504,843 (9,178) 454,763
Year ended Dec. 31, 1995 $516,219 12,682 418,072
Year ended Dec. 31, 1994 $490,641 (2,653) 403,809
Note: The other information required in this schedule (e.g., deferred
policy acquisition costs, reserves for losses and loss expenses, unearned
premiums, net premiums earned, net investment income, amortization of
deferred policy acquisition costs, and net premiums written) is contained
in Schedule III in this report. In addition, the Company does not discount
loss reserves.
PAGE
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SELECTIVE INSURANCE GROUP, INC.
By: s// James W. Entringer March 26, 1997
-------------------------------
James W. Entringer, Chairman of
the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
By: s// James W. Entringer March 26, 1997
-------------------------------
James W. Entringer, Chairman of
the Board, President
and Chief Executive Officer
By: s// Gregory E. Murphy March 26, 1997
-------------------------------
Gregory E. Murphy, Senior Vice
President, Finance
By: s// A. David Brown March 26, 1997
-------------------------------
A. David Brown, Director
By: s// William A. Dolan, II March 26 1997
-------------------------------
William A. Dolan, II, Director
By: s// William C. Gray March 26, 1997
-------------------------------
Thomas D. Sayles, Jr.
By: s// C. Edward Herder March 26, 1997
-------------------------------
C. Edward Herder, Director
By: s// Frederick H. Jarvis March 26, 1997
-------------------------------
Frederick H. Jarvis, Director
By: s// William M. Kearns,Jr. March 26, 1997
-------------------------------
William M. Kearns, Jr., Director
By: s// Joan M. Lamm-Tennant, Ph.D. March 26, 1997
-------------------------------
Joan M. Lamm-Tennant, Ph.D.
Director
By: s// S. Griffin McClellan, III March 26, 1997
-------------------------------
S. Griffin McClellan, III
Director
By: s// Russell R. Moffett March 26, 1997
-------------------------------
Russell R. Moffett,Director
By: s// William M. Rue March 26, 1997
-------------------------------
William M. Rue, Director
By: s// Thomas D. Sayles, Jr. March 26, 1997
-------------------------------
Thomas D. Sayles, Jr.
Director
By: s// J. Brian Thebault March 26, 1997
-------------------------------
J. Brian Thebault, Director
PAGE
EXHIBIT INDEX
* Exhibits included within this 10-K
P Paper filing under cover of Form SE
Exhibit
Number
- -------
2 Agreement and Plan of Merger, dated as of March 27, 1992, among
Selective Insurance Group, Inc., Niagara Acquisition Co., Niagara
Exchange Corporation, Riedman Corporation, PSCO Partners Limited
Partnership, PSCO Bermuda Partners, PSCO Fund Limited and Charles
J. Clauss (incorporated herein by reference to Exhibit 1 to the
Company's Current Report on Form 8-K dated March 30, 1992, filed
with the Securities Exchange Commission on April 7, 1992), File
No. 0-8641.
3.1 Restated Certificate of Incorporation of Selective Insurance Group,
Inc., dated August 4, 1977, as amended through November 6, 1989
(incorporated herein by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994,
File No. 0-8641).
3.2 The Company's By-Laws, adopted on August 26, 1977, amended through
May 1, 1992 (incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1994, File No. 0-8641).
4.1 The form of Indenture dated December 29, 1982, between the
Selective Insurance Group, Inc. and Midlantic National Bank, as
Trustee relating to the Company's 8 3/4% Subordinated Convertible
Debentures due 2001 (incorporated herein by reference to Exhibit
4.3 to the Company's Registration Statement on Form S-3
No. 2-80881).
4.2 Rights Agreement dated November 3, 1989 between Selective Insurance
Group, Inc. and Midlantic National Bank (incorporated herein by
reference to Exhibit 4.2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994, File No. 0-8641).
10.1 The Selective Insurance Retirement Savings Plan as amended through
August 15, 1996 (incorporated herein by reference by Exhibit 4 to
the Company's Registration Statement on Form S-8 No. 333-10477).
10.2 The Retirement Income Plan for Employees of Selective Insurance
Company of America, as amended through May 6, 1994 (incorporated
herein by reference to Exhibit 10.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994, File
No. 0-8641).
10.3 The Company's Stock Option Plan as amended through May 6, 1988
(incorporated herein by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 No. 33-22450).
10.4 Directors' Plan. A retirement and total and permanent disability
plan for directors as amended through May 5, 1989 (incorporated
herein by reference to Exhibit 10.4 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994, File
No. 0-8641).
10.5 Deferred Compensation Plan for Directors (incorporated herein by
reference to Exhibit 10.5 to the Company's Annual Report on Form
10-K for the year ended December 31, 1993, File No. 0-8641).
10.6 The Company's 1987 Employee Stock Purchase Savings Plan
(incorporated herein by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993,
File No. 0-8641).
10.7 The Selective Insurance Rewards Program adopted January 1, 1994,
which replaced the Annual Incentive Compensation Plan
(incorporated herein by reference to Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994,
File No. 0-8641).
PAGE
10.8 The Selective Insurance Group, Inc. Stock Purchase Plan for
Independent Insurance Agents as amended through December 1, 1995
(incorporated herein by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995,
File No. 0-8641).
10.9 The Selective Insurance Group, Inc. Stock Option Plan for Directors
as amended through November 1, 1991 (incorporated herein by
reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-8 No. 33-36368).
10.10 Selective Insurance Group, Inc. Stock Option Plan II, as amended,
and related forms of option agreements (incorporated herein by
reference to Exhibits 4.1 and 4.2 to the Company's Registration
Statement on Form S-8 No. 33-87534).
*10.11 Amendment, dated October 29, 1996, to the Selective Insurance
Group, Inc. Stock Option Plan II in Exhibit 10.10 above, filed
herewith.
10.12 The Selective Insurance Group, Inc. Stock Compensation Plan for
Nonemployee Directors (incorporated herein by reference to
Exhibit 4 to the Company's Registration Statement on Form S-8
No. 333-10465).
10.13 Employment, Termination and Severance Agreements.
10.13a Employment Agreement with James W. Entringer, dated September 1,
1993, as amended (incorporated herein by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, File No. 0-8641).
10.13b Amendment, dated September 1, 1996, to the Employment Agreement
in Exhibit 10.11a above (incorporated herein by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, File No. 0-8641).
10.13c Employment Agreement with Dominic J. Addesso , dated September 1,
1993, as amended (incorporated herein by reference to Exhibit
10.14 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, File No. 0-8641).
10.13d Amendment, dated September 1, 1996, to the Employment Agreement
in Exhibit 10.13c above (incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, File No. 0-8641).
10.13e Employment Agreement with Thornton R. Land , dated September 1,
1993, as amended (incorporated herein by reference to Exhibit
10.15 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, File No. 0-8641).
10.13f Amendment, dated September 1, 1996, to the Employment Agreement
in Exhibit 10.13e above (incorporated herein by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, File No. 0-8641).
10.13g Employment Agreement with Gregory E. Murphy, dated August 1, 1995
(incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995, File No. 0-8641).
10.13h Employment Agreement with Donald E. Williams, dated August 1,
1995 (incorporated herein by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 0-8641).
PAGE
10.13i Employment Agreement with Jamie Ochiltree, III, dated October 31,
1995 (incorporated herein by reference to Exhibit 10.11f to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995, File No. 0-8641).
10.13j Form of Termination Agreement, between the Company and each of
Messrs. Entringer, Addesso and Land, as amended (incorporated
herein by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993, File
No. 0-8641).
10.13k Termination Agreement, dated August 1, 1995, between Selective
Insurance Company of America and Gregory E. Murphy (incorporated
herein by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995, File
No. 0-8641).
10.13l Termination Agreement, dated August 1, 1995, between Selective
Insurance Company of America and Donald E. Williams (incorporated
herein by reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995, File
No. 0-8641).
10.13m Termination Agreement, dated August 1, 1995, between Selective
Insurance Company of America and Jamie Ochiltree (incorporated
herein by reference to Exhibit 10.11j to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995, File
No. 0-8641).
10.13n Severance agreement with Walter H. Hallowell, dated July 12, 1994
(incorporated herein by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994,
File No. 0-8641).
10.14 Property Reinsurance Contracts.
*10.14a New Jersey Homeowners Quota Share Treaty between Selective
Insurance Company of America, Selective Way Insurance Company,
Selective Insurance Company of the Southeast, Selective Insurance
Company of South Carolina, and Exchange Insurance Company and
various insurance and/or reinsurance companies (Contract
No. 3645-24).
10.14b Reinsurance Agreement, as amended through April 18, 1995, between
Selective Insurance Company of America, Selective Way Insurance
Company, Selective Insurance Company of the Southeast, Selective
Insurance Company of South Carolina, Exchange Insurance Company
and American Re-Insurance Company (Contract No. 3525-0076)
(incorporated herein by reference to Exhibit 10.12b to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995, File No. 0-8641).
*10.14c Amendments, dated February 15, 1996 and July 19, 1996, to the
Reinsurance Agreement in Exhibit 10.14b above.
10.14d Special Surplus Reinsurance Treaty issued to Selective Insurance
Company of America, Selective Way Insurance Company, Selective
Insurance Company of the Southeast, Selective Insurance Company
of South Carolina, Exchange Insurance Company, and Charleston
Insurance Company (Treaty No. E0065) (incorporated herein by
reference to Exhibit 10.16c to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994, File No. 0-8641).
10.14e Obligatory Second Surplus Reinsurance Contract between St. Paul
Fire and Marine Insurance Company and Selective Insurance
Company of America, Selective Way Insurance Company, Selective
Insurance Company of the Southeast, Selective Insurance Company of
South Carolina, Exchange Insurance Company, and Charleston
Insurance Company (Contract No. 3645-23) (incorporated herein by
reference to Exhibit 10.16d to the Company's Annual Report on Form
10-K for the year ended December 31, 1994, File No. 0-8641).
PAGE
*10.14f Property Catastrophe Excess of Loss Reinsurance Contract between
various insurance and/or reinsurance companies and/or underwriting
members of Lloyd's and Selective Insurance Company of America,
Selective Way Insurance Company, Selective Insurance Company of
the Southeast, Selective Insurance Company of South Carolina and
Exchange Insurance Company.
*10.14g Property Excess of Loss Reinsurance Agreement between Selective
Insurance Company of America, Selective Way Insurance Company,
Selective Insurance Company of the Southeast, Selective Insurance
Company of South Carolina, Exchange Insurance Company, and
American Re-Insurance Company and/or St. Paul Reinsurance
Management Corporation (Contract No. 3525-0087).
10.15 Casualty Reinsurance Contracts.
10.15a Multiple Line Excess of Loss Reinsurance Agreement, as amended
through August 23, 1995 between Selective Insurance Company of
America, Selective Way Insurance Company, Selective Insurance
Company of the Southeast, Selective Insurance Company of South
Carolina, Exchange Insurance Company, and American Re-Insurance
Company (Contract No. 3525-0066) (incorporated herein by
reference to Exhibit 10.13a to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, File No. 0-8641).
*10.15b Amendment, dated September 25, 1996, to the Multiple Line Excess
of Loss Reinsurance Agreement in Exhibit 10.15a above.
10.15c Commercial Umbrella Liability Excess of Loss Reinsurance
Agreement as amended through April 5, 1995 between American
Re-Insurance Company and Selective Insurance Company of America,
Selective Way Insurance Company, Selective Insurance Company of
the Southeast, and Selective Insurance Company of South Carolina
(Contract No. 3525-0067) (incorporated herein by reference to
Exhibit 10.13b to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, File No. 0-8641).
*10.15d Amendment, dated November 5, 1996, to the Commercial Umbrella
Liability Excess of Loss Reinsurance Agreement in Exhibit 10.15c
above.
*10.15e First Casualty Catastrophe Excess of Loss Reinsurance Contract.
*10.15f Second Casualty Catastrophe Excess of Loss Reinsurance Contract.
*10.15g Casualty Excess of Loss Reinsurance Agreement between Selective
Insurance Company of America, Selective Way Insurance Company,
Selective Insurance Company of the Southeast, Selective Insurance
Company of South Carolina, Exchange Insurance Company, and various
insurance and/or reinsurance companies (Contract No. 3525-0090).
10.16 Form of Note Purchase Agreement dated as of November 15, 1992 with
respect to Selective Insurance Group, Inc. 7.84% Senior Notes due
November 15, 2002 (incorporated herein by reference to Exhibit 99.1
to the Company's Post-Effective Amendment No. 1 to the Registration
Statement on Form S-3, No. 33-30833).
10.17 Form of Note Purchase Agreement dated as of August 1, 1994 with
respect to Selective Insurance Group, Inc. 8.77% Senior Notes due
August 1, 2005 (incorporated herein by reference to Exhibit 99.2
to the Company's Post-Effective Amendment No. 1 to the
Registration Statement on Form S-3, No. 33-30833).
*11 Computation of earnings per share, filed herewith.
PAGE
*13 Portions of the 1996 Annual Report to Stockholders incorporated by
reference into this Form 10-K, filed herewith.
*21 Subsidiaries of Selective Insurance Group, Inc., filed herewith.
*23 Consent of Independent Auditors, filed herewith.
*27 Financial Data Schedule, filed herewith.
P28 Combined 1996 statutory Schedule P for the Selective Insurance
Group (information from reports furnished to state insurance
regulatory authorities, filed concurrently herewith under cover
of Form SE).
EXHIBIT 10.11 - COVER LETTER
- ----------------------------
March 21, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Selective Insurance Group, Inc. Form 10K for the period ending
December 31, 1997
Ladies and Gentlemen:
Accompanying this letter for filing pursuant to the Securities Act of 1933,
is an amendment, effective October 29, 1996, to The Selective Insurance
Group, Inc. Stock Option Plan II . This plan was filed as Exhibit 4.1 and 4.2
to the Company's Registration Statement on Form S-8 No. 33-87534.
Very truly yours,
/s/ Leo L. McConville, Jr.
----------------------
Leo L. McConville, Jr.
Accountant Technical
Specialist
PAGE
EXHIBIT 10.11
- -------------
SELECTIVE INSURANCE GROUP, INC. RESOLUTIONS
-------------------------------------------
RESOLVED, that the first three sentences of Section III of the Selective
Insurance Stock Option Plan II (the "Plan"), be and the same hereby are,
amended so that, as amended, said sentences shall be as follows:
The Plan shall be administered by a Compensation Committee (the
"Committee") appointed by the Board of Directors of the Company.
The Committee shall consist of two (2) or more directors of the
Company, all of whom shall be both "Non-Employee Directors" within
the meaning of Rule 16b-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and "Outside Directors" as
defined for the purposes of Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"). Subject to the terms and
conditions of the Plan, the Committee shall have the exclusive
authority to select the terms and conditions of Option Agreements
(as hereinafter defined) and whether an option will be granted to
an employee as a stock option which qualifies as an incentive
stock option under Section 422 of the Code (hereinafter referred
to as a "Qualified Option") or a stock option which does not
qualify under the Code (hereinafter referred to as a "Non-
Qualified Option").
RESOLVED further, that the proper officers of the Company be, and they
hereby are, authorized an empowered to execute and deliver, for and on behalf
of the Company, all such further instruments and documents, and to perform
all such further acts as they, in their discretion shall deem necessary or
appropriate in order to carry into effect the intents and purposes of the
foregoing resolutions.
INTERESTS AND LIABILITIES AGREEMENT
(hereinafter referred to as the "Agreement")
to the
NEW JERSEY HOMEOWNERS QUOTA SHARE TREATY
----------------------------------------
(hereinafter referred to as the "Contract")
between
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
and/or any insurance affiliates which are now owned or hereafter may be
acquired by
The Selective Insurance Group
(hereinafter either individually or collectively referred to as the
"Company")
and
VARIOUS INSURANCE AND/OR REINSURANCE COMPANIES
(hereinafter referred to as the "Subscribing Reinsurer")
It is mutually agreed by and between the Company on the one part and the
Subscribing Reinsurer on the other part, that the Subscribing Reinsurer's
share in the interest and liabilities of the Reinsurers as set forth in the
Contract attached hereto and forming a part of this Agreement shall be for
% of the 85% Quota Share.
The share of the Subscribing Reinsurer in the interests and liabilities of
the Reinsurers in respect of the said Contract shall be separate and apart
from the shares of the other reinsurers in the said Contract, and the
interests and liabilities of the Subscribing Reinsurer shall not be joint
with those of the other reinsurers and in no event shall the Subscribing
Reinsurer participate in the interests and liabilities of the other
reinsurers.
Effective: January 1, 1996
3645-24
PAGE
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, in duplicate, by their duly authorized representatives this day
of , 199__.
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
and/or any insurance affiliates which are now owned or hereafter
may be acquired by
The Selective Insurance Group
- -----------------------------------------------------------------------------
and on this day of , 199__.
Effective: January 1, 1996
3645-24
PAGE
NEW JERSEY HOMEOWNERS QUOTA SHARE TREATY
TABLE OF CONTENTS
-----------------
Article Page
------- ----
1 Business Covered 1
2 Exclusion 1
3 Term and Cancellation 2
4 Territory 3
5 Contract Detail 3
6 Definition of Loss Occurrence 3
7 Extra Contractual Obligations 5
8 Excess of Original Policy Limits 5
9 Indemnification and Errors and Omissions 6
10 Reinsurance Follows Original Policies 6
11 Notice of Loss 6
12 Losses 7
13 Loss Expenses 7
14 Premium and Commissions 8
15 Currency 10
16 Accounts, Reports and Payments 10
17 Loss and Unearned Premium Reserves 11
18 Sunset and Commutation 13
19 Federal Excise Tax 13
20 Service of Suit (U.S.A.) 14
21 Insolvency 15
22 Access to Company's Records 15
23 Arbitration 16
24 Intermediary 16
Effective: January 1, 1996
3645-24
PAGE
NEW JERSEY HOMEOWNERS QUOTA SHARE TREATY
----------------------------------------
(hereinafter referred to as the "Contract")
In consideration of the mutual covenants hereinafter contained and subject to
all the terms and conditions hereinafter set forth
VARIOUS INSURANCE AND/OR REINSURANCE COMPANIES AND/OR
UNDERWRITING MEMBERS OF LLOYD'S
(hereinafter collectively referred to as the "Reinsurers")
one of whom is
THE "SUBSCRIBING REINSURER" WHOSE NAME
APPEARS ON THE INTERESTS AND LIABILITIES AGREEMENT
ATTACHING TO AND FORMING A PART OF THIS CONTRACT
do hereby indemnify, as herein provided and specified, the
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
and/or any insurance affiliates which are now owned or hereafter may be
acquired by
The Selective Insurance Group
(hereinafter either individually or collectively referred to as the
"Company")
ARTICLE 1
---------
BUSINESS COVERED
- ----------------
This Contract applies to risks located in the State of New Jersey with
respect to all sections of coverage written and classified by the Company as
Homeowners, Condominium, Tenants and Mobile Homeowners insurances.
ARTICLE 2
---------
EXCLUSIONS
- ----------
A. As per original policy terms and conditions.
B. This Contract excludes all liability of the Company arising by contract,
operation of law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any
Effective: January 1, 1996 1 o 16
3645-24
PAGE
insolvency fund. "Insolvency fund" includes any guaranty fund,
insolvency fund, plan, pool, association, fund or other arrangement,
howsoever denominated, established or governed; which provides for any
assessment of or payment or assumption by the Company of part or all of
any claim, debt, charge, fee, or other obligation of an insurer, or its
successors or assigns, which has been declared by any competent
authority to be insolvent, or which is otherwise deemed unable to meet
any claim, debt, charge, fee or other obligation in whole or in part.
ARTICLE 3
---------
TERM AND CANCELLATION
- ---------------------
This Contract shall apply to all cessions commencing on and after January 1,
1996, at 12:01 a.m., Eastern Standard Time, and shall be unlimited as to its
duration, but may be terminated as of any January 1 by either party giving to
the other not less than ninety (90) days' prior written notice of
cancellation. The Reinsurers shall continue to participate in all insurances
and reinsurances coming within the terms of this Contract granted or renewed
by the Company during the ninety (90) days aforesaid.
Notwithstanding the above, the portfolio of unearned premiums and unexpired
liability as of 12:01 a.m., Eastern Standard Time, January 1, 1996, shall be
assumed by the Reinsurers under this Contract and nothing herein contained
shall alter or affect the continuity granted, insofar as this portfolio
assumption is concerned, by the said preceding Contract. In consideration of
the foregoing, the Company shall pay to the Reinsurers hereunder the unearned
premiums calculated on the monthly pro rata basis as of January 1, 1996, less
provisional commission allowed the Company by the Reinsurers and in
consequence thereof, the Reinsurers hereunder shall be liable for all losses
under the said preceding Contract occurring subsequent to 12:01 a.m., Eastern
Standard Time, January 1, 1996.
In the event of termination of this Contract, the liability of the Reinsurers
shall remain in force to the natural expiration or cancellation or next
anniversary date whichever comes first. However, the Company has the option
to take back the unearned premium and unexpired liability at effective date
of termination. In the event of the Company exercising this option, the
Reinsurers shall incur no liability for losses occurring subsequent to the
date of termination, but shall remain liable for all losses outstanding as of
the date of termination. In the event of the Company withdrawing the
cessions as provided for herein, it shall debit the Reinsurers with a sum
equal to the pro rata unearned premiums on unexpired cessions at the
respective date, less the rate of commission allowed by the Reinsurers on
such cessions, provided such option is exercised prior to the termination of
this Contract.
If any law or regulation of the federal, state or local government of any
jurisdiction in which the Company is doing business should render illegal the
arrangements made in this Contract, the Contract can be terminated
immediately, insofar as it applies to such jurisdiction, by the Company
giving notice to the Reinsurers to such effect.
Effective: January 1, 1996 2 of 16
3645-24
PAGE
This Contract may be altered or amended in any of its terms and conditions by
mutual consent of the parties, either by endorsement hereof or by an
instrument in writing attached hereto and formally signed.
ARTICLE 4
---------
TERRITORY
- ---------
This Contract covers risks located in New Jersey and/or as provided in the
original policies.
ARTICLE 5
---------
CONTRACT DETAIL
- ---------------
The Company shall cede under this Contract and the Reinsurers shall accept by
way of reinsurance eighty five percent (85%) quota share of all business
covered hereunder.
The liability of the Reinsurers for any interest shall attach simultaneously
with the liability of the Company.
The maximum cession hereunder is $850,000 (being 85% of $1,000,000) per
policy as respects Coverage A, Section I, except with respect to Section II,
for which the Company agrees to a maximum cession of $425,000 (being 85% of
$500,000) per policy.
In no event, however, shall the Reinsurers' liability exceed $95,000,000 in
any one Loss Occurrence, as defined in Article 6, Definition of Loss
Occurrence.
The Company shall maintain net for its own account on each and every risk the
remaining 15% subject to Excess of Loss Reinsurances.
With respect to Extra Contractual Obligations, as defined in Article 7, Extra
Contractual Obligations, the Reinsurers shall be liable to pay up to 100% of
the Extra Contractual loss recoverable hereunder, but the contractual loss
plus the Extra Contractual Obligation shall not exceed Coverage A, Section I
Treaty Limits. Furthermore, the Extra Contractual loss recoverable hereunder
shall be the Reinsurers' pro rata share equal to the percentage ceded
hereunder.
ARTICLE 6
---------
DEFINITION OF LOSS OCCURRENCE
- -----------------------------
The term "Loss Occurrence" shall mean the sum of all individual losses
directly occasioned by any one disaster, accident or loss or series of
disasters, accidents or losses arising out of one event
Effective: January 1, 1996 3 of 16
3645-24
PAGE
which occurs within the state of New Jersey. However, the duration and
extent of any one "Loss Occurrence" shall be limited to all individual losses
sustained by the Company occurring during any period of 168 consecutive hours
arising out of and directly occasioned by the same event except that the term
"Loss Occurrence" shall be further defined as follows:
A. As regards windstorm, hail, tornado, hurricane, cyclone, including
ensuing collapse and water damage, all individual losses sustained by the
Company occurring during any period of 72 consecutive hours arising out of
and directly occasioned by the same event. However, the event need not be
limited to one state or province or states or provinces contiguous thereto.
B. As regards riot, riot attending a strike, civil commotion, vandalism and
malicious mischief, all individual losses sustained by the Company occurring
during any period of 72 consecutive hours within the area of one municipality
or county and the municipalities or counties contiguous thereto arising out
of and directly occasioned by the same event. The maximum duration of 72
consecutive hours may be extended in respect of individual losses which occur
beyond such 72 consecutive hours during the continued occupation of an
insured's premises by strikers, provided such occupation commenced during the
aforesaid period.
C. As regards earthquake (the epicenter of which need not necessarily be
within the territorial confines referred to in the opening paragraph of this
Article) and fire following directly occasioned by the earthquake, only those
individual fire losses which commence during the period of 168 consecutive
hours may be included in the Company's "Loss Occurrence".
D. As regards "Freeze", only individual losses directly occasioned by
collapse, breakage of glass and water damage (caused by bursting of frozen
pipes and tanks) may be included in the Company's "Loss Occurrence".
Except for those "Loss Occurrences" referred to in paragraphs A. and B.
above, the Company may choose the date and time when any such period of
consecutive hours commences provided that it is not earlier than the date and
time of the occurrence of the first recorded individual loss sustained by the
Company arising out of that disaster, accident or loss and provided that only
one such period of 168 consecutive hours shall apply with respect to one
event.
However, as respects those "Loss Occurrences" referred to in paragraphs A.
and B. above, if the disaster, accident or loss occasioned by the event is of
greater duration than 72 consecutive hours, then the Company may divide that
disaster, accident or loss into two or more "Loss Occurrences" provided no
two periods overlap and no individual loss is included in more than one such
period and provided that no period commences earlier than the date and time
of the occurrence of the first recorded individual loss sustained by the
Company arising out of that disaster, accident or loss.
No individual losses occasioned by an event that would be covered by 72 hours
clauses may be included in any "Loss Occurrence" claimed under the 168 hours
provision.
Effective: January 1, 1996 4 of 16
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ARTICLE 7
---------
EXTRA CONTRACTUAL OBLIGATIONS
- -----------------------------
This Contract shall protect the Company for any Extra Contractual Obligations
within the limitations of Article 5, Contract Detail. "Extra Contractual
Obligations" are defined as those liabilities not covered under any other
provision of this Contract and which arise from the handling of any claim on
business covered hereunder, such liabilities arising because of, but not
limited to, the following: failure by the Company to settle within the policy
limit, or by reason of alleged or actual negligence, fraud or bad faith in
rejecting an offer of settlement or in the preparation of the defense or in
the trial of any action against its insured or reinsured or in the
preparation or prosecution of an appeal consequent upon such action.
The date on which any Extra Contractual Obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original
accident, casualty, disaster or loss occurrence.
However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a Corporate Officer of the
Company acting individually or collectively or in collusion with any
individuals or corporation or any other organization or party involved in the
presentation, defense or settlement of any claim covered hereunder.
ARTICLE 8
---------
EXCESS OF ORIGINAL POLICY LIMITS
- --------------------------------
This Contract shall protect the Company, within Coverage A, Section I Treaty
limits hereof, in connection with ultimate net loss in excess of the limit of
its original policy, such loss in excess of the limit having been incurred
because of failure by it to settle within the policy limit or by reason of
alleged or actual negligence, fraud or bad faith in rejecting an offer of
settlement or in the preparation of the defense or in the trial of any action
against its insured or reinsured or in the preparation or prosecution of an
appeal consequent upon such action.
However, this Article shall not apply where the loss has been incurred due to
fraud by a member of the Board of Directors or a Corporate Officer of the
Company acting individually or collectively or in collusion with any
individual or corporation or any other organization or party involved in the
presentation, defense or settlement of any claim covered hereunder.
For the purposes of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original policy.
<PAGE>
Effective: January 1, 1996 5 of 16
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ARTICLE 9
---------
INDEMNIFICATION AND ERRORS AND OMISSIONS
- ----------------------------------------
Any recitals in this Contract of the terms and provisions of any original
insurance or reinsurance are merely descriptive. The Reinsurers are
reinsuring, to the amount herein provided, the obligations of the Company
under any original insurance or reinsurance. The Company shall be the sole
judge as to:
A. what shall constitute a claim or loss covered under any original
insurance or reinsurance written by the Company;
B. the Company's liability thereunder;
C. the amount or amounts which shall be proper for the Company to pay
thereunder.
The Reinsurers shall be bound by the judgment of the Company as to the
obligation(s) and liability(ies) of the Company under any original insurance
or reinsurance, subject to the terms and conditions of this Contract.
Any inadvertent error, omission or delay in complying with the terms and
conditions of this Contract shall not be held to relieve either party hereto
from any liability which would attach to it hereunder if such error, omission
or delay had not been made, provided such error, omission or delay is
rectified immediately upon discovery.
ARTICLE 10
----------
REINSURANCE FOLLOWS ORIGINAL POLICIES
- -------------------------------------
All reinsurances for which the Reinsurers shall be liable by subscribing to
this Contract shall be subject in all respects to the same rates, terms,
conditions, interpretations, waivers, the exact proportion of premiums paid
to the Company and to the same modifications, alterations and cancellations
as the respective insurances of the Company to which such reinsurances
relate, the true intent of this Contract being that the Reinsurers shall, in
every case to which this Contract applies and in the proportion specified
herein, follow the fortunes of the Company.
ARTICLE 11
----------
NOTICE OF LOSS
- --------------
In the event of loss which may cause a claim to the Reinsurers in the
estimated amount of $500,000 or more, notice of such loss shall be advised to
the Reinsurers as soon as possible.
Effective: January 1, 1996 6 of 16
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ARTICLE 12
----------
LOSSES
- ------
A. The Company alone and at its full discretion shall adjust, settle or
compromise all claims and losses. All such adjustments, settlements and
compromises, including ex gratia payments, shall be binding on the Reinsurers
in proportion to their participation. The Company shall likewise at its sole
discretion commence, continue, defend, compromise, settle or withdraw from
actions, suits or proceedings and generally do all such matters and things
relating to any claim or loss as in its judgement may be beneficial or
expedient; and all loss payments made shall be shared by the Reinsurers
proportionately. The Reinsurers shall, on the other hand, benefit
proportionately from all reductions of losses by salvage, compromise or
otherwise.
B. In respect of all business covered hereunder in the event of a loss
being intimated or reported to the Company or its agent before the Company's
net retention has been established, the Company, nevertheless, shall be
entitled to claim on the Reinsurers in conformity with the limits which the
Company usually retains net and cedes hereunder upon such risk or risks in
the same or similar localities as established by its books and/or practices.
However, upon request of the Reinsurers, the Company will produce evidence of
its practice applicable to any such case forming the subject of inquiry or
investigation.
C. Losses due by the Reinsurers to the Company in an amount not exceeding
$500,000 on any one loss shall be carried to account; but when the amount due
from the Reinsurers as a result of any one loss and its expenses equals or
exceeds $500,000 any one loss or Loss Occurrence, as defined in Article 6,
Definition of Loss Occurrence, it will, at the option and upon demand of the
Company, be paid by special remittance immediately upon receipt of a special
loss account which shall be prepared by the Company and shall contain all
relevant details in connection with the loss.
ARTICLE 13
----------
LOSS EXPENSES
- -------------
A. The Reinsurers shall be liable for their proportionate share of all
expenses incurred by the Company in connection with the investigation and
settlement or contesting the validity of specific claims or losses or alleged
losses (except as hereinafter provided). In addition, the Reinsurers shall
be liable for their proportional share of legal expenses and costs incurred
in connection with coverage questions and legal actions connected hereto.
B. When the Company uses its own field employees or officials instead of
outside adjusters to settle losses, the Company shall be permitted to include
a pro rata share of the salaries and expenses of the said field employees
according to the time occupied in adjusting such losses and also the expenses
of said officials incurred in connection with the losses, but no salaries of
such officials or any normal overhead charge, such as rent, postage,
lighting, cleaning, heating, etc., shall be included.
Effective: January 1, 1996 7 of 16
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PAGE
C. Unallocated loss expenses, being operating expense classifications not
attributable to specific losses, are excluded hereunder. These are defined
as administrative expenses of personnel assigned to claims sections and the
expenses of non-claim departments involved in the administrative claim work
(other than the Company's Legal Department as specified above.)
ARTICLE 14
----------
PREMIUM AND COMMISSIONS
- -----------------------
A. With respect to all business, the Reinsurers shall be paid premiums at
the gross rates applicable, less a provisional commission of 37%.
B. The provisional commission of 37% shall be adjusted annually on the
following basis:
Loss and Allocated Loss Adjustment Expense Ratio Commission
------------------------------------------------ ----------
60% or Higher 28.00%
59% 29.00%
58% 30.00%
57% 31.00%
56% 32.00%
55% 33.00%
54% 34.00%
53% 35.00%
52% 36.00%
51% 37.00%
50% 37.75%
49% 38.50%
48% 39.25%
47% 40.00%
46% 40.75%
45% 41.50%
44% 42.25%
43% or Lower 43.00%
If the ratio of losses incurred to premiums earned for the period January 1,
1996 to January 1, 1997 is greater than 60%, the difference in percent shall
be multiplied by the earned premium ceded during the period and the result
shall be carried forward.
The 1994 Contract year deficit shall be carried forward and included in the
Loss and Allocated Loss Adjustment Expense Ratio for the 1995, 1996 and 1997
Contract years according to the following schedule: 1/3 in 1995, 1/3 in 1996
and 1/3 in 1997. Deficits and Credits incurred during the 1995 Contract year
and subsequent Contract years shall be carried forward until extinction in
respect of ceded Loss and Allocated Loss Adjustment Expense Ratio percentages
over 60% and under 43%, respectively. The portion of the 1994 deficit
carried forward and included in the Loss and Allocated Loss Adjustment
Expense
Effective: January 1, 1996 8 of 16
3645-24
PAGE
Ratio for the 1996 Contract year shall be reduced by an amount of 1.0% of the
"premiums earned" for the Contract year. The loss corridor retained net by
the Company shall not be considered as incurred or paid by the Reinsurers and
thus shall not be carried forward as a deficit.
The deficit and credit carry-forward calculations shall apply based on each
Reinsurers' individual experience.
"Premiums earned" for the purposes of the commission adjustment shall mean
the total premiums written during the Contract year, plus the reserve for
unearned premiums at the beginning of the Contract year, minus the reserve
for unearned premiums at the end of the Contract year.
"Losses incurred" shall mean the net loss and allocated loss adjustment
expenses recovered during any Contract year on losses occurring during that
Contract year, plus the outstanding loss reserve, including losses incurred
but not reported, at the end of that Contract year on losses occurring during
that Contract year, plus any deficit or minus any credit carried forward from
any prior Contract year. Extra Contractual Obligations losses, as defined in
Article 7, Extra Contractual Obligations, and losses in excess of original
policy limits, as defined in Article 8, Excess of Original Policy Limits, are
to be included in the losses incurred definition subject to the Contract
Limit, if applicable.
The Company shall retain 100% of the Loss and Allocated Loss Adjustment
Expense Ratio between 65% and 70% for the 1996 Contract year.
C. An interim statement of adjusted commission shall be prepared and
submitted to the Reinsurers by the Company as soon as possible after the
close of the year under adjustment, and the difference between the adjusted
commission for the year as indicated by the interim statement and the
provisional commission shall be payable on the earned premiums for the year.
The first such statement shall be made as of January 1, 1997.
D. Annual statements of adjusted commission shall be prepared and submitted
to the Reinsurers by the Company as soon as possible after the January 1st
next succeeding the close of the year under adjustment, and the difference
between the adjusted commission for the year as indicated by the statement
and the previously submitted adjusted commission for the same year shall be
payable on the earned premiums for the year.
E. The final calculation of adjusted commission shall be prepared and
submitted by the Company 84 months after the close of the Contract year under
adjustment and in accordance with Article 18, Sunset and Commutation.
F. The commission allowances which the Reinsurers, in accordance with the
preceding stipulations, will pay to the Company, include provisions for all
taxes, assessments and expenses falling on the business transacted under this
Contract; and in the event of the Reinsurers being compelled to make returns
to the Insurance Departments or other departments of any state, District of
Columbia, province, county or city, or any board, bureau or association, and
consequently being obliged to pay taxes or assessments direct to
Effective: January 1, 1996 9 of 16
3645-24
PAGE
such department, board, bureau or association on the premium received from
the Company under this Contract, such taxes or assessment shall be refunded
by the Company to the Reinsurers. This Section shall have no application to
federal or dominion government taxes or to any federal, dominion, state,
District of Columbia, province or municipal excess profits or income taxes.
G. If any amount of reserves for losses and loss expense that had been used
in any calculation of adjusted commission are indicated by subsequent
developments to have been underestimated or overestimated, such calculation
shall be revised at the request of either party. The Company shall refund to
the Reinsurers, or the Reinsurers shall pay to the Company, such amount as
will give effect to the revisions.
ARTICLE 15
----------
CURRENCY
- --------
Wherever the word "Dollars" or the sign "$" appear in this Contract, they
shall be construed to mean United States Dollars, excepting in those cases
where the policies are issued by the Company in Canadian Dollars in which
cases they shall mean Canadian Dollars.
For purposes of this Contract, where the Company received premiums or pays
losses in currencies other than United States or Canadian currency, such
premiums and losses shall be converted into United States Dollars at the
actual rates of exchange at which these premiums and losses are entered in
the Company's books.
ARTICLE 16
----------
ACCOUNTS, REPORTS AND PAYMENTS
- ------------------------------
A. The Company shall furnish to the Reinsurers monthly accounts of business
ceded hereunder within 45 days after the close of each month, showing
premiums due the Reinsurers, adjustments to premium reserves, if any, and
commissions, Federal Excise Tax, if any, and paid losses due from the
Reinsurers, supported by statistical details as set forth herein. The
balance shown to be due by each account shall be payable by the debtor party
within 45 days after the close of the month accounted for.
B. The statistical details referred to in the preceding paragraph shall be
comprised of:
1. Premiums less return premiums summarized by major classes.
2. Paid loss and paid loss adjustment expense summarized by major
classes and segregated into years of occurrence.
3. Outstanding losses summarized by major classes and segregated into
years of occurrence.
Effective: January 1, 1996 10 of 16
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PAGE
4. Total unearned premiums each month and at the end of each year
summarized by major classes.
C. In addition, the Company shall forward with its current account,
particulars of every loss and its expenses paid therein which are in excess
of $500,000 any one loss or Loss Occurrence, as defined in Article 6,
Definition of Loss Occurrence, to the Contract and also shall forward details
of the aggregate settlement made in respect of any event which is recognized
by the Reinsurers to be a catastrophe.
It is agreed, however, that when the amount due from the Reinsurers as a
result of any one loss exceeds their proportion of $500,000, they will at the
option and upon demand of the Company make payment by special remittance
immediately upon receipt of a special loss account which shall be prepared by
the Company and shall contain all relevant details in connection with the
loss.
ARTICLE 17
----------
Loss and Unearned Premium Reserves
- ----------------------------------
(This Article applies to those Reinsurers who do not qualify for credit by
any state or any other governmental authority having jurisdiction over the
Company's loss and unearned premium reserves.)
A: Where a Letter of Credit Trust Agreement is used, the following clause
shall apply:
It is agreed that when the Company files with the Insurance Department or
establishes reserves for claims covered hereunder and unearned premium, as
required by law, the Company shall forward to the Reinsurers a statement
showing the proportion of such loss and unearned premium reserves which is
applicable to the Reinsurers. The Reinsurers hereby agree to apply for and
secure delivery to the Company of a clean, irrevocable and unconditional
Letter of Credit, with a minimum term of one year, that is issued or
confirmed, and presentable and payable in the United States by any bank or
trust company, and is in a format acceptable to the governmental authority
having jurisdiction over the Company's reserves in an amount equal to the
Reinsurers' proportion of said loss and unearned premium reserves.
The Company and the Reinsurers agree that such Letter of Credit shall be
subject to the terms of a separate Letter of Credit Trust Agreement, and that
said trust agreement shall be in a form acceptable to the governmental
authority having jurisdiction over the Company's loss and unearned premium
reserves.
The designated bank shall have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition of
funds withdrawn, except to see that withdrawals are made only upon the order
of properly authorized representatives of the Company.
Effective: January 1, 1996 11 of 16
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PAGE
B: Where a Letter of Credit Trust Agreement is not used, the following
clause shall apply:
It is agreed that when the Company files with the Insurance Department or
establishes reserves for claims covered hereunder and unearned premium, as
required by law, the Company shall forward to the Reinsurers a statement
showing the proportion of such loss and unearned premium reserves which is
applicable to the Reinsurers. The Reinsurers hereby agree to apply for and
secure delivery to the Company of a clean, irrevocable and unconditional
Letter of Credit, with a minimum term of one year, that is issued or
confirmed, and presentable and payable in the United States by any bank or
trust company, and is in a format acceptable to the governmental authority
having jurisdiction over the Company's reserves in an amount equal to the
Reinsurers' proportion of said loss and unearned premium reserves.
The Company and the Reinsurers agree that the Letter of Credit provided by
the Reinsurers under this provision may be drawn upon at any time,
notwithstanding any other provisions in this Contract, and be utilized by the
Company or any successor by operation of law of the Company, including,
without limitation, any liquidator, rehabilitator, receiver or conservator of
such Company for the following purposes:
1. to reimburse the Company for the Reinsurers' share of surrenders and
benefits or losses paid by the Company under the terms and
provisions of the policies reinsured under this Contract;
2. to reimburse the Company for the Reinsurers' share of premium
returned to the owners of policies reinsured under this Contract on
account of cancellation of such policies;
3. to fund an account with the Company in an amount at least equal to
the deduction, for reinsurance ceded, from the Company's liabilities
for policies ceded under this Contract. Such amount shall include,
but not be limited to, amounts for policy reserves, reserves for
claims and losses incurred (including losses incurred but not
reported), loss adjustment expenses, and unearned premiums;
4. to pay any other amounts the Company claims are due under this
Contract;
5. to return any amounts drawn down on Letters of Credit in excess of
the actual amounts required for 1., 2. and 3. above, or in case of
4. above, any amounts which are subsequently determined not to be
due.
All of the foregoing should be applied without diminution because of
insolvency on the part of the Company or the Reinsurers.
The designated bank shall have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition of
funds withdrawn, except to see that withdrawals are made only upon the order
of properly authorized representatives of the Company.
Effective: January 1, 1996 12 of 16
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ARTICLE 18
----------
SUNSET AND COMMUTATION
- ----------------------
A. Not later than 84 months after the close of the Contract year, the
Company shall advise the Reinsurers of all claims reported for said Contract
year not finally settled which are likely to result in a claim under this
Contract. The Company and the Reinsurers or their respective representatives
shall, by mutual agreement, determine and capitalize such claims. Payment by
the Reinsurers of their proportion of the amount or amounts so mutually
agreed, shall constitute a complete and final release of the Reinsurers of
liability in respect of such claim (or claims).
B. If agreement cannot be reached, the Company and the Reinsurers shall
mutually appoint an Actuary or Appraiser to investigate, determine and
capitalize such claims. If both parties then agree, the Reinsurers shall pay
their proportion of the amount so determined to be the capitalized value of
such claims.
C. If the parties fail to agree, then any difference shall be settled by a
panel of three Actuaries, one to be chosen by each party and the third by the
two so chosen. If either party refuses or neglects to appoint an Actuary
within thirty days, the other party may appoint two Actuaries. If the two
Actuaries fail to agree on the selection of a third Actuary within thirty
days of their appointment, each of them shall name two, of whom the other
shall decline one and the decision shall be made by drawing lots. All the
Actuaries shall be Fellows of the Casualty Actuarial Society or of the
American Academy of Actuaries. None of the Actuaries shall be under the
control of either party to this Contract.
Each party shall submit its case to its Actuary within thirty days of the
appointment of the third Actuary. The decision in writing of any two
Actuaries, when filed with the parties hereto, shall be final and binding on
both parties. The expense of the Actuaries and of the Commutation shall be
equally divided between the two parties. Said Commutation shall take place
in Branchville, New Jersey, unless some other place is mutually agreed upon
by the Company and the Reinsurers.
ARTICLE 19
----------
FEDERAL EXCISE TAX
- ------------------
(This Article applies only to those Reinsurers, domiciled outside the United
States of America who are not exempt from the Federal Excise Tax.)
The Reinsurers have agreed to allow for the purpose of paying the Federal
Excise Tax the percentage specified by United States law of the premium
payable hereon to the extent such premium is subject to Federal Excise Tax.
Effective: January 1, 1996 13 of 16
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PAGE
In the event of any return of premium becoming due hereunder, the Reinsurers
will deduct the percentage specified by United States law from the amount of
the return and the Company or its agent should take steps to recover the Tax
from the United States Government.
ARTICLE 20
----------
SERVICE OF SUIT (U.S.A.)
- ------------------------
(This Article applies only to those Reinsurers not domiciled in the United
States of America, and/or not authorized in any state, territory and/or
district of the United States where authorization is required by insurance
regulatory authorities.)
It is agreed that in the event of the failure of the Reinsurers to pay any
amount claimed to be due under this Contract, the Reinsurers, at the request
of the Company, will submit to the jurisdiction of any court of competent
jurisdiction within the United States of America and will comply with all
requirements necessary to give such court jurisdiction; and all matters
arising hereunder shall be determined in accordance with the law and practice
of such court. Nothing in this Article constitutes or should be understood
to constitute a waiver of the Reinsurers' 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 Mendes and Mount, 750
Seventh Avenue, New York, New York 10019-6879 (hereinafter, "agent for
service of process") and in any suit instituted against any Reinsurer(s) upon
this Contract, the Reinsurer(s) will abide by the final decision of such
court or of any appellate court in the event of an appeal.
The above named are authorized and directed to accept service of process on
behalf of the Reinsurers in any such suit and/or upon the request of the
Company to give a written undertaking to the Company that the agent for
service of process will enter a general appearance on behalf of the
Reinsurers in the event such a suit shall be instituted.
Further, pursuant to any statute of any state, territory or district of the
United States of America which makes provision therefor, the Reinsurers
hereby designate the Superintendent, Commissioner or Director of Insurance or
other officer specified for that purpose in the statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be
served any lawful process in any action, suit or proceeding instituted by or
on behalf of the Company or any beneficiary hereunder arising out of this
Contract and hereby designate the agent for service of process as the firm to
whom the said officer is authorized to mail such process or a true copy
thereof.
Effective: January 1, 1996 14 of 16
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PAGE
ARTICLE 21
----------
INSOLVENCY
- ----------
In the event of the insolvency of the Company, this reinsurance shall be
payable directly to the Company, or to its liquidator, receiver, conservator
or statutory successor on the basis of the liability of the Company without
diminution because of the insolvency of the Company or because the
liquidator, receiver, conservator or statutory successor of the Company has
failed to pay all or a portion of any claim. It is agreed, however, that the
liquidator, receiver, conservator or statutory successor of the Company shall
give written notice to the Reinsurers of the pendency of a claim against the
Company indicating the policy or bond reinsured, which claim would involve a
possible liability on the part of the Reinsurers within a reasonable time
after such claim is filed in the conservation or liquidation proceeding or in
the receivership, and that during the pendency of such claim, the Reinsurers
may investigate such claim and interpose, at their own expense, in the
proceeding where such claim is to be adjudicated any defense or defenses that
they may deem available to the Company or its liquidator, receiver,
conservator or statutory successor. The expense thus incurred by the
Reinsurers shall be chargeable, subject to the approval of the court, against
the Company as part of the expense of conservation or liquidation to the
extent of a pro rata share of the benefit which may accrue to the Company
solely as a result of the defense undertaken by the Reinsurers.
Where two or more Reinsurers are involved in the same claim and a majority in
interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of the reinsurance Contract as
though such expense had been incurred by the Company.
As to all reinsurance made, ceded, renewed or otherwise becoming effective
under this Contract, the reinsurance shall be payable as set forth above by
the Reinsurers to the Company or to its liquidator, receiver, conservator or
statutory successor, except as provided by Sections 4118(a)(1)(A) and 1114(c)
of the New York Insurance Law or except (1) where the Contract specifically
provides another payee in the event of the insolvency of the Company, and (2)
where the Reinsurers, with the consent of the direct insured or insureds,
have assumed such policy obligations of the Company as direct obligations of
the Reinsurers to the payees under such policies and in substitution for the
obligations of the Company to such payees. Then, and in that event only, the
Company, with the prior approval of the certificate of assumption on New York
risks by the Superintendent of Insurance of the State of New York, is
entirely released from its obligation and the Reinsurers pay any loss
directly to payees under such policy.
ARTICLE 22
----------
ACCESS TO COMPANY'S RECORDS
- ---------------------------
The Reinsurers or their duly designated representatives shall have access to
the books, documents and records of the Company at all reasonable times for
the purpose of obtaining information concerning this Contract or the subject
matter thereof.
Effective: January 1, 1996 15 of 16
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PAGE
ARTICLE 23
----------
ARBITRATION
- -----------
As a precedent to any right of action hereunder, if any dispute shall arise
between the parties to this Contract with reference to the interpretation of
this Contract or their rights with respect to any transaction involved,
whether such dispute arises before or after termination of this Contract,
such dispute, upon the written request of either party, shall be submitted to
three arbitrators, one to be chosen by each party, and the third by the two
so chosen. If either party refuses or neglects to appoint an arbitrator
within thirty days after the receipt of written notice from the other party
requesting it to do so, the requesting party may appoint two arbitrators. If
the two arbitrators fail to agree in the selection of a third arbitrator
within thirty days of their appointment, each of them shall name two, of whom
the other shall decline one and the decision shall be made by drawing lots.
All arbitrators shall be active or retired disinterested officers of
insurance or reinsurance companies or Underwriters at Lloyd's, London not
under the control of either party to this Contract.
The arbitrators shall interpret this Contract as an honorable engagement and
not as merely a legal obligation. They are relieved of all judicial
formalities and may abstain from following the strict rules of law. They
shall make their award with a view to effecting the general purpose of this
Contract in a reasonable manner rather than in accordance with a literal
interpretation of the language. Each party shall submit its case to its
arbitrator within thirty days of the appointment of the third arbitrator.
The decision in writing of any two arbitrators, when filed with the parties
hereto, shall be final and binding on both parties. Judgment may be entered
upon the final decision of the arbitrators in any court having jurisdiction.
Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the expense of the third arbitrator and of
the arbitration. Said arbitration shall take place in the city in which the
Company's Head Office is located unless some other place is mutually agreed
upon by the parties to this Contract.
ARTICLE 24
----------
INTERMEDIARY
- ------------
Guy Carpenter & Company, Inc. is hereby recognized as the intermediary
negotiating this Contract for all business hereunder. All communications
(including but not limited to notices, statements, premiums, return premiums,
commissions, taxes, losses, loss adjustment expenses, salvages, and loss
settlements) relating thereto shall be transmitted to the Company or the
Reinsurers through Guy Carpenter & Company, Inc., Two World Trade Center, New
York, New York 10048. Payments by the Company to the intermediary shall be
deemed to constitute payment to the Reinsurers. Payments by the Reinsurers
to the intermediary shall be deemed to constitute payment to the Company only
to the extent that such payments are actually received by the Company.
Effective: January 1, 1996 16 of 16
3645-24
PAGE
SUMMARY OF CHANGES
------------------
to the
SELECTIVE INSURANCE COMPANY
---------------------------
NEW JERSEY HOMEOWNERS QUOTA SHARE TREATY
----------------------------------------
This Contract effective January 1, 1996 differs from the previous Contract
effective January 1, 1995 in the following manner:
1. Throughout the Contract, all dates have been amended to reflect the
current term. All references to "Agreement", "Contract", "Company", and
"Reinsurers" have been amended to read "the Agreement", "the Contract",
"the Company", "the Reinsurers", and "the Subscribing Reinsurer" (in
the Interests and Liabilities Agreement), to correct grammatical errors.
Also, cross references to other Articles have been added and editorial
corrections (such as capitalization) have been made. All major sections
and subsections have been renamed to appear in the following order for
the sake of consistency: A., 1., (a), (i).
2. Preamble; Has been amended to follow the language contained in all
other Selective Contracts.
3. Article 2, Exclusions; The full definition of Insolvency Funds has been
included within the wording and excluded as an attachment.
4. Article 3, Term and Cancellation; The third paragraph has been amended
to clarify each party's responsibilities in the event of a cancellation
on a cut-off basis.
5. Article 5, Contract Detail; The third paragraph has been amended to
read "(being 85% of $1,000,000) per policy" and "maximum cession of
$425,000 (being 85% of $500,000)". The fourth paragraph has been
amended to reflect the increased occurrence limit of $95,000,000.
6. Article 11, Notice of Loss; The reference to Guy Carpenter has been
deleted, as all obligations of the Intermediary are covered in the
Intermediary Article.
7. Article 14, Premium and Commissions; The provisional commission has
been amended to be 37%. The subheading in Section B. has been amended
to read "Loss and Allocated Loss Adjustment Expense Ratio" and the
Sliding Scale Commissions and subsequent paragraphs of Section B. have
been amended in accordance with the terms of the firm order.
8. Article 17, Loss and Unearned Premium Reserves; This Article has been
amended to allow funding for Unearned Premium Reserves.
EXHIBIT 10.14c - COVER LETTER
- ----------------------------
March 21, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Reinsurance Agreement, as amended through April 18, 1995, between
Selective insurance Company of America, Selective Way Insurance
Company, Selective Insurance Company of the Southeast, Selective
Insurance Company of South Carolina, Exchange Insurance Company and
American Re-Insurance Company (Contract No. 3525-0076)
Ladies and Gentlemen:
Accompanying this letter for filing pursuant to the Securities Act of
1933, are amendments, dated February 15, 1996 and July 19, 1996, to the
reinsurance agreement referred to above. This agreement was filed as
Exhibit 10.12b to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, File No. 0-8641.
Very truly yours,
/s/ Leo L. McConville, Jr.
----------------------
Leo L. McConville, Jr.
Accountant Technical
Specialist
PAGE
EXHIBIT 10.14c
- --------------
- -----------------------------------------------------------------------------
No. 3525-0076-E005
ENDORSEMENT
-----------
Attached to and forming part of Reinsurance Agreement No. 3525-0076
between SELECTIVE INSURANCE COMPANY OF AMERICA and the SELECTIVE WAY
INSURANCE COMPANY, both of Branchville, New Jersey and the SELECTIVE
INSURANCE COMPANY OF THE SOUTHEAST and the SELECTIVE INSURANCE COMPANY OF
SOUTH CAROLINA, both of Charlotte, North Carolina, the EXCHANGE INSURANCE
COMPANY, of Buffalo, New York and the CHARLESTON INSURANCE COMPANY, of
Charleston, South Carolina (therein and herein collectively referred to as
the "Company") and the AMERICAN RE-INSURANCE COMPANY, Princeton, New Jersey
(therein and herein referred to as the "Reinsurer").
It is understood and agreed that effective 12:01 A.M., January 1, 1996
Exhibit C is terminated in accordance with the terms contained in Section 7,
Termination, of Exhibit C.
IN WITNESS WHEREOF the parties hereto have caused this Endorsement to
be executed in duplicate this is 15th day of February ,1996.
ACCEPTED:
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
CHARLESTON INSURANCE COMPANY
/s/ Wayne Rydell
------------
Wayne Rydell
/s/ P.C. Anderson
-------------
P.C. Anderson
- -----------------
Attested by:
AMERICAN RE-INSURANCE COMPANY
/s/ Peter K. Colket, V.P.
-------------------------
Peter K. Colket, V.P.
/s/ Scott Burgess
--------------
Scott Burgess
-----------------------------
Attested by:
PAGE
- -----------------------------------------------------------------------------
No.3525-0076-E006
ENDORSEMENT
-----------
Attached to and forming part of Reinsurance Agreement No.3525-0076
between SELECTIVE INSURANCE COMPANY OF AMERICA and the SELECTIVE WAY
INSURANCE COMPANY, both of Branchville, New Jersey and the SELECTIVE
INSURANCE COMPANY OF THE SOUTHEAST and the SELECTIVE INSURANCE COMPANY OF
SOUTH CAROLINA, both of Charlotte, North Carolina, the EXCHANGE INSURANCE
COMPANY, of Buffalo, New York and the CHARLESTON INSURANCE COMPANY, of
Charleston, South Carolina (therein and herein collectively referred to as
the "Company") and the AMERICAN RE-INSURANCE COMPANY, Princeton, New Jersey
(therein and herein referred to as the "Reinsurer").
It is mutually understood and agreed that effective 12 01 A.M., July 1,
1996 Exhibits A and B are terminated in accordance with the terms contained
in the Section entitled Termination, of each Exhibit.
IN WITNESS WHEREOF the parties hereto have caused this Endorsement to
be executed in duplicate this 19th day of, July, 1996.
ACCEPTED:
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
CHARLESTON INSURANCE COMPANY
/s/ P.C. Anderson
-------------
P.C. Anderson
/s/ Wayne Rydell
-------------
Wayne Rydell
- -----------------
Attested by:
AMERICAN RE-INSURANCE COMPANY
/s/ Patrick Colket, V.P.
-------------------------
Patrick Colket, V.P.
/s/ David L. Beebe
--------------
David L. Beebe
-----------------------------
Attested by:
PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
--------------------------------------------------------
TABLE OF CONTENTS
-----------------
Article Page
------- ----
Preamble 1
1 Term 2
2 Exclusions 2
3 Definitions 4
4 Self-Insured Obligations 5
5 Reinsuring Clause 6
6 Reinstatement 6
7 Premium 7
8 Ultimate Net Loss 8
9 Net Retained Lines 8
10 Loss Settlements 9
11 Currency 9
12 Taxes 10
13 Federal Excise Tax 10
14 Errors and Omissions 10
15 Access to Records 11
16 Insolvency 11
17 Arbitration 12
18 Service of Suit 13
19 Loss Reserves 14
20 Catastrophe Claims Trust Fund Settlement 16
21 Intermediary 17
Attachments
- -----------
Pools, Associations And Syndicates Exclusion Clause 18
Nuclear Incident Exclusion Clause -
Physical Damage - Reinsurance - U.S.A. 20
Nuclear Incident Exclusion Clause -
Physical Damage - Reinsurance - Canada 22
Effective: January 1, 1996
3645-21
PAGE
PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
--------------------------------------------------------
(hereinafter referred to as the "Contract")
In consideration of the mutual covenants hereinafter contained and upon the
terms and conditions hereinafter set forth
VARIOUS INSURANCE AND/OR REINSURANCE COMPANIES
AND/OR UNDERWRITING MEMBERS OF LLOYD'S
(hereinafter collectively referred to as the "Reinsurers")
one of whom is
THE "SUBSCRIBING REINSURER" WHOSE NAME APPEARS
ON THE INTERESTS AND LIABILITIES AGREEMENT
ATTACHING TO AND FORMING A PART OF THIS CONTRACT
do hereby indemnify, as herein provided and specified,
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
and/or any insurance affiliates which are now
owned or hereafter may be acquired by The
Selective Insurance Group.
(hereinafter referred to collectively or
individually as the "Company")
PREAMBLE
- --------
The Reinsurers hereby reinsure the excess liability of the Company resulting
from losses occurring during the term of this Contract, covering anywhere in
the world, under all of its policies, other than policies or portions thereof
hereinafter excluded, subject to the following conditions:
Effective: January 1, 1996 1 of 23
3645-21
PAGE
ARTICLE 1
---------
TERM
- ----
The term of this Contract shall be from 12:01 a.m., Standard Time at the
location of the risk or risks, January 1,1996, to 12:01 a.m., Standard Time
at the location of the risk or risks, January 1,1997.
Should this Contract terminate while a Loss Occurrence, as defined in Article
3, Definitions, is in progress, the Reinsurers shall nevertheless be liable
to the extent of their interest, subject to the other conditions of this
Contract, for all losses resulting from such Loss Occurrence, whether such
losses arise before or after such termination, provided that no part of such
Loss Occurrence shall be recoverable from any renewal of this Contract.
ARTICLE 2
---------
EXCLUSIONS
- ----------
This Contract shall not apply to and specifically excludes:
A. Loss or liability excluded by the provisions of the "Pools, Associations
and Syndicates Exclusion Clause" attached hereto.
B. Any risks written by the Company's Aviation Department or written by the
Company as a member of an Aviation Insurance Group. However, with
respect to Property business, the exclusion shall not apply to
stationary ground risks, cargo and/or aircraft property damage.
C. Accident and Health business.
D. Fidelity business, except when written as a miscellaneous hazard in
Inland Marine transportation policies.
E. All business classified by the Company as Casualty, (including the
Casualty sections of Homeowners, Farmowners and Commercial Multiple
Peril policies).
F. Boiler and Machinery.
G. Workers' Compensation and Employers' Liability business.
H. Hail on growing or standing crops.
I. Livestock Mortality.
J. Mortgage Impairment Insurance with respect to Flood and Earthquake.
Effective: January 1, 1996 2 of 23
3645-21
PAGE
K. Stop loss reinsurance, quota share treaty reinsurance, and surplus
treaty reinsurance assumed from other insurance and reinsurance
companies and from Lloyd's Syndicates.
L. Contract Surety and Credit Insurance.
M. Liability excluded under the provisions of the "Nuclear Incident
Exclusion Clause - Physical Damage - Reinsurance - U.S.A." and the
"Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance -
Canada", attached hereto.
N. Liability arising from participation or membership in an Insolvency
Fund.
O. Financial Guarantee and Insolvency business.
P. War Risks.
Q. Loss/or damage/or costs/or expenses arising from seepage and/or
pollution and/or contamination, other than contamination from smoke
damage. Nevertheless, this exclusion does not preclude any payment of
the cost of removal of debris of property damaged by a loss otherwise
covered hereunder, but subject always to a limit of twenty-five percent
of the Company's property loss under the original policy.
R. Losses in respect of overhead transmission and distribution lines and
their supporting structures, other than those on or within 150 meters
(or 500 feet) of the insured premises. It is understood and agreed that
public utilities extension and/or suppliers extension and/or contingent
business interruption coverages are not subject to this exclusion,
provided that these are not part of a transmitters or distribution
policy.
S. Notwithstanding any other provision of this Contract, the Reinsurers
shall not be liable to the Company for any Extra Contractual Obligations
or Losses in Excess of Policy Limits.
"Extra Contractual Obligations" means those liabilities of the Company,
together with any legal costs and expenses incurred in connection
therewith, paid or payable by the Company as a result of an action
against it or its reassured, by any assured or reassured, the assignee
of any assured or reassured, or a third party claimant, which arise from
the handling of any claim on any insurance contract, such liabilities
arising because of, but not limited to, the following: failure by the
Company or its reassured to settle within the policy limit, or by reason
of alleged or actual negligence, fraud, or bad faith in rejecting an
offer of settlement or in the preparation of the defense or in the trial
of any action against its assured or reassured or in the preparation or
prosecution of an appeal consequent upon such action.
"Losses in Excess of Policy Limits" means those losses of the Company or
its reassured in excess of the limit of any contract of insurance or
reinsurance reinsured hereunder, such loss in excess of the limit having
been incurred because of failure by the Company or its reassured to
settle within the policy limit or by reason of alleged or actual
negligence, fraud, or bad faith in rejecting an offer of settlement or
in the preparation of the defense or in the
Effective: January 1, 1996 3 of 23
3645-21
PAGE
trial of any action against its assured or reassured or in the
preparation or prosecution of an appeal consequent upon such action.
No inference shall be drawn from the foregoing exclusion of liabilities
that this Contract or any portion of this Contract otherwise covers such
liabilities in the absence of said exclusion.
It is understood that Exclusion B. shall not apply when such hazards are
incidental to and form a minor part of the usual operations of the assured.
These Exclusions, other than M., N., O. and P. shall also not apply in the
event of the Company being interested without its knowledge on an excluded
risk, either by an existing assured extending its operations or by an
inadvertent acceptance by an agent or otherwise; this Contract shall attach
in respect of such prohibited risk, but only until discovery by the
Management of the Home Office and then only for thirty (30) days thereafter.
ARTICLE 3
---------
DEFINITIONS
- -----------
A. The term "policies" wherever used herein, shall mean all policies,
contracts, binders and other evidences of insurance and reinsurance,
whether oral or written, heretofore issued or which may be issued
hereafter by the Company.
B. The term "Loss Occurrence" shall mean the sum of all individual losses
directly occasioned by any one disaster, accident or loss or series of
disasters, accidents or losses arising out of one event which, with
respect to Continental U.S. losses and/or Canadian losses, occurs within
the area of one state of the United States or province of Canada and
states or provinces contiguous thereto and to one another. However, the
duration and extent of any one "Loss Occurrence" shall be limited to all
individual losses sustained by the Company occurring during any period
of 168 consecutive hours arising out of and directly occasioned by the
same event except that the term "Loss Occurrence" shall be further
defined as follows:
1. As regards windstorm, hail, tornado, hurricane, cyclone, including
ensuing collapse and water damage, all individual losses sustained
by the Company occurring during any period of 72 consecutive hours
arising out of and directly occasioned by the same event. However,
the event need not be limited to one state or province or states or
provinces contiguous thereto.
2. As regards riot, riot attending a strike, civil commotion,
vandalism and malicious mischief, all individual losses sustained
by the Company occurring during any period of 72 consecutive
hours within the area of one municipality or county and the
municipalities or counties contiguous thereto arising out of and
directly occasioned by the same event. The maximum duration of 72
consecutive hours may be extended in respect of individual losses
which occur beyond such 72 consecutive hours during the
Effective: January 1, 1996 4 of 23
3645-21
PAGE
continued occupation of an assured's premises by strikers, provided
such occupation commenced during the aforesaid period.
3. As regards earthquake (the epicenter of which need not necessarily
be within the territorial confines referred to in the opening
paragraph of this Section B.) and fire following directly
occasioned by the earthquake, only those individual fire losses
which commence during the period of 168 consecutive hours may be
included in the Company's "Loss Occurrence".
4. As regards "Freeze", only individual losses directly occasioned by
collapse, breakage of glass and water damage (caused by bursting of
frozen pipes and tanks) may be included in the Company's "Loss
Occurrence".
For all those "Loss Occurrences" the Company may choose the date and
time when any such period of consecutive hours commences provided that
it is not earlier than the date and time of the occurrence of the first
recorded individual loss sustained by the Company arising out of that
disaster, accident or loss and provided that only one such period of 168
consecutive hours shall apply with respect to one event, except for any
"Loss Occurrence" referred to in sub-paragraphs 1. and 2. above where
only one such period of 72 consecutive hours shall apply with respect to
one event, regardless of the duration of the event.
No individual losses occasioned by an event that would be covered by 72
hours clauses may be included in any "Loss Occurrence" claimed under the
168 hours provision.
C. The term "premium income" shall mean gross earned premiums on business
covered hereunder, less return premiums for cancellations and
reductions, less premiums inuring to the benefit of the Reinsurers
hereunder.
ARTICLE 4
---------
SELF-INSURED OBLIGATIONS
- ------------------------
There shall be included herein all obligations of the Company assumed by it
as a self-insurer or self-insured obligations in excess of any valid and
collectible insurance available to the Company to the same extent as if all
types of insurance described in the Contract were afforded under the broadest
form of policy(ies) issued by the Company.
An insurance or reinsurance wherein any of the companies hereby reinsured
and/or its affiliated and/or subsidiary companies are named as the insured or
reinsured party, either alone or jointly with some other party, shall be
deemed to be an insurance or reinsurance coming within the scope of this
Contract, notwithstanding that no legal liability may arise in respect
thereof by reason of the fact that any of the companies hereby reinsured
and/or its affiliated and/or subsidiary companies may not be obligated by law
to pay a claim to itself and/or its affiliated and/or subsidiary companies.
Effective: January 1, 1996 5 of 23
3645-21
PAGE
In respect of all such business, the Company shall include in the premium
income hereunder, as defined in Article 3, Definitions, the premiums that
would be paid were such obligations covered by a normal policy or policies.
ARTICLE 5
---------
REINSURING CLAUSE
- -----------------
The Reinsurers will pay to the Company for any loss under this Contract,
whenever the Company has paid or advanced or agreed to pay or advance or
become liable to pay as the result of any one Loss Occurrence, as defined in
Article 3, Definitions, an amount of Ultimate Net Loss, as defined in Article
8, Ultimate Net Loss, the excess of the appropriate retention(s), as set
forth in the following Schedule, and the sum recoverable hereunder for each
Loss Occurrence shall be 100% of the amount of Ultimate Net Loss the excess
of the appropriate retention(s), but not more than the amount of the limit of
the Reinsurers' liability for each Excess Layer, as set forth in the
following Schedule, and subject further to the limitations set forth in
Article 6, Reinstatement.
Schedule
--------
Retention
(each Loss Limit of Reinsurers' Liability
Occurrence) (each Loss Occurrence)
----------- ------------------------------
A. Second Excess Layer $10,000,000 $10,000,000 the excess of
$10,000,000.
B. Third Excess Layer $20,000,000 $15,000,000 the excess of
$20,000,000.
C. Fourth Excess Layer $35,000,000 $20,000,000 the excess of
$35,000,000.
D. Fifth Excess Layer $55,000,000 $30,000,000 the excess of
$55,000,000.
E. Sixth Excess Layer $85,000,000 $40,000,000 the excess of
$85,000,000.
ARTICLE 6
---------
REINSTATEMENT
- -------------
In the event of any portion of the limit under this Contract being exhausted
by loss, each Loss Occurrence, as defined in Article 3, Definitions, reduces
the amount of indemnity provided under
Effective: January 1, 1996 6 of 23
3645-21
PAGE
this Contract by the amount paid. The amount so exhausted shall be
automatically reinstated from the time of the Loss Occurrence, and for each
amount so reinstated the Company agrees to pay to the Reinsurers an
additional reinsurance premium calculated at pro rata of the annual premium
as respects the fraction of indemnity exhausted and 100% of the annual
premium regardless of the unexpired term of this Contract, to be paid
simultaneously with the payment of losses by the Reinsurers.
Nevertheless, the Reinsurers' liability shall never be more than 100% of:
In respect of all Loss
In respect of any one Occurrences during the
Loss Occurrence the term of this Contract
--------------------- -------------------------
A. Second Excess Layer $10,000,000 $20,000,000
B. Third Excess Layer $15,000,000 $30,000,000
C. Fourth Excess Layer $20,000,000 $40,000,000
D. Fifth Excess Layer $30,000,000 $60,000,000
E. Sixth Excess Layer $40,000,000 $80,000,000
ARTICLE 7
---------
PREMIUM
- -------
The Company shall pay to the Reinsurers a deposit reinsurance premium for
each layer as provided in the following Schedule. It is agreed that the
final developed premium for each layer, calculated by applying the following
rates to the Company's premium income, as defined in Article 3, Definitions,
shall also be subject to a minimum premium for the layer as follows:
Schedule
--------
Annual Reinsurance Premiums
---------------------------
Rate Deposit Premium Minimum Premium
---- --------------- ---------------
A. Second Excess Layer 0.933% $1,500,000 $1,200,000
B. Third Excess Layer 1.167% $1,875,000 $1,500,000
C. Fourth Excess Layer 1.120% $1,800,000 $1,440,000
Effective: January 1, 1996 7 of 23
3645-21
PAGE
D. Fifth Excess Layer 1.307% $2,100,000 $1,680,000
E. Sixth Excess Layer 1.244% $2,000,000 $1,600,000
Deposit premiums shall be paid to the Reinsurers in equal semi-annual
installments at January 1, 1996, and July 1, 1996. As soon as practicable
after the January 1, 1997 expiration of this Contract, the Company shall
furnish to the Reinsurers a statement of the premium income, as defined in
Article 3, Definitions, accounted for by the Company during the term of this
Contract, and adjustment shall then be made in accordance with the foregoing
Schedule.
ARTICLE 8
---------
ULTIMATE NET LOSS
- -----------------
The term "Ultimate Net Loss" shall mean the amount paid or payable by the
Company in settlement of losses or liability, after deducting all recoveries,
all salvage and all amounts due from any other reinsurers (except as noted in
Article 9, Net Retained Lines) and shall include all adjustment and legal
expenses in connection with the adjustment and settlement of claims including
an allowance for salaried adjusters or other salaried employees employed by
the Company while diverted from normal duties to the service of field
adjustment in connection with losses for which claim is made hereunder, at
the per diem rate normally applied in the Company's books to such employees,
plus expenses incurred by such employees in connection with such adjustments.
Also, expenses of the Company's officials incurred in connection with the
loss, but no salaries of the Company's officials or any normal overhead
charges, such as rent, postage, lighting, heating, cleaning, etc., shall be
included.
All salvage and recoveries received subsequent to a loss settlement under
this Contract shall be applied as if received prior to said loss settlement,
and all necessary adjustments shall be made between the Company and the
Reinsurers.
Nothing in this Article shall be construed to mean that losses under this
Contract are not recoverable until the Company's Ultimate Net Loss has been
ascertained.
ARTICLE 9
---------
NET RETAINED LINES
- ------------------
Except as otherwise provided, this Contract applies only to that portion of
any insurance or reinsurance which the Company retains for its own account
(including the Company's net retention in all underlying reinsurance
programs) and, in calculating the amount of loss hereunder and also in
computing the amount or amounts in excess of which this Contract attaches,
only loss
Effective: January 1, 1996 8 of 23
3645-21
PAGE
in respect of that portion of any insurance or reinsurance which the Company
retains net for its own account shall be included.
The amount of the Reinsurers' liability hereunder in any Loss Occurrence, as
defined in Article 3, Definitions, shall not be increased by reason of the
inability of the Company to collect from any other reinsurers, whether
specific or general, any amount which may have become due from them, whether
such inability arises from the insolvency of such other reinsurers or not.
Notwithstanding the preceding paragraphs, the Company has in effect various
underlying reinsurances, recoveries of which shall inure to the benefit of
the Company, subject to a minimum net retention, any one loss occurrence, as
defined therein, of not less than $1,000,000, any and all recoveries in
excess of the $1,000,000 minimum net retention shall inure to the benefit of
the Reinsurers hereunder.
It is warranted that in addition to the initial net loss retentions
hereunder, the Company shall retain for its own account and not reinsured in
any way at least 5% of the excess loss covered under this Contract.
ARTICLE 10
----------
LOSS SETTLEMENTS
- ----------------
The Company shall advise the Reinsurers promptly of all Loss Occurrences, as
defined in Article 3, Definitions, which, in the opinion of the Company, may
result in a claim under this Contract and shall also keep the Reinsurers
advised of any subsequent material developments in connection therewith.
All loss settlements made by the Company, provided they are within the terms
of the original policies and of this Contract, shall be unconditionally
binding on the Reinsurers, who agree to pay all amounts for which they may be
liable immediately upon being furnished by the Company with reasonable
evidence of the amount due or to be due.
ARTICLE 11
----------
CURRENCY
- --------
For purposes of this Contract, the net retained liability, as defined in
Article 9, Net Retained Lines, and the Ultimate Net Loss of the Company, as
defined in Article 8, Ultimate Net Loss, and the limit of the Reinsurers'
liability, as determined in Article 5, Reinsuring Clause, shall be considered
in terms of the Canadian currency for all policies issued by the Company in
Canadian Dollars and in terms of United States Dollars for all other
policies. If a Loss Occurrence, as defined in Article 3, Definitions,
involves policies issued in both United States and Canadian Dollars, the net
retained liability and the Ultimate Net Loss of the Company and the limit of
the
Effective: January 1, 1996 9 of 23
3645-21
PAGE
Reinsurers' liability shall be apportioned between the two currencies in the
proportion that the Ultimate Net Loss in each currency bears to the total
Ultimate Net Loss of the Company. All loss payments hereunder shall be made
in United States or Canadian Dollars in accordance with these provisions.
Payment of the reinsurance premium hereunder at the rate specified in Article
5, Reinsuring Clause, shall be made in Canadian Dollars for policies issued
by the Company in Canadian Dollars and in United States Dollars for all other
policies.
ARTICLE 12
----------
TAXES
- -----
In consideration of the terms under which this Contract is issued, the
Company agrees not to claim any deduction in respect of the premium hereon
when making Canadian tax returns or tax returns, other than Income or Profits
Tax returns, to any state or territory of the United States of America or the
District of Columbia.
ARTICLE 13
----------
FEDERAL EXCISE TAX
- ------------------
(This Article applies only to those Reinsurers, excepting Underwriters at
Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who
are domiciled outside the United States of America.)
The Reinsurers have agreed to allow for the purpose of paying the Federal
Excise Tax the percentage specified by United States law of the premium
payable hereon to the extent such premium is subject to Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurers
will deduct the percentage specified by United States law from the amount of
the return and the Company or its agent should take steps to recover the tax
from the U.S. Government.
ARTICLE 14
----------
ERRORS AND OMISSIONS
- --------------------
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made, provided such delay, omission or
error is rectified as soon as practicable upon discovery.
Effective: January 1, 1996 10 of 23
3645-21
PAGE
ARTICLE 15
----------
ACCESS TO RECORDS
- -----------------
The Reinsurers or their designated representatives shall have access at any
reasonable time to all records of the Company which pertain in any way to
this Contract.
ARTICLE 16
----------
INSOLVENCY
- ----------
In the event of the insolvency of the Company, this reinsurance shall be
payable directly to the Company, or to its liquidator, receiver, conservator
or statutory successor on the basis of the liability of the Company under the
policies or contracts reinsured without diminution because of the insolvency
of the Company or because the liquidator, receiver, conservator or statutory
successor of the Company has failed to pay all or a portion of any claim. It
is agreed, however, that the liquidator, receiver, conservator, or statutory
successor of the Company shall give written notice to the Reinsurers of the
pendency of a claim against the Company indicating the policy or bond
reinsured, which claim would involve a possible liability on the part of the
Reinsurers within a reasonable time after such claim is filed in the
conservation or liquidation proceeding or in the receivership, and that
during the pendency of such claim, the Reinsurers may investigate such claim
and interpose, at their own expense, in the proceeding where such claim is to
be adjudicated any defense or defenses that they may deem available to the
Company or its liquidator, receiver, conservator or statutory successor. The
expense thus incurred by the Reinsurers shall be chargeable, subject to the
approval of the court, against the Company as part of the expense of
conservation or liquidation to the extent of a pro rata share of the benefit
which may accrue to the Company solely as a result of the defense undertaken
by the Reinsurers.
Where two or more Reinsurers are involved in the same claim and a majority in
interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of the reinsurance Contract as
though such expense had been incurred by the Company.
As to all reinsurance made, ceded, renewed or otherwise becoming effective
under this Contract, the reinsurance shall be payable as set forth above by
the Reinsurers to the Company or to its conservator, liquidator or statutory
successor, (except as provided by Section 4118(a)(1)(A) and Section 1114(c)
of the New York Insurance Law or) except (1) where the Contract specifically
provides another payee in the event of the insolvency of the Company, and (2)
where the Reinsurers, with the consent of the direct assured or assureds,
have assumed such policy obligations of the Company as direct obligations of
the Reinsurers to the payees under such policies and in substitution for the
obligations of the Company to such payees. Then, and in that event only, the
Company, with the prior approval by the Superintendent of Insurance of the
State of New York of the certificate of assumption on New York risks, is
entirely released from its obligation and the Reinsurers pay any loss
directly to payees under such policy.
Effective: January 1, 1996 11 of 23
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PAGE
Should any party hereto be placed in rehabilitation or liquidation or should
a rehabilitator, liquidator, receiver, conservator or other person or entity
of similar capacity be appointed as respects such party, all amounts due any
of the parties hereto whether by reason of premiums, losses or otherwise
under this Contract or any other Contract(s) of reinsurance heretofore or
hereafter entered into between the parties (whether or not any such
Contract(s) be assumed or ceded) shall at all times be subject to the right
of offset at any time and from time to time, and upon the exercise of same,
only the net balance shall be due and payable in accordance with Section 7427
of the Insurance Law of the State of New York to the extent such statute or
any other applicable law, statute or regulation governing such offset shall
apply.
ARTICLE 17
----------
ARBITRATION
- -----------
As a precedent to any right of action hereunder, if any dispute shall arise
between the parties to this Contract with reference to the interpretation of
this Contract or their rights with respect to any transaction involved,
whether such dispute arises before or after termination of this Contract,
such dispute, upon the written request of either party, shall be submitted to
three arbitrators, one to be chosen by each party, and the third by the two
so chosen. If either party refuses or neglects to appoint an arbitrator
within thirty days after the receipt of written notice from the other party
requesting it to do so, the requesting party may appoint two arbitrators. If
the two arbitrators fail to agree in the selection of a third arbitrator
within thirty days of their appointment, each of them shall name two, of whom
the other shall decline one and the decision shall be made by drawing lots.
All arbitrators shall be active or retired disinterested executive officers
of insurance or reinsurance companies or Underwriters at Lloyd's, London not
under the control of either party to this Contract.
The arbitrators shall interpret this Contract as an honorable engagement and
not as merely a legal obligation. They are relieved of all judicial
formalities and may abstain from following the strict rules of law. They
shall make their award with a view to effecting the general purpose of this
Contract in a reasonable manner rather than in accordance with a literal
interpretation of the language. Each party shall submit its case to its
arbitrator within thirty days of the appointment of the third arbitrator.
The decision in writing of any two arbitrators, when filed with the parties
hereto, shall be final and binding on both parties. Judgment may be entered
upon the final decision of the arbitrators in any court having jurisdiction.
Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the expense of the third arbitrator and of
the arbitration. Said arbitration shall take place in the city in which the
Company's Head Office is located unless some other place is mutually agreed
upon by the parties to this Contract.
Effective: January 1, 1996 12 of 23
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PAGE
ARTICLE 18
----------
SERVICE OF SUIT
- ---------------
(This Article applies only to those Reinsurers not domiciled in the United
States of America, and/or not authorized in any state, territory and/or
district of the United States where authorization is required by insurance
regulatory authorities.)
It is agreed that in the event of the failure of a Subscribing Reinsurer to
pay any amount claimed to be due under this Contract, the Subscribing
Reinsurer, at the request of the Company, will submit to the jurisdiction of
any court of competent jurisdiction within the United States of America and
will comply with all requirements necessary to give such court jurisdiction;
and all matters arising hereunder shall be determined in accordance with the
law and practice of such court. Nothing in this Article constitutes or
should be understood to constitute a waiver of the Subscribing 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 Mendes and Mount, 750
Seventh Avenue, New York, New York 10019-6879 (hereinafter, "agent for
service of process") and in any suit instituted against a Reinsurer upon this
Contract, that Reinsurer will abide by the final decision of such court or of
any appellate court in the event of an appeal.
The above named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of the
Company to give a written undertaking to the Company that the agent for
service of process will enter a general appearance on behalf of the Reinsurer
in the event such a suit shall be instituted.
Further, pursuant to any statute of any state, territory or district of the
United States of America which makes provision therefor, the Reinsurers
hereby designate the Superintendent, Commissioner or Director of Insurance or
other officer specified for that purpose in the statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be
served any lawful process in any action, suit or proceeding instituted by or
on behalf of the Company or any beneficiary hereunder arising out of this
Contract and hereby designate the agent for service of process as the firm to
whom the said officer is authorized to mail such process or a true copy
thereof.
Effective: January 1, 1996 13 of 23
3645-21
PAGE
ARTICLE 19
----------
LOSS RESERVES
- -------------
(This Article applies to those Reinsurers who do not qualify for credit by
any state or any other governmental authority having jurisdiction over the
Company's loss reserves.)
A: Where a Letter of Credit Trust Agreement is used, the following clause
shall apply:
It is agreed that when the Company files with the Insurance Department
or establishes reserves for claims covered hereunder, as required by
law, the Company will forward to the Reinsurers a statement showing the
proportion of such loss reserves which is applicable to the Reinsurers.
The Reinsurers hereby agree to apply for and secure delivery to the
Company of a clean, irrevocable and unconditional Letter of Credit, with
a minimum term of one year, that is issued or confirmed, and presentable
and payable in the United States by any bank or trust company that must
be issued or confirmed by a bank member of the Federal Reserve System,
and is in a format acceptable to the governmental authority having
jurisdiction over the Company's loss reserves in an amount equal to the
Reinsurers' proportion of said loss reserves. Under no circumstances
shall any amount relating to reserves in respect of incurred but not
reported losses be funded in the amount of the Letter of Credit. The
foregoing shall not affect the Company's authority to draw upon the
Letter of Credit to cover all obligations due or which become due to the
Company under this Contract, including losses incurred but not reported,
in the event that a nonrenewal or nonextension notice is received from
the issuing bank.
The Company and the Reinsurers agree that such Letter of Credit will be
subject to the terms of a separate Letter of Credit Trust Agreement, and
that said trust agreement shall be in a form acceptable to the
governmental authority having jurisdiction over the Company's loss
reserves.
The designated bank shall have no responsibility whatsoever in
connection with the propriety of withdrawals made by the Company or the
disposition of funds withdrawn, except to see that withdrawals are made
only upon the order of properly authorized representatives of the
Company.
B: Where a Letter of Credit Trust Agreement is not used, the following
clause shall apply:
It is agreed that when the Company files with the Insurance Department
or establishes reserves for claims covered under this Contract, as
required by law, the Company will forward to the Reinsurers a statement
showing the proportion of such loss reserves which is applicable to the
Reinsurers. The Reinsurers hereby agree to apply for and secure
delivery to the Company of a clean, irrevocable and unconditional Letter
of Credit, with a minimum term of one year, that is issued or confirmed,
and presentable and payable in the United States by any bank or trust
company that must be issued or confirmed by a bank member of the Federal
Reserve System, and is in a format acceptable to the governmental
authority
Effective: January 1, 1996 14 of 23
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PAGE
having jurisdiction over the Company's loss reserves in an amount equal to
the Reinsurers' proportion of said loss reserves. Under no circumstances
shall any amount relating to reserves in respect of incurred but not reported
losses be funded in the amount of the Letter of Credit. The foregoing shall
not affect the Company's authority to draw upon the Letter of Credit to cover
all obligations due or which become due to the Company under this Contract,
including losses incurred but not reported, in the event that a nonrenewal or
nonextension notice is received from the issuing bank.
The Company and the Reinsurers agree that the Letter of Credit provided by
the Reinsurers under this provision may be drawn upon at any time,
notwithstanding any other provisions in this Contract, and be utilized by the
Company or any successor by operation of law of the Company, including,
without limitation, any liquidator, rehabilitator, receiver or conservator of
such insurer for the following purposes:
1. to reimburse the Company for the Reinsurers' share of surrenders and
benefits or losses paid by the Company under the terms and provisions of
the policies reinsured under this Contract,
2. to fund an account with the Company in an amount at least equal to the
deduction, for reinsurance ceded, from the Company's liabilities for
policies ceded under this Contract. Such amount shall include, but not
be limited to, amounts for policy reserves, reserves for claims and
losses incurred (including losses incurred but not reported), and loss
adjustment expenses,
3. to pay any other amounts the Company claims are due under this Contract,
4. to return any amounts drawn down on Letters of Credit in excess of the
actual amounts required for 1. and 2. above, or in case of 3. above, any
amounts which are subsequently determined not to be due.
All of the foregoing should be applied without diminution because of
insolvency on the part of the Company or the Reinsurers.
The designated bank shall have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition of
funds withdrawn, except to see that withdrawals are made only upon the order
of properly authorized representatives of the Company.
Effective: January 1, 1996 15 of 23
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PAGE
ARTICLE 20
----------
CATASTROPHE CLAIMS TRUST FUND SETTLEMENT
- ----------------------------------------
(Applies to any Reinsurer domiciled within the United States of America.)
A. The Reinsurer shall establish a catastrophe claims trust fund in advance
of the receipt of a proof of loss under the following circumstances:
1. The occurrence of a windstorm, the duration of which is defined in
Article 3, Definitions, causing a loss which:
(a) has been assigned a catastrophe number by the Property Claims
Service which has estimated the industry insured loss to be at
least $750,000,000; and
(b) is subject to the terms and conditions of this Contract and
falls within the class of business to which this Contract
applies; and
2. The Company's estimated Ultimate Net Loss, as defined in Article 8,
Ultimate Net Loss, for the occurrence described in subparagraph 1.
(a) is greater than the Company's retention and limits of
underlying layers, if any, of the same reinsurance program; and
3. The Reinsurer receives a written request for funding the
catastrophe claims trust from the Intermediary.
B. The amount the Reinsurer shall place into the trust fund shall equal the
Reinsurer's share of the Company's estimate of its Ultimate Net Loss in
excess of the applicable retention(s) specified in the Exhibit(s) attached to
and made part of this Contract.
C. The Reinsurer shall deposit into the catastrophe claims trust fund the
amount described in paragraph B. within fifteen days of the Reinsurer's
receipt of a written request for funding from the Intermediary. The
Intermediary shall not request funding from the Reinsurer until a claim
billing has been made on the next lowest layer, if any, of the program which
is the subject of this Contract.
D. The terms of the trust fund are set out in a "Catastrophe Claims Trust
Fund Agreement", issued June 17, 1991 and signed and dated on or after this
date between the Reinsurer and Morgan Guaranty Trust Company of New York as
Trustee. A copy of such Agreement has been made available to the Company.
E. Nothing herein shall be deemed to obviate the Company's obligation to
provide the Reinsurer with timely and satisfactory proof of loss. Pursuant
to section 5 of the Catastrophe Claims Trust Fund Agreement described in
paragraph D., the Trustee shall make payments to the Company from the Trust
Fund upon receipt of instructions from the Intermediary. The Company is
hereby required to submit proof of loss to the Intermediary
Effective: January 1, 1996 16 of 23
3645-21
PAGE
prior to the Intermediary providing such payment instructions to the Trustee.
After 90 days of funding, or at the option of the Reinsurer if it reasonably
concludes that the circumstances set forth in paragraph A. are not present,
any portion of the Trust Fund which has not been paid to the Company may be
withdrawn by the Reinsurer.
ARTICLE 21
----------
INTERMEDIARY
- ------------
Guy Carpenter & Company, Inc. is hereby recognized as the Intermediary
negotiating this Contract for all business hereunder. All communications
(including but not limited to notices, statements, premiums, return premiums,
commissions, taxes, losses, loss adjustment expenses, salvages, and loss
settlements) relating thereto shall be transmitted to the Company or the
Reinsurers through Guy Carpenter & Company, Inc., Two World Trade Center, New
York, New York 10048. Payments by the Company to the Intermediary shall be
deemed to constitute payment to the Reinsurers. Payments by the Reinsurers
to the Intermediary shall be deemed to constitute payment to the Company only
to the extent that such payments are actually received by the Company.
Effective: January 1, 1996 17 of 23
3645-21
PAGE
Pools, Associations And Syndicates Exclusion Clause
---------------------------------------------------
SECTION A
- ---------
Excluding:
(a) All Business derived directly or indirectly from any Pool,
Association or Syndicate which maintains its own reinsurance
facilities.
(b) Any Pool or Scheme (whether voluntary or mandatory) formed after
March 1, 1968 for the purpose of insuring Property whether on a
country-wide basis or in respect of designated areas. This
exclusion shall not apply to so-called Automobile Insurance Plans
or other Pools formed to provide coverage for Automobile Physical
Damage.
SECTION B
- ---------
It is agreed that business written by the Company for the same perils, which
is known at the time to be insured by, or in excess of underlying amounts
placed in the following Pools, Associations or Syndicates, whether by way of
insurance or reinsurance, is excluded hereunder:
Industrial Risk Insurers; Associated Factory Mutuals; Improved Risk
Mutuals.
Any Pool, Association or Syndicate formed for the purpose of writing
Oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs.
United States Aircraft Insurance Group, Canadian Aircraft Insurance
Group, Associated Aviation Underwriters, American Aviation Underwriters.
Section B does not apply:
(a) Where the Total Insured Value over all interests of the risk in
question is less than $300,000,000. Except in relation to business
where Hartford and I.R.I. are jointly insuring a risk, the Total
Insured Value over all interests of the risk in question is less
than $500,000,000.
(b) To interests traditionally underwritten as Inland Marine or Stock
and/or Contents written on a Blanket basis.
(c) To Contingent Business Interruption, except when the Company is
aware that the key location is known at the time to be insured in
any Pool, Association or Syndicate named above, other than as
provided for under Section B (a).
(d) To risks as follows: Offices, Hotels, Apartments, Hospitals,
Educational Establishments, Public Utilities (other than Railroad
Schedules) and Builders Risks on the classes of risks specified in
this subsection (d) only.
Effective: January 1, 1996 18 of 23
3645-21
PAGE
SECTION C
- ---------
NEVERTHELESS the Reinsurers specifically agree that liability accruing to the
Company from its participation in Residual Market Mechanisms, including but
not limited to,
(1) The following so-called "Coastal Pools"
ALABAMA INSURANCE UNDERWRITING ASSOCIATION
FLORIDA WINDSTORM UNDERWRITING ASSOCIATION
LOUISIANA INSURANCE UNDERWRITING ASSOCIATION
MISSISSIPPI WINDSTORM UNDERWRITING ASSOCIATION
NORTH CAROLINA INSURANCE UNDERWRITING ASSOCIATION
SOUTH CAROLINA WINDSTORM AND HAIL UNDERWRITING ASSOCIATION
TEXAS CATASTROPHE PROPERTY INSURANCE ASSOCIATION
GEORGIA UNDERWRITING ASSOCIATION
VIRGINIA PROPERTY INSURANCE ASSOCIATION
(2) All "Fair Plan" and "Rural Risk Plan" Business, for all perils otherwise
protected hereunder shall not be excluded, except that this Contract
does not include any increase in such liability resulting from:
(i) The inability of any other participant in such Residual Market
Mechanisms, including but not limited to, "Coastal Pool" and/or
"Fair Plan" and/or "Rural Risk Plan", to meet its liability.
(ii) Any Claim against such Residual Market Mechanisms, including but
not limited to, "Coastal Pool" and/or "Fair Plan", and/or "Rural
Risk Plan" or any participant therein, including the Company,
whether by way of subrogation or otherwise, brought by or on behalf
of any insolvency fund (as defined in the Insolvency Funds
Exclusion Clause incorporated in this Contract).
- -----------------------------------------------------------------------------
NOTES: Wherever used herein the terms:
"Company" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
Agreement" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
Effective: January 1, 1996 19 of 23
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PAGE
Nuclear Incident Exclusion Clause - Physical Damage -
-----------------------------------------------------
Reinsurance - U.S.A.
--------------------
1. This Reinsurance does not cover any loss or liability accruing to the
Reassured, directly or indirectly, and whether as Insurer or Reinsurer,
from any Pool of Insurers or Reinsurers formed for the purpose of
covering Atomic or Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph (1) of this
clause, this Reinsurance does not cover any loss or liability accruing
to the Reassured, directly or indirectly and whether as Insurer or
Reinsurer, from any insurance against Physical Damage (including
business interruption or consequential loss arising out of such Physical
Damage) to:
I. Nuclear reactor power plants including all auxiliary property on
the site, or
II. Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and "critical facilities" as such, or
III. Installations for fabricating complete fuel elements or for
processing substantial quantities of "special nuclear material",
and for reprocessing, salvaging, chemically separating, storing or
disposing of "spent" nuclear fuel or waste materials, or
IV. Installations other than those listed in paragraph (2) III above
using substantial quantities of radioactive isotopes or other
products of nuclear fission.
3. Without in any way restricting the operations of paragraphs (1) and (2)
hereof, this Reinsurance does not cover any loss or liability by
radioactive contamination accruing to the Reassured, directly or
indirectly, and whether as Insurer or Reinsurer, from any insurance on
property which is on the same site as a nuclear reactor power plant or
other nuclear installation and which normally would be insured therewith
except that this paragraph (3) shall not operate
(a) where Reassured does not have knowledge of such nuclear reactor
power plant or nuclear installation, or
(b) where said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive
contamination, however caused. However on and after 1st January
1960 this sub-paragraph (b) shall only apply provided the said
radioactive contamination exclusion provision has been approved by
the Governmental Authority having jurisdiction thereof.
4. Without in any way restricting the operations of paragraphs (1), (2) and
(3) hereof, this Reinsurance does not cover any loss or liability by
radioactive contamination accruing to the Reassured, directly or
indirectly, and whether as Insurer or Reinsurer, when such radioactive
contamination is a named hazard specifically insured against.
Effective: January 1, 1996 20 of 23
3645-21
PAGE
5. It is understood and agreed that this clause shall not extend to risks
using radioactive isotopes in any form where the nuclear exposure is not
considered by the Reassured to be the primary hazard.
6. The term "special nuclear material" shall have the meaning given it in
the Atomic Energy Act of 1954 or by any law amendatory thereof.
7. Reassured to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
12/12/57
NMA 1119
- -----------------------------------------------------------------------------
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
"Agreement" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
Effective: January 1, 1996 21 of 23
3645-21
PAGE
Nuclear Incident Exclusion Clause - Physical Damage -
-----------------------------------------------------
Reinsurance - Canada
--------------------
1. This Contract does not cover any loss or liability accruing to the
Reassured, directly or indirectly, and whether as Insurer or Reinsurer,
from any Pool of Insurers or Reinsurers formed for the purpose of
covering Atomic or Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph 1 of this
clause, this Contract does not cover any loss or liability accruing to
the Reassured, directly or indirectly, and whether as Insurer or
Reinsurer, from any insurance against Physical Damage (including
business interruption or consequential loss arising out of such Physical
Damage) to:
(a) Nuclear reactor power plants including all auxiliary property on
the site, or
(b) Any other nuclear reactor, installation, including laboratories
handling radioactive materials in connection with reactor
installations, and critical facilities as such, or
(c) Installations for fabricating complete fuel elements or for
processing substantial quantities of prescribed substances, and for
reprocessing, salvaging, chemically separating, storing or
disposing of spent nuclear fuel or waste materials, or
(d) Installations other than those listed in (c) above using
substantial quantities of radioactive isotopes or other products of
nuclear fission.
3. Without in any way restricting the operation of paragraphs 1 and 2 of
this clause, this Contract does not cover any loss or liability by
radioactive contamination accruing to the Reassured, directly or
indirectly, and whether as Insurer or Reinsurer from any insurance on
property which is on the same site as a nuclear reactor power plant or
other nuclear installation and which normally would be insured
therewith, except that this paragraph 3 shall not operate.
(a) where the Reassured does not have knowledge of such nuclear reactor
power plant or nuclear installation, or
(b) where the said insurance contains a provision excluding coverage
for damage to property caused by or resulting from radioactive
contamination, however caused.
4. Without in any way restricting the operation of paragraphs 1, 2 and 3 of
this clause, this Contract does not cover any loss or liability by
radioactive contamination accruing to the Reassured, directly or
indirectly, and whether as Insurer or Reinsurer, when such radioactive
contamination is a named hazard specifically insured against.
5. This clause shall not extend to risks using radioactive isotopes in any
form where the nuclear exposure is not considered by the Reassured to be
the primary hazard.
6. The term "prescribed substances" shall have the meaning given it by the
Atomic Energy Control Act or by any law amendatory thereof.
Effective: January 1, 1996 22 of 23
3645-21
PAGE
7. The Reassured to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
8. Without in any way restricting the operation of paragraphs 1, 2, 3 and 4
of this clause, this Contract does not cover any loss or liability
accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, caused:
(a) by any nuclear incident as defined in the Nuclear Liability Act or
any other nuclear liability act, law or statute, or any law
amendatory thereof or nuclear explosion, except for ensuing loss or
damage which results directly from fire, lightning or explosion of
natural, coal or manufactured gas; or
(b) by contamination by radioactive material.
NOTE: - Without in any way restricting the operation of paragraph 1, 2, 3 and
4 of this clause, paragraph 8 of this clause shall only apply to all original
contracts of the Reassured whether new, renewal or replacement which become
effective on or after December 31, 1992.
NMA 1980
(1/1/93)
- -----------------------------------------------------------------------------
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
"Contract" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
Effective: January 1, 1996 23 of 23
3645-21
PAGE
- -----------------------------------------------------------------------------
ATTACHED ARE THE FOLLOWING:
---------------------------
- A summary of the changes from the 1/1/95 contract.
- Alternate pages for Article 19, Loss Reserves, for use with the
London Market only.
- An alternate page for Article 21, Intermediary, for use with Mid
Ocean in Bermuda only.
- Separate signature pages for the:
- Interests and Liabilities Agreement for those Reinsurers
agreeing to the provisions of the Catastrophe Claims Trust
Fund Settlements Article.
- Interests and Liabilities Agreement for those Reinsurers
not agreeing to the provisions of the Catastrophe Claims
Trust Fund Settlements Article.
PAGE
SUMMARY OF CHANGES
------------------
to
THE SELECTIVE INSURANCE GROUP
PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
--------------------------------------------------------
This Contract effective January 1, 1996, follows the 1995 Contract with the
exception of the following:
1. Throughout the Contract, all dates, rates, and premium amounts have
been amended to reflect the terms of the firm order.
2. Throughout the Contract, all references to "Agreement", "Contract",
"Company", and "Reinsurers" have been amended to read "the
Agreement", "the Contract", "the Company", "the Reinsurers", and
"the Subscribing Reinsurer" (in the Interests and Liabilities
Agreement), to correct grammatical errors. Also, cross references
to other Articles have been added and editorial corrections (such
as capitalization) have been made.
3. Throughout the Contract, all major sections and subsections have
been renamed to appear in the following order for the sake of
consistency: A., 1., (a), (I).
4. Interests and Liabilities Agreement; The inception and expiration
dates have been amended to read "effective 12:01 a.m., Standard
Time at the location of the risk or risks, January 1, 1996 to 12:01
a.m., Standard Time at the location of the risk or risks, January
1, 1997". The Subscribing Reinsurers' participations have been
amended from "% of the ... layer" to read the actual limit of
Reinsurers' liability "each Loss Occurrence".
5. Preamble; Has been amended to add "one of whom is THE "SUBSCRIBING
REINSURER" WHOSE NAME APPEARS ON THE INTERESTS AND LIABILITIES
AGREEMENT ATTACHING TO AND FORMING A PART OF THIS CONTRACT" to tie
the two documents together.
6. Article 1, Term; The term "Eastern Standard Time" has been deleted
and replaced with "Standard Time at the location of the risk or
risks" to follow the language of the placement slip.
7. Article 2, Exclusions; The introductory sentence has been amended
to include "and specifically excludes". Exclusion M. has been
amended to include the phrase "Liability excluded under the
provisions of the" for the sake of clarity. Exclusion S. has been
amended to also exclude Losses in Excess of Policy Limits, and the
definition of this term, in accordance with the terms of the firm
order.
8. Article 3, Definitions; Replaces the old "Definition of Policies"
and "Definition of Loss Occurrence" Articles with a true
definitions article, and now includes the definition of
Effective: January 1, 1996
3645-21
PAGE
"premium income". The definition of "Loss Occurrence" has been
amended to include in the first paragraph the phrase "with respect
to Continental U.S. losses and/or Canadian losses", as the term
does not restrict locations for exposures elsewhere.
9. Article 4, Self-Insured Obligations; The first paragraph has been
amended to replace the phrase "broadest form of agreements" with
"broadest form of policies" for the sake of consistency. The last
sentence of this Article has been amended to delete the phrase "are
named as the insured or reinsured party or one of the insured or
reinsured parties" and replace it with the standard language "may
not be obligated by law to pay a claim to itself and/or its
affiliated and/or subsidiary companies".
10. Article 5, Reinsuring Clause; The new sixth layer has been
introduced to the Schedule and the limit has been amended for the
fifth layer, in accordance with the terms of the firm order.
11. Article 6, Reinstatement; The first paragraph has been amended to
delete "each loss hereon" and replace it with "each Loss
Occurrence, as defined in Article 3, Definitions,", and all
applicable limits, retentions and reinstatement amounts (including
the introduction of the new sixth layer) have been amended in
accordance with the terms of the firm order.
12. Article 7, Premium; The first paragraph has been amended to
include the phrase "calculated by applying the following rates to
the Company's premium income, as defined in Article 3,
Definitions". The definition of "premium income" has been moved to
Article 3, Definitions.
13. Article 18, Service of Suit; The zip code of Mendes and Mount has
been corrected.
Effective: January 1, 1996
3645-21
PAGE
ARTICLE 19
----------
LOSS RESERVES
- -------------
(This Article applies to those Reinsurers who do not qualify for credit by
any state or any other governmental authority having jurisdiction over the
Company's loss reserves.)
A: Where a Letter of Credit Trust Agreement is used, the following clause
shall apply:
It is agreed that when the Company files with the Insurance Department
or establishes reserves for claims covered hereunder, as required by
law, the Company will forward to the Reinsurers a statement showing the
proportion of such loss reserves which is applicable to the Reinsurers.
The Reinsurers hereby agree to apply for and secure delivery to the
Company of a clean, irrevocable and unconditional Letter of Credit, with
a minimum term of one year, issued by Citibank, N.A., in a format
acceptable to the governmental authority having jurisdiction over the
Company's loss reserves in an amount equal to the Reinsurers' proportion
of said loss reserves. Under no circumstances shall any amount relating
to reserves in respect of incurred but not reported losses be funded in
the amount of the Letter of Credit. The foregoing shall not affect the
Company's authority to draw upon the Letter of Credit to cover all
obligations due or which become due to the Company under this Contract,
including losses incurred but not reported, in the event that a
nonrenewal or nonextension notice is received from the issuing bank.
The Company and the Reinsurers agree that such Letter of Credit will be
subject to the terms of a separate Letter of Credit Trust Agreement, and
that said trust agreement shall be in a form acceptable to the
governmental authority having jurisdiction over the Company's loss
reserves.
Citibank, N.A., shall have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition
of funds withdrawn, except to see that withdrawals are made only upon
the order of properly authorized representatives of the Company.
B: Where a Letter of Credit Trust Agreement is not used, the following
clause shall apply:
It is agreed that when the Company files with the Insurance Department
or establishes reserves for claims covered under this Contract, as
required by law, the Company will forward to the Reinsurers a statement
showing the proportion of such loss reserves which is applicable to the
Reinsurers. The Reinsurers hereby agree to apply for and secure
delivery to the Company of a clean, irrevocable and unconditional Letter
of Credit, with a minimum term of one year, issued by Citibank, N.A., in
a format acceptable to the governmental authority having jurisdiction
over the Company's loss reserves in an amount equal to the Reinsurers'
proportion of said loss reserves. Under no circumstances shall any
amount relating to reserves in respect of incurred but not reported
losses be funded in the amount of the Letter of Credit. The foregoing
shall not affect the Company's authority to draw upon the Letter of
Credit to cover all obligations due or which become due to the Company
under
Effective: January 1, 1996 14 of 23
3645-21
PAGE
this Contract, including losses incurred but not reported, in the event
that a nonrenewal or nonextension notice is received from the issuing
bank.
The Company and the Reinsurers agree that the Letter of Credit provided
by the Reinsurers under this provision may be drawn upon at any time,
notwithstanding any other provisions in this Contract, and be utilized
by the Company or any successor by operation of law of the Company,
including, without limitation, any liquidator, rehabilitator, receiver
or conservator of such insurer for the following purposes:
1. to reimburse the Company for the Reinsurers' share of surrenders
and benefits or losses paid by the Company under the terms and
provisions of the policies reinsured under this Contract,
2. to fund an account with the Company in an amount at least equal to
the deduction, for reinsurance ceded, from the Company's
liabilities for policies ceded under this Contract. Such amount
shall include, but not be limited to, amounts for policy reserves,
reserves for claims and losses incurred (including losses incurred
but not reported), and loss adjustment expenses,
3. to pay any other amounts the Company claims are due under this
Contract,
4. to return any amounts drawn down on Letters of Credit in excess of
the actual amounts required for 1. and 2. above, or in case of 3.
above, any amounts which are subsequently determined not to be due.
All of the foregoing should be applied without diminution because of
insolvency on the part of the Company or the Reinsurers.
Citibank, N.A., shall have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition
of funds withdrawn, except to see that withdrawals are made only upon
the order of properly authorized representatives of the Company.
Effective: January 1, 1996 15 of 23
3645-21
PAGE
ARTICLE 21
----------
INTERMEDIARY
- ------------
Guy Carpenter & Company, Inc. (being the U.S. Intermediary) and Bowring
(Bermuda) Ltd. (being the Bermuda Intermediary) are hereby recognized as the
Intermediaries negotiating this Contract for all business hereunder. All
communications (including but not limited to notices, statements, premiums,
return premiums, commissions, taxes, losses, loss adjustment expenses,
salvages and loss settlements) relating thereto shall be transmitted to the
Company or the Reinsurer through Guy Carpenter & Company, Inc., Two World
Trade Center, New York, New York 10048 and Bowring (Bermuda) Ltd., Craig
Appin House, Wesley Street, P.O. Box HM2444, Hamilton HMJX, Bermuda.
Payments by the Company to either of the Intermediaries shall be deemed to
constitute payment to the Reinsurer. Payments by the Reinsurer to either of
the Intermediaries shall be deemed to constitute payment to the Company only
to the extent that such payments are actually received by the Company.
Effective: January 1, 1996 17 of 23
3645-21
PAGE
INTERESTS AND LIABILITIES AGREEMENT
(hereinafter referred to as the "Agreement")
to the
PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
--------------------------------------------------------
(hereinafter referred to as the "Contract")
between
The Insurance Companies comprising THE SELECTIVE
INSURANCE GROUP, including, but not limited to:
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
and/or any insurance affiliates which are now
owned or hereafter may be acquired by The
Selective Insurance Group.
(hereinafter referred to collectively or
individually as the "Company")
and
(hereinafter referred to as the "Subscribing Reinsurer")
It is mutually agreed by and between the Company on the one part, and the
Subscribing Reinsurer on the other part that the Subscribing Reinsurer's
share in the interests and liabilities of the Reinsurers as set forth in the
Contract attached hereto and forming a part of this Agreement, effective
12:01 a.m., Standard Time at the location of the risk or risks, January
1,1996, to 12:01 a.m., Standard Time at the location of the risk or risks,
January 1,1997, shall be for:
% of up to $10,000,000 each Loss Occurrence.
% of up to $15,000,000 each Loss Occurrence.
% of up to $20,000,000 each Loss Occurrence.
% of up to $30,000,000 each Loss Occurrence.
% of up to $40,000,000 each Loss Occurrence.
Effective: January 1, 1996
3645-21
PAGE
The share of the Subscribing Reinsurer in the interests and liabilities of
all Reinsurers in respect of the said Contract shall be separate and apart
from the shares of the other reinsurers to the said Contract, and the
interests and liabilities of the Subscribing Reinsurer shall not be joint
with those of the other reinsurers and in no event shall the Subscribing
Reinsurer participate in the interests and liabilities of the other
reinsurers.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives this 18th day of April,
1996.
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
and/or any insurance affiliates which are now
owned or hereafter may be acquired by The
Selective Insurance Group.
/s/ Peter Anderson Assistant Vice President
--------------
Peter Anderson
- -----------------------------------------------------------------------------
and on this day of , 199__.
Effective: January 1, 1996
3645-21
PAGE
The share of the Subscribing Reinsurer in the interests and liabilities of
all Reinsurers in respect of the said Contract shall be separate and apart
from the shares of the other reinsurers to the said Contract, and the
interests and liabilities of the Subscribing Reinsurer shall not be joint
with those of the other reinsurers and in no event shall the Subscribing
Reinsurer participate in the interests and liabilities of the other
reinsurers.
IT IS FURTHER AGREED between the parties hereto that the provisions of
Article 20, Catastrophe Claims Trust Fund Settlement, of the attached
Contract shall not be binding nor create any legal obligation on the part of
the Subscribing Reinsurer. All other terms and conditions as provided for in
said Contract shall remain in force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives this 18th day of April,
1996.
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
and/or any insurance affiliates which are now
owned or hereafter may be acquired by The
Selective Insurance Group.
/s/ Peter Anderson Assistant Vice President
--------------
Peter Anderson
- -----------------------------------------------------------------------------
and on this day of , 199__.
Effective: January 1, 1996
3645-21
No. 3525-0087
PROPERTY PER RISK REINSURANCE AGREEMENT
---------------------------------------
between
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
and
The Participants Subscribing to the Respective Interests and Liabilities
Contracts to which this Agreement as attached (hereinafter referred to as the
"Reinsurer")
PAGE
No. 3525-0087
TABLE OF CONTENTS
-----------------
ARTICLE PAGE
------- ----
I RETENTION OF COMPANY AND LIABILITY
OF REINSURER 1
II EXHIBITS COVERED 2
III LINES OF BUSINESS COVERED 2
IV SEVERABILITY 2
V EXCLUSIONS 3
VI TERRITORY 4
VII ULTIMATE NET LOSS 4
VIII DECLARATORY JUDGMENT EXPENSES 5
IX EXTRA CONTRACTUAL OBLIGATIONS 6
X EXCESS JUDGMENTS CLAUSE 7
XI CLAIMS 7
XII SUBROGATION AND SALVAGE 8
XIII SELF-INSURED OBLIGATIONS 8
XIV ERRORS AND OMISSIONS 9
XV RESERVES AND TAXES 9
XVI ACCESS TO RECORDS 10
XVII INSOLVENCY CLAUSE 10
XVIII ARBITRATION 11
XIX OFFSET AND SECURITY CLAUSE 12
PAGE
No. 3525-0087
TABLE OF CONTENTS
-----------------
(continued)
XX COMMENCEMENT AND TERMINATION 13
XXI EXTENDED TERMINATION 14
PAGE
No. 3525-0087
PROPERTY PER RISK REINSURANCE AGREEMENT
---------------------------------------
THIS REINSURANCE AGREEMENT made and entered into by and between the
SELECTIVE INSURANCE COMPANY OF AMERICA, SELECTIVE WAY INSURANCE COMPANY, both
of Branchville, New Jersey, SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST,
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA, both of Charlotte, North
Carolina, EXCHANGE INSURANCE COMPANY, of Buffalo, New York (hereinafter
collectively referred to as the "Company") and the participants subscribing
to the respective Interests and Liabilities Contracts to which this Agreement
is attached (hereinafter referred to as the "Reinsurer").
WITNESSETH:
The Reinsurer hereby reinsures the Company to the extent and on the
terms and conditions and subject to the exceptions, exclusions and
limitations hereinafter set forth and nothing hereinafter shall in any manner
create any obligations or establish any rights against the Reinsurer in favor
of any third parties or any persons not parties to this Agreement.
ARTICLE I
----------
RETENTION OF COMPANY AND LIABILITY OF REINSURER
- -----------------------------------------------
The retention of the Company and the liability of the Reinsurer and all
other benefits accruing to the Company, as provided in this Agreement or any
amendments thereof, shall apply to the parties comprising the Company as a
group and not separately to each of the parties. Any payments by the
Reinsurer to any of the parties comprising the Company shall discharge the
Reinsurer's liability under this Agreement.
-1-
PAGE
No. 3525-0087
ARTICLE II
----------
EXHIBITS COVERED
- ----------------
The Company will reinsure with the Reinsurer and the Reinsurer will
accept reinsurance from the Company as set forth in Exhibits A, B and C which
are attached hereto and made a part of this Agreement, such Exhibits being
entitled for purposes of identification as follows:
Exhibit A -First Excess of Loss Cover
Exhibit B -Second Excess of Loss Cover
Exhibit C -Third Excess of Loss Cover
ARTICLE III
-----------
LINES OF BUSINESS COVERED
- -------------------------
(a) All business classified by the Reinsured as Property including but
not limited to Fire, Allied Lines, Earthquake, Inland Marine, Property
Sections of Homeowners, Farmowners, Businessowners, and Commercial Multi-
Peril Policies, Legal Liability Coverage when written on a Property or Inland
Marine form, Automobile Physical Damage, and Fidelity when included in a
multi-peril policy.
(b) In addition to the terms and conditions contained herein, it is
specifically understood and agreed that the business subject to recoveries
under this Agreement and the Exhibits attached shall be limited to business
which is written in accordance with the Company's SBU Guidelines. Any change
in Company underwriting philosophy which significantly impacts the Company's
SBU Guidelines shall be discussed with the lead Reinsurer.
ARTICLE IV
----------
SEVERABILITY
- ------------
If any provision of this Agreement shall be rendered illegal or
unenforceable by the laws, regulations or public policy of any state, such
provision shall be considered void in
-2-
PAGE
No. 3525-0087
such state, but this shall not affect the validity or enforceability of any
other provisions of this Contract or the enforceability of such provision in
any other jurisdiction.
ARTICLE V
---------
EXCLUSIONS
- ----------
(a) This Agreement does not cover risks specifically listed below
unless individually submitted by the Company to the Reinsurer for inclusion
hereunder, and, if specially accepted by the Reinsurer, such business shall
then be covered under the terms of this Agreement, except as such terms shall
be modified by such acceptance:
1. All Lines of Business not specifically covered hereunder.
2. Financial Guarantees, Financial Insurance (including residual
value or similar types of coverage) and Insolvency.
3. Reinsurance assumed by the Company under obligatory
reinsurance agreements and excess of loss reinsurance
agreements, other than inter-company reinsurance between the
companies comprising the "Company" under this Agreement, but
this will not exclude reinsurance written by the Company over
Self-Insured retentions.
4. Pools, Associations and Syndicates business as per the
attached Pools, Associations and Syndicates Clause
5. Policies issued with a deductible greater than $l00,000;
provided this exclusion shall not apply to policies which
customarily provide a percentage deductible on the perils of
Earthquake, Windstorm or to policies in respect of the
Company's so-called "Board of Education Enhancements" program.
6. The following Automobile Physical Damage kinds of risks and
perils:
(i) Collision or upset.
(ii) Wrongful conversion, embezzlement or secretion.
(iii)Manufacturers' stock at factories.
7. Flood, surface water, waves, tidal water or tidal waves,
overflow of streams or other bodies of water or spray from any
of the foregoing written as a stand-alone policy.
-3-
PAGE
No. 3525-0087
8. Earthquake, landslide and other earth movement, when written
as a stand-alone policy.
9. War risk, bombardment, invasion, insurrection, rebellion,
revolution, military or usurped power, or confiscation by
order of any government or public authority, as excluded under
a standard policy containing a standard war exclusion clause.
10. Loss or liability excluded by the provisions of Nuclear
Incident Exclusion Clauses - Physical Damage - Reinsurance -
No. 2 and Reinsurance - No. 4 attached hereto. The word
"Reassured" used therein means "Company".
11. Insolvency Funds Exclusion Clause attached.
12. Mortgage impairment insurances when written and classified as
such, however this exclusion shall not apply to standard
mortgage errors and omissions policies.
ARTICLE VI
----------
TERRITORY
- ---------
This Agreement applies only to policies on a worldwide basis.
ARTICLE VII
-----------
ULTIMATE NET LOSS
- -----------------
(a) The term "Ultimate Net Loss" as used in this Agreement means the
sum actually paid by the Company in settlement of losses for which it is held
liable, including Declaratory Judgment Expenses in accordance with the
provisions of Article VIII, Extra Contractual Obligations in accordance with
the provisions of Article IX, and all expenses incurred by the Company in
settlement or defense of claims, including taxed court costs, pre-judgment
and post-judgment interest, and loss expenses incurred in the investigation,
adjustment, litigation, defense and settlement of claims made against the
Company under the policies reinsured hereunder.
(b) Recoveries, salvages and claims upon other reinsurance which inures
to the benefit of the Reinsurer under this Agreement, whether collectible or
not, shall be deducted in arriving at the "ultimate net loss."
-4-
PAGE
No. 3525-0087
(c) All office expenses of the Company and all salaries and expenses of
its officials and employees are excluded under this Agreement.
(d) In the event of the insolvency of the Company, "ultimate net loss"
means the amount of loss which the Company has incurred or for which it is
liable, and payment by the Reinsurer shall be made to the liquidator,
receiver or statutory successor of the Company in accordance with the
provisions of Article XVII of this Agreement.
(e) In calculating the amount of any loss hereunder and also in
computing the amount or amounts in excess of which this Agreement attaches,
only loss or losses in respect of that portion of any insurance or
reinsurance agreement which the company retains net for its own account shall
be included.
(f) The amount of the Reinsurers' liability hereunder in respect to any
loss or losses shall not be increased by reason of the inability of the
Company to collect from any other reinsurers whether specific or general any
amounts which may have become due from them whether such inability arises
from the insolvency of such other reinsurers or otherwise.
ARTICLE VIII
------------
DECLARATORY JUDGMENT EXPENSES
- -----------------------------
The term "Declaratory Judgment Expenses" shall mean legal expenses paid
by the Company for the investigation, analysis, evaluation, and/or resolution
of litigation of coverage issues between the Company and any other party to
determine the Company's obligation to defend, indemnify and/or pay on behalf
of its insured(s) under policies reinsured hereunder arising from a specific
claim or claims.
The date on which Declaratory Judgment Expenses are incurred by the
Company shall be deemed, in all circumstances, to be the same dates as the
specific claim or claims under the policy reinsured hereunder.
Recoveries from any form of insurance and/or reinsurance that
protect the Company against claims the subject matter of this clause will
inure to the benefit of the
-5-
PAGE
No. 3525-0087
Reinsurer and shall be deducted from the total amount of Declaratory Judgment
Expenses for purposes of determining the amount recoverable hereunder.
ARTICLE IX
----------
EXTRA CONTRACTUAL OBLIGATIONS
- -----------------------------
(a) The Agreement shall protect the Company within the limits hereof,
where ultimate net loss includes 90% of any Extra Contractual Obligations.
(b) "Extra Contractual Obligations" are defined as those liabilities
not covered under any other provision of this agreement, which arise from the
handling of any claim on business covered hereunder (including awards to a
third party claimant in excess of the Company's policy limit)such liabilities
arising because of, but not limited to the following: failure by the company
to settle within the policy limit, or by reason of alleged or actual
negligence, fraud or bad faith in rejecting an offer of settlement or in the
preparation of the defense or in the trial of any action against its insured
or in the preparation or prosecution of an appeal consequent upon such
action.
(c) The date on which an Extra Contractual Obligation is incurred by
the Company shall be deemed, in all circumstances, to be the date of the
original occurrence.
(d) This article shall not apply where the loss has been incurred due
to the fraud of a member of the Board of Directors or a corporate officer of
the Company acting individually or collectively or in collusion with any
individual or corporation or any other organization or party involved in the
presentation, defense or settlement of any claim covered hereunder.
(e) Recoverables from any form of insurance or reinsurance which
protects the Company against claims which are subject matter of this clause
will inure to the benefit of the reinsurer and shall be deducted in arriving
at the amount of the Company's ultimate net loss.
-6-
PAGE
No. 3525-0087
ARTICLE X
---------
EXCESS JUDGMENTS CLAUSE
(a) In the event a claimant is awarded an amount in excess of the
Company's policy limit as a result of the Company's alleged or actual
tortious conduct in the handling of the investigation, defense or settlement
of the claim made against the Company's insured and an action is brought by
the insured or assignee and a judgment rendered against the Company for an
amount in excess of the Company's policy limit, 90% of that portion of the
award made to the claimant which is in excess of the Company's policy limit
shall be added to the amount of the Company's policy limit and the sum
thereof shall be considered one loss, subject to the provision in (b) below
and other provisions, exclusions and limitations set forth in this Agreement.
(b) Recoveries from any form of insurance or reinsurance which protect
the Company against claims the subject matter of this clause will inure to
the benefit of the Reinsurer and shall be deducted to arrive at the amount of
the Company's ultimate net loss.
ARTICLE XI
----------
CLAIMS
- ------
(a) The Company shall advise the Reinsurer promptly of all claims and
any subsequent developments pertaining thereto which in its opinion may
develop into losses involving reinsurance hereunder.
(b) The Company has the obligation to investigate and, to the extent
that may be required by the policies reinsured hereunder, defend any claim
affecting this reinsurance and to pursue such claim to final determination.
(c) It is understood that when so requested the Company will afford the
Reinsurer an opportunity to be associated with the Company at the expense of
the Reinsurer in the defense or control of any claim or suit or proceeding
involving this
-7-
PAGE
No. 3525-0087
reinsurance; and the Company and the Reinsurer shall cooperate
in every respect in the defense of such suit or claim or proceeding.
ARTICLE XII
-----------
SUBROGATION AND SALVAGE
- -----------------------
(a) The Reinsurer shall be subrogated, as respects any loss for which
the Reinsurer shall actually pay or become liable, but only to the extent of
the amount of payment by or the amount of liability to the Reinsurer, to all
the rights of the Company against any person or other entity who may be
legally responsible in damages for said loss.
(b) Any recoveries, salvages or reimbursements applying to risks
covered under this Agreement shall always be used to reimburse the excess
carriers (from the last to the first, beginning with the carrier of the last
excess), according to their participation, before being used in any way to
reimburse the Company for its primary loss.
(c) In the event there are any recoveries, salvages or reimbursements
recovered subsequent to a loss settlement, it is agreed that if the expenses
incurred in obtaining salvage or other recoveries are less than the amount
recovered, such expenses shall be borne by each party in the proportion that
each party benefits from the recoveries. If the expense incurred in
obtaining salvage or other recoveries is greater than the amount recovered,
the salvage or other recoveries shall first be applied to the reimbursement
of the expense of recovery and the remaining expense shall be borne by the
Company and the Reinsurer in proportion to the liability of each party for
the loss before such recovery had been obtained. Expenses hereunder shall
exclude all office expenses of the Company and all salaries and expenses of
its officials and employees.
ARTICLE XIII
------------
SELF-INSURED OBLIGATIONS
- ------------------------
(a) As respects all business the subject matter hereof, where the
coverage has been agreed upon between the Company and the Reinsurer, this
Agreement shall cover all obligations of the Company assumed by it as a self-
insurer (or self-insured obligations in
-8-
PAGE
No. 3525-0087
excess of any valid and collectible insurance available to the Company) to
the same extent as if all types of insurance covered by this Agreement were
afforded under the broadest forms of agreements issued by the Company.
(b) An insurance or reinsurance wherein the Company hereby reinsured
and/or its affiliated and/or subsidiary Companies are named as the Insured or
Reinsured party, either alone or jointly with some other party, shall be
deemed to be an insurance or reinsurance coming within the scope of this
Agreement, notwithstanding that no legal liability may arise in respect
thereof by reason of the fact that the Company hereby reinsured and/or its
affiliated and/or subsidiary Companies are named as the Insured or Reinsured
party or one of the Insured or Reinsured parties.
ARTICLE XIV
-----------
ERRORS AND OMISSIONS
- --------------------
Any inadvertent delay, error or omission on the part of the Company
shall not invalidate the reinsurance under this Agreement, provided such
errors or omissions are corrected promptly after discovery thereof, but the
liability of the Reinsurer under this Agreement or any exhibits or
endorsements attached hereto shall in no event exceed the limits specified
therein.
ARTICLE XV
----------
RESERVES AND TAXES
- ------------------
(a) The Reinsurer shall maintain legal reserves with respect to
unearned premiums and all claims hereunder in accordance with the Exhibits as
attached hereto.
(b) The Company will be liable for all taxes on premiums reported to
the Reinsurer hereunder and will reimburse the Reinsurer for such taxes where
the Reinsurer is required to pay the same.
-9-
PAGE
No. 3525-0087
ARTICLE XVI
-----------
ACCESS TO RECORDS
- -----------------
The Company shall place at the disposal of the Reinsurer and the
Reinsurer shall have the right to inspect, through its authorized
representatives, at all reasonable times during the currency of this
Agreement and thereafter, the books, records and papers of the Company
pertaining to the reinsurance provided hereunder and all claims made in
connection therewith.
ARTICLE XVII
------------
INSOLVENCY CLAUSE
- -----------------
The reinsurance provided by this Agreement shall be payable by the
Reinsurer directly to the Company or to its liquidator, receiver or statutory
successor on the basis of the liability of the Company under the contract or
contracts reinsured. Subject to the right of setoff and the verification of
coverage, the Reinsurer shall pay its share of the loss without diminution
because of the insolvency of the Company. In the event of the insolvency of
the Company, the liquidator, receiver or statutory successor of the Company
shall give written notice of the pendency of each claim against the Company
on a policy or bond reinsured within a reasonable time after such claim is
filed in the insolvency proceeding. During the pendency of such claim, the
Reinsurer may, at its own expense, investigate such claim and interpose in
the proceeding where such claim is to be adjudicated any defense or defenses
which it may deem available to the Company, its liquidator or receiver or
statutory successor. Subject to court approval, any expense thus incurred by
the Reinsurer shall be chargeable against the Company as part of the expense
of liquidation to the extent of such proportionate share of the benefit as
shall accrue to the Company solely as a result of the defense undertaken by
the Reinsurer. The reinsurance shall be payable as set forth above except
where this Agreement specifically provides for the payment of reinsurance
proceeds to another party in the event of the insolvency of the Company.
-10-
PAGE
No. 3525-0087
ARTICLE XVIII
-------------
ARBITRATION
- -----------
(a) As a condition precedent to any right of action hereunder, any
dispute arising out of this Agreement shall be submitted to the decision of a
board of arbitration composed of two arbitrators and an umpire, meeting in
Branchville, New Jersey unless otherwise agreed.
(b) The members of the board of arbitration shall be active or retired
disinterested officials of insurance or reinsurance companies. Each party
shall appoint its arbitrator and the two arbitrators shall choose an umpire
before instituting the hearing. If the respondent fails to appoint its
arbitrator within four weeks after being requested to do so by the claimant,
the latter shall also appoint the second arbitrator. If the two arbitrators
fail to agree upon the appointment of an umpire within four weeks after their
nominations, each of them shall name three, of whom the other shall decline
two and the decision shall be made by drawing lots.
(c) The claimant shall submit its initial brief within 20 days from
appointment of the umpire. The respondent shall submit its brief within 20
days after receipt of the claimant's brief and the claimant may submit a
reply brief within l0 days after receipt of the respondent's brief.
(d) The board shall make its decision with regard to the custom and
usage of the insurance and reinsurance business. The board shall issue its
decision in writing based upon a hearing in which evidence may be introduced
without following strict rules of evidence but in which cross examination and
rebuttal shall be allowed. The board shall make its decision within 60 days
following the termination of the hearings unless the parties consent to an
extension. The majority decision of the board shall be final and binding
upon all parties to the proceeding. Judgment may be entered upon the award
of the board in any court having jurisdiction thereof.
-11-
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No. 3525-0087
(e) If more than one reinsurer is involved in the same dispute, all
such reinsurers shall constitute and act as one party for purposes of this
clause and communications shall be made by the Company to each of the
reinsurers constituting the one party, provided, however, that nothing
therein shall impair the rights of such reinsurers to assert several, rather
than joint defenses or claims, nor be construed as changing the liability of
the reinsurers under the terms of this Agreement from several to joint.
(f) Each party shall bear the expense of its own arbitrator and shall
jointly and equally bear with the other party the expense of the umpire and
all other costs.
ARTICLE XIX
-----------
OFFSET AND SECURITY CLAUSE
- --------------------------
(a) Each party hereto has the right, which may be exercised at any
time, to offset any amounts, whether on account of premiums or losses or
otherwise, due from such party to another party under this Agreement or any
other reinsurance agreement heretofore or hereafter entered into between
them, against any amounts, whether on account of premiums or losses or
otherwise due from the latter party to the former party. The party asserting
the right of offset may exercise this right, whether as assuming or ceding
insurer or in both roles in the relevant agreement or agreements.
(b) Each party hereby assigns and pledges to the other party (or to
each other party, if more than one) all of its rights under this Agreement to
receive premium or loss payments at any time from such other party
("Collateral"), to secure its premium or loss obligations to such other party
at any time under this Agreement and any other reinsurance agreement
heretofore or hereinafter entered into by and between them ("Secured
Obligations"). If at any time a party is in default under any Secured
Obligation or shall be subject to any liquidation, rehabilitation,
reorganization or conservation proceeding, each other party shall be entitled
in its discretion, to apply, or to withhold for the purpose of
-12-
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No. 3525-0087
applying in due course, any Collateral assigned and pledged to it by the
former party and otherwise to realize upon such Collateral as security for
such Secured Obligations.
(c) The security interest described herein, and the term "Collateral,"
shall apply to all payments and other proceeds in respect of the rights
assigned and pledged. A party's security interest in Collateral shall be
deemed evidenced only by the counterpart of this Agreement delivered to such
party.
(d) Each right under this Article is a separate and independent right,
exercisable, without notice or demand, alone or together with other rights,
in the sole election of the party entitled thereto, and no waiver, delay, or
failure to exercise, in respect of any right, shall constitute a waiver of
any other right. The provisions of this Article shall survive any
cancellation or other termination of this Agreement. In the event of the
insolvency of either party to this agreement, then offsets shall only be
allowed to the extent permitted by the applicable law of the insolvency
party's "state of domicile."
ARTICLE XX
----------
COMMENCEMENT AND TERMINATION
- ----------------------------
(a) This Agreement and the Exhibits attached hereto shall take effect
as of 12:01 A.M., July 1, 1996 and shall, except as otherwise stipulated
herein or in any Exhibit hereto or any Endorsement hereof, continue in full
force and effect until terminated as hereinafter provided. In the event of
termination of this agreement, the Reinsurer shall return the unearned
premium and shall not be liable for losses occurring after the anniversary
date. However, the Reinsured shall have the option to continue coverage
hereon for business in force at the existing rate applied to the unearned
subject premium income portfolio at the date of termination; not to exceed 12
months plus odd time.
(b) This Agreement or any of the Exhibits may be cancelled at any time
by mutual agreement or as of any January 1, April 1, July 1 or October 1 by
either party giving 90 days notice to the other stating when thereafter
cancellation shall be effective.
-13-
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No. 3525-0087
(c) Every notice of termination shall be given by registered or
certified letter addressed to the intended recipient at such recipient's
address as hereinabove set forth. In determining whether the requisite
number of days' notice has been given in any case, the date of termination
shall be counted but the date of mailing shall not.
(d) Notwithstanding the termination of this Agreement or any Exhibit as
attached hereto, the provisions of this Agreement shall continue to apply to
all unfinished business hereunder to the end that all obligations and
liabilities incurred by each party hereunder prior to such termination shall
be fully performed and discharged.
ARTICLE XXI
-----------
EXTENDED TERMINATION
- --------------------
If this Agreement should terminate while an occurrence giving rise to a
claim hereunder is in progress, subject to the other conditions of this
Agreement, the Reinsurer shall be liable for its proportion of the entire
loss or damage caused by such occurrence.
-14-
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No. 3525-0087
EXHIBIT A
EXHIBIT A
---------
FIRST EXCESS OF LOSS COVER
--------------------------
Section 1
---------
COVER
- -----
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amounts of ultimate net loss which the Company may pay as a
result of losses occurring on and after 12:01 A.M., July 1, 1996 under the
Company's policies in force as of 12:01A.M., July 1, 1996 and new and renewal
policies becoming effective on and after said date, covering business
classified by the Company as set forth in the Article entitled Lines of
Business Covered of the Agreement, except as excluded in the Article entitled
Exclusions of the Agreement, subject to the limitations set forth in Section
2 hereof.
Section 2
---------
LIMITS OF COVER
- ---------------
(a) The Reinsurer shall not be liable for any loss until the Company's
ultimate net loss on each risk in each occurrence involving one or more of
the perils covered under this Agreement exceeds $400,000 and then the
Reinsurer shall be liable for the amount of the Company's ultimate net loss
in excess of $400,000; but the Reinsurer's liability shall not exceed
$2,100,000 on each risk in each occurrence; provided, the aggregate of
reinsurance losses shall not exceed $6,300,000 in any one occurrence.
(b) The Company shall be the sole judge of what constitutes one risk.
The definition of risk shall include Commercial Automobile Physical Damage at
the location of the risk. When the Company provides an insured with a
separate sublimit for Flood and/or Earthquake on an occurrence or annual
limit basis, it is its intention to reserve the option to judge a loss or
losses caused by one occurrence and falling to the sublimit as being one risk
each insured.
-1-
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No. 3525-0087
EXHIBIT A
Section 3
---------
DEFINITIONS
- -----------
(a) The term "Company's net premiums earned" used herein means the
Company's net premiums written (i.e., gross premiums less return premiums and
less premiums for reinsurance ceded which inures to the benefit of this
cover) during the period for which computation is being made, plus the net
unearned premiums at the beginning of the period, less the net unearned
premiums at the end of the period; said unearned premiums to be computed on
the monthly pro rata basis.
(b) The term "policies" means each of the Company's binders, policies,
contracts, cessions and certificates providing insurance on the perils and
classes of business covered hereunder.
(c) The term "Loss Occurrence" shall mean the sum of all individual
losses directly occasioned by any one disaster, accident or loss or series of
disasters, accidents or losses arising out of one event which, with respect
to Continental U.S. losses and/or Canadian losses, occurs within the area of
one state of the United States or province of Canada and states or provinces
contiguous thereto and to one another. However, the duration and extent of
any one "Loss Occurrence" shall be limited to all individual losses sustained
by the Company occurring during any period of 168 consecutive hours arising
out of an directly occasioned by the same event except that the term "Loss
Occurrence" shall be further defined as follows:
1. As regards windstorm, hail, tornado, hurricane, cyclone, including
ensuing collapse and water damage, all individual losses sustained
by the Company occurring during any period of 72 consecutive hours
arising out of and directly occasioned by the same event. However,
the event need not be limited to one state or province or states
or provinces contiguous thereto.
2. As regards riot, riot attending a strike, civil commotion,
vandalism and malicious mischief, all individual losses sustained
by the Company occurring during any period of 72 consecutive hours
within the area of one
-2-
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No. 3525-0087
EXHIBIT A
municipality or county and the municipalities or counties
contiguous thereto arising out of an directly occasioned by the
same event. The maximum duration of 72 consecutive hours may be
extended in respect of individual losses which occur beyond such
72 consecutive hours during the continued occupation of an
assured's premises by strikers, provided such occupation commenced
during the aforesaid period.
3. As regards earthquake (the epicenter of which need not necessarily
be within the territorial confines referred to in the opening
paragraph of this subsection (c)) and fire following directly
occasioned by the earthquake, only those individual fire losses
which commence during the period of 168 consecutive hours may be
included in the Company's "Loss Occurrence."
4. As regards "Freeze," only individual losses directly occasioned by
collapse, breakage of glass and water damage (caused by bursting
of frozen pipes and tanks) may be included in the Company's "Loss
Occurrence."
For all those "Loss Occurrences" the Company may choose the date and
time when any such period of consecutive hours commences provided that
it is not earlier than the date and time of the occurrence of the first
recorded individual loss sustained by the company arising out of that
disaster, accident or loss and provided that only one such period of
168 consecutive hours shall apply with respect to one event, except for
any "Loss Occurrence" referred to in sub-paragraphs 1. and 2. above
where only one such period of 72 consecutive hours shall apply with
respect to one event, regardless of the duration of the event.
No individual losses occasioned by an event that would be covered by 72
hours clause may be included in any "Loss Occurrence" claimed under the
168 hours provision.
Section 4
---------
REINSURANCE PREMIUM
- -------------------
(a) As premium for the reinsurance provided hereunder during each
contract year, the Company shall pay the Reinsurer 2.44% of its net earned
premium for the contract year, subject to an annual minimum premium of
$3,440,000.
(b) The Company shall pay the Reinsurer an annual deposit premium of
$4,300,000 in four equal installments of $1,075,000 on January 1, April 1,
July 1 and October 1 of each year this Agreement remains in effect.
-3-
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No. 3525-0087
EXHIBIT A
(c) "Net earned premium" as used herein is defined as gross earned
premium of the Company for the classes of business reinsured hereunder, less
the earned portion of premiums ceded by the Company for reinsurance which
inures to the benefit of this Contract. For purposes of calculating net
earned premium, 85% of the Company's individual premiums on Homeowners and
Farmowners policies other than as respects Personal Article Floaters (PAF)
and 65% of the Company's indivisible premiums on Businessowners policies
shall be considered applicable to the perils and classes of business covered
hereunder shall be considered subject premium.
Section 5
---------
REINSTATEMENT
- -------------
In the event of the whole or any portion of the liability under this
Agreement being exhausted by loss, the amount so exhausted shall be
automatically reinstated from the time of occurrence of the loss at no
additional premium.
Section 6
---------
REPORTS AND REMITTANCES
- -----------------------
(a) The Company will provide the Reinsurer with all necessary data
respecting premiums and losses, including reserves thereon, as at dates and
on forms mutually acceptable to the Company and the Reinsurer.
(b) Payment by the Reinsurer of its proportion of losses and loss
expenses paid or to be paid by the Company will be made by the Reinsurer to
the Company within 15 days after proof of amount paid or to be paid by the
Company is received by the Reinsurer. The Company may, however, give the
Reinsurer written notice of its intention to pay any loss on a certain date
and may require the receipt of payment of the Reinsurer's share of the loss
by such date, provided the Reinsurer in any event shall have a period of 48
hours after receipt of said written notice to mail or otherwise dispatch the
payment.
-4-
PAGE
No. 3525-0087
EXHIBIT A
This Exhibit A is attached to and forms part of Reinsurance Agreement
No.3525-0087 issued to SELECTIVE INSURANCE COMPANY OF AMERICA, SELECTIVE WAY
INSURANCE COMPANY, SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST, SELECTIVE
INSURANCE COMPANY OF SOUTH CAROLINA, and EXCHANGE INSURANCE COMPANY.
-5-
PAGE
No. 3525-0087
EXHIBIT B
EXHIBIT B
---------
SECOND EXCESS OF LOSS COVER
---------------------------
Section 1
---------
COVER
- -----
The Reinsurer agrees to reimburse the Company, on an excess of loss basis,
for the amounts of ultimate net loss which the Company may pay as a result
of losses occurring on and after 12:01 A.M., July 1, 1996 under the
Company's policies in force as of 12:01A.M., July 1, 1996 and new and
renewal policies becoming effective on and after said date, covering
business classified by the Company as set forth in the Article entitled
Lines of Business Covered of the Agreement, except as excluded in the
Article entitled Exclusions of the Agreement, subject to the limitations set
forth in Section 2 hereof.
Section 2
---------
LIMITS OF COVER
- ---------------
(a) The Reinsurer shall not be liable for any loss until the Company's
ultimate net loss on each risk in each occurrence involving one or more of
the perils covered under this Agreement exceeds $2,500,000 and then the
Reinsurer shall be liable for the amount of the Company's ultimate net loss
in excess of $2,500,000; but the Reinsurer's liability shall not exceed
$2,500,000 on each risk in each occurrence; provided, the aggregate of
reinsurance losses shall not exceed $7,500,000 in any one occurrence.
(b) The Company shall be the sole judge of what constitutes one
risk. When the Company provides an insured with a separate sublimit for
Flood and/or Earthquake on an occurrence or annual limit basis, it is its
intention to reserve the option to judge a loss or losses caused by one
occurrence and falling to the sublimit as being one risk each insured.
-1-
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No. 3525-0087
EXHIBIT B
Section 3
---------
DEFINITIONS
- -----------
(a) The term "Company's net premiums earned" used herein means the
Company's net premiums written (i.e., gross premiums less return premiums
and less premiums for reinsurance ceded which inures to the benefit of this
cover) during the period for which computation is being made, plus the net
unearned premiums at the beginning of the period, less the net unearned
premiums at the end of the period; said unearned premiums to be computed on
the monthly pro rata basis.
(b) The term "policies" means each of the Company's binders, policies,
contracts, cessions and certificates providing insurance on the perils and
classes of business covered hereunder.
(c) The term "Loss Occurrence" shall mean the sum of all individual
losses directly occasioned by any one disaster, accident or loss or series
of disasters, accidents or losses arising out of one event which, with
respect to Continental U.S. losses and/or Canadian losses, occurs within
the area of one state of the United States or province of Canada and states
or provinces contiguous thereto and to one another. However, the duration
and extent of any one "Loss Occurrence" shall be limited to all individual
losses sustained by the Company occurring during any period of 168
consecutive hours arising out of an directly occasioned by the same event
except that the term "Loss Occurrence" shall be further defined as follows:
1. As regards windstorm, hail, tornado, hurricane, cyclone, including
ensuing collapse and water damage, all individual losses sustained
by the Company occurring during any period of 72 consecutive hours
arising out of and directly occasioned by the same event. However,
the event need not be limited to one state or province or states
or provinces contiguous thereto.
2. As regards riot, riot attending a strike, civil commotion,
vandalism and malicious mischief, all individual losses sustained
by the Company occurring during any period of 72 consecutive hours
within the area of one
-2-
PAGE
No. 3525-0087
EXHIBIT B
municipality or county and the municipalities or counties
contiguous thereto arising out of an directly occasioned by the
same event. The maximum duration of 72 consecutive hours may be
extended in respect of individual losses which occur beyond such
72 consecutive hours during the continued occupation of an
assured's premises by strikers, provided such occupation commenced
during the aforesaid period.
3. As regards earthquake (the epicenter of which need not necessarily
be within the territorial confines referred to in the opening
paragraph of this subsection (c)) and fire following directly
occasioned by the earthquake, only those individual fire losses
which commence during the period of 168 consecutive hours may be
included in the Company's "Loss Occurrence."
4. As regards "Freeze," only individual losses directly occasioned by
collapse, breakage of glass and water damage (caused by bursting
of frozen pipes and tanks) may be included in the Company's "Loss
Occurrence."
For all those "Loss Occurrences" the Company may choose the date and
time when any such period of consecutive hours commences provided that
it is not earlier than the date and time of the occurrence of the first
recorded individual loss sustained by the company arising out of that
disaster, accident or loss and provided that only one such period of 168
consecutive hours shall apply with respect to one event, except for any
"Loss Occurrence" referred to in sub-paragraphs 1. and 2. above where
only one such period of 72 consecutive hours shall apply with respect to
one event, regardless of the duration of the event.
No individual losses occasioned by an event that would be covered by 72
hours clause may be included in any "Loss Occurrence" claimed under the
168 hours provision.
Section 4
---------
REINSURANCE PREMIUM
- -------------------
(a) As premium for the reinsurance provided hereunder during each
contract year, the Company shall pay the Reinsurer .33% of its net earned
premium for the contract year, subject to an annual minimum premium of
$470,400.
(b) The Company shall pay the Reinsurer an annual deposit premium of
$588,000 in four equal installments of $147,000 on January 1, April 1, July 1
and October 1 of each year this Agreement remains in effect.
-3-
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No. 3525-0087
EXHIBIT B
(c) "Net earned premium" as used herein is defined as gross earned
premium of the Company for the classes of business reinsured hereunder, less
the earned portion of premiums ceded by the Company for reinsurance which
inures to the benefit of this Contract. For purposes of calculating net
earned premium, 85% of the Company's individual premiums on Homeowners and
Farmowners policies other than as respects Personal Article Floaters (PAF)
and 65% of the Company's indivisible premiums on Businessowners policies
shall be considered applicable to the perils and classes of business covered
hereunder shall be considered subject premium.
Section 5
---------
REINSTATEMENT
- -------------
In the event of the whole or any portion of the liability under this
Agreement being exhausted by loss, the amount so exhausted shall be
automatically reinstated from the time of occurrence of the loss at no
additional premium.
Section 6
---------
REPORTS AND REMITTANCES
- -----------------------
(a) The Company will provide the Reinsurer with all necessary data
respecting premiums and losses, including reserves thereon, as at dates and
on forms mutually acceptable to the Company and the Reinsurer.
(b) Payment by the Reinsurer of its proportion of losses and loss
expenses paid or to be paid by the Company will be made by the Reinsurer to
the Company within 15 days after proof of amount paid or to be paid by the
Company is received by the Reinsurer. The Company may, however, give the
Reinsurer written notice of its intention to pay any loss on a certain date
and may require the receipt of payment of the Reinsurer's share of the loss
by such date, provided the Reinsurer in any event shall have a period of 48
hours after receipt of said written notice to mail or otherwise dispatch the
payment.
-4-
PAGE
No. 3525-0087
EXHIBIT B
This Exhibit B is attached to and forms part of Reinsurance Agreement
No.3525-0087 issued to SELECTIVE INSURANCE COMPANY OF AMERICA, SELECTIVE WAY
INSURANCE COMPANY, SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST, SELECTIVE
INSURANCE COMPANY OF SOUTH CAROLINA, and EXCHANGE INSURANCE COMPANY.
-5-
PAGE
No. 3525-0087
EXHIBIT C
---------
THIRD EXCESS OF LOSS COVER
--------------------------
Section 1
---------
COVER
- -----
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amounts of ultimate net loss which the Company may pay as a
result of losses occurring on and after 12:01 A.M., July 1, 1996 under the
Company's policies in force as of 12:01A.M., July 1, 1996 and new and renewal
policies becoming effective on and after said date, covering business
classified by the Company as set forth in the Article entitled Lines of
Business Covered of the Agreement, except as excluded in the Article entitled
Exclusions of the Agreement, subject to the limitations set forth in Section
2 hereof.
Section 2
---------
LIMITS OF COVER
- ---------------
(a) The Reinsurer shall not be liable for any loss until the Company's
ultimate net loss on each risk in each occurrence involving one or more of
the perils covered under this Agreement exceeds $5,000,000 and then the
Reinsurer shall be liable for the amount of the Company's ultimate net loss
in excess of $5,000,000; but the Reinsurer's liability shall not exceed
$5,000,000 on each risk in each occurrence; provided, the aggregate of
reinsurance losses shall not exceed $15,000,000 in any one occurrence.
(b) The Company shall be the sole judge of what constitutes one risk.
When the Company provides an insured with a separate sublimit for Flood
and/or Earthquake on an occurrence or annual limit basis, it is its intention
to reserve the option to judge a loss or losses caused by one occurrence and
falling to the sublimit as being one risk each insured.
-1-
PAGE
No. 3525-0087
Section 3
---------
DEFINITIONS
- -----------
(a) The term "Company's net premiums earned" used herein means the
Company's net premiums written (i.e., gross premiums less return premiums
and less premiums for reinsurance ceded which inures to the benefit of this
cover) during the period for which computation is being made, plus the net
unearned premiums at the beginning of the period, less the net unearned
premiums at the end of the period; said unearned premiums to be computed on
the monthly pro rata basis.
(b) The term "policies" means each of the Company's binders, policies,
contracts, cessions and certificates providing insurance on the perils and
classes of business covered hereunder.
(c) The term "Loss Occurrence" shall mean the sum of all individual
losses directly occasioned by any one disaster, accident or loss or series of
disasters, accidents or losses arising out of one event which, with respect
to Continental U.S. losses and/or Canadian losses, occurs within the area of
one state of the United States or province of Canada and states or provinces
contiguous thereto and to one another. However, the duration and extent of
any one "Loss Occurrence" shall be limited to all individual losses sustained
by the Company occurring during any period of 168 consecutive hours arising
out of an directly occasioned by the same event except that the term "Loss
Occurrence" shall be further defined as follows:
1. As regards windstorm, hail, tornado, hurricane, cyclone, including
ensuing collapse and water damage, all individual losses sustained
by the Company occurring during any period of 72 consecutive hours
arising out of and directly occasioned by the same event. However,
the event need not be limited to one state or province or states or
provinces contiguous thereto.
2. As regards riot, riot attending a strike, civil commotion,
vandalism and malicious mischief, all individual losses sustained
by the Company occurring during any period of 72 consecutive hours
within the area of one municipality or county and the
municipalities or counties contiguous
-2-
PAGE
No. 3525-0087
thereto arising out of an directly occasioned by the same event.
The maximum duration of 72 consecutive hours may be extended in
respect of individual losses which occur beyond such 72 consecutive
hours during the continued occupation of an assured's premises by
strikers, provided such occupation commenced during the aforesaid
period.
3. As regards earthquake (the epicenter of which need not necessarily
be within the territorial confines referred to in the opening
paragraph of this subsection (c)) and fire following directly
occasioned by the earthquake, only those individual fire losses
which commence during the period of 168 consecutive hours may be
included in the Company's "Loss Occurrence."
4. As regards "Freeze," only individual losses directly occasioned by
collapse, breakage of glass and water damage (caused by bursting of
frozen pipes and tanks) may be included in the Company's "Loss
Occurrence."
For all those "Loss Occurrences" the Company may choose the date and
time when any such period of consecutive hours commences provided that
it is not earlier than the date and time of the occurrence of the first
recorded individual loss sustained by the company arising out of that
disaster, accident or loss and provided that only one such period of 168
consecutive hours shall apply with respect to one event, except for any
"Loss Occurrence" referred to in sub-paragraphs 1. and 2. above where
only one such period of 72 consecutive hours shall apply with respect to
one event, regardless of the duration of the event.
No individual losses occasioned by an event that would be covered by 72
hours clause may be included in any "Loss Occurrence" claimed under the
168 hours provision.
Section 4
---------
REINSURANCE PREMIUM
- -------------------
(a) As premium for the reinsurance provided hereunder during each
contract year, the Company shall pay the Reinsurer .24% of its net earned
premium for the contract year, subject to an annual minimum premium of
$340,800.
(b) The Company shall pay the Reinsurer an annual deposit premium of
$426,000 in four equal installments of $106,500 on January 1, April 1, July 1
and October1 of each year this Agreement remains in effect.
(c) "Net earned premium" as used herein is defined as gross earned
premium of the Company for the classes of business reinsured hereunder, less
the earned portion of
-3-
PAGE
No. 3525-0087
premiums ceded by the Company for reinsurance which inures to the benefit of
this Contract. For purposes of calculating net earned premium, 85% of the
Company's individual premiums on Homeowners and Farmowners policies other
than as respects Personal Article Floaters (PAF) and 65% of the Company's
indivisible premiums on Businessowners policies shall be considered
applicable to the perils and classes of business covered hereunder shall be
considered subject premium.
Section 5
---------
REINSTATEMENT
- -------------
Each claim hereon reduces the amount of indemnity from the time of
occurrence of the loss by the sum paid, but any amount so exhausted is hereby
reinstated from the time of occurrence of the loss. The first full amount so
reinstated shall be at no additional charge. The Company agrees to pay, as
the 2nd full limit reinstated an additional premium calculated at pro rata of
the annual earned premium hereon for the calendar year during which the loss
occurred, being pro rata as to the fraction of the face value of this
Agreement (i.e., the fraction of $5,000,000) so reinstated and 100% as to the
calendar year unexpired at the time of the occurrence of the loss.
Nevertheless, the Reinsurer's liability hereunder shall never exceed
$5,000,000 in respect of any one occurrence and, subject to the limit in
respect of any one occurrence, shall be further limited to $15,000,000 in any
one calendar year by reason of any and all claims arising hereunder.
Section 6
---------
REPORTS AND REMITTANCES
- -----------------------
(a) The Company will provide the Reinsurer with all necessary data
respecting premiums and losses, including reserves thereon, as at dates and
on forms mutually acceptable to the Company and the Reinsurer.
(b) Payment by the Reinsurer of its proportion of losses and loss
expenses paid or to be paid by the Company will be made by the Reinsurer to
the Company within 15 days after proof of amount paid or to be paid by the
Company is received by the Reinsurer. The
-4-
PAGE
No. 3525-0087
Company may, however, give the Reinsurer written notice of its intention to
pay any loss on a certain date and may require the receipt of payment of the
Reinsurer's share of the loss by such date, provided the Reinsurer in any
event shall have a period of 48 hours after receipt of said written notice to
mail or otherwise dispatch the payment.
This Exhibit C is attached to and forms part of Reinsurance Agreement
No.3525-0087 issued to SELECTIVE INSURANCE COMPANY OF AMERICA, SELECTIVE WAY
INSURANCE COMPANY, SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST, SELECTIVE
INSURANCE COMPANY OF SOUTH CAROLINA, and EXCHANGE INSURANCE COMPANY.
-5-
PAGE
No. 3525-0087
INSOLVENCY FUNDS EXCLUSION CLAUSE
---------------------------------
Liability of the Company arising from its participation or membership,
whether voluntary or involuntary, in any insolvency fund, including any
guarantee fund, association, pool, plan or other facility which provides for
the assessment of, payment by, or assumption by the Company of a part or the
whole of any claim, debt, charge, fee or other obligations of an insurer, or
its successors or assigns, which has been declared insolvent by any authority
having jurisdiction.
EXHIBIT 10.15b - COVER LETTER
- ----------------------------
March 21, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Multiple Line Excess of Loss Reinsurance Agreement, as amended through
August 23,1995 between Selective insurance Company of America,
Selective Way Insurance Company, Selective Insurance Company of the
Southeast, Selective Insurance Company of South Carolina, Exchange
Insurance Company and American Re-Insurance Company (Contract
No. 3525-0066)
Ladies and Gentlemen:
Accompanying this letter for filing pursuant to the Securities Act of 1933,
is an amendment, dated September 25, 1996, to the reinsurance agreement
referred to above. This agreement was filed as Exhibit 10.13a to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995,
File No. 0-8641.
Very truly yours,
/s/ Leo L. McConville, Jr.
----------------------
Leo L. McConville, Jr.
Accountant Technical
Specialist
PAGE
EXHIBIT 15b
- -----------
- -----------------------------------------------------------------------------
No. 3525-0066-E010
ENDORSEMENT
-----------
Attached to and forming part of Reinsurance Agreement No. 3525-0066
between SELECTIVE INSURANCE COMPANY OF AMERICA and SELECTIVE WAY INSURANCE
COMPANY, both of Branchville, New Jersey and SELECTIVE INSURANCE COMPANY OF
THE SOUTHEAST and SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA, both of
Charlotte, North Carolina, EXCHANGE INSURANCE COMPANY, Buffalo, New York and
CHARLESTON INSURANCE COMPANY, Charleston, South Carolina (herein and therein
collectively referred to as the "Company") and AMERICAN RE-INSURANCE COMPANY,
Princeton, New Jersey (herein and therein referred to as the "Reinsurer").
I. It is understood and agreed that effective 12:01 A.M., Standard Time,
January 1, 1996, as respects, new and renewal policies becoming effective on
and after said date, Section (b)(B)l.(v) and (vi); and Section (b)(B)3.; and
Section (b)(C) General Liability #2 of ARTICLE IV, EXCLUSIONS are revised as
follows:
(B) The Following Insurance Coverages:
(v) Emergency Medical Services for incidental medical malpractice;
(vi) Teachers and other school professionals, but only for their
school related activities and only if school professionals
other than teachers have their own professional liability
insurance;
3. Errors and Omissions, except for School Boards, Volunteer Fire
Companies and Employee Benefits.
(C) The Following Risks:
GENERAL LIABILITY (Other Liability) with respect to:
2. Products Liability for risks engaged in the manufacture, wholesale,
or retail distribution of aviation parts. This exclusion does apply
to risks engaged in the "incidental" manufacturing of "non-critical
component parts" used in aircraft. For the purpose of this
exception the following definitions apply:
i. "Incidental" means that an insured manufactures only "non-
ritical component aviation parts" (i.e., no critical parts)
and that such parts represent no more than 30% of the
insured's total annual gross receipts at the time the policy
is signed or renewed.
ii. "Non-Critical component part" means a part or product where
application or use does not in any way relate to or involve
the
-1-
PAGE
No. 3525-0066-E010
navigation, operation, airworthiness, or passenger safety of
any aircraft, airport or guidance system or does not require
FAA certification or approval as Technical Standing Order or
Parts manufacturer.
Sub-Assembly (defined as a group of component parts, combined
to perform a particular function within an end product) and
End Product (defined as a group of sub-assemblies)
manufacturing are not covered whether critical or non-critical
in nature.
II. It is further understood and agreed that effective 12:01 A.M., Standard
Time, January 1, 1996, Section 2, Limits of Cover; and Section 5,
Reinsurance Premium; and paragraph C of Section 6, Reports and
Remittances of Exhibit C are amended as follows:
Section 2
---------
LIMITS OF COVER
- ---------------
(a) The limits of cover provided hereunder are divided into the
following two Parts:
Part I
------
The Reinsurer shall not be liable for any loss under this Part I
until the Company's ultimate net loss in each occurrence exceeds $1,000,000
and then the Reinsurer shall be liable for the amount of the Company's
ultimate net loss in excess of $1,000,000, provided, that the maximum
liability of the Reinsurer for ultimate net loss resulting from each
occurrence shall be limited to $1,000,000.
Part II
-------
1. The Reinsurer shall not be liable for any loss under this Part
II until the Company's ultimate net loss in each occurrence exceeds
$2,000,000 and then the Reinsurer shall be liable for the amount of the
Company's ultimate net loss in excess of $2,000,000, provided, that the
maximum liability of the Reinsurer for ultimate net loss resulting from each
occurrence shall be limited to $3,000,000.
2. Recoveries from Part I shall inure to the benefit of the
Company and shall not be deducted in arriving at the Company's ultimate net
loss under this Part II.
-2-
PAGE
No. 3525-0066-E010
(b) In the event a loss resulting from the same occurrence involves a
combination of the Classes of Insurance covered under this Exhibit and/or the
Company's Commercial Umbrella Liability Excess of Loss Covers (Exhibit A and
Exhibit B attached hereto) and/or any one risk under the Working Excess Per
Risk Exhibit of the Company's Property Exhibit Form Reinsurance Agreement,
additional reinsurance is hereby provided when the total of the Company's
combined retentions under this Exhibit, the Commercial Umbrella Liability
Covers (Exhibit A and Exhibit B), and any one risk under the Working Excess
Exhibit of the Property Reinsurance Agreement, exceeds $1,000,000. As
respects such combined loss the Company shall retain the first $1,000,000 of
such combined retentions and the Reinsurer shall reimburse the Company for
the amount in excess of the Company's combined retentions of $1,000,000,
provided the maximum liability of the Reinsurer in respect to the additional
reinsurance provided under this paragraph shall not exceed $400,000 in each
occurrence.
(c) The Company's retention and the reinsurance recoverable under this
Exhibit shall be apportioned to the Classes of Insurance covered hereunder in
the same proportion that the Company's ultimate net loss with respect to each
class bears to the Company's ultimate net loss on the combined Classes of
Insurance.
Section 5
---------
REINSURANCE PREMIUM
- -------------------
(a) The premium for the reinsurance provided under Parts I and II of
this Exhibit shall be computed at the rates set forth below as applied to the
Company's net premiums earned on the business covered under each Part.
Part I .45%
Part II .10%
(b) As respects Part I the annual minimum premium shall be $2,250,000.
As respects Part II, the annual minimum premium shall be $500,000.
-3-
PAGE
No. 3525-0066-E010
(c) The following percentages of the Company's net premiums earned
shall be applied, as respects those policies having indivisible premiums:
1. 15% as respects Homeowners and Farmowners policies;
2. 35% as respects Businessowners policies;
3. 45% as respects that portion of the Personal Umbrella policy
other than Automobile Liability;
4. 55% as respects the remaining Automobile Liability portion of
the Personal Umbrella policy.
Section 6
---------
REPORTS AND REMITTANCES
- -----------------------
(c) As respects Parts I and II of Section 2 of this Exhibit, if, at the
end of any calendar year, the total amount of premium paid to the Reinsurer
as respects Part I or II, in the twelve monthly accounts furnished during
that calendar year is less than the annual minimum premium applicable to the
respective Part, the difference between the total amount previously paid the
annual minimum shall be promptly remitted to the Reinsurer.
III. It is still further understood and agreed that effective 12:01 A.M.,
January 1, 1996, Exhibit E - Excess Workers' Compensation Quota Share is
canceled by mutual consent on a run-off basis.
All other terms and conditions remain unchanged.
Nothing herein contained shall alter, vary or extend any provision or
condition of the Agreement other than as above stated.
-4-
PAGE
No. 3525-0066-E010
IN WITNESS WHEREOF the parties hereto have caused this Endorsement to be
executed in duplicate this 25th day of September,1996.
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
CHARLESTON INSURANCE COMPANY
/s/ P.C. Anderson
-------------
P.C. Anderson
/s/ Wayne Rydell
-------------
Wayne Rydell
- -----------------
Attested by:
AMERICAN RE-INSURANCE COMPANY
/s/ Edward Duess
-------------------------
Edward Duess
/s/ Thomas Bell
--------------
Thomas Bell
-----------------------------
Attested by:
-5-
EXHIBIT 10.15d - COVER LETTER
- -----------------------------
March 21, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Commercial Umbrella Liability Excess of Loss Reinsurance Agreement as
amended through April 5, 1995 between American Re-Insurance Company
and Selective insurance Company of America, Selective Way Insurance
Company, Selective Insurance Company of the Southeast, and Selective
Insurance Company of South Carolina (Contract No. 3525-0067)
Ladies and Gentlemen:
Accompanying this letter for filing pursuant to the Securities Act of 1933,
is an amendment, dated November 5, 1996, to the reinsurance agreement
referred to above. This agreement was filed as Exhibit 10.13b to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995,
File No. 0-8641.
Very truly yours,
/s/ Leo L. McConville, Jr.
----------------------
Leo L. McConville, Jr.
Accountant Technical
Specialist
EXHIBIT 10.15d
- --------------
- -----------------------------------------------------------------------------
No. 3525-0067-E006
ENDORSEMENT
-----------
Attached to and forming part of the Commercial Umbrella Liability Excess
of Loss Reinsurance Agreement No.3525-0067 made and entered into by and
between the AMERICAN RE-INSURANCE COMPANY, Princeton, New Jersey (hereinafter
called the "Reinsurer") and SELECTIVE INSURANCE COMPANY OF AMERICA and
SELECTIVE WAY INSURANCE COMPANY, both of Branchville, New Jersey, SELECTIVE
INSURANCE COMPANY OF SOUTH CAROLINA and SELECTIVE INSURANCE COMPANY OF THE
SOUTHEAST, both of Charlotte, North Carolina, and EXCHANGE INSURANCE COMPANY,
Buffalo, New York, and CHARLESTON INSURANCE COMPANY, North Charleston, South
Carolina (hereinafter collectively called the "Company").
It is mutually understood and agreed that effective 12:01 A.M., July 1,
1996, ARTICLE III - LIMITS OF COVER and ARTICLE V - PREMIUM are amended as
follows:
ARTICLE III
-----------
LIMITS OF COVER
- ---------------
(a) As respects commercial umbrella policies issued for the Statewide
Excess Liability Fund (SELF) for amounts greater than $10,000,000 but not
exceeding $ 15,000,000, the Reinsurer shall reimburse the Company for the
amount of its ultimate net loss under each policy in each occurrence in
excess of $10,000,000 under each policy in each occurrence.
(b) It is understood and agreed that in no event shall the Reinsurer's
liability exceed the difference between the Company's retention and the
limits of liability provided in the Company's policy subject to the
Reinsurer's limit of liability set forth above.
ARTICLE V
---------
PREMIUM
- -------
As respects policies issued for the Statewide Excess Liability Fund
(SELF) for amounts greater than $10,000,000 but not exceeding $15,000,000,
the Company shall pay the Reinsurer for each risk covered:
i. $.40 per capita of each municipality reinsured hereunder,
ii. $.20 per capita of each county reinsured hereunder,
provided the Reinsurer's premium shall never be less than $300 for each
million dollar of policy limits.
-1-
PAGE
No. 3525-0067-E006
IN WITNESS WHEREOF the parties hereto have caused this Endorsement to be
executed in duplicate this 5th day of November, 1996.
AMERICAN RE-INSURANCE COMPANY
/s/ Roy M. Wesley
-------------------------
Roy M. Wesley
/s/ Peter J. Curran
--------------
Peter J. Curran
-----------------------------
Attested by:
ACCEPTED:
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
EXCHANGE INSURANCE COMPANY
CHARLESTON INSURANCE COMPANY
/s/ P.C. Anderson
-------------
P.C. Anderson
/s/ Wayne Rydell
-------------
Wayne Rydell
- -----------------
Attested by:
-2-
INTERESTS AND LIABILITIES AGREEMENT
(hereinafter referred to as the "Agreement")
to the
FIRST CASUALTY CATASTROPHE EXCESS OF LOSS
-----------------------------------------
REINSURANCE CONTRACT
--------------------
(hereinafter referred to as the "Contract")
between
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
(hereinafter referred to either individually or collectively as the
"Company")
and
(hereinafter referred to as the "Subscribing Reinsurer")
It is mutually agreed by and between the Company on the one part and the
Subscribing Reinsurer on the other part that the Subscribing Reinsurer's
share in the interests and liabilities of the Reinsurers as set forth inthe
Contract, to which this Agreement is attached, shall be for %.
The share of the Subscribing Reinsurer in the interests and liabilities of
the Reinsurers in respect of said Contract shall be separate and apart from
the shares of such other subscribing reinsurers, if any, to said Contract.
The interests and liabilities of the Subscribing Reinsurer shall not be joint
with those of such other subscribing reinsurers and in no event shall the
Subscribing Reinsurer participate in the interests and liabilities of such
other subscribing reinsurers.
This Agreement shall become effective commencing 12:01 a.m., Eastern Standard
Time, January 1,1996, in respect of business in force at such date or
business incepting, renewing or having an anniversary date on and after such
date, and shall remain in effect until 12:01 a.m., Eastern Standard Time,
January 1,1997.
Effective: January 1, 1996
3645-16/01
PAGE
The interests and liabilities of the Subscribing Reinsurer therein may not be
changed, altered and amended unless such change, alteration and amendment is
evidenced by Endorsement to this Agreement executed by the Company and the
Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives this 12th day of
April, 1996.
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
/s/Peter Anderson Assistant Vice President
--------------
Peter Anderson
and on this day of , 199__.
Effective: January 1, 1996
3645-16/01
PAGE
FIRST CASUALTY CATASTROPHE EXCESS OF LOSS
-----------------------------------------
REINSURANCE CONTRACT
--------------------
TABLE OF CONTENTS
-----------------
Article Page
------- ----
Preamble 1
1 Business and Territory Covered 1
2 Commencement and Termination 2
3 Extended Expiration 2
4 Exclusions 3
5 Reinsuring Clause 6
6 Definitions 7
7 Warranties 8
8 Premium 9
9 Reinstatement of Limit 10
10 Net Retained Lines 10
11 Ultimate Net Loss 11
12 Excess of Original Policy Limits 11
13 Extra Contractual Obligations 12
14 Notice of Loss and Loss Settlements 13
15 Reinsurance Tax 13
16 Access to Records 13
17 Arbitration 13
18 Currency 14
19 Service of Suit 14
20 Federal Excise Tax 15
21 Loss Reserves 16
22 Indemnification and Errors and Omissions 17
23 Insolvency 18
24 Intermediary 19
Attachments
- -----------
Nuclear Incident Exclusion Clause - Liability -
Reinsurance - U.S.A. 20
Nuclear Incident Exclusion Clause - Liability -
Reinsurance - Canada 25
Nuclear Incident Exclusion Clause - Physical Damage
and Liability (Boiler and Machinery Policies) -
Reinsurance - U.S.A. 28
Nuclear Incident Exclusion Clause - Physical Damage
and Liability (Boiler and Machinery Policies) -
Reinsurance - Canada 29
Nuclear Energy Risks Exclusion Clause (Reinsurance)
(1994) (Worldwide Excluding U.S.A. and Canada) 30
Effective: January 1, 1996
3645-16/01
PAGE
FIRST CASUALTY CATASTROPHE EXCESS OF LOSS
-----------------------------------------
REINSURANCE CONTRACT
--------------------
(hereinafter referred to as the "Contract")
In consideration of the mutual covenants hereinafter contained and upon the
terms and conditions hereinafter set forth
VARIOUS INSURANCE AND/OR REINSURANCE COMPANIES
----------------------------------------------
AND/OR UNDERWRITING MEMBERS OF LLOYD'S
--------------------------------------
(hereinafter referred to as the "Reinsurers")
one of whom is
THE "SUBSCRIBING REINSURER" WHOSE NAME
--------------------------------------
APPEARS ON THE INTERESTS AND LIABILITIES AGREEMENT
--------------------------------------------------
ATTACHING TO AND FORMING A PART OF THIS CONTRACT
------------------------------------------------
does hereby indemnify, as herein provided and specified,
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
(hereinafter referred to either individually or collectively as the
"Company")
ARTICLE 1
---------
BUSINESS AND TERRITORY COVERED
- ------------------------------
The Reinsurers shall indemnify the Company for the liability which may accrue
to the Company as a result of any damage, injury, disease, or loss covered
which takes place during the term of this Contract, whether covered under
policies, bonds, binders, contracts of insurance or reinsurance or under
other evidences of liability, whether oral or written, covering anywhere in
the world (hereinafter referred to as "policy" or "policies") heretofore or
hereafter issued, whether written separately or as part of any Multiple Peril
or similar types of policies and classified by the Company as Casualty
business including, but not limited to:
A. Homeowners and Farmowners.
B. Business Owners.
Effective: January 1, 1996 1 of 32
3645-16/01
PAGE
C. Commercial Multi-Peril (Section II only).
D. Workers' Compensation including Employers' Liability.
E. Automobile P.I.P. including Death and Dismemberment Medical
Payments.
F. Automobile Bodily Injury and Property Damage.
G. Collision Damage.
H. Personal and/or Bodily Injury including Medical Payments.
I. Property Damage Liability.
J. Automobile Liability.
K. General Liability.
L. Umbrella Liability.
ARTICLE 2
---------
COMMENCEMENT AND TERMINATION
- ----------------------------
This Contract shall become effective commencing 12:01 a.m., Eastern Standard
Time, January 1,1996, in respect of business in force at such date or
business incepting, renewing or having an anniversary date on and after such
date, and shall remain in effect until 12:01 a.m., Eastern Standard Time,
January 1,1997.
If any law or regulation of the federal, state or local government of any
jurisdiction in which the Company is doing business shall render illegal the
arrangements made in this Contract, the Contract can be terminated
immediately, insofar as it applies to such jurisdiction, by the Company
giving notice to the Reinsurers to such effect.
ARTICLE 3
---------
EXTENDED EXPIRATION
- -------------------
If this Contract terminates while a loss covered hereunder is in progress, it
is agreed that, subject to the other conditions of this Contract, the
Reinsurers shall indemnify the Company as if the entire loss had occurred
during the term of this Contract, provided the loss covered hereunder started
before the time of termination.
Effective: January 1, 1996 2 of 32
3645-16/01
PAGE
ARTICLE 4
---------
EXCLUSIONS
- ----------
This Contract does not apply to and specifically excludes:
A. As respects Burglary and Theft:
1. Jewelers' Block policies;
2. Personal Property Floater policies;
3. Homeowners' and Farmowners' policies.
B. As respects Personal Injury Liability:
Advertisers', Broadcasters', and Telecasters' Liability.
C. As respects all other business covered hereunder:
1. Scheduled buses operating as common carriers.
2. Vehicles used by truckmen regularly engaged in the interstate
transportation of goods for others and operating beyond a 250 mile
radius but not to include intrastate transportation.
3. Regular retail newspaper delivery in towns of 500,000 population or
more.
4. Amusement parks or amusement devices when written as such.
5. Concerns engaged in the demolition of buildings more than three
stories in height, or vessels.
6. Products Liability for policies covering:
(a) Ethical Drugs;
(b) Proprietary Drugs;
(c) Chemicals, other than Consumer Products;
(d) Beauty Preparations;
(e) Aviation Parts;
(f) Volatile Oils and Insecticides.
7. Professional Liability except as respects:
Effective: January 1, 1996 3 of 32
3645-16/01
PAGE
(a) Morticians;
(b) Druggists;
(c) Pastors;
(d) Printers;
(e) Veterinarians;
(f) Barbers and Beauticians;
(g) Optometrists, Opticians and Audiologists;
(h) Employee Benefits Administrators working for insureds whose
principal business is not the administration of employee
benefits for others;
(i) Volunteer Fire Companies and Rescue Squads for incidental
medical malpractice;
(j) Teachers and full-time school professionals;
(k) Cemeteries;
(l) Real Estate/Insurance Agents.
8. Directors' and Officers' Liability, except as respects Condominium
Owners Associations, Public Officials, Volunteer Fire Companies,
Emergency Medical Services, and Religious Institutions.
9. Errors and Omissions Insurance except for School Boards (when the
Company's limits subject to this Contract do not exceed
$1,000,000), Public Officials, Auto Dealers, Employee Benefits,
Volunteer Fire Companies, Volunteer Ambulance Squads, Teachers and
full-time school professionals.
10. Kidnap, Ransom and Extortion Insurance; except as respects
dishonest and fraudulent acts by employees of the insured under
Fidelity bonds which may be currently or subsequently covered
hereunder.
11. Manufacture, production or refining of natural or artificial fuel,
gas, butane, propane or liquefied petroleum gases or gasoline.
12. Onshore and offshore gas and oil drilling operations.
13. Railroad operations, including street railways, excepting side
track agreement coverages.
14. All underground mining operations.
Effective: January 1, 1996 4 of 32
3645-16/01
PAGE
15. Aircraft or airports as respects coverage for all liability arising
out of ownership, maintenance or use of any aircraft or flight
operations.
16. Tunnel construction more than 50 feet in length.
17. Working or navigation of any vessel exceeding 25 tons or 100 feet
in length.
18. Manufacture of fireworks, fuses, nitroglycerine, celluloid and
pyroxylin.
19. Ocean Marine business and all forms of legal liability arising out
of the operations or navigation of ships or vessels, except as
respects yachts.
20. Pollution Liability losses including Automobile Liability related
to hauling of hazardous or waste material except as relates to
environmental coverage required by law.
21. Asbestos, defined as follows:
Bodily injury (including occupational disease) and/or property
damage liability arising from the manufacture, removal,
installation, storage, mining, handling or transportation of
asbestos if the insured's operations, at the time of policy
issuance, present a known asbestos exposure; however, this
exclusion shall not apply to the removal, installation, storage,
handling or transportation of asbestos if such removal,
installation, storage, handling or transportation is incidental to
the insured's overall operations.
The term "incidental", as used in this exclusion, is intended to
recognize the fact that certain insureds (such as, but not limited
to, plumbing, carpentry, etc. contractors) will infrequently, but
regularly encounter asbestos within the scope of their operations
even though their operations as such, do not involve the
manufacture, removal, installation, storage, mining, handling or
transportation of asbestos. This exclusion does not apply to such
"incidental" operations.
22. Tobacco related claims.
D. As respects Workers' Compensation:
The exclusions stipulated in Section C. above and, in addition, the
following risks:
1. U.S. L & H and Jones Act, unless there is an incidental exposure to
such operations;
2. Construction and/or maintenance of coffer dams;
3. Operation of dry docks.
E. The exclusions set forth in Sections B., C. and D. shall not apply to
risks regularly engaged in other operations which involve only
incidental operations in any such exclusions.
Effective: January 1, 1996 5 of 32
3645-16/01
PAGE
F. Pools, Associations and Syndicates. Where the Company is required by
any regulatory authority to participate in any Assigned Risk Plan or
similar mandatory coverage plan covering a class or operation otherwise
excluded hereunder, the exclusion(s) shall not apply.
G. Liability excluded under the provisions of the following Nuclear Clauses
attaching to and forming a part of this Contract:
1. Nuclear Incident Exclusion Clause - Liability - Reinsurance -
U.S.A.;
2. Nuclear Incident Exclusion Clause - Liability - Reinsurance -
Canada;
3. Nuclear Incident Exclusion Clause - Physical Damage and Liability -
(Boiler and Machinery Policies) - Reinsurance - U.S.A.;
4. Nuclear Incident Exclusion Clause - Physical Damage and Liability -
(Boiler and Machinery Policies) - Reinsurance - Canada;
5. Nuclear Energy Risks Exclusion Clause (Reinsurance) (1994)
(Worldwide excluding U.S.A. & Canada).
H. All liability of the Company arising by contract, operation of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency Fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, howsoever denominated, established or governed, which
provides for any assessment of or payment or assumption by the Company
of part or all of any claim, debt, charge, fee, or other obligation of
an insurer, or its successors or assigns, which has been declared by any
competent authority to be insolvent, or which is otherwise deemed unable
to meet any claim, debt, charge, fee or other obligation in whole or in
part.
I. Financial Guarantee and Insolvency.
ARTICLE 5
---------
REINSURING CLAUSE
- -----------------
As respects the Ultimate Net Loss, as defined in Article 11, Ultimate Net
Loss, of the Company arising out of each Loss Occurrence, as defined in
Article 6, Definitions, covered hereunder on which the Company has paid or
advanced, or agreed to pay or advance, or becomes liable to pay to or on
behalf of its insured(s) or reinsured(s), an amount exceeding $5,000,000
Ultimate Net Loss, the Reinsurers shall pay or be liable to pay to the
Company the amount the excess of $5,000,000 Ultimate Net Loss in respect of
each Loss Occurrence, but the sum recoverable hereunder shall not exceed
$10,000,000 in respect of each such Loss Occurrence.
In respect of Occupational or other diseases and Cumulative Injury loss
- -----------------------------------------------------------------------
Effective: January 1, 1996 6 of 32
3645-16/01
PAGE
The Reinsurers will pay to the Company in respect of loss or losses, on
business the subject matter hereof, the excess of the amount of
$5,000,000 of Aggregate net loss any one Policy Year, both as defined in
Article 6, Definitions, for each insured sustained by the Company
resulting from occupational or other diseases or Cumulative Injury
losses suffered by any one or more employees of each insured provided
the loss to the Reinsurers hereunder shall not exceed $10,000,000 of
Aggregate net loss any one Policy Year covered hereunder for each
insured.
ARTICLE 6
---------
DEFINITIONS
- -----------
A. The term "Loss Occurrence", as used in this Contract, shall mean any one
disaster or casualty or accident or loss or series of disasters or
casualties or accidents or losses arising out of or caused by one event
except that:
1. As respects Property Damage Liability Insurance (other than
Automobile and Products but not excepting environmental coverage
required by law), said term shall also, subject to provisions (a)
and (b) below, be understood to mean loss or losses caused by a
series of operations, events or occurrences arising out of
operations at one specific site and which cannot be attributed to
any single one of such operations, events or occurrences, but
rather to the cumulative effect of the same. In assessing each and
every Loss Occurrence within the foregoing definition, it is
understood and agreed that:
(a) the series of operations, events or occurrences shall not
extend over a period longer than 12 consecutive months; and
(b) the Company may elect the date on which the period of not
exceeding 12 consecutive months shall commence and which will
be considered the date of loss for purposes of this Contract.
In the event that the series of operations, events or occurrences
extends over a period longer than 12 months, then each consecutive
period of 12 months, the first of which commences on the date
elected under provision (b) above, shall form the basis of claim
under this Contract.
2. As respects an occupational or other disease suffered by an
employee and for which the employer is liable, such occupational or
other disease shall be deemed a separate Loss Occurrence within the
meaning hereof. If the Company shall, within a Policy Year, as
defined in Section B. below, sustain a loss arising from
occupational or other disease(s) from the same common causative
agent suffered by more than one employee of one insured, such
losses shall be deemed to have arisen out of one Loss Occurrence,
and the date of loss for purposes of this Contract will be the
inception or anniversary date of the policy out of which the loss
arose. A loss as respects each employee
Effective: January 1, 1996 7 of 32
3645-16/01
PAGE
affected by an occupational or other disease shall be deemed to
have been sustained by the Company at the earlier of the date when
compensable disability of the employee commenced or the date
compensable medical attention commenced and at no other date.
3. As respects business when the cause of loss is the "neglect, error
or omission" of the insured, it is understood that such neglect,
error or omission shall be deemed to be a Loss Occurrence within
the meaning hereof. The date of such Loss Occurrence shall be the
date of loss as defined in the Company's original policy.
4. As respects Products Personal Injury and Products Property Damage
Liability Insurance, it is understood that injuries to all persons
and all damage to property of others occurring during a policy
period and proceeding from or traceable to the same causative
agency shall be deemed to have arisen out of one Loss Occurrence,
and the date of such Loss Occurrence shall be deemed to be the
commencement date of the policy period. For the purposes of this
provision, each annual period of a policy which continues in force
for more than one year shall be deemed to be a separate policy
period. The word "injuries", as used in this paragraph, includes
but is not limited to infection, contagion, poisoning or
contamination.
B. "Policy year" shall mean each separate original policy period of not
exceeding twelve months commencing at the inception, anniversary or
renewal date as of and from January1,1996.
C. "Aggregate" shall mean Ultimate Net Loss, as defined in Article 11,
Ultimate Net Loss, occurring in the aggregate during any one Policy
Year, as defined in Section B. above.
D. The term "Gross Net Earned Premium Income" shall mean gross earned
premiums, less return premiums, cancellations and premiums paid for
reinsurances, recoveries under which would inure to the benefit of the
Reinsurers under this Contract.
ARTICLE 7
---------
WARRANTIES
- ----------
A. It is warranted that the Company shall retain net for its own account
the primary $500,000 for Monoline General Liability, Comprehensive
General Liability, Commercial Multi-Line Package policies, and Personal
Multi-Line Package policies; $500,000 for Workers' Compensation,
Commercial Automobile Liability, and Personal Automobile Liability;
$500,000 for Personal Umbrella policies; and $100,000 for Commercial
Umbrella policies.
B. The maximum per person contribution to the Ultimate Net Loss, as defined
in Article 11, Ultimate Net Loss, with respect to Section 1 and Section
2 of Workers' Compensation business, including Statutory and Voluntary
Compensation, and statutory benefits payable under the Longshore and
Harbor Workers' Compensation Act, Jones Act and Federal
Effective: January 1, 1996 8 of 32
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Employers' Liability Act is $10,000,000 any one Loss Occurrence, as
defined in Article 6, Definitions.
C. The maximum amount of net (being net of facultative) liability each
policy written by the Company and subject to this Contract shall be as
follows:
1. Automobile Bodily Injury Liability $2,000,000
2. Personal or Bodily Injury Liability $2,000,000
(other than Automobile)
3. Property Damage Liability $1,000,000
(Automobile and other than Automobile)
4. Combined Single Limit Bodily Injury Liability $2,000,000
and Property Damage Liability policies
5. Collision Damage $2,000,000
6. Personal Umbrella Liability $5,000,000
7. Commercial Umbrella Liability $5,000,000
Notwithstanding the foregoing, Personal Injury Protection benefits under any
"No-fault" Auto policy are not subject to the above limitations.
ARTICLE 8
---------
PREMIUM
- -------
A. The Company shall pay to the Reinsurers a reinsurance deposit premium of
$874,000, payable in installments of $218,500 at January 1, April 1,
July 1 and October 1, 1996.
B. As soon as practicable after the expiration of this Contract, the
Company shall furnish to the Reinsurers a statement of the actual
reinsurance premium due the Reinsurers and the reinsurance deposit
premium shall be adjusted at a rate of 0.173% of the Company's Gross Net
Earned Premium Income, as defined in Article 6, Definitions, accounted
for by the Company during the term of this Contract, on all business
which is the subject matter of this Contract. However, in no event
shall the final adjusted reinsurance premium be less than the minimum
premium of $874,000.
Effective: January 1, 1996 9 of 32
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ARTICLE 9
---------
REINSTATEMENT OF LIMIT
- ----------------------
Each loss hereon reduces the amount of indemnity provided under this Contract
by the amount paid. Any amount so exhausted shall be automatically
reinstated from the time of the Loss Occurrence, as defined in Article 6,
Definitions.
The reinsurance limit provided in this Contract, as outlined in Article 5,
Reinsuring Clause, is subject to two (2) reinstatements. The reinstated
limits are in addition to the initial limit of this Contract.
The first amount shall be reinstated without payment of additional premium.
For the second amount so reinstated, the Company agrees to pay an additional
premium calculated at pro rata of the annual premium as respects the fraction
of indemnity exhausted and 100% of the annual premium regardless of the
unexpired term of this Contract. Nevertheless, the Reinsurers' liability
shall not exceed $10,000,000 with respect to any one Loss Occurrence, and
shall not exceed $30,000,000 with respect to all losses arising during the
term of this Contract.
Reinstatement premiums are to be paid immediately after the claim to this
Contract has been paid.
ARTICLE 10
----------
NET RETAINED LINES
- ------------------
This Contract applies only to that portion of any insurance, reinsurance or
any Extra Contractual Obligations, as defined in Article 13, Extra
Contractual Obligations, which the Company retains net for its own account,
except as otherwise provided for in Article 11, Ultimate Net Loss. In
calculating the amount of any loss hereunder and also in computing the amount
or amounts in excess of which this Contract attaches, only loss or losses in
respect of that portion of any insurance, reinsurance or any Extra
Contractual Obligations which the Company retains net for its own account
shall be included.
The amount of the Reinsurers' liability hereunder in respect to any loss or
losses shall not be increased by reason of the inability of the Company to
collect from any other reinsurers whether specific or general any amounts
which may have become due from them whether such inability arises from the
insolvency of such other reinsurers or otherwise.
Effective: January 1, 1996 10 of 32
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ARTICLE 11
----------
ULTIMATE NET LOSS
- -----------------
The words "Ultimate Net Loss", mentioned in this Contract, shall mean the
actual loss paid or payable by the Company, and 90% Extra Contractual
Obligations, as defined in Article 13, Extra Contractual Obligations, and
losses in excess of original policy limits, as defined in Article 12, Excess
of Original Policy Limits, such loss to include expenses of litigation, if
any, and all other loss adjustment expenses of the Company, which include all
expenses arising from Declaratory Judgment Actions incurred in the
investigation adjustment, defense and litigation of claims under the terms of
and allocated to policies subject to this Contract (including a pro rata
share of salaries and expenses of the Company's employees including staff
counsel according to the time occupied in adjusting such loss and expenses of
the Company's officials incurred in connection with the loss but salaries of
officials and any office expenses of the Company shall not be included);
salvages and recoveries including recoveries under all other reinsurances
whether collectible or not are to be first deducted from such loss to arrive
at the amount of liability, if any, attaching hereunder. Nothing, however,
in this Article shall be construed as meaning that losses are not recoverable
hereunder until the Ultimate Net Loss to the Company has been ascertained.
The Company shall retain the right to purchase excess of loss reinsurance
below the retention of this Contract. Recoveries from excess of loss
reinsurance shall inure to the sole benefit of the Company and any recoveries
from this excess of loss reinsurance shall be disregarded in computing the
Company's Ultimate Net Loss applicable to this Contract.
All salvages, recoveries and payments recovered or received subsequent to a
loss settlement under this Contract shall be applied as if recovered or
received prior to the said settlement and all necessary adjustments shall be
made by the parties hereto.
Whenever the Company issues a lost instrument bond or a lost instrument
letter of indemnity, for salvage purposes or in lieu of loss payments under
its bond or policy, the Reinsurers agree to accept liability under such bond
or letter of indemnity in accordance with the terms of this Contract.
ARTICLE 12
----------
EXCESS OF ORIGINAL POLICY LIMITS
- --------------------------------
(Third Party Liability Business Only)
- -------------------------------------
This Contract shall protect the Company, within the limits hereof, in
connection with Ultimate Net Loss, as defined in Article 11, Ultimate Net
Loss, in excess of the limit of its original policy, such loss in excess of
the limit having been incurred because of failure by it to settle within the
policy limit or by reason of alleged or actual negligence, fraud or bad faith
in rejecting an offer of
Effective: January 1, 1996 11 of 32
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settlement or in the preparation of the defense or in the trial of any action
against its insured or reinsured or in the preparation or prosecution of an
appeal consequent upon such action.
However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a Corporate Officer of the
Company acting individually or collectively or in collusion with any
individual or corporation or any other organization or party involved in the
presentation, defense or settlement of any claim covered hereunder.
For the purposes of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original policy.
If any provision of this Article shall be rendered illegal or unenforceable
by the law, regulations, or public policy of any state, such provision shall
be considered void in such state, but this shall not affect the validity or
enforceability of any other provision of this Article, or the enforceability
of such provision in any other jurisdiction.
ARTICLE 13
----------
EXTRA CONTRACTUAL OBLIGATIONS
- -----------------------------
This Contract shall protect the Company, within the limits hereof, where the
Ultimate Net Loss, as defined in Article 11, Ultimate Net Loss, includes any
Extra Contractual Obligations. "Extra Contractual Obligations" are defined
as those liabilities not covered under any other provision of this Contract
and which arise from the handling of any claim on business covered hereunder,
such liabilities arising because of, but not limited to, the following:
failure by the Company to settle within the policy limit, or by reason of
alleged or actual negligence, fraud or bad faith in rejecting an offer of
settlement or in the preparation of the defense or in the trial of any action
against its insured or reinsured or in the preparation or prosecution of an
appeal consequent upon such action.
The date on which any Extra Contractual Obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original loss
occurrence.
Coverage provided under this Contract for Extra Contractual Obligations shall
be excess over coverage provided under any applicable in force claims made
Errors and Omissions insurance policy.
However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a Corporate Officer of the
Company acting individually or collectively or in collusion with any
individual or corporation or any other organization or party involved in the
presentation, defense or settlement of any claim covered hereunder.
Effective: January 1, 1996 12 of 32
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If any provision of this Article shall be rendered illegal or unenforceable
by the law, regulations, or public policy of any state, such provision shall
be considered void in such state, but this shall not affect the validity or
enforceability of any other provision of this Article, or the enforceability
of such provision in any other jurisdiction.
ARTICLE 14
----------
NOTICE OF LOSS AND LOSS SETTLEMENTS
- ------------------------------------
The Company shall give notice to the Reinsurers, as soon as reasonably
practicable, of any occurrence which results in or appears to be of serious
enough nature as probably to result in a loss involving this Contract, and
the Company shall keep the Reinsurers advised of all subsequent developments
in connection therewith.
The Reinsurers agree to abide by the loss settlements of the Company, such
settlements to be considered as satisfactory proof of loss. Amounts falling
to the share of the Reinsurers shall be immediately payable to the Company by
them upon reasonable evidence of the amount paid or to be paid by the Company
being presented to the Reinsurers by the Company.
ARTICLE 15
----------
REINSURANCE TAX
- ---------------
In consideration of the terms under which this Contract is issued, the
Company undertakes not to claim any deduction of the premium hereon when
making Canadian tax returns or when making tax returns, other than Income or
Profits Tax returns, to any state or territory of the United States of
America or to the District of Columbia.
ARTICLE 16
----------
ACCESS TO RECORDS
- -----------------
The Reinsurers or their duly designated representatives shall have access to
the books and records of the Company at all reasonable times for the purpose
of obtaining information concerning this Contract or the subject matter
thereof.
ARTICLE 17
----------
ARBITRATION
- -----------
As a precedent to any right of action hereunder, if any dispute shall arise
between the parties to this Contract with reference to the interpretation of
this Contract or their rights with respect to any transaction involved,
whether such dispute arises before or after termination of this Contract,
Effective: January 1, 1996 13 of 32
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such dispute, upon the written request of either party, shall be submitted to
three arbitrators, one to be chosen by each party, and the third by the two
so chosen. If either party refuses or neglects to appoint an arbitrator
within thirty days after the receipt of written notice from the other party
requesting it to do so, the requesting party may appoint two arbitrators. If
the two arbitrators fail to agree in the selection of a third arbitrator
within thirty days of their appointment, each of them shall name three, of
whom the other shall decline two and the decision shall be made by drawing
lots. All arbitrators shall be executive officers of insurance or
reinsurance companies or Underwriters at Lloyd's, London not under the
control of either party to this Contract.
The arbitrators shall interpret this Contract as an honorable engagement and
not as merely a legal obligation; they are relieved of all judicial
formalities and may abstain from following the strict rules of law, and they
shall make their award with a view to effecting the general purpose of this
Contract in a reasonable manner rather than in accordance with a literal
interpretation of the language. Each party shall submit its case to its
arbitrator within thirty days of the appointment of the third arbitrator.
The decision in writing of any two arbitrators, when filed with the parties
hereto, shall be final and binding on both parties. Judgement may be entered
upon the award of the board in any court having jurisdiction thereof. The
expense of the arbitrators and of the arbitration shall be equally divided
between the two parties. Said arbitration shall take place in the city in
which the Company's Head Office is located unless some other place is
mutually agreed upon by the parties to this Contract.
ARTICLE 18
----------
CURRENCY
- --------
Wherever the word "dollars" or the sign "$" appears in this Contract, it
shall mean United States dollars.
For the purpose of this Contract, transactions and settlements on policies
written or assumed by the Company in other than United States currency shall
be converted into United States dollars at the rates of exchange at which
they are entered in the Company's books at its head office.
ARTICLE 19
----------
SERVICE OF SUIT
- ---------------
(This Article applies only to those Reinsurers not domiciled in the United
States of America, and/or not authorized in any state, territory and/or
district of the United States where authorization is required by insurance
regulatory authorities.)
Effective: January 1, 1996 14 of 32
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PAGE
It is agreed that in the event of the failure of the Reinsurers to pay any
amount claimed to be due under this Contract, the Reinsurers, at the request
of the Company, will submit to the jurisdiction of any court of competent
jurisdiction within the United States of America and will comply with all
requirements necessary to give such court jurisdiction; and all matters
arising hereunder shall be determined in accordance with the law and practice
of such court. Nothing in this Article constitutes or should be understood to
constitute a waiver of the Reinsurers' 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 Mendes and Mount, 750
Seventh Avenue, New York, New York 10019-6879 (hereinafter, "agent for
service of process") and in any suit instituted against any Reinsurer(s) upon
this Contract, the Reinsurer(s) will abide by the final decision of such
court or of any appellate court in the event of an appeal.
The above named are authorized and directed to accept service of process on
behalf of the Reinsurers in any such suit and/or upon the request of the
Company to give a written undertaking to the Company that the agent for
service of process will enter a general appearance on behalf of the
Reinsurers in the event such a suit shall be instituted.
Further, pursuant to any statute of any state, territory or district of the
United States of America which makes provision therefor, the Reinsurers
hereby designate the Superintendent, Commissioner or Director of Insurance or
other officer specified for that purpose in the statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be
served any lawful process in any action, suit or proceeding instituted by or
on behalf of the Company or any beneficiary hereunder arising out of this
Contract and hereby designate the agent for service of process as the firm to
whom the said officer is authorized to mail such process or a true copy
thereof.
ARTICLE 20
----------
FEDERAL EXCISE TAX
- ------------------
(This Article applies only to those Reinsurers excepting Reinsurers at
Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who
are domiciled outside the United States of America.)
The Reinsurers have agreed to allow for the purpose of paying the statutorily
prescribed Federal Excise Tax of the premium payable hereon to the extent
such premium is subject to Federal Excise Tax.
Effective: January 1, 1996 15 of 32
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PAGE
In the event of any return of premium becoming due hereunder, the Reinsurers
will deduct the statutorily prescribed percentage from the amount of the
return and the Company or its agent should take steps to recover the Tax from
the U.S. Government.
ARTICLE 21
----------
LOSS RESERVES
- -------------
(This Article applies to those Reinsurers who do not qualify for credit by
any state or any other governmental authority having jurisdiction over the
Company's loss reserves.)
A: Where a Letter of Credit Trust Agreement is used, the following clause
shall apply:
It is agreed that when the Company files with the Insurance Department
or establishes reserves for claims covered hereunder, as required by
law, the Company will forward to the Reinsurers a statement showing the
proportion of such loss reserves which is applicable to the Reinsurers.
The Reinsurers hereby agree to apply for and secure delivery to the
Company of a clean, irrevocable and unconditional Letter of Credit, with
a minimum term of one year, that is issued or confirmed, and presentable
and payable in the United States by any bank or trust company, and is in
a format acceptable to the governmental authority having jurisdiction
over the Company's loss reserves in an amount equal to the Reinsurers'
proportion of said loss reserves.
The Company and the Reinsurers agree that such Letter of Credit will be
subject to the terms of a separate Letter of Credit Trust Agreement, and
that said trust agreement shall be in a form acceptable to the
governmental authority having jurisdiction over the Company's loss
reserves.
The designated bank shall have no responsibility whatsoever in
connection with the propriety of withdrawals made by the Company or the
disposition of funds withdrawn, except to see that withdrawals are made
only upon the order of properly authorized representatives of the
Company.
B: Where a Letter of Credit Trust Agreement is not used, the following
clause shall apply:
It is agreed that when the Company files with the Insurance Department
or establishes reserves for claims covered under this Contract, as
required by law, the Company will forward to the Reinsurers a statement
showing the proportion of such loss reserves which is applicable to the
Reinsurers. The Reinsurers hereby agree to apply for and secure
delivery to the Company of a clean, irrevocable and unconditional Letter
of Credit, with a minimum term of one year, that is issued or confirmed,
and presentable and payable in the United States by any bank or trust
company, and is in a format acceptable to the governmental authority
having jurisdiction over the Company's loss reserves in an amount equal
to the Reinsurers' proportion of said loss reserves.
Effective: January 1, 1996 16 of 32
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PAGE
The Company and the Reinsurers agree that the Letter of Credit provided
by the Reinsurers under this provision may be drawn upon at any time,
notwithstanding any other provisions in this Contract, and be utilized
by the Company or any successor by operation of law of the Company,
including, without limitation, any liquidator, rehabilitator, receiver
or conservator of such insurer for the following purposes:
1. to reimburse the Company for the Reinsurers' share of surrenders
and benefits or losses paid by the Company under the terms and
provisions of the policies reinsured under this Contract,
2. to fund an account with the Company in an amount at least equal to
the deduction, for reinsurance ceded, from the Company's
liabilities for policies ceded under this Contract. Such amount
shall include, but not be limited to, amounts for policy reserves,
reserves for claims and losses incurred (including losses incurred
but not reported), and loss adjustment expenses,
3. to pay any other amounts the Company claims are due under this
Contract,
4. to return any amounts drawn down on Letters of Credit in excess of
the actual amounts required for 1. and 2. above, or in case of 3.
above, any amounts which are subsequently determined not to be due.
All of the foregoing should be applied without diminution because of
insolvency on the part of the Company or the Reinsurers.
The designated bank shall have no responsibility whatsoever in
connection with the propriety of withdrawals made by the Company or the
disposition of funds withdrawn, except to see that withdrawals are made
only upon the order of properly authorized representatives of the
Company.
ARCTICLE 22
-----------
INDEMNIFICATION AND ERRORS AND OMISSIONS
- ----------------------------------------
Any recitals in this Contract of the terms and provisions of any original
insurance or reinsurance are merely descriptive. The Reinsurers are
reinsuring, to the amount herein provided, the obligations of the Company
under any original insurance or reinsurance. The Company shall be the sole
judge as to:
A. what shall constitute a claim or loss covered under any original
insurance or reinsurance of the Company;
B. the Company's liability thereunder;
C. the amount or amounts which it shall be proper for the Company to
pay thereunder.
Effective: January 1, 1996 17 of 32
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PAGE
The Reinsurers shall be bound by the judgement of the Company as to the
obligation(s) and liability(ies) of the Company under any original insurance
or reinsurance, subject to the terms and conditions of this Contract.
Any inadvertent error, omission or delay in complying with the terms and
conditions of this Contract shall not be held to relieve either party hereto
from any liability which would attach to it hereunder if such error, omission
or delay had not been made, provided such error, omission or delay is
rectified immediately upon discovery.
ARTICLE 23
----------
INSOLVENCY
- ----------
In the event of the insolvency of the Company, this reinsurance shall be
payable directly to the Company, or to its liquidator, receiver, conservator
or statutory successor on the basis of the liability of the Company without
diminution because of the insolvency of the Company or because the
liquidator, receiver, conservator or statutory successor of the Company has
failed to pay all or a portion of any claim. It is agreed, however, that the
liquidator, receiver, conservator or statutory successor of the Company shall
give written notice to the Reinsurers of the pendency of a claim against the
Company indicating the policy or bond reinsured, which claim would involve a
possible liability on the part of the Reinsurers within a reasonable time
after such claim is filed in the conservation or liquidation proceeding or in
the receivership, and that during the pendency of such claim, the Reinsurers
may investigate such claim and interpose, at their own expense, in the
proceeding where such claim is to be adjudicated any defense or defenses that
they may deem available to the Company or its liquidator, receiver,
conservator or statutory successor. The expense thus incurred by the
Reinsurers shall be chargeable, subject to the approval of the court, against
the Company as part of the expense of conservation or liquidation to the
extent of a pro rata share of the benefit which may accrue to the Company
solely as a result of the defense undertaken by the Reinsurers.
Where two or more Reinsurers are involved in the same claim and a majority in
interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of the reinsurance Contract as
though such expense had been incurred by the Company.
As to all reinsurance made, ceded, renewed or otherwise becoming effective
under this Contract, the reinsurance shall be payable as set forth above by
the Reinsurers to the Company or to its liquidator, receiver, conservator or
statutory successor, except as provided by Sections 4118(a)(1)(A) and 1114(c)
of the New York Insurance Law or except (1) where the Contract specifically
provides another payee in the event of the insolvency of the Company, and (2)
where the Reinsurers, with the consent of the direct insured or insureds,
have assumed such policy obligations of the Company as direct obligations of
the Reinsurers to the payees under such policies and in substitution for the
obligations of the Company to such payees. Then, and in that event only, the
Company, with the prior approval of the certificate of assumption on New York
Effective: January 1, 1996 18 of 32
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risks by the Superintendent of Insurance of the State of New York, is
entirely released from its obligation and the Reinsurers pay any loss
directly to payees under such policy.
Should any party hereto be placed in rehabilitation or liquidation or should
a rehabilitator, liquidator, receiver, conservator or other person or entity
of similar capacity be appointed as respects such party, all amounts due any
of the parties hereto whether by reason of premiums, losses or otherwise
under this Contract or any other contract(s) of reinsurance heretofore or
hereafter entered into between the parties (whether or not any such
contract(s) be assumed or ceded) shall at all times be subject to the right
of offset at any time and from time to time, and upon the exercise of same,
only the net balance shall be due and payable in accordance with Section 7427
of the Insurance Law of the State of New York to the extent such statute or
any other applicable law, statute or regulation governing such offset shall
apply.
ARTICLE 24
----------
INTERMEDIARY
- ------------
Guy Carpenter & Company, Inc. is hereby recognized as the Intermediary
negotiating this Contract for all business hereunder. All communications
(including but not limited to notices, statement, premiums, return premiums,
commissions, taxes, losses, loss adjustment expenses, salvages, and loss
settlements) relating thereto shall be transmitted to the Company or the
Reinsurers through Guy Carpenter & Company, Inc., Two World Trade Center, New
York, New York 10048. Payments by the Company to the Intermediary shall be
deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to
the Intermediary shall be deemed to constitute payment to the Company only to
the extent that such payments are actually received by the Company.
Effective: January 1, 1996 19 of 32
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Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A.
- --------------------------------------------------------------------
(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 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.
Effective: January 1, 1996 20 of 32
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PAGE
(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 thereof, 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
Effective: January 1, 1996 21 of 32
3645-16/01
PAGE
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.
IV. As used in this endorsement:
"hazardous properties" include radioactive, toxic or explosive
properties; "nuclear material" means source material, special
nuclear material or byproduct material; "source material", "special
nuclear material", and "byproduct material" have the meanings given
them in the Atomic Energy Act of 1954 or in any law amendatory
thereof; "spent fuel" means any fuel element or fuel component,
solid or liquid, which has been used or exposed to radiation in a
nuclear reactor; "waste" means any waste material (1) containing
byproduct material other than the tailings or wastes produced by
the extraction or concentration of uranium or thorium from any ore
processed
Effective: January 1, 1996 22 of 32
3645-16/01
PAGE
primarily for its source material content and (2)resulting from the
operation by any person or organization of any nuclear facility
included under the first two paragraphs of the definition of
nuclear facility; "nuclear facility" means
(a) any nuclear reactor,
(b) any equipment or device designed or used for (1) separating
the isotopes of uranium or plutonium, (2) processing or
utilizing spent fuel, or (3) handling, processing or packaging
waste,
(c) any equipment or device used for the processing, fabricating
or alloying of special nuclear material if at any time the
total amount of such material in the custody of the insured at
the premises where such equipment or device is located
consists of or contains more than 25 grams of plutonium or
uranium 233 or any combination thereof, or more than 250 grams
of uranium 235,
(d) any structure, basin, excavation, premises or place prepared
or used for the storage or disposal of waste,
and includes the site on which any of the foregoing is located, all
operations conducted on such site and all premises used for such
operations; "nuclear reactor" means any apparatus designed or used
to sustain nuclear fission in a self-supporting chain reaction or
to contain a critical mass of fissionable material;
WITH RESPECT TO INJURY TO OR DESTRUCTION OF PROPERTY, THE WORD
"INJURY" OR "DESTRUCTION" 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 (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3) above
are not applicable to original liability policies of the Reassured in
Canada and that with respect to such policies this Clause shall be
deemed to include the Nuclear Energy Liability Exclusion Provisions
adopted by the Canadian Underwriters' Association or the Independent
Insurance Conference of Canada.
Effective: January 1, 1996 23 of 32
3645-16/01
PAGE
- -----------------------------------------------------------------------------
*NOTE. The words printed in "ALL CAPITAL LETTERS" 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.
- -----------------------------------------------------------------------------
21/9/67
NMA 1590 (amended)
- -----------------------------------------------------------------------------
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
"Agreement" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
Effective: January 1, 1996 24 of 32
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PAGE
Nuclear Incident Exclusion Clause - Liability - Reinsurance - Canada
--------------------------------------------------------------------
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 agreed that for all purposes of this Reinsurance all the
original liability contracts of the Reassured, whether new, renewal or
replacement, of the following classes, namely,
Personal Liability,
Farmers Liability,
Storekeepers Liability,
which become effective on or after 31st December, 1984, shall be deemed
to include, from their inception dates and thereafter, the following
provision:-
Limited Exclusion Provision.
---------------------------
This Policy does not apply to bodily injury or property damage with
respect to which an Insured is also insured under a contract of nuclear
energy liability insurance (whether the Insured is unnamed in such
contract and whether or not it is legally enforceable by the Insured)
issued by the Nuclear Insurance Association of Canada or any other group
or pool of insurers or would be an Insured under any such policy but for
its termination upon exhaustion of its limit of liability.
With respect to property, loss of use of such property shall be deemed
to be property damage.
3. Without in any way restricting the operation of paragraph 1 of this
clause it is agreed that for all purposes of this Reinsurance all the
original liability contracts of the Reassured, whether new, renewal or
replacement, of any class whatsoever (other than Personal Liability,
Farmers Liability, Storekeepers Liability or Automobile Liability
contracts), which become effective on or after 31st December, 1984,
shall be deemed to include, from their inception dates and thereafter,
the following provision:
Broad Exclusion Provision.
-------------------------
It is agreed that this Policy does not apply:
(a) to liability imposed by or arising under the Nuclear Liability
Act; nor
(b) to bodily injury or property damage with respect to which an
Insured under this policy is also insured under a contract of
nuclear energy liability insurance
Effective: January 1, 1996 25 of 32
3645-16/01
PAGE
(whether the Insured is unnamed in such contract and whether
or not it is legally enforceable by the Insured) issued by the
Nuclear Insurance Association of Canada or any other insurer
or group or pool of insurers or would be an Insured under any
such policy but for its termination upon exhaustion of its
limit of liability; nor
(c) to bodily injury or property damage resulting directly or
indirectly from the nuclear energy hazard arising from:
(i) the ownership, maintenance, operation or use of a nuclear
facility by or on behalf of an Insured;
(ii) the furnishing by an Insured of services, materials,
parts or equipment in connection with the planning,
construction, maintenance, operation or use of any
nuclear facility; and
(iii)the possession, consumption, use, handling, disposal or
transportation of fissionable substances, or of other
radioactive material (except radioactive isotopes, away
from a nuclear facility, which have reached the final
stage of fabrication so as to be usable for any
scientific, medical, agricultural, commercial or
industrial purpose) used, distributed, handled or sold by
an Insured.
As used in this Policy:
- ----------------------
1. The term "nuclear energy hazard" means the radioactive, toxic, explosive
or other hazardous properties of radioactive material;
2. The term "radioactive material" means uranium, thorium, plutonium,
neptunium, their respective derivatives and compounds, radioactive
isotopes of other elements and any other substances that the Atomic
Energy Control Board may, by regulation, designate as being prescribed
substances capable of releasing atomic energy, or as being requisite for
the production, use or application of atomic energy;
3. The term "nuclear facility" means:
(a) any apparatus designed or used to sustain nuclear fission in a
self-supporting chain reaction or to contain a critical mass of
plutonium, thorium and uranium or any one or more of them;
(b) any equipment or device designed or used for (i) separating the
isotopes of plutonium, thorium and uranium or any one or more of
them, (ii) processing or utilizing spent fuel, or (iii) handling,
processing or packaging waste;
(c) any equipment or device used for the processing, fabricating or
alloying of plutonium, thorium or uranium enriched in the isotope
uranium 233 or in the isotope uranium 235,
Effective: January 1, 1996 26 of 32
3645-16/01
PAGE
or any one or more of them if at any time the total amount of such
material in the custody of the Insured at the premises where such
equipment or device is located consists of or contains more than 25
grams of plutonium or uranium 233 or any combination thereof, or
more than 250 grams of uranium 235;
(d) any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste radioactive material;
and includes the site on which any of the foregoing is located, together
with all operations conducted thereon and all premises used for such
operations.
4. The term "fissionable substance" means any prescribed substance that is,
or from which can be obtained, a substance capable of releasing atomic
energy by nuclear fission.
5. With respect to property, loss of use of such property shall be deemed
to be property damage.
NMA 1979
(11/10/84)
- -----------------------------------------------------------------------------
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
"Agreement" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
Effective: January 1, 1996 27 of 32
3645-16/01
PAGE
Nuclear Incident Exclusion Clause - Physical Damage and Liability (Boiler
-------------------------------------------------------------------------
and Machinery Policies) - Reinsurance - U.S.A.
---------------------------------------------
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 original Boiler and Machinery Insurance or Reinsurance
contracts of the Reassured shall be deemed to include the following
provisions of this paragraph:
This Policy does not apply to "loss", whether it be direct or
indirect, proximate or remote
(a) from an Accident caused directly or indirectly by nuclear
reaction, nuclear radiation or radioactive contamination, all
whether controlled or uncontrolled; or
(b) from nuclear reaction, nuclear radiation or radioactive
contamination, all whether controlled or uncontrolled, caused
directly or indirectly by, contributed to or aggravated by an
Accident.
3. However, it is agreed that loss arising out of the use of Radioactive
Isotopes in any form is not hereby excluded from reinsurance protection.
- -----------------------------------------------------------------------------
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
"Agreement" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
23/6/58
NMA 1166
Effective: January 1, 1996 28 of 32
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PAGE
Nuclear Incident Exclusion Clause - Physical Damage and Liability (Boiler
-------------------------------------------------------------------------
and Machinery Policies) - Reinsurance - Canada
----------------------------------------------
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 original Boiler and Machinery Insurance or Reinsurance
contracts of the Reassured shall be deemed to include the following
provisions of this paragraph;
This Policy does not apply to loss, whether it be direct or
indirect, proximate or remote
(a) from an Accident caused directly or indirectly by nuclear
reaction, nuclear radiation or radioactive contamination, all
whether controlled or uncontrolled; or
(b) from nuclear reaction, nuclear radiation or radioactive
contamination, all whether controlled or uncontrolled, caused
directly or indirectly by, contributed to or aggravated by an
Accident.
3. However, it is agreed that loss arising out of the use of Radioactive
Isotopes in any form is not hereby excluded from reinsurance protection.
4. Without in any way restricting the operation of paragraph (1) hereof, it
is understood and agreed that policies issued by the Reassured effective
on or before 31st December, 1958, shall be free from the application of
the other provisions of this Clause until expiry date or 31st December,
1961, whichever first occurs, whereupon all the provisions of this
Clause shall apply.
- -----------------------------------------------------------------------------
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
"Agreement" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
29/10/59
NMA 1251
Effective: January 1, 1996 29 of 32
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PAGE
Nuclear Energy Risks Exclusion Clause (Reinsurance) (1994) (Worldwide
---------------------------------------------------------------------
Excluding U.S.A. and Canada)
----------------------------
This Agreement shall exclude Nuclear Energy Risks whether such risks are
written directly and/or by way of reinsurance and/or via Pools and/or
Associations.
For all purposes of this Agreement Nuclear Energy Risks shall mean all first
party and/or third party insurances or reinsurances (other than Workers'
Compensation and Employers' Liability) in respect of:
(I) All Property on the site of a nuclear power station.
Nuclear Reactors, reactor buildings and plant and equipment therein
on any site other than a nuclear power station.
(II) All Property, on any site (including but not limited to the sites
referred to in (I) above) used or having been used for:
(a) the generation of nuclear energy; or
(b) the Production, Use or Storage of Nuclear Material.
(III)Any other Property eligible for insurance by the relevant local
Nuclear Insurance Pool and/or Association but only to the extent of
the requirements of that local Pool and/or Association.
(IV) The supply of goods and services to any of the sites, described in
(I) to (III) above, unless such insurances or reinsurances shall
exclude the perils of irradiation and contamination by Nuclear
Material.
Except as undernoted, Nuclear Energy Risks shall not include:
(i) Any insurance or reinsurance in respect of the construction or
erection or installation or replacement or repair or maintenance or
decommissioning of Property as described in (I) to (III) above
(including contractors' plant and equipment);
(ii) Any Machinery Breakdown or other Engineering insurance or
reinsurance not coming within the scope of (i) above.
Provided always that such insurance or reinsurance shall exclude the perils
of irradiation and contamination by Nuclear Material.
However, the above exemption shall not extend to:
(1) The provision of any insurance or reinsurance whatsoever in respect
of:
Effective: January 1, 1996 30 of 32
3645-16/01
PAGE
(a) Nuclear Material;
(b) Any Property in the High Radioactivity Zone or Area of any
Nuclear Installation as from the introduction of Nuclear
Material or - for reactor installations - as from fuel loading
or first criticality where so agreed with the relevant local
Nuclear Insurance Pool and/or Association.
(2) The provision of any insurance or reinsurance for the undernoted
perils:
- fire, lightning, explosion;
- earthquake;
- aircraft and other aerial devices or
articles dropped therefrom;
- irradiation and radioactive contamination;
- any other peril insured by the relevant
local Nuclear Insurance Pool and/or Association;
in respect of any other Property not specified in (1) above which
directly involves the Production, Use or Storage of Nuclear
Material as from the introduction of Nuclear Material into such
Property.
Definitions
- -----------
"Nuclear Material" means:
(i) Nuclear fuel, other than natural uranium and depleted uranium,
capable of producing energy by a self-sustaining chain process
of nuclear fission outside a Nuclear Reactor, either alone or
in combination with some other material; and
(ii) Radioactive Products or Waste.
"Radioactive Products or Waste" means any radioactive material produced
in, or any material made radioactive by exposure to the radiation
incidental to the production or utilization of nuclear fuel, but does
not include radioisotopes which have reached the final stage of
fabrication so as to be usable for any scientific, medical,
agricultural, commercial or industrial purpose.
"Nuclear Installation" means:
(i) Any Nuclear Reactor;
(ii) Any factory using nuclear fuel for the production of Nuclear
Material, or any factory for the processing of Nuclear
Material, including any factory for the reprocessing of
irradiated nuclear fuel; and
Effective: January 1, 1996 31 of 32
3645-16/01
PAGE
(iii)Any facility where Nuclear Material is stored, other than
storage incidental to the carriage of such material.
"Nuclear Reactor" means any structure containing nuclear fuel in such an
arrangement that a self-sustaining chain process of nuclear fission can
occur therein without an additional source of neutrons.
"Production, Use or Storage of Nuclear Material" means the production,
manufacture, enrichment, conditioning, processing, reprocessing, use,
storage, handling and disposal of Nuclear Material.
"Property" shall mean all land, buildings, structures, plant, equipment,
vehicles, contents (including but not limited to liquids and gases) and
all materials of whatever description whether fixed or not.
"High Radioactivity Zone or Area" means:
(i) For nuclear power stations and Nuclear Reactors, the vessel or
structure which immediately contains the core (including its
supports and shrouding) and all the contents thereof, the fuel
elements, the control rods and the irradiated fuel store; and
(ii) For non-reactor Nuclear Installations, any area where the
level of radioactivity requires the provision of a biological
shield.
N.M.A. 1975(a)
April 1, 1994
- -----------------------------------------------------------------------------
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
"Agreement" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
Effective: January 1, 1996 32 of 32
3645-16/01
PAGE
SUMMARY OF CHANGES
------------------
to the
SELECTIVE INSURANCE GROUP
-------------------------
FIRST CASUALTY CATASTROPHE EXCESS OF LOSS PROGRAM
-------------------------------------------------
This Contract commencing at January 1, 1996 differs from the previous
Contract in the following manner:
1. Throughout the Contract, all dates, rates, and premium amounts have been
amended to reflect the terms of the firm order.
2. Throughout the Contract, all references to "Agreement", "Contract",
"Company", and "Reinsurers" have been amended to read "the Agreement",
"the Contract", "the Company", "the Reinsurers", and "the Subscribing
Reinsurer" (in the Interests and Liabilities Agreement), to correct
grammatical errors. Also, cross references to other Articles have been
added and editorial corrections (such as capitalization) have been made.
3. Throughout the Contract, all major sections and subsections have been
renamed to appear in the following order for the sake of consistency:
A., 1., (a), (i).
4. Preamble; Has been amended to follow the language contained in all
other Selective Insurance Group Contracts. The Company name has been
amended to delete any references to Charleston Insurance Company.
5. Article 1, Business and Territory Covered; The first sentence has been
amended to replace the phrase "This Contract shall indemnify..." with
the phrase "The Reinsurers shall indemnify".
6. Article 3, Extended Expiration; Has been amended to read "If this
Contract terminates" rather than "If this Contract shall terminate".
7. Article 4, Exclusions; Section G. has been amended for the sake of
clarity.
8. Article 5, Reinsuring Clause; The definitions of "Policy Year" and
"Aggregate" have been moved to Article 6.
9. Article 6, Definitions; Has been amended to include the definitions of
"Policy Year", "Aggregate" and "Gross Net Earned Premium Income".
10. Article 7, Warranties; Section C has been amended to read "net (being
net of facultative) liability each policy written by the Company" and
the phrase "in respect of each class of insurance" has been deleted, and
the maximum net liability for Commercial Umbrella Liability has been
amended to read "$5,000,000".
PAGE
11. Article 8, Premium; The definition of "Gross Net Earned Premium Income"
has been moved to Article 6.
12. Article 9, Reinstatement; This Article has been reworded to follow the
language of all other Selective Insurance Group Contracts.
13. Article 11, Ultimate Net Loss; The first paragraph has been amended to
include reference to coverage provided for losses in excess of original
policy limits, and the phrase "Company's field employees" has been
replaced with "Company's employees including staff counsel".
14. Article 14, Notice of Loss and Loss Settlements; This Article has been
reworded to follow the language of all other Selective Insurance Group
Contracts.
15. Article 19, Service of Suit; The zip code of Mendes and Mount has been
corrected.
16. Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A.;
minor editorial changes have been made to correctly reflect the language
contained in the London Market NMA 1590 (amended).
INTERESTS AND LIABILITIES AGREEMENT
(hereinafter referred to as the "Agreement")
to the
SECOND CASUALTY CATASTROPHE EXCESS OF LOSS
------------------------------------------
REINSURANCE CONTRACT
--------------------
(hereinafter referred to as the "Contract")
between
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
(hereinafter referred to either individually or collectively as the
"Company")
and
(hereinafter referred to as the "Subscribing Reinsurer")
It is mutually agreed by and between the Company on the one part and the
Subscribing Reinsurer on the other part that the Subscribing Reinsurer's
share in the interests and liabilities of the Reinsurers as set forth inthe
Contract, to which this Agreement is attached, shall be for %.
The share of the Subscribing Reinsurer in the interests and liabilities of
the Reinsurers in respect of said Contract shall be separate and apart from
the shares of such other subscribing reinsurers, if any, to said Contract.
The interests and liabilities of the Subscribing Reinsurer shall not be joint
with those of such other subscribing reinsurers and in no event shall the
Subscribing Reinsurer participate in the interests and liabilities of such
other subscribing reinsurers.
This Agreement shall become effective commencing 12:01 a.m., Eastern Standard
Time, January 1,1996, in respect of business in force at such date or
business incepting, renewing or having an anniversary date on and after such
date, and shall remain in effect until 12:01 a.m., Eastern Standard Time,
January 1,1997.
Effective: January 1, 1996
3645-16/02
PAGE
The interests and liabilities of the Subscribing Reinsurer therein may not be
changed, altered and amended unless such change, alteration and amendment is
evidenced by Endorsement to this Agreement executed by the Company and the
Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives this 12th day of
April, 1996.
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
/s/Peter Anderson Assistant Vice President
--------------
Peter Anderson
and on this day of , 199__.
Effective: January 1, 1996
3645-16/02
PAGE
SECOND CASUALTY CATASTROPHE EXCESS OF LOSS
------------------------------------------
REINSURANCE CONTRACT
--------------------
TABLE OF CONTENTS
-----------------
Article Page
------- ----
Preamble 1
1 Business and Territory Covered 1
2 Commencement and Termination 2
3 Extended Expiration 2
4 Third Party Rights 3
5 Exclusions 3
6 Reinsuring Clause 7
7 Definitions 7
8 Warranties 9
9 Premium 9
10 Reinstatement of Limit 10
11 Net Retained Lines 10
12 Ultimate Net Loss 11
13 Excess of Original Policy Limits 12
14 Extra Contractual Obligations 12
15 Notice of Loss and Loss Settlements 13
16 Reinsurance Tax 13
17 Access to Records 14
18 Arbitration 14
19 Currency 15
20 Service of Suit 15
21 Federal Excise Tax 16
22 Loss Reserves 16
23 Indemnification and Errors and Omissions 18
24 Insolvency 18
25 Intermediary 19
Attachments
- -----------
Nuclear Incident Exclusion Clause - Liability -
Reinsurance - U.S.A. 20
Nuclear Incident Exclusion Clause - Liability -
Reinsurance - Canada 25
Nuclear Incident Exclusion Clause - Physical Damage
and Liability (Boiler and Machinery Policies) -
Reinsurance - U.S.A. 28
Nuclear Incident Exclusion Clause - Physical Damage
and Liability (Boiler and Machinery Policies) -
Reinsurance - Canada 29
Nuclear Energy Risks Exclusion Clause (Reinsurance)
(1994) (Worldwide Excluding U.S.A. and Canada) 30
Effective: January 1, 1996
3645-16/02
PAGE
SECOND CASUALTY CATASTROPHE EXCESS OF LOSS
------------------------------------------
REINSURANCE CONTRACT
--------------------
(hereinafter referred to as the "Contract")
In consideration of the mutual covenants hereinafter contained and upon the
terms and conditions hereinafter set forth
VARIOUS INSURANCE AND/OR REINSURANCE COMPANIES
----------------------------------------------
AND/OR UNDERWRITING MEMBERS OF LLOYD'S
--------------------------------------
(hereinafter referred to as the "Reinsurers")
one of whom is
THE "SUBSCRIBING REINSURER" WHOSE NAME
--------------------------------------
APPEARS ON THE INTERESTS AND LIABILITIES AGREEMENT
--------------------------------------------------
ATTACHING TO AND FORMING A PART OF THIS CONTRACT
------------------------------------------------
does hereby indemnify, as herein provided and specified,
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
(hereinafter referred to either individually or collectively as the
"Company")
ARTICLE 1
---------
BUSINESS AND TERRITORY COVERED
- ------------------------------
The Reinsurers shall indemnify the Company for the liability which may accrue
to the Company as a result of any damage, injury, disease, or loss covered
which takes place during the term of this Contract, whether covered under
policies, bonds, binders, contracts of insurance or reinsurance or under
other evidences of liability, whether oral or written, covering anywhere in
the world (hereinafter referred to as "policy" or "policies") heretofore or
hereafter issued, whether written separately or as part of any Multiple Peril
or similar types of policies and classified by the Company as Casualty
business including but not limited to:
A. Homeowners and Farmowners.
B. Business Owners.
Effective: January 1, 1996 1 of 32
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C. Commercial Multi-Peril (Section II only).
D. Workers' Compensation including Employers' Liability.
E. Automobile P.I.P. including Death and Dismemberment Medical
Payments.
F. Automobile Bodily Injury and Property Damage.
G. Collision Damage.
H. Personal and/or Bodily Injury including Medical Payments.
I. Property Damage Liability.
J. Automobile Liability.
K. General Liability.
L. Umbrella Liability.
ARTICLE 2
---------
COMMENCEMENT AND TERMINATION
- ----------------------------
This Contract shall become effective commencing 12:01 a.m., Eastern Standard
Time, January 1,1996, in respect of business in force at such date or
business incepting, renewing or having an anniversary date on and after such
date, and shall remain in effect until 12:01 a.m., Eastern Standard Time,
January 1,1997.
If any law or regulation of the federal, state or local government of any
jurisdiction in which the Company is doing business shall render illegal the
arrangements made in this Contract, the Contract can be terminated
immediately, insofar as it applies to such jurisdiction, by the Company
giving notice to the Reinsurers to such effect.
ARTICLE 3
---------
EXTENDED EXPIRATION
- -------------------
If this Contract terminates while a loss covered hereunder is in progress, it
is agreed that, subject to the other conditions of this Contract, the Reinsurers
shall indemnify the Company as if the entire loss had occurred during the term
of this Contract, provided the loss covered hereunder started before the time
of termination.
Effective: January 1, 1996 2 of 32
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ARTICLE 4
---------
THIRD PARTY RIGHTS
- ------------------
This Contract is solely between the Company and the Reinsurers, and in no
instance shall any other party have any rights under this Contract except as
expressly provided otherwise in Article 24, Insolvency.
ARTICLE 5
---------
EXCLUSIONS
- ----------
This Contract does not apply to and specifically excludes:
A. As respects Burglary and Theft:
1. Jewelers' Block policies;
2. Personal Property Floater policies;
3. Homeowners' and Farmowners' policies.
B. As respects Personal Injury Liability:
Advertisers', Broadcasters', and Telecasters' Liability.
C. As respects all other business covered hereunder:
1. Scheduled buses operating as common carriers.
2. Vehicles used by truckmen regularly engaged in the interstate
transportation of goods for others and operating beyond a 250 mile
radius but not to include intrastate transportation.
3. Regular retail newspaper delivery in towns of 500,000 population or
more.
4. Amusement parks or amusement devices when written as such.
5. Concerns engaged in the demolition of buildings more than three
stories in height, or vessels.
6. Products Liability for policies covering:
(a) Ethical Drugs;
(b) Proprietary Drugs;
Effective: January 1, 1996 3 of 32
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(c) Chemicals, other than Consumer Products;
(d) Beauty Preparations;
(e) Aviation Parts;
(f) Volatile Oils and Insecticides.
7. Professional Liability except as respects:
(a) Morticians;
(b) Druggists;
(c) Pastors;
(d) Printers;
(e) Veterinarians;
(f) Barbers and Beauticians;
(g) Optometrists, Opticians and Audiologists;
(h) Employee Benefits Administrators working for insureds whose
principal business is not the administration of employee
benefits for others;
(i) Volunteer Fire Companies and Rescue Squads for incidental
medical malpractice;
(j) Teachers and full-time school professionals;
(k) Cemeteries;
(l) Real Estate/Insurance Agents.
8. Directors' and Officers' Liability, except as respects Condominium
Owners Associations, Public Officials, Volunteer Fire Companies,
Emergency Medical Services, and Religious Institutions.
9. Errors and Omissions Insurance except for School Boards (when the
Company's limits subject to this Contract do not exceed
$1,000,000), Public Officials, Auto Dealers, Employee Benefits,
Volunteer Fire Companies, Volunteer Ambulance Squads, Teachers and
full-time school professionals.
10. Kidnap, Ransom and Extortion Insurance; except as respects
dishonest and fraudulent acts by employees of the insured under
Fidelity bonds which may be currently or subsequently covered
hereunder.
Effective: January 1, 1996 4 of 32
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11. Manufacture, production or refining of natural or artificial fuel,
gas, butane, propane or liquefied petroleum gases or gasoline.
12. Onshore and offshore gas and oil drilling operations.
13. Railroad operations, including street railways, excepting side
track agreement coverages.
14. All underground mining operations.
15. Aircraft or airports as respects coverage for all liability arising
out of ownership, maintenance or use of any aircraft or flight
operations.
16. Tunnel construction more than 50 feet in length.
17. Working or navigation of any vessel exceeding 25 tons or 100 feet
in length.
18. Manufacture of fireworks, fuses, nitroglycerine, celluloid and
pyroxylin.
19. Ocean Marine business and all forms of legal liability arising out
of the operations or navigation of ships or vessels, except as
respects yachts.
20. Pollution Liability losses including Automobile Liability related
to hauling of hazardous or waste material except as relates to
environmental coverage required by law.
21. Asbestos, defined as follows:
Bodily injury (including occupational disease) and/or property
damage liability arising from the manufacture, removal,
installation, storage, mining, handling or transportation of
asbestos if the insured's operations, at the time of policy
issuance, present a known asbestos exposure; however, this
exclusion shall not apply to the removal, installation, storage,
handling or transportation of asbestos if such removal,
installation, storage, handling or transportation is incidental to
the insured's overall operations.
The term "incidental" as used in this exclusion, is intended to
recognize the fact that certain insureds (such as, but not limited
to, plumbing, carpentry, etc. contractors) will infrequently, but
regularly encounter asbestos within the scope of their operations
even though their operations as such, do not involve the
manufacture, removal, installation, storage, mining, handling or
transportation of asbestos. This exclusion does not apply to such
"incidental" operations.
22. Tobacco related claims.
D. As respects Workers' Compensation:
Effective: January 1, 1996 5 of 32
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The exclusions stipulated in Section C. above and, in addition, the
following risks:
1. U.S. L & H and Jones Act, unless there is an incidental exposure to
such operations;
2. Construction and/or maintenance of coffer dams;
3. Operation of dry docks.
E. The exclusions set forth in Sections B., C. and D. shall not apply to
risks regularly engaged in other operations which involve only
incidental operations in any such exclusions.
F. Pools, Associations and Syndicates. Where the Company is required by
any regulatory authority to participate in any Assigned Risk Plan or
similar mandatory coverage plan covering a class or operation otherwise
excluded hereunder, the exclusion(s) shall not apply.
G. Liability excluded under the provisions of the following Nuclear Clauses
attaching to and forming a part of this Contract:
1. Nuclear Incident Exclusion Clause - Liability - Reinsurance -
U.S.A.;
2. Nuclear Incident Exclusion Clause - Liability - Reinsurance -
Canada;
3. Nuclear Incident Exclusion Clause - Physical Damage and Liability -
(Boiler and Machinery Policies) - Reinsurance - U.S.A.;
4. Nuclear Incident Exclusion Clause - Physical Damage and Liability -
(Boiler and Machinery Policies) - Reinsurance - Canada;
5. Nuclear Energy Risks Exclusion Clause (Reinsurance) (1994)
(Worldwide excluding U.S.A. & Canada).
H. All liability of the Company arising by contract, operation of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency Fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, howsoever denominated, established or governed, which
provides for any assessment of or payment or assumption by the Company
of part or all of any claim, debt, charge, fee, or other obligation of
an insurer, or its successors or assigns, which has been declared by any
competent authority to be insolvent, or which is otherwise deemed unable
to meet any claim, debt, charge, fee or other obligation in whole or in
part.
I. Financial Guarantee and Insolvency.
Effective: January 1, 1996 6 of 32
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PAGE
ARTICLE 6
---------
REINSURING CLAUSE
- -----------------
As respects the Ultimate Net Loss, as defined in Article 12, Ultimate Net Loss,
of the Company arising out of each Loss Occurrence, as defined in Article 7,
Definitions, covered hereunder on which the Company has paid or advanced, or
agreed to pay or advance, or becomes liable to pay to or on behalf of its
insured(s) or reinsured(s), an amount exceeding $15,000,000 Ultimate Net Loss,
the Reinsurers shall pay or be liable to pay to the Company the amount the
excess of $15,000,000 Ultimate Net Loss in respect of each Loss Occurrence, but
the sum recoverable hereunder shall not exceed $10,000,000 in respect of each
such Loss Occurrence.
In respect of Occupational or other diseases and Cumulative Injury loss
-----------------------------------------------------------------------
The Reinsurers will pay to the Company in respect of loss or losses on
business the subject matter hereof the excess of the amount of
$15,000,000 of Aggregate net loss any one Policy Year, both as defined
in Article 7, Definitions, for each insured sustained by the Company
resulting from occupational or other diseases or Cumulative Injury
losses suffered by any one or more employees of each insured provided
the loss to the Reinsurers hereunder shall not exceed $10,000,000 of
Aggregate net loss any one Policy Year covered hereunder for each
insured.
ARTICLE 7
---------
DEFINITIONS
- -----------
A. The term "Loss Occurrence", as used in this Contract, shall mean any one
disaster or casualty or accident or loss or series of disasters or
casualties or accidents or losses arising out of or caused by one event
except that:
1. As respects Property Damage Liability Insurance (other than
Automobile and Products but not excepting environmental coverage
required by law), said term shall also, subject to provisions (a)
and (b) below, be understood to mean loss or losses caused by a
series of operations, events or occurrences arising out of
operations at one specific site and which cannot be attributed to
any single one of such operations, events or occurrences but rather
to the cumulative effect of the same. In assessing each and every
Loss Occurrence within the foregoing definition, it is understood
and agreed that:
(a) the series of operations, events or occurrences shall not
extend over a period longer than 12 consecutive months; and
(b) the Company may elect the date on which the period of not
exceeding 12 consecutive months shall commence and which will
be considered the date of loss for purposes of this Contract.
Effective: January 1, 1996 7 of 32
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In the event that the series of operations, events or occurrences
extends over a period longer than 12 months, then each consecutive
period of 12 months, the first of which commences on the date
elected under provision (b) above, shall form the basis of claim
under this Contract.
2. As respects an occupational or other disease suffered by an
employee and for which the employer is liable, such occupational or
other disease shall be deemed a separate Loss Occurrence within the
meaning hereof. If the Company shall, within a Policy Year, as
defined in Section B. below, sustain a loss arising from
occupational or other disease(s) from the same common causative
agent suffered by more than one employee of one insured, such
losses shall be deemed to have arisen out of one Loss Occurrence,
and the date of loss for purposes of this Contract will be the
inception or anniversary date of the policy out of which the loss
arose. A loss as respects each employee affected by an
occupational or other disease shall be deemed to have been
sustained by the Company at the earlier of the date when
compensable disability of the employee commenced or the date
compensable medical attention commenced and at no other date.
3. As respects business when the cause of loss is the "neglect, error
or omission" of the insured, it is understood that such neglect,
error or omission shall be deemed to be a Loss Occurrence within
the meaning hereof. The date of such Loss Occurrence shall be the
date of loss as defined in the Company's original policy.
4. As respects Products Personal Injury and Products Property Damage
Liability Insurance, it is understood that injuries to all persons
and all damage to property of others occurring during a policy
period and proceeding from or traceable to the same causative
agency shall be deemed to have arisen out of one Loss Occurrence,
and the date of such Loss Occurrence shall be deemed to be the
commencement date of the policy period. For the purposes of this
provision, each annual period of a policy which continues in force
for more than one year shall be deemed to be a separate policy
period. The word "injuries", as used in this paragraph, includes
but is not limited to infection, contagion, poisoning or
contamination.
B. "Policy year" shall mean each separate original policy period of not
exceeding twelve months commencing at the inception, anniversary or
renewal date as of and from January 1,1996.
C. "Aggregate" shall mean Ultimate Net Loss, as defined in Article 12,
Ultimate Net Loss, occurring in the aggregate during any one Policy
Year, as defined in Section B. above.
D. The term "Gross Net Earned Premium Income" shall mean gross earned
premiums, less return premiums, cancellations and premiums paid for
reinsurances, recoveries under which would inure to the benefit of the
Reinsurers under this Contract.
Effective: January 1, 1996 8 of 32
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ARTICLE 8
---------
WARRANTIES
- ----------
A. It is warranted that the Company shall retain net for its own account
the primary $500,000 for Monoline General Liability, Comprehensive
General Liability, Commercial Multi-Line Package policies, and Personal
Multi-Line Package policies; $500,000 for Workers' Compensation,
Commercial Automobile Liability, and Personal Automobile Liability;
$500,000 for Personal Umbrella policies; and $100,000 for Commercial
Umbrella policies.
B. The maximum per person contribution to the Ultimate Net Loss, as defined
in Article 12, Ultimate Net Loss, with respect to Section 1 and Section
2 of Workers' Compensation business, including Statutory and Voluntary
Compensation, and statutory benefits payable under the Longshore and
Harbor Workers' Compensation Act, Jones Act and Federal Employers'
Liability Act is $10,000,000 any one Loss Occurrence, as defined in
Article 7, Definitions.
C. The maximum amount of net (being net of facultative) liability each
policy written by the Company and subject to this Contract in respect of
each class of insurance shall be as follows:
1. Automobile Bodily Injury Liability $2,000,000
2. Personal or Bodily Injury Liability $2,000,000
(other than Automobile)
3. Property Damage Liability $1,000,000
(Automobile and other than Automobile)
4. Combined Single Limit Bodily Injury Liability $2,000,000
and Property Damage Liability policies
5. Collision Damage $2,000,000
6. Personal Umbrella Liability $5,000,000
7. Commercial Umbrella Liability $5,000,000
Notwithstanding the foregoing, Personal Injury Protection benefits under any
"No-fault" Auto policy are not subject to the above limitations.
ARTICLE 9
---------
PREMIUM
- -------
A. The Company shall pay to the Reinsurers a reinsurance deposit premium of
$340,000, payable in installments of $85,000 at January 1, April 1, July
1 and October 1, 1996.
Effective: January 1, 1996 9 of 32
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B. As soon as practicable after the expiration of this Contract, the
Company shall furnish to the Reinsurers a statement of the actual
reinsurance premium due the Reinsurers and the reinsurance deposit
premium shall be adjusted at a rate of 0.067% of the Company's Gross Net
Earned Premium Income, as defined in Article 7, Definitions, accounted
for by the Company during the term of this Contract, on all business
which is the subject matter of this Contract. However, in no event
shall the final adjusted reinsurance premium be less than the minimum
premium of $340,000.
ARTICLE 10
----------
REINSTATEMENT OF LIMIT
- ----------------------
Each loss hereon reduces the amount of indemnity provided under this Contract
by the amount paid. Any amount so exhausted shall be automatically
reinstated from the time of the Loss Occurrence, as defined in Article 7,
Definitions.
The reinsurance limit provided in this Contract, as outlined in Article 6,
Reinsuring Clause, is subject to one (1) reinstatement. The reinstated limit
is in addition to the initial limit of this Contract.
For each amount so reinstated, the Company agrees to pay an additional
premium calculated at pro rata of the annual premium as respects the fraction
of indemnity exhausted and 100% of the annual premium regardless of the
unexpired term of this Contract. Nevertheless, the Reinsurers' liability
shall not exceed $10,000,000 with respect to any one Loss Occurrence and
shall not exceed $20,000,000 with respect to all losses arising during the
term of this Contract.
Reinstatement premiums are to be paid immediately after the claim to this
Contract has been paid.
ARTICLE 11
----------
NET RETAINED LINES
- ------------------
This Contract applies only to that portion of any insurance, reinsurance or
any Extra Contractual Obligations, as defined in Article 14, Extra
Contractual Obligations, which the Company retains net for its own account,
except as otherwise provided for in Article 12, Ultimate Net Loss. In
calculating the amount of any loss hereunder and also in computing the amount
or amounts in excess of which this Contract attaches, only loss or losses in
respect of that portion of any insurance, reinsurance or any Extra
Contractual Obligations which the Company retains net for its own account
shall be included.
The amount of the Reinsurers' liability hereunder in respect to any loss or
losses shall not be increased by reason of the inability of the Company to
collect from any other reinsurers whether
Effective: January 1, 1996 10 of 32
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specific or general any amounts which may have become due from them whether
such inability arises from the insolvency of such other reinsurers or
otherwise.
ARTICLE 12
----------
ULTIMATE NET LOSS
- -----------------
The words "Ultimate Net Loss", mentioned in this Contract, shall mean the
actual loss paid or payable by the Company, and 90% Extra Contractual
Obligations, as defined in Article 14, Extra Contractual Obligations, and
losses in excess of original policy limits, as defined in Article 13, Excess
of Original Policy Limits, such loss to include expenses of litigation, if
any, and all other loss adjustment expenses of the Company, which include all
expenses arising from Declaratory Judgment Actions incurred in the
investigation adjustment, defense and litigation of claims under the terms of
and allocated to policies subject to this Contract (including a pro rata
share of salaries and expenses of the Company's employees including staff
counsel according to the time occupied in adjusting such loss and expenses of
the Company's officials incurred in connection with the loss, but salaries of
officials and any office expenses of the Company shall not be included);
salvages and recoveries including recoveries under all other reinsurances
whether collectible or not are to be first deducted from such loss to arrive
at the amount of liability, if any, attaching hereunder. Nothing, however,
in this Article shall be construed as meaning that losses are not recoverable
hereunder until the Ultimate Net Loss to the Company has been ascertained.
The Company shall retain the right to purchase excess of loss reinsurance
below the retention of this Contract. Recoveries from excess of loss
reinsurance shall inure to the sole benefit of the Company and any recoveries
from this excess of loss reinsurance shall be disregarded in computing the
Company's Ultimate Net Loss applicable to this Contract.
All salvages, recoveries and payments recovered or received subsequent to a
loss settlement under this Contract shall be applied as if recovered or
received prior to the said settlement and all necessary adjustments shall be
made by the parties hereto.
Whenever the Company issues a lost instrument bond or a lost instrument
letter of indemnity for salvage purposes or in lieu of loss payments under
its bond or policy, the Reinsurers agree to accept liability under such bond
or letter of indemnity in accordance with the terms of this Contract.
Effective: January 1, 1996 11 of 32
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ARTICLE 13
----------
EXCESS OF ORIGINAL POLICY LIMITS
- --------------------------------
(Third Party Liability Business Only)
- -------------------------------------
This Contract shall protect the Company, within the limits hereof, in
connection with Ultimate Net Loss, as defined in Article 12, Ultimate Net
Loss, in excess of the limit of its original policy, such loss in excess of
the limit having been incurred because of failure by it to settle within the
policy limit or by reason of alleged or actual negligence, fraud or bad faith
in rejecting an offer of settlement or in the preparation of the defense or
in the trial of any action against its insured or reinsured or in the
preparation or prosecution of an appeal consequent upon such action.
However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a Corporate Officer of the
Company acting individually or collectively or in collusion with any
individual or corporation or any other organization or party involved in the
presentation, defense or settlement of any claim covered hereunder.
For the purposes of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original policy.
If any provision of this Article shall be rendered illegal or unenforceable
by the law, regulations, or public policy of any state, such provision shall
be considered void in such state, but this shall not affect the validity or
enforceability of any other provision of this Article, or the enforceability
of such provision in any other jurisdiction.
ARTICLE 14
----------
EXTRA CONTRACTUAL OBLIGATIONS
- -----------------------------
This Contract shall protect the Company, within the limits hereof, where the
Ultimate Net Loss, as defined in Article 12, Ultimate Net Loss, includes any
Extra Contractual Obligations. "Extra Contractual Obligations" are defined
as those liabilities not covered under any other provision of this Contract
and which arise from the handling of any claim on business covered hereunder,
such liabilities arising because of, but not limited to, the following:
failure by the Company to settle within the policy limit, or by reason of
alleged or actual negligence, fraud or bad faith in rejecting an offer of
settlement or in the preparation of the defense or in the trial of any action
against its insured or reinsured or in the preparation or prosecution of an
appeal consequent upon such action.
The date on which any Extra Contractual Obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original loss
occurrence.
Effective: January 1, 1996 12 of 32
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Coverage provided under this Contract for Extra Contractual Obligations shall
be excess over coverage provided under any applicable in force claims made
Errors and Omissions insurance policy.
However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a Corporate Officer of the
Company acting individually or collectively or in collusion with any
individual or corporation or any other organization or party involved in the
presentation, defense or settlement of any claim covered hereunder.
If any provision of this Article shall be rendered illegal or unenforceable
by the law, regulations, or public policy of any state, such provision shall
be considered void in such state, but this shall not affect the validity or
enforceability of any other provision of this Article, or the enforceability
of such provision in any other jurisdiction.
ARTICLE 15
----------
NOTICE OF LOSS AND LOSS SETTLEMENTS
- -----------------------------------
The Company shall give notice to the Reinsurers, as soon as reasonably
practicable, of any occurrence which results in or appears to be of serious
enough nature as probably to result in a loss involving this Contract, and
the Company shall keep the Reinsurers advised of all subsequent developments
in connection therewith.
The Reinsurers agree to abide by the loss settlements of the Company, such
settlements to be considered as satisfactory proof of loss. Amounts falling
to the share of the Reinsurers shall be immediately payable to the Company by
them upon reasonable evidence of the amount paid or to be paid by the Company
being presented to the Reinsurers by the Company.
ARTICLE 16
----------
REINSURANCE TAX
- ---------------
In consideration of the terms under which this Contract is issued, the
Company undertakes not to claim any deduction of the premium hereon when
making Canadian tax returns or when making tax returns, other than Income or
Profits Tax returns, to any state or territory of the United States of
America or to the District of Columbia.
Effective: January 1, 1996 13 of 32
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ARTICLE 17
----------
ACCESS TO RECORDS
- -----------------
The Reinsurers or their duly designated representatives shall have access to
the books and records of the Company at all reasonable times for the purpose
of obtaining information concerning this Contract or the subject matter
thereof.
ARTICLE 18
----------
ARBITRATION
- -----------
As a precedent to any right of action hereunder, if any dispute shall arise
between the parties to this Contract with reference to the interpretation of
this Contract or their rights with respect to any transaction involved,
whether such dispute arises before or after termination of this Contract,
such dispute, upon the written request of either party, shall be submitted to
three arbitrators, one to be chosen by each party, and the third by the two
so chosen. If either party refuses or neglects to appoint an arbitrator
within thirty days after the receipt of written notice from the other party
requesting it to do so, the requesting party may appoint two arbitrators. If
the two arbitrators fail to agree in the selection of a third arbitrator
within thirty days of their appointment, each of them shall name three, of
whom the other shall decline two and the decision shall be made by drawing
lots. All arbitrators shall be executive officers of insurance or
reinsurance companies or Underwriters at Lloyd's, London not under the
control of either party to this Contract.
The arbitrators shall interpret this Contract as an honorable engagement and
not as merely a legal obligation; they are relieved of all judicial
formalities and may abstain from following the strict rules of law, and they
shall make their award with a view to effecting the general purpose of this
Contract in a reasonable manner rather than in accordance with a literal
interpretation of the language. Each party shall submit its case to its
arbitrator within thirty days of the appointment of the third arbitrator.
The decision in writing of any two arbitrators, when filed with the parties
hereto, shall be final and binding on both parties. Judgement may be entered
upon the award of the board in any court having jurisdiction thereof. The
expense of the arbitrators and of the arbitration shall be equally divided
between the two parties. Said arbitration shall take place in the city in
which the Company's Head Office is located unless some other place is
mutually agreed upon by the parties to this Contract.
Effective: January 1, 1996 14 of 32
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ARTICLE 19
----------
CURRENCY
- --------
Wherever the word "dollars" or the sign "$" appears in this Contract, it
shall mean United States dollars.
For the purpose of this Contract, transactions and settlements on policies
written or assumed by the Company in other than United States currency shall
be converted into United States dollars at the rates of exchange at which
they are entered in the Company's books at its head office.
ARTICLE 20
----------
SERVICE OF SUIT
- ---------------
(This Article applies only to those Reinsurers not domiciled in the United
States of America, and/or not authorized in any state, territory and/or
district of the United States where authorization is required by insurance
regulatory authorities.)
It is agreed that in the event of the failure of the Reinsurers to pay any
amount claimed to be due under this Contract, the Reinsurers, at the request
of the Company, will submit to the jurisdiction of any court of competent
jurisdiction within the United States of America and will comply with all
requirements necessary to give such court jurisdiction; and all matters
arising hereunder shall be determined in accordance with the law and practice
of such court. Nothing in this Article constitutes or should be understood to
constitute a waiver of the Reinsurers' 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 Mendes and Mount, 750
Seventh Avenue, New York, New York 10019-6879 (hereinafter, "agent for
service of process") and in any suit instituted against any Reinsurer(s) upon
this Contract, the Reinsurer(s) will abide by the final decision of such
court or of any appellate court in the event of an appeal.
The above named are authorized and directed to accept service of process on
behalf of the Reinsurers in any such suit and/or upon the request of the
Company to give a written undertaking to the Company that the agent for
service of process will enter a general appearance on behalf of the
Reinsurers in the event such a suit shall be instituted.
Further, pursuant to any statute of any state, territory or district of the
United States of America which makes provision therefor, the Reinsurers
hereby designate the Superintendent, Commissioner or Director of Insurance or
other officer specified for that purpose in the statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be
served any lawful process in any action, suit or proceeding instituted by or
on behalf of the
Effective: January 1, 1996 15 of 32
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Company or any beneficiary hereunder arising out of this Contract and hereby
designate the agent for service of process as the firm to whom the said
officer is authorized to mail such process or a true copy thereof.
ARTICLE 21
----------
FEDERAL EXCISE TAX
- ------------------
(This Article applies only to those Reinsurers excepting Reinsurers at
Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who
are domiciled outside the United States of America.)
The Reinsurers have agreed to allow for the purpose of paying the statutorily
prescribed Federal Excise Tax of the premium payable hereon to the extent
such premium is subject to Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurers
will deduct the statutorily prescribed percentage from the amount of the
return and the Company or its agent should take steps to recover the Tax from
the U.S. Government.
ARTICLE 22
----------
LOSS RESERVES
- -------------
(This Article applies to those Reinsurers who do not qualify for credit by
any state or any other governmental authority having jurisdiction over the
Company's loss reserves.)
A: Where a Letter of Credit Trust Agreement is used, the following clause
shall apply:
It is agreed that when the Company files with the Insurance Department
or establishes reserves for claims covered hereunder, as required by
law, the Company will forward to the Reinsurers a statement showing the
proportion of such loss reserves which is applicable to the Reinsurers.
The Reinsurers hereby agree to apply for and secure delivery to the
Company of a clean, irrevocable and unconditional Letter of Credit, with
a minimum term of one year, that is issued or confirmed, and presentable
and payable in the United States by any bank or trust company, and is in
a format acceptable to the governmental authority having jurisdiction
over the Company's loss reserves in an amount equal to the Reinsurers'
proportion of said loss reserves.
The Company and the Reinsurers agree that such Letter of Credit will be
subject to the terms of a separate Letter of Credit Trust Agreement, and
that said trust agreement shall be in a form acceptable to the
governmental authority having jurisdiction over the Company's loss
reserves.
Effective: January 1, 1996 16 of 32
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PAGE
The designated bank shall have no responsibility whatsoever in
connection with the propriety of withdrawals made by the Company or the
disposition of funds withdrawn, except to see that withdrawals are made
only upon the order of properly authorized representatives of the
Company.
B: Where a Letter of Credit Trust Agreement is not used, the following
clause shall apply:
It is agreed that when the Company files with the Insurance Department
or establishes reserves for claims covered under this Contract, as
required by law, the Company will forward to the Reinsurers a statement
showing the proportion of such loss reserves which is applicable to the
Reinsurers. The Reinsurers hereby agree to apply for and secure
delivery to the Company of a clean, irrevocable and unconditional Letter
of Credit, with a minimum term of one year, that is issued or confirmed,
and presentable and payable in the United States by any bank or trust
company, and is in a format acceptable to the governmental authority
having jurisdiction over the Company's loss reserves in an amount equal
to the Reinsurers' proportion of said loss reserves.
The Company and the Reinsurers agree that the Letter of Credit provided
by the Reinsurers under this provision may be drawn upon at any time,
notwithstanding any other provisions in this Contract, and be utilized
by the Company or any successor by operation of law of the Company,
including, without limitation, any liquidator, rehabilitator, receiver
or conservator of such insurer for the following purposes:
1. to reimburse the Company for the Reinsurers' share of surrenders
and benefits or losses paid by the Company under the terms and
provisions of the policies reinsured under this Contract,
2. to fund an account with the Company in an amount at least equal to
the deduction, for reinsurance ceded, from the Company's
liabilities for policies ceded under this Contract. Such amount
shall include, but not be limited to, amounts for policy reserves,
reserves for claims and losses incurred (including losses incurred
but not reported), and loss adjustment expenses,
3. to pay any other amounts the Company claims are due under this
Contract,
4. to return any amounts drawn down on Letters of Credit in excess of
the actual amounts required for 1. and 2. above, or in case of 3.
above, any amounts which are subsequently determined not to be due.
All of the foregoing should be applied without diminution because of
insolvency on the part of the Company or the Reinsurers.
The designated bank shall have no responsibility whatsoever in
connection with the propriety of withdrawals made by the Company or the
disposition of funds withdrawn, except to see that withdrawals are made
only upon the order of properly authorized representatives of the
Company.
Effective: January 1, 1996 17 of 32
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PAGE
ARTICLE 23
----------
INDEMNIFICATION AND ERRORS AND OMISSIONS
- ----------------------------------------
Any recitals in this Contract of the terms and provisions of any original
insurance or reinsurance are merely descriptive. The Reinsurers are
reinsuring, to the amount herein provided, the obligations of the Company
under any original insurance or reinsurance. The Company shall be the sole
judge as to:
A. what shall constitute a claim or loss covered under any original
insurance or reinsurance of the Company;
B. the Company's liability thereunder;
C. the amount or amounts which it shall be proper for the Company to
pay thereunder.
The Reinsurers shall be bound by the judgement of the Company as to the
obligation(s) and liability(ies) of the Company under any original insurance
or reinsurance, subject to the terms and conditions of this Contract.
Any inadvertent error, omission or delay in complying with the terms and
conditions of this Contract shall not be held to relieve either party hereto
from any liability which would attach to it hereunder if such error, omission
or delay had not been made, provided such error, omission or delay is
rectified immediately upon discovery.
ARTICLE 24
----------
INSOLVENCY
- ----------
In the event of the insolvency of the Company, this reinsurance shall be
payable directly to the Company, or to its liquidator, receiver, conservator
or statutory successor on the basis of the liability of the Company without
diminution because of the insolvency of the Company or because the
liquidator, receiver, conservator or statutory successor of the Company has
failed to pay all or a portion of any claim. It is agreed, however, that the
liquidator, receiver, conservator or statutory successor of the Company shall
give written notice to the Reinsurers of the pendency of a claim against the
Company indicating the policy or bond reinsured, which claim would involve a
possible liability on the part of the Reinsurers within a reasonable time
after such claim is filed in the conservation or liquidation proceeding or in
the receivership, and that during the pendency of such claim, the Reinsurers
may investigate such claim and interpose, at their own expense, in the
proceeding where such claim is to be adjudicated any defense or defenses that
they may deem available to the Company or its liquidator, receiver,
conservator or statutory successor. The expense thus incurred by the
Reinsurers shall be chargeable, subject to the approval of the court, against
the Company as part of the expense of conservation or liquidation to the
extent of a pro
Effective: January 1, 1996 18 of 32
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PAGE
rata share of the benefit which may accrue to the Company solely as a result
of the defense undertaken by the Reinsurers.
Where two or more Reinsurers are involved in the same claim and a majority in
interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of the reinsurance Contract as
though such expense had been incurred by the Company.
As to all reinsurance made, ceded, renewed or otherwise becoming effective
under this Contract, the reinsurance shall be payable as set forth above by
the Reinsurers to the Company or to its liquidator, receiver, conservator or
statutory successor, except as provided by Sections 4118(a)(1)(A) and 1114(c)
of the New York Insurance Law or except (1) where the Contract specifically
provides another payee in the event of the insolvency of the Company, and (2)
where the Reinsurers, with the consent of the direct insured or insureds,
have assumed such policy obligations of the Company as direct obligations of
the Reinsurers to the payees under such policies and in substitution for the
obligations of the Company to such payees. Then, and in that event only, the
Company, with the prior approval of the certificate of assumption on New York
risks by the Superintendent of Insurance of the State of New York, is
entirely released from its obligation and the Reinsurers pay any loss
directly to payees under such policy.
Should any party hereto be placed in rehabilitation or liquidation or should
a rehabilitator, liquidator, receiver, conservator or other person or entity
of similar capacity be appointed as respects such party, all amounts due any
of the parties hereto whether by reason of premiums, losses or otherwise
under this Contract or any other contract(s) of reinsurance heretofore or
hereafter entered into between the parties (whether or not any such
contract(s) be assumed or ceded) shall at all times be subject to the right
of offset at any time and from time to time, and upon the exercise of same,
only the net balance shall be due and payable in accordance with Section 7427
of the Insurance Law of the State of New York to the extent such statute or
any other applicable law, statute or regulation governing such offset shall
apply.
ARTICLE 25
----------
INTERMEDIARY
- ------------
Guy Carpenter & Company, Inc. is hereby recognized as the Intermediary
negotiating this Contract for all business hereunder. All communications
(including but not limited to notices, statement, premiums, return premiums,
commissions, taxes, losses, loss adjustment expenses, salvages, and loss
settlements) relating thereto shall be transmitted to the Company or the
Reinsurers through Guy Carpenter & Company, Inc., Two World Trade Center, New
York, New York 10048. Payments by the Company to the Intermediary shall be
deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to
the Intermediary shall be deemed to constitute payment to the Company only to
the extent that such payments are actually received by the Company.
Effective: January 1, 1996 19 of 32
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Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A.
- --------------------------------------------------------------------
(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 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.
Effective: January 1, 1996 20 of 32
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PAGE
(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 thereof, 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
Effective: January 1, 1996 21 of 32
3645-16/02
PAGE
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.
IV. As used in this endorsement:
"hazardous properties" include radioactive, toxic or explosive
properties; "nuclear material" means source material, special
nuclear material or byproduct material; "source material", "special
nuclear material", and "byproduct material" have the meanings given
them in the Atomic Energy Act of 1954 or in any law amendatory
thereof; "spent fuel" means any fuel element or fuel component,
solid or liquid, which has been used or exposed to radiation in a
nuclear reactor; "waste" means any waste material (1) containing
byproduct material other than the tailings or wastes produced by
the extraction or concentration of uranium or thorium from any ore
processed
Effective: January 1, 1996 22 of 32
3645-16/02
PAGE
primarily for its source material content and (2)resulting from the
operation by any person or organization of any nuclear facility
included under the first two paragraphs of the definition of
nuclear facility; "nuclear facility" means
(a) any nuclear reactor,
(b) any equipment or device designed or used for (1) separating
the isotopes of uranium or plutonium, (2) processing or
utilizing spent fuel, or (3) handling, processing or packaging
waste,
(c) any equipment or device used for the processing, fabricating
or alloying of special nuclear material if at any time the
total amount of such material in the custody of the insured at
the premises where such equipment or device is located
consists of or contains more than 25 grams of plutonium or
uranium 233 or any combination thereof, or more than 250 grams
of uranium 235,
(d) any structure, basin, excavation, premises or place prepared
or used for the storage or disposal of waste,
and includes the site on which any of the foregoing is located, all
operations conducted on such site and all premises used for such
operations; "nuclear reactor" means any apparatus designed or used
to sustain nuclear fission in a self-supporting chain reaction or
to contain a critical mass of fissionable material;
WITH RESPECT TO INJURY TO OR DESTRUCTION OF PROPERTY, THE WORD
"INJURY" OR "DESTRUCTION" 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 (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3) above
are not applicable to original liability policies of the Reassured in
Canada and that with respect to such policies this Clause shall be
deemed to include the Nuclear Energy Liability Exclusion Provisions
adopted by the Canadian Underwriters' Association or the Independent
Insurance Conference of Canada.
Effective: January 1, 1996 23 of 32
3645-16/02
PAGE
- -----------------------------------------------------------------------------
*NOTE. The words printed in "ALL CAPITAL LETTERS" 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.
- -----------------------------------------------------------------------------
21/9/67
NMA 1590 (amended)
- -----------------------------------------------------------------------------
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
"Agreement" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
Effective: January 1, 1996 24 of 32
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PAGE
Nuclear Incident Exclusion Clause - Liability - Reinsurance - Canada
--------------------------------------------------------------------
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 agreed that for all purposes of this Reinsurance all the
original liability contracts of the Reassured, whether new, renewal or
replacement, of the following classes, namely,
Personal Liability,
Farmers Liability,
Storekeepers Liability,
which become effective on or after 31st December, 1984, shall be deemed
to include, from their inception dates and thereafter, the following
provision:-
Limited Exclusion Provision.
---------------------------
This Policy does not apply to bodily injury or property damage with
respect to which an Insured is also insured under a contract of nuclear
energy liability insurance (whether the Insured is unnamed in such
contract and whether or not it is legally enforceable by the Insured)
issued by the Nuclear Insurance Association of Canada or any other group
or pool of insurers or would be an Insured under any such policy but for
its termination upon exhaustion of its limit of liability.
With respect to property, loss of use of such property shall be deemed
to be property damage.
3. Without in any way restricting the operation of paragraph 1 of this
clause it is agreed that for all purposes of this Reinsurance all the
original liability contracts of the Reassured, whether new, renewal or
replacement, of any class whatsoever (other than Personal Liability,
Farmers Liability, Storekeepers Liability or Automobile Liability
contracts), which become effective on or after 31st December, 1984,
shall be deemed to include, from their inception dates and thereafter,
the following provision:
Broad Exclusion Provision.
-------------------------
It is agreed that this Policy does not apply:
(a) to liability imposed by or arising under the Nuclear Liability
Act; nor
(b) to bodily injury or property damage with respect to which an
Insured under this policy is also insured under a contract of
nuclear energy liability insurance
Effective: January 1, 1996 25 of 32
3645-16/02
PAGE
(whether the Insured is unnamed in such contract and whether
or not it is legally enforceable by the Insured) issued by the
Nuclear Insurance Association of Canada or any other insurer
or group or pool of insurers or would be an Insured under any
such policy but for its termination upon exhaustion of its
limit of liability; nor
(c) to bodily injury or property damage resulting directly or
indirectly from the nuclear energy hazard arising from:
(i) the ownership, maintenance, operation or use of a nuclear
facility by or on behalf of an Insured;
(ii) the furnishing by an Insured of services, materials,
parts or equipment in connection with the planning,
construction, maintenance, operation or use of any
nuclear facility; and
(iii)the possession, consumption, use, handling, disposal or
transportation of fissionable substances, or of other
radioactive material (except radioactive isotopes, away
from a nuclear facility, which have reached the final
stage of fabrication so as to be usable for any
scientific, medical, agricultural, commercial or
industrial purpose) used, distributed, handled or sold by
an Insured.
As used in this Policy:
- ----------------------
1. The term "nuclear energy hazard" means the radioactive, toxic, explosive
or other hazardous properties of radioactive material;
2. The term "radioactive material" means uranium, thorium, plutonium,
neptunium, their respective derivatives and compounds, radioactive
isotopes of other elements and any other substances that the Atomic
Energy Control Board may, by regulation, designate as being prescribed
substances capable of releasing atomic energy, or as being requisite for
the production, use or application of atomic energy;
3. The term "nuclear facility" means:
(a) any apparatus designed or used to sustain nuclear fission in a
self-supporting chain reaction or to contain a critical mass of
plutonium, thorium and uranium or any one or more of them;
(b) any equipment or device designed or used for (i) separating the
isotopes of plutonium, thorium and uranium or any one or more of
them, (ii) processing or utilizing spent fuel, or (iii) handling,
processing or packaging waste;
(c) any equipment or device used for the processing, fabricating or
alloying of plutonium, thorium or uranium enriched in the isotope
uranium 233 or in the isotope uranium 235,
Effective: January 1, 1996 26 of 32
3645-16/02
PAGE
or any one or more of them if at any time the total amount of such
material in the custody of the Insured at the premises where such
equipment or device is located consists of or contains more than 25
grams of plutonium or uranium 233 or any combination thereof, or
more than 250 grams of uranium 235;
(d) any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste radioactive material;
and includes the site on which any of the foregoing is located, together
with all operations conducted thereon and all premises used for such
operations.
4. The term "fissionable substance" means any prescribed substance that is,
or from which can be obtained, a substance capable of releasing atomic
energy by nuclear fission.
5. With respect to property, loss of use of such property shall be deemed
to be property damage.
NMA 1979
(11/10/84)
- -----------------------------------------------------------------------------
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
"Agreement" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
Effective: January 1, 1996 27 of 32
3645-16/02
PAGE
Nuclear Incident Exclusion Clause - Physical Damage and Liability (Boiler
-------------------------------------------------------------------------
and Machinery Policies) - Reinsurance - U.S.A.
---------------------------------------------
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 original Boiler and Machinery Insurance or Reinsurance
contracts of the Reassured shall be deemed to include the following
provisions of this paragraph:
This Policy does not apply to "loss", whether it be direct or
indirect, proximate or remote
(a) from an Accident caused directly or indirectly by nuclear
reaction, nuclear radiation or radioactive contamination, all
whether controlled or uncontrolled; or
(b) from nuclear reaction, nuclear radiation or radioactive
contamination, all whether controlled or uncontrolled, caused
directly or indirectly by, contributed to or aggravated by an
Accident.
3. However, it is agreed that loss arising out of the use of Radioactive
Isotopes in any form is not hereby excluded from reinsurance protection.
- -----------------------------------------------------------------------------
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
"Agreement" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
23/6/58
NMA 1166
Effective: January 1, 1996 28 of 32
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PAGE
Nuclear Incident Exclusion Clause - Physical Damage and Liability (Boiler
-------------------------------------------------------------------------
and Machinery Policies) - Reinsurance - Canada
----------------------------------------------
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 original Boiler and Machinery Insurance or Reinsurance
contracts of the Reassured shall be deemed to include the following
provisions of this paragraph;
This Policy does not apply to loss, whether it be direct or
indirect, proximate or remote
(a) from an Accident caused directly or indirectly by nuclear
reaction, nuclear radiation or radioactive contamination, all
whether controlled or uncontrolled; or
(b) from nuclear reaction, nuclear radiation or radioactive
contamination, all whether controlled or uncontrolled, caused
directly or indirectly by, contributed to or aggravated by an
Accident.
3. However, it is agreed that loss arising out of the use of Radioactive
Isotopes in any form is not hereby excluded from reinsurance protection.
4. Without in any way restricting the operation of paragraph (1) hereof, it
is understood and agreed that policies issued by the Reassured effective
on or before 31st December, 1958, shall be free from the application of
the other provisions of this Clause until expiry date or 31st December,
1961, whichever first occurs, whereupon all the provisions of this
Clause shall apply.
- -----------------------------------------------------------------------------
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
"Agreement" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
29/10/59
NMA 1251
Effective: January 1, 1996 29 of 32
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PAGE
Nuclear Energy Risks Exclusion Clause (Reinsurance) (1994) (Worldwide
---------------------------------------------------------------------
Excluding U.S.A. and Canada)
----------------------------
This Agreement shall exclude Nuclear Energy Risks whether such risks are
written directly and/or by way of reinsurance and/or via Pools and/or
Associations.
For all purposes of this Agreement Nuclear Energy Risks shall mean all first
party and/or third party insurances or reinsurances (other than Workers'
Compensation and Employers' Liability) in respect of:
(I) All Property on the site of a nuclear power station.
Nuclear Reactors, reactor buildings and plant and equipment therein
on any site other than a nuclear power station.
(II) All Property, on any site (including but not limited to the sites
referred to in (I) above) used or having been used for:
(a) the generation of nuclear energy; or
(b) the Production, Use or Storage of Nuclear Material.
(III)Any other Property eligible for insurance by the relevant local
Nuclear Insurance Pool and/or Association but only to the extent of
the requirements of that local Pool and/or Association.
(IV) The supply of goods and services to any of the sites, described in
(I) to (III) above, unless such insurances or reinsurances shall
exclude the perils of irradiation and contamination by Nuclear
Material.
Except as undernoted, Nuclear Energy Risks shall not include:
(i) Any insurance or reinsurance in respect of the construction or
erection or installation or replacement or repair or maintenance or
decommissioning of Property as described in (I) to (III) above
(including contractors' plant and equipment);
(ii) Any Machinery Breakdown or other Engineering insurance or
reinsurance not coming within the scope of (i) above.
Provided always that such insurance or reinsurance shall exclude the perils
of irradiation and contamination by Nuclear Material.
However, the above exemption shall not extend to:
(1) The provision of any insurance or reinsurance whatsoever in respect
of:
Effective: January 1, 1996 30 of 32
3645-16/02
PAGE
(a) Nuclear Material;
(b) Any Property in the High Radioactivity Zone or Area of any
Nuclear Installation as from the introduction of Nuclear
Material or - for reactor installations - as from fuel loading
or first criticality where so agreed with the relevant local
Nuclear Insurance Pool and/or Association.
(2) The provision of any insurance or reinsurance for the undernoted
perils:
- fire, lightning, explosion;
- earthquake;
- aircraft and other aerial devices or
articles dropped therefrom;
- irradiation and radioactive contamination;
- any other peril insured by the relevant
local Nuclear Insurance Pool and/or Association;
in respect of any other Property not specified in (1) above which
directly involves the Production, Use or Storage of Nuclear
Material as from the introduction of Nuclear Material into such
Property.
Definitions
- -----------
"Nuclear Material" means:
(i) Nuclear fuel, other than natural uranium and depleted uranium,
capable of producing energy by a self-sustaining chain process
of nuclear fission outside a Nuclear Reactor, either alone or
in combination with some other material; and
(ii) Radioactive Products or Waste.
"Radioactive Products or Waste" means any radioactive material produced
in, or any material made radioactive by exposure to the radiation
incidental to the production or utilization of nuclear fuel, but does
not include radioisotopes which have reached the final stage of
fabrication so as to be usable for any scientific, medical,
agricultural, commercial or industrial purpose.
"Nuclear Installation" means:
(i) Any Nuclear Reactor;
(ii) Any factory using nuclear fuel for the production of Nuclear
Material, or any factory for the processing of Nuclear
Material, including any factory for the reprocessing of
irradiated nuclear fuel; and
Effective: January 1, 1996 31 of 32
3645-16/02
PAGE
(iii)Any facility where Nuclear Material is stored, other than
storage incidental to the carriage of such material.
"Nuclear Reactor" means any structure containing nuclear fuel in such an
arrangement that a self-sustaining chain process of nuclear fission can
occur therein without an additional source of neutrons.
"Production, Use or Storage of Nuclear Material" means the production,
manufacture, enrichment, conditioning, processing, reprocessing, use,
storage, handling and disposal of Nuclear Material.
"Property" shall mean all land, buildings, structures, plant, equipment,
vehicles, contents (including but not limited to liquids and gases) and
all materials of whatever description whether fixed or not.
"High Radioactivity Zone or Area" means:
(i) For nuclear power stations and Nuclear Reactors, the vessel or
structure which immediately contains the core (including its
supports and shrouding) and all the contents thereof, the fuel
elements, the control rods and the irradiated fuel store; and
(ii) For non-reactor Nuclear Installations, any area where the
level of radioactivity requires the provision of a biological
shield.
N.M.A. 1975(a)
April 1, 1994
- -----------------------------------------------------------------------------
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
"Agreement" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
Effective: January 1, 1996 32 of 32
3645-16/02
PAGE
SUMMARY OF CHANGES
------------------
to the
SELECTIVE INSURANCE GROUP
-------------------------
SECOND CASUALTY CATASTROPHE EXCESS OF LOSS PROGRAM
--------------------------------------------------
This Contract commencing at January 1, 1996 differs from the previous
Contract in the following manner:
1. Throughout the Contract, all dates, rates, and premium amounts have been
amended to reflect the terms of the firm order.
2. Throughout the Contract, all references to "Agreement","Contract",
"Company", and "Reinsurers" have been amended to read "the Agreement",
"the Contract", "the Company", "the Reinsurers", and "the Subscribing
Reinsurer" (in the Interests and Liabilities Agreement), to correct
grammatical errors. Also, cross references to other Articles have been
added and editorial corrections (such as capitalization) have been made.
3. Throughout the Contract, all major sections and subsections have been
renamed to appear in the following order for the sake of consistency:
A., 1., (a), (i).
4. Preamble; Has been amended to follow the language contained in all
other Selective Insurance Group Contracts. The Company name has been
amended to delete any references to Charleston Insurance Company.
5. Article 1, Business and Territory Covered; The first sentence has been
amended to replace the phrase "This Contract shall indemnify..." with
the phrase "The Reinsurers shall indemnify".
6. Article 3, Extended Expiration; Has been amended to read "If this
Contract terminates" rather than "If this Contract shall terminate".
7. Article 5, Exclusions; Section G. has been amended for the sake of
clarity.
8. Article 6, Reinsuring Clause; The definitions of "Policy Year" and
"Aggregate" have been moved to Article 7.
9. Article 7, Definitions; Has been amended to include the definitions of
"Policy Year", "Aggregate" and "Gross Net Earned Premium Income".
10. Article 8, Warranties; Section C has been amended to read "net (being
net of facultative) liability each policy written by the Company" and
the phrase "in respect of each class of insurance" has been deleted, and
the maximum net liability for Commercial Umbrella Liability has been
amended to read "$5,000,000".
PAGE
11. Article 9, Premium; The definition of "Gross Net Earned Premium Income"
has been moved to Article 7.
12. Article 10, Reinstatement; This Article has been reworded to follow the
language of all other Selective Insurance Group Contracts.
13. Article 12, Ultimate Net Loss; The first paragraph has been amended to
include reference to coverage provided for losses in excess of original
policy limits, and the phrase "Company's field employees" has been
replaced with "Company's employees including staff counsel".
14. Article 15, Notice of Loss and Loss Settlements; This Article has been
reworded to follow the language of all other Selective Insurance Group
Contracts.
15. Article 20, Service of Suit; The zip code of Mendes and Mount has been
corrected.
16. Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A.;
minor editorial changes have been made to correctly reflect the language
contained in the London Market NMA 1590 (amended).
No. 3525-0090
CASUALTY EXCESS OF LOSS
-----------------------
REINSURANCE AGREEMENT
---------------------
between
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
and
VARIOUS INSURANCE AND/OR
REINSURANCE COMPANIES
PAGE
No. 3525-0090
TABLE OF CONTENTS
-----------------
ARTICLE PAGE
------- ----
I RETENTION OF COMPANY AND LIABILITY
OF REINSURER 1
II EXHIBITS COVERED 2
III BUSINESS COVERED AND GOVERNING
GUIDELINES 2
IV TERRITORY 3
V EXCLUSIONS 3
VI DEFINITIONS 5
VII ULTIMATE NET LOSS 7
VIII WARRANTIES 8
IX CLAIMS 9
X EXTRA CONTRACTUAL OBLIGATIONS 9
XI SUBROGATION AND SALVAGE 10
XII ORIGINAL CONDITIONS 11
XIII RESERVES AND TAXES 11
XIV INSOLVENCY CLAUSE 11
XV ARBITRATION 12
XVI OFFSET AND SECURITY CLAUSE 14
XVII SELF-INSURED OBLIGATIONS 15
XVIII ERRORS AND OMISSIONS 15
PAGE
No. 3525-0090
TABLE OF CONTENTS
-----------------
ARTICLE PAGE
------- ----
XIX ACCESS TO RECORDS 16
XX COMMENCEMENT AND TERMINATION 16
XXI SURVIVORSHIP CLAUSE 17
PAGE
No. 3525-0090
CASUALTY EXCESS OF LOSS
REINSURANCE AGREEMENT
---------------------
THIS AGREEMENT made and entered into by and between SELECTIVE INSURANCE
COMPANY OF AMERICA and SELECTIVE WAY INSURANCE COMPANY both of Branchville,
New Jersey and SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST and SELECTIVE
INSURANCE COMPANY OF SOUTH CAROLINA, both of Charlotte, North Carolina, and
EXCHANGE INSURANCE COMPANY, Buffalo, New York (herein and therein
collectively referred to as the "Company") and various insurance and/or
reinsurance companies and/or underwriting members of Lloyd's (hereinafter
referred to as the "Reinsurers") one of whom is the "Subscribing Reinsurer"
whose name appears on the Interests and Liabilities Agreement attaching to
and forming a part of this Contract.
WITNESSETH:
The Reinsurer hereby reinsures the Company to the extent and on the
terms and conditions and subject to the exceptions, exclusions and
limitations hereinafter set forth and nothing hereinafter shall in any manner
create any obligations or establish any rights against the Reinsurer in favor
of any third parties or any persons not parties to this Agreement.
ARTICLE I
---------
RETENTION OF COMPANY AND LIABILITY OF REINSURER
- -----------------------------------------------
The retention of the Company and the liability of the Reinsurer and all
other benefits accruing to the Company, as provided in this Agreement or any
amendments thereof, shall apply to the parties comprising the Company as a
group and not separately to each of the parties. Any payments by the
Reinsurer to any of the parties comprising the Company shall discharge the
Reinsurer's liability under this Agreement.
-1-
PAGE
No. 3525-0090
ARTICLE II
----------
EXHIBITS COVERED
- ----------------
The Company will reinsure with the Reinsurer and the Reinsurer will
accept the reinsurance from the Company as set forth in Exhibits A, B, C, D,
E and F which are attached hereto and made a part of this Agreement, such
Exhibits being entitled for purposes of identification as follows:
EXHIBIT A -FIRST CASUALTY EXCESS OF LOSS
EXHIBIT B -SECOND CASUALTY EXCESS OF LOSS
EXHIBIT C -THIRD CASUALTY EXCESS OF LOSS
EXHIBIT D -FOURTH CASUALTY EXCESS OF LOSS
EXHIBIT E - FIFTH CASUALTY EXCESS OF LOSS
EXHIBIT F -SIXTH CASUALTY EXCESS OF LOSS
ARTICLE III
-----------
BUSINESS COVERED AND GOVERNING GUIDELINES
- -----------------------------------------
(a) Except as may be modified herein, it is understood and agreed that
this Agreement shall apply to all policies and binders underwritten by the
Company and defined by the Company as Casualty, Workers Compensation and
Umbrella business, and classified as Lines of Business in the Company's
Annual Statement as follows:
Lines of Business
-----------------
Liability Coverages Under:
Farmowners Multiple Peril
Homeowners Multiple Peril
Commercial Multiple Peril
Workers Compensation
Other Liability
Products Liability
Private Passenger Auto Liability
Commercial Auto Liability
-2-
PAGE
No. 3525-0090
(b) In addition to the terms and conditions contained herein, it is
specifically understood and agreed that the business subject to recoveries
under this Agreement and the Exhibits attached shall be limited to business
which is written in accordance with the Company's SBU Guidelines. Any change
in Company underwriting philosophy which significantly impacts the Company's
SBU Guidelines shall be discussed with the lead Reinsurer.
ARTICLE IV
----------
TERRITORY
- ---------
This Agreement shall follow the territorial coverage granted by the
Company under its original policies reinsured hereunder.
ARTICLE V
---------
EXCLUSIONS
- ----------
(a) The reinsurance provided under this Agreement is subject to the
exclusions as set forth below unless submitted by the Company to the
Reinsurer for inclusion hereunder.
(b) This Agreement does not apply to:
1. Reinsurance assumed by the Company; however, this exclusion
shall not relate to reinsurance of Self-Insured Retention Groups or Risk
Retention Groups and inter-company pooling arrangements.
2. All business derived from any Pool, Association, Joint
Underwriting Association, Syndicate, Exchange, Plan or other
facility directly as a member, subscriber or participant, or
indirectly by way of reinsurance, except for Workers
Compensation Assigned Risk Plan in New Jersey. However, this
exclusion shall not apply to individual automobile assigned
risks, including limited assignment distribution and
commercial limited assignment distribution assigned to the
Company nor shall it apply to any voluntary Governmental
pools.
3. Any economic performance insurance written as such, including
but not limited to financial guarantee covers, contract
frustration
-3-
PAGE
No. 3525-0090
covers, efficacy covers, credit risk covers, political risk
covers or residual value covers.
4. Liability of the Company arising from its participation or
membership, whether voluntary or involuntary, in any
Insolvency Fund, including any Guarantee Fund, Association,
Pool, Plan or other facility which provides for the assessment
of, payment by, or assumption by the company of a part or the
whole of any claims, debt, charge, fee, or other obligations
of an insured or its successors or assigns, which has been
declared insolvency by any authority having jurisdiction.
5. The Company's liability for punitive, exemplary or
consequential damages or compensatory damages resulting from
an action of an insured or assignee against the Company,
except as provided under Self-Insured Obligations or Extra
Contractual Obligations.
6. Policies issued by the Company to insurance or reinsurance
companies (each hereinafter referred to as "insurer"), other
than Self-Insured Obligations, which provides insurance
against liability of the insurer for any damages resulting
from alleged or actual tortious conduct by the insurer in the
handling of claims made against any of its policyholders or in
the handling of any other business matters with any of its
policyholders.
7. Liability excluded by provisions of the following clauses.
The word "Reassured" therein means "Company."
Nuclear Incident Exclusion Clause
Liability - Reinsurance - No. 1B
Nuclear Incident Exclusion Clause Reinsurance - No. 4
Nuclear Energy Risks Exclusions Clause (Reinsurance) (1994)
(Worldwide excluding USA and Canada)
8. Operations employing the process of nuclear fission or fusion
or handling of radioactive material. This exclusion does not
apply to liability arising out of the use of x-ray or related
equipment by medical professionals.
9. Atomic Energy Commission projects and operations conducted
under license from the Atomic Energy Commission.
-4-
PAGE
No. 3525-0090
10. War, whether or not declared, or any act or condition incident
to war. War includes, but is not limited to, civil war,
insurrection, rebellion or revolution.
Reinsurance as is afforded by this Agreement shall apply to any risks
excluded above until discovery by a member of the underwriting
department of the Home Office of the Company of the existence of such
risk and for 30 days thereafter, and shall then cease unless, within
such 30 day period, the Company has received from the Lead Reinsurer
written notice of their approval of such risk.
ARTICLE VI
----------
DEFINITIONS
- -----------
(a) The term "loss occurrence" as used in this Agreement means each
accident or occurrences or series of accidents or occurrences arising out of
one event, provided that as respects:
1. Products Liability (bodily injury and property damage), "loss
occurrence" means the sum of all damages arising from the
consumption of, use of, or exposure to each insured's
product(s) during each policy year, which emanate from or are
traceable to the same causative agency.
2. Third Party Bodily Injury or Property Damage Liability, other
than Automobile and Products, "loss occurrence" means the sum
of all damages sustained by each insured during each policy
year arising from or traceable to a continuous or repeated
exposure to the same causative agency.
(i) If the date of loss occurrence under items 1. and 2.
above cannot be specifically determined, the date of loss
occurrence shall be the inception date of the policy
reinsured hereunder, where such policy shall be deemed to
be in effect not more than 12 calendar months from
inception.
3. Occupational Disease, "loss occurrence" means each employee
contracting a disease or cumulative injury for which the
employer (insured) is liable.
(i) The date of loss occurrence under item 3. above shall be
the date that the medical expense reimbursement or
compensation indemnity is first paid to the employee by
the Company.
-5-
PAGE
No. 3525-0090
(ii) If an Occupational Disease of the same specific kind or
class, which is traceable to the same causative agency,
is contracted by two or more employees and the dates of
the individual loss occurrences, as defined in paragraph
(i) of item 3., are within the same policy year, then
such individual loss occurrences shall be accumulated and
deemed one loss occurrence during that policy year and
the date of loss occurrence shall be the inception date
of the policy. Such policy shall be deemed to be in
effect not more than 12 calendar months from inception.
4. If policies which respond on a "claims made" basis are
involved in the same event with other "occurrence" and/or
"claims made" policies the date of the event shall be
determined as follows:
(i) If an "occurrence" policy is involved, the date of the
event shall be the date as determined under the
"occurrence" policy,(or as stated above), or,
(ii) If no "occurrence" policy is identified as being
involved, then the date of the event will be the date the
first claim is made under the "claims made" policy. If
the first claim from an event is under an Extended
Reporting Period Endorsement, the date of the event shall
be the first date the first claim is made.
5. Subject to the provisions of items (a)2.(i), 3.(i) and 3.(ii)
under this Article, if only occurrence policies are involved,
then the date of the event shall be the date as determined
under that or those policy(ies).
(b) The term "claim(s) made" as used herein shall mean all claims under
policies classified by the Company as such and for which all claims are
submitted by the original insured within the period of time prescribed by the
Company in the policy.
(c) The term "policy year" means each annual period the policy is in
effect. Policies in effect for a period longer than one year shall be deemed
to have separate policy years.
(d) The term "gross net written premium income" means gross subject
premiums, deposits, advance premiums and additional premiums less return
premiums and
-6-
PAGE
No. 3525-0090
less premiums for reinsurance ceded by the Company which inures to the
benefit of the Reinsurer under this Agreement.
(e) The term "gross net earned premium income" means the Company's
gross net premium written income written during the period for which
computation is being made, plus the gross net unearned premiums at the
beginning of the period, less the gross net unearned premiums at the end of
the period; said unearned premiums to be computed on the monthly pro rata
basis.
(f) The term "policies" means each of the Company's binders, policies,
contracts, cessions and certificates providing insurance on the perils and
Classes of Insurance covered hereunder.
(g) Subject to the provisions of the Ultimate Net Loss Clause,
Declaratory Judgment Expenses means expenses paid by the Company in the
investigation, analysis, evaluation or resolution of litigation of coverage
issues between the Company and any other party to determine if there is
coverage under a policy issued by the Company and therefore reinsured by this
Agreement for a specific claim or claims.
(h) The term "Agreement Year" as used in this Agreement shall mean each
12 month period ending on June 30. The first Agreement Year will be the
period from July 1, 1996 to June 30, 1997.
ARTICLE VII
-----------
ULTIMATE NET LOSS
- -----------------
(a) The term "Ultimate Net Loss" as used in this Agreement means the
sum actually paid by the Company in settlement of losses for which it is held
liable, including Declaratory Judgment Expenses in accordance with the
provisions of paragraph (g) of Article VI, Definitions, Extra Contractual
Obligations in accordance with the provisions of Article X, and all expenses
incurred by the Company in settlement or defense of claims, including taxed
court costs, pre-judgment and post-judgment interest, and loss expenses
-7-
PAGE
No. 3525-0090
incurred in the investigation, adjustment, litigation, defense and settlement
of claims made against the Company under the policies reinsured hereunder.
(b) Recoveries, salvages and claims upon other reinsurance which inures
to the benefit of the Reinsurer under this Agreement, whether collectible or
not, shall be deducted in arriving at the "ultimate net loss."
(c) All office expenses of the Company and all salaries and expenses of
its officials and employees are excluded under this Agreement.
(d) In the event of the insolvency of the Company, "ultimate net loss"
means the amount of loss which the Company has incurred or for which it is
liable, and payment by the Reinsurer shall be made to the liquidator,
receiver or statutory successor of the Company in accordance with the
provisions of Article XIV of this Agreement.
(e) In calculating the amount of any loss hereunder and also in
computing the amount or amounts in excess of which this Agreement attaches,
only loss or losses in respect of that portion of any insurance or
reinsurance agreement which the company retains net for its own account shall
be included.
(f) The amount of the Reinsurers' liability hereunder in respect to any
loss or losses shall not be increased by reason of the inability of the
Company to collect from any other reinsurers whether specific or general any
amounts which may have become due from them whether such inability arises
from the insolvency of such other reinsurers or otherwise.
ARTICLE VIII
------------
WARRANTIES
- ----------
It is warranted by the Company that the Maximum any one Life-Workers
Compensation Recoverable under this Treaty shall be $20,000,000.
-8-
PAGE
No. 3525-0090
ARTICLE IX
----------
CLAIMS
- ------
(a) The Company shall advise the Reinsurer promptly of all claims and
any subsequent developments pertaining thereto of any claim or loss reserved
at 50% or more of the retention under this Agreement and any claim for which
a bad faith action has been filed.
(b) The Company has the obligation to investigate and, to the extent
that may be required by the policies reinsured hereunder, defend any claim
affecting this reinsurance and to pursue such claim to final determination.
(c) It is understood that when so requested the Company will afford the
Reinsurer an opportunity to be associated with the Company at the expense of
the Reinsurer in the defense or control of any claim or suit or proceeding
involving this reinsurance; and the Company and the Reinsurer shall cooperate
in every respect in the defense of such suit or claim or proceeding.
(d) Any and all payments made by the Company in settlement of loss or
losses whether in payment of an award or verdict or in the satisfaction of a
judgment in any Court against the insured or the Company or made voluntarily
by the Company before judgment, in full settlement or as a compromise, shall
be unconditionally binding upon the Reinsurer and amounts falling to the
share of the Reinsurer shall be immediately payable to the Company by them
upon reasonable evidence of the amount paid or to be paid by the Company
being presented to the Reinsurer by the Company.
(e) Inadvertent error in or delay or omission of any such claim
notifications shall not in any way prejudice the rights of the Company under
this Agreement.
ARTICLE X
---------
EXTRA CONTRACTUAL OBLIGATIONS
- -----------------------------
(a) The Agreement shall protect the Company within the limits hereof,
where ultimate net loss includes Extra Contractual Obligations.
-9-
PAGE
No. 3525-0090
(b) "Extra Contractual Obligations" are defined as those liabilities
not covered under any other provision of this agreement, which arise from the
handling of any claim on business covered hereunder (including awards to a
third party claimant in excess of the Company's policy limit)such liabilities
arising because of, but not limited to the following: failure by the company
to settle within the policy limit, or by reason of alleged or actual
negligence, fraud or bad faith in rejecting an offer of settlement or in the
preparation of the defense or in the trial of any action against its insured
or in the preparation or prosecution of an appeal consequent upon such
action.
(c) The date on which an Extra Contractual Obligation is incurred by
the Company shall be deemed, in all circumstances, to be the date of the
original occurrence.
(d) This article shall not apply where the loss has been incurred due
to the fraud of a member of the Board of Directors or a corporate officer of
the Company acting individually or collectively or in collusion with any
individual or corporation or any other organization or party involved in the
presentation, defense or settlement of any claim covered hereunder.
(e) Recoverables from any form of insurance or reinsurance which
protects the Company against claims which are subject matter of this clause
will inure to the benefit of the reinsurer and shall be deducted in arriving
at the amount of the Company's ultimate net loss.
ARTICLE XI
----------
SUBROGATION AND SALVAGE
- -----------------------
(a) Any recoveries, salvages or reimbursements applying to risks
covered under this Agreement shall always be used to reimburse the excess
carriers (from the last to the first, beginning with the carrier of the last
excess), according to their participation, before being used in any way to
reimburse the Company for its primary loss.
(b) All salvages, recoveries or reimbursements, after deduction of
expenses applicable thereto, recovered or received subsequent to a loss
settlement under this
-10-
PAGE
No. 3525-0090
Agreement shall be applied as if recovered or received prior to the aforesaid
settlement and all necessary adjustments shall be made by the parties hereto,
provided always, that nothing in this clause shall be construed to mean that
losses under this Agreement are not recoverable until the Company's ultimate
net loss has been ascertained.
ARTICLE XII
-----------
ORIGINAL CONDITIONS
- -------------------
The liability of the Reinsurer shall follow the insurance liability of
the Company in every case and shall be subject in all respects to all the
general and special stipulations, clauses, waivers and modifications of the
Company's policy, binder or other undertaking, and any endorsements thereon,
except as may be provided herein. However, nothing herein shall in any
manner create any obligations by the Reinsurer or establish any rights
against the Reinsurer in favor or any insured or insureds under the original
policies issued by the Company.
ARTICLE XIII
------------
RESERVES AND TAXES
- ------------------
(a) The Reinsurer shall maintain legal reserves with respect to
unearned premiums and claims hereunder. The Company shall furnish to the
Reinsurer semi-annually a list of outstanding claims in which the Reinsurer
is interested, showing the amount of loss reserves set up by the Company in
respect of both the gross amount and the Reinsurer's share of each and every
such claim.
(b) The Company will be liable for all taxes on premiums reported to
the Reinsurer hereunder and will reimburse the Reinsurer for such taxes where
the Reinsurer is required to pay the same.
ARTICLE XIV
-----------
INSOLVENCY CLAUSE
- -----------------
In the event of the insolvency of the Company and the appointment of a
conservator, liquidator or statutory successor, the reinsurance provided by
this Agreement
-11-
PAGE
No. 3525-0090
shall be payable by the Reinsurer directly to the Company or to its
liquidator, receiver or statutory successor on the basis of the liability of
the Company under the contract or contracts reinsured. Subject to the right
of offset and the verification of coverage, the Reinsurer shall pay its share
of the loss without diminution because of the insolvency of the Company. The
liquidator, receiver or statutory successor of the Company shall give written
notice of the pendency of each claim against the Company on a policy or bond
reinsured within a reasonable time after such claim is filed in the
insolvency proceeding. During the pendency of such claim, the Reinsurer may,
at its own expense, investigate such claim and interpose in the proceeding
where such claim is to be adjudicated any defense or defenses which it may
deem available to the Company, its liquidator or receiver or statutory
successor. Subject to court approval, any expense thus incurred by the
Reinsurer shall be chargeable against the Company as part of the expense of
liquidation to the extent of such proportionate share of the benefit as shall
accrue to the Company solely as a result of the defense undertaken by the
Reinsurer. The reinsurance shall be payable as set forth above except where
this Agreement specifically provides for the payment of reinsurance proceeds
to another party in the event of the insolvency of the Company.
ARTICLE XV
----------
ARBITRATION
- -----------
(a) As a condition precedent to any right of action hereunder, any
dispute arising out of this Agreement shall be submitted to the decision of a
board of arbitration composed of two arbitrators and an umpire, meeting in
Branchville, New Jersey unless otherwise agreed.
(b) The members of the board of arbitration shall be active or retired
disinterested officials of insurance or reinsurance companies. Each party
shall appoint its arbitrator and the two arbitrators shall choose an umpire
before instituting the hearing. If the respondent fails to appoint its
arbitrator within four weeks after being requested to do so by the claimant,
the latter shall also appoint the second arbitrator. If the two arbitrators
-12-
PAGE
No. 3525-0090
fail to agree upon the appointment of an umpire within four weeks after their
nominations, each of them shall name three, of whom the other shall decline
two and the decision shall be made by drawing lots.
(c) The claimant shall submit its initial brief within 20 days from
appointment of the umpire. The respondent shall submit its brief within 20
days after receipt of the claimant's brief and the claimant may submit a
reply brief within l0 days after receipt of the respondent's brief.
(d) The board shall make its decision with regard to the custom and
usage of the insurance and reinsurance business. The board shall issue its
decision in writing based upon a hearing in which evidence may be introduced
without following strict rules of evidence but in which cross examination and
rebuttal shall be allowed. The board shall make its decision within 60 days
following the termination of the hearings unless the parties consent to an
extension. The majority decision of the board shall be final and binding
upon all parties to the proceeding. Judgment may be entered upon the award
of the board in any court having jurisdiction thereof.
(e) If more than one reinsurer is involved in the same dispute, all
such reinsurers shall constitute and act as one party for purposes of this
clause and communications shall be made by the Company to each of the
reinsurers constituting the one party, provided, however, that nothing
therein shall impair the rights of such reinsurers to assert several, rather
than joint defenses or claims, nor be construed as changing the liability of
the reinsurers under the terms of this Agreement from several to joint.
(f) Each party shall bear the expense of its own arbitrator and shall
jointly and equally bear with the other party the expense of Arbitration.
-13-
PAGE
No. 3525-0090
ARTICLE XVI
-----------
OFFSET AND SECURITY CLAUSE
- --------------------------
(a) Each party hereto has the right, which may be exercised at any
time, to offset any amounts, whether on account of premiums or losses or
otherwise, due from such party to another party under this Agreement or any
other reinsurance agreement heretofore or hereafter entered into between
them, against any amounts, whether on account of premiums or losses or
otherwise due from the latter party to the former party. The party asserting
the right of offset may exercise this right, whether as assuming or ceding
insurer or in both roles in the relevant agreement or agreements.
(b) Each party hereby assigns and pledges to the other party (or to
each other party, if more than one) all of its rights under this Agreement to
receive premium or loss payments at any time from such other party
("Collateral"), to secure its premium or loss obligations to such other party
at any time under this Agreement and any other reinsurance agreement
heretofore or hereinafter entered into by and between them ("Secured
Obligations"). If at any time a party is in default under any Secured
Obligation or shall be subject to any liquidation, rehabilitation,
reorganization or conservation proceeding, each other party shall be entitled
in its discretion, to apply, or to withhold for the purpose of applying in
due course, any Collateral assigned and pledged to it by the former party and
otherwise to realize upon such Collateral as security for such Secured
Obligations.
(c) The security interest described herein, and the term "Collateral,"
shall apply to all payments and other proceeds in respect of the rights
assigned and pledged. A party's security interest in Collateral shall be
deemed evidenced only by the counterpart of this Agreement delivered to such
party.
(d) Each right under this Article is a separate and independent right,
exercisable, without notice or demand, alone or together with other rights,
in the sole election of the party entitled thereto, and no waiver, delay, or
failure to exercise, in respect of any right, shall constitute a waiver of
any other right. The provisions of this Article
-14-
PAGE
No. 3525-0090
shall survive any cancellation or other termination of this Agreement. In
the event of the insolvency of either party to this agreement, then offsets
shall only be allowed to the extent permitted by the applicable law of the
insolvent party's "state of domicile."
ARTICLE XVII
------------
SELF-INSURED OBLIGATIONS
- ------------------------
(a) As respects all business the subject matter hereof, where the
coverage has been agreed upon between the Company and the Reinsurer, this
Agreement shall cover all obligations of the Company assumed by it as a self-
insured (or self-insured obligations in excess of any valid and collectible
insurance available to the Company) to the same extent as if all types of
insurance covered by this Agreement were afforded under the broadest forms of
agreements issued by the Company.
(b) An insurance or reinsurance wherein the Company hereby reinsured
and/or its affiliated and/or subsidiary Companies are named as the Insured or
Reinsured party, either alone or jointly with some other party, shall be
deemed to be an insurance or reinsurance coming within the scope of this
Agreement, notwithstanding that no legal liability may arise in respect
thereof by reason of the fact that the Company hereby reinsured and/or its
affiliated and/or subsidiary Companies are named as the Insured or Reinsured
party or one of the Insured or Reinsured parties.
ARTICLE XVIII
-------------
ERRORS AND OMISSIONS
- --------------------
Errors or omissions made in connection with this Contract shall not
relieve either party from any liability which would have attached had such
error or omission not occurred, provided always that such error or omission
shall be rectified as soon as possible after discovery by the Company's Home
Office. However, the liability of the Reinsurers under this Contract or any
exhibits or endorsements attached hereto shall in no event exceed the limits
specified herein, nor be extended to cover any risks, perils or classes of
insurance or reinsurance generally or specifically excluded herein, unless
specifically
-15-
PAGE
No. 3525-0090
reported to the Reinsurers for acceptance hereunder within 30
days after discovery by the Company's Home Office.
ARTICLE XIX
-----------
ACCESS TO RECORDS
- -----------------
The Company shall place at the disposal of the Reinsurer and the
Reinsurer shall have the right to inspect, through its authorized
representatives, at all reasonable times during the currency of this
Agreement and thereafter, the books, records and papers of the Company
pertaining to the reinsurance provided hereunder and all claims made in
connection therewith.
ARTICLE XX
----------
COMMENCEMENT AND TERMINATION
- ----------------------------
(a) This Agreement and the Exhibits attached hereto shall take effect
as of 12:01 A.M., July 1, 1996 and shall, except as otherwise stipulated
herein or in any Exhibit hereto or any Endorsement hereof, continue in full
force and effect until terminated as hereinafter provided.
(b) This Agreement or any of the Exhibits may be cancelled at any time
by mutual agreement or as of any June 30 or December 31 by either party
giving 90 days notice to the other stating when thereafter cancellation shall
be effective.
(c) In the event of cancellation, the Reinsurer shall remain liable for
losses occurring or claims made prior to such cancellation date, but all
liability shall terminate hereunder as to losses occurring in respect of
occurrence policies, or claims made, in respect of claims made policies
subsequent to the cancellation date.
(d) At the sole option of the Company, the Reinsurer shall remain
liable for all policies coming within the terms of this Contract with respect
to all Loss Occurrences that may occur on any and all of the Company's
Policies that are in force at the termination date of the Contract until the
Policies' scheduled anniversary, expiration, cancellation or nonrenewal,
which shall occur first, provided, however, that in no event shall the
-16-
PAGE
No. 3525-0090
Reinsurer be liable under this contract for any loss more than 12 months.
Should the Company choose the run-off option, the Company and Lead Reinsurer
shall mutually agree to the rate at which the reinsurance premium for said
run-off period will be calculated. This agreed rate shall be multiplied
against the Gross Net Earned Premium Income for the run-off period.
(e) Every notice of termination shall be given by certified letter
addressed to the intended recipient at such recipient's address. In
determining whether the requisite number of days' notice has been given in
any case, the date of termination shall be counted but the date of mailing
shall not.
(f) Notwithstanding the termination of this Agreement as hereinabove
provided, the provisions of this Agreement shall continue to apply to all
unfinished business hereunder to the end that all obligations and liabilities
incurred by each party hereunder prior to such termination shall be fully
performed and discharged.
ARTICLE XXI
-----------
SURVIVORSHIP CLAUSE
- -------------------
If any provision of this Agreement shall be rendered illegal or
unenforceable by the laws, regulations or public policy of any state, such
provision shall be considered void in such state, but this shall not affect
the validity or enforceability of any other provision of this Agreement or
the enforceability of such provision in any other jurisdiction.
-17-
PAGE
No. 3525-0090
EXHIBIT A
EXHIBIT A
---------
FIRST CASUALTY EXCESS OF LOSS
-----------------------------
Section 1
---------
COVER
- -----
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amounts of ultimate net loss which the Company may pay as a
result of losses occurring on and after 12:01 A.M., July 1, 1996, as respects
policies in force at 12:01 A.M., Standard Time, July 1, 1996, and new and
renewal policies becoming effective on and after said date and subject to the
exclusions set forth in Article V of this Agreement and the limits set forth
in Section 2 of this Exhibit.
Section 2
---------
LIMITS OF COVER
- ---------------
Subject to the Limits and Retention hereof, the Reinsurers shall pay to
the Company the amount of Ultimate Net Loss up to $4,000,000 Ultimate Net
Loss each and every Loss Occurrence that takes place during the currency of
this Contract in excess of $1,000,000 Ultimate Net Loss in respect of each
and every Loss Occurrence.
Section 3
---------
REINSTATEMENT CLAUSE
- --------------------
Each claim hereon reduces the amount of indemnity from the time of
occurrence of the loss by the sum paid, but any amount so exhausted is hereby
reinstated from the time of occurrence of the loss for no additional premium.
Section 4
---------
PREMIUM
- -------
(a) The Company shall pay to the Reinsurers a deposit reinsurance
premium of $6,328,000 in equal quarterly installments of $1,582,000, payable
at July 1, October 1, January 1 and April 1.
-1-
PAGE
No. 3525-0090
EXHIBIT A
(b) Within 90 days after the end of each Agreement Year, the Company
shall furnish to the Reinsurers a statement of the Gross Net Earned Premium
Income of the Company for the Contract term and the reinsurance premium shall
be adjusted at a rate of 1.12% of the Company's Gross Net Earned Premium
Income. For the purposes of this calculation, 15% of the Company's earned
premium for Homeowners and Farmowners Policies and 35% for Businessowners
Policies shall be included. The debtor party shall immediately pay the
creditor the difference between the calculated premium and the deposit
premium payments. However, in no event shall the adjusted reinsurance
premium be less than $5,062,400.
Section 5
---------
REPORTS AND REMITTANCES
- -----------------------
(a) The Company will provide the Reinsurer with all necessary data
respecting premiums and losses, including reserves thereon, as at dates and
on forms mutually acceptable to the Company and the Reinsurer.
(b) Payment by the Reinsurer of its proportion of losses and loss
adjustment expenses paid or to be paid by the Company will be made by the
Reinsurer to the Company within 15 days after proof of the amount paid or to
be paid by the Company is received by the Reinsurer. The Company may give
the Reinsurer written notice of its intention to pay a loss, equal to or
greater than $500,000 to the layer, on a certain date and may require the
receipt of payment of the Reinsurer's share of the loss by such date,
provided the Reinsurer in any event shall have a period of 48 hours after
receipt of said written notice to mail or otherwise dispatch the payment.
This Exhibit A is attached to and forms part of Reinsurance Agreement
No. 3525-0090 issued to the SELECTIVE INSURANCE COMPANY OF AMERICA and
SELECTIVE WAY INSURANCE COMPANY and SELECTIVE INSURANCE COMPANY OF THE
SOUTHEAST and SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA and EXCHANGE
INSURANCE COMPANY.
-2-
PAGE
No. 3525-0090
EXHIBIT B
EXHIBIT B
---------
SECOND CASUALTY EXCESS OF LOSS
------------------------------
Section 1
---------
COVER
- -----
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amounts of ultimate net loss which the Company may pay as a
result of losses occurring on and after 12:01 A.M., July 1, 1996, as respects
policies in force at 12:01 A.M., Standard Time, July 1, 1996, and new and
renewal policies becoming effective on and after said date and subject to the
exclusions set forth in Article V of this Agreement and the limits set forth
in Section 2 of this Exhibit.
Section 2
---------
LIMITS OF COVER
- ---------------
Subject to the Limits and Retention hereof, the Reinsurers shall pay to
the Company the amount of Ultimate Net Loss up to $7,000,000 Ultimate Net
Loss each and every Loss Occurrence that takes place during the currency of
this Contract in excess of $5,000,000 Ultimate Net Loss in respect of each
and every Loss Occurrence.
Section 3
---------
REINSTATEMENT CLAUSE
claim hereon reduces the amount of indemnity from the time of occurrence
of the loss by the sum paid, but any amount so exhausted is hereby reinstated
from the time of occurrence of the loss for no additional premium.
Section 4
---------
PREMIUM
- -------
(a) The Company shall pay to the Reinsurers a deposit reinsurance
premium of $1,638,500 in equal quarterly installments of $409,625, payable at
July 1 and October 1, 1996, and January 1 and April 1, 1997.
-1-
PAGE
No. 3525-0090
EXHIBIT B
(b) Within 90 days after the end of each Agreement Year, the Company
shall furnish to the Reinsurers a statement of the Gross Net Earned Premium
Income of the Company for the Contract term and the reinsurance premium shall
be adjusted at a rate of .29% of the Company's Gross Net Earned Premium
Income. For the purposes of this calculation, 15% of the Company's earned
premium for Homeowners and Farmowners Policies and 35% for Businessowners
Policies shall be included. The debtor party shall immediately pay the
creditor the difference between the calculated premium and the deposit
premium payments. However, in no event shall the adjusted reinsurance
premium be less than $1,310,800.
Section 5
---------
REPORTS AND REMITTANCES
- -----------------------
(a) The Company will provide the Reinsurer with all necessary data
respecting premiums and losses, including reserves thereon, as at dates and
on forms mutually acceptable to the Company and the Reinsurer.
(b) Payment by the Reinsurer of its proportion of losses and loss
adjustment expenses paid or to be paid by the Company will be made by the
Reinsurer to the Company within 15 days after proof of the amount paid or to
be paid by the Company is received by the Reinsurer. The Company may give
the Reinsurer written notice of its intention to pay a loss, equal to or
greater than $500,000 to the layer, on a certain date and may require the
receipt of payment of the Reinsurer's share of the loss by such date,
provided the Reinsurer in any event shall have a period of 48 hours after
receipt of said written notice to mail or otherwise dispatch the payment.
This Exhibit B is attached to and forms part of Reinsurance Agreement
No. 3525-0090 issued to the SELECTIVE INSURANCE COMPANY OF AMERICA and
SELECTIVE WAY INSURANCE COMPANY and SELECTIVE INSURANCE COMPANY OF THE
SOUTHEAST and SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA and EXCHANGE
INSURANCE COMPANY.
-2-
PAGE
No. 3525-0090
EXHIBIT C
EXHIBIT C
---------
THIRD CASUALTY EXCESS OF LOSS
-----------------------------
Section 1
---------
COVER
- -----
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amounts of ultimate net loss which the Company may pay as a
result of losses occurring on and after 12:01 A.M., July 1, 1996, as respects
policies in force at 12:01 A.M., Standard Time, July 1, 1996, and new and
renewal policies becoming effective on and after said date and subject to the
exclusions set forth in Article V of this Agreement and the limits set forth
in Section 2 of this Exhibit.
Section 2
---------
LIMITS OF COVER
- ---------------
Subject to the Limits and Retention hereof, the Reinsurers shall pay to
the Company the amount of Ultimate Net Loss up to $9,000,000 Ultimate Net
Loss each and every Loss Occurrence or that takes place during the currency
of this Contract in excess of $12,000,000 Ultimate Net Loss in respect of
each and every Loss Occurrence.
Section 3
---------
REINSTATEMENT
- -------------
Each claim hereon reduces the amount of indemnity provided under this
Contract from the time of the loss occurrence by the amount paid. However,
the amount so reduced shall be immediately reinstated twice. For the first
full amount so reinstated there shall be no charge. For the next amount so
reinstated the Company shall pay the Reinsurer an additional premium
calculated at pro rata of the reinsurance earned premium payable under this
Exhibit. Such premium shall be pro rata as to the fraction of the face value
of the limit so reinstated and 100% as to time. Nevertheless, the
Reinsurer's liability
-1-
PAGE
No. 3525-0090
EXHIBIT C
hereunder shall never exceed $9,000,000 any one loss occurrence nor
$27,000,000 for all loss occurrences during the term of this Contract.
Section 4
---------
PREMIUM
- -------
(a) The Company shall pay to the Reinsurers a deposit reinsurance
premium of $791,000 in equal quarterly installments of $197,750, payable at
July 1 and October 1, 1996, and January 1 and April 1, 1997.
(b) Within 90 days after the end of each Agreement Year, the Company
shall furnish to the Reinsurers a statement of the Gross Net Earned Premium
Income of the Company for the Contract term and the reinsurance premium shall
be adjusted at a rate of .14% of the Company's Gross Net Earned Premium
Income. For the purposes of this calculation, 15% of the Company's earned
premium for Homeowners and Farmowners Policies and 35% for Businessowners
Policies shall be included. The debtor party shall immediately pay the
creditor the difference between the calculated premium and the deposit
premium payments. However, in no event shall the adjusted reinsurance
premium be less than $632,800.
Section 5
---------
REPORTS AND REMITTANCES
- -----------------------
(a) The Company will provide the Reinsurer with all necessary data
respecting premiums and losses, including reserves thereon, as at dates and
on forms mutually acceptable to the Company and the Reinsurer.
(b) Payment by the Reinsurer of its proportion of losses and loss
adjustment expenses paid or to be paid by the Company will be made by the
Reinsurer to the Company within 15 days after proof of the amount paid or to
be paid by the Company is received by the Reinsurer. The Company may give
the Reinsurer written notice of its intention to pay a loss, equal to or
greater than $500,000 to the layer, on a certain date and may require the
receipt of payment of the Reinsurer's share of the loss by such date,
-2-
PAGE
No. 3525-0090
EXHIBIT C
provided the Reinsurer in any event shall have a period of 48 hours after
receipt of said written notice to mail or otherwise dispatch the payment.
This Exhibit C is attached to and forms part of Reinsurance Agreement
No. 3525-0090 issued to the SELECTIVE INSURANCE COMPANY OF AMERICA and
SELECTIVE WAY INSURANCE COMPANY and SELECTIVE INSURANCE COMPANY OF THE
SOUTHEAST and SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA and EXCHANGE
INSURANCE COMPANY.
-3-
PAGE
No. 3525-0090
EXHIBIT D
EXHIBIT D
---------
FOURTH CASUALTY EXCESS OF LOSS
------------------------------
Section 1
---------
COVER
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amounts of ultimate net loss which the Company may pay as a
result of losses occurring on and after 12:01 A.M., July 1, 1996, as respects
policies in force at 12:01 A.M., Standard Time, July 1, 1996, and new and
renewal policies becoming effective on and after said date and subject to the
exclusions set forth in Article V of this Agreement and the limits set forth
in Section 2 of this Exhibit.
Section 2
---------
LIMITS OF COVER
- ---------------
Subject to the Limits and Retention hereof, the Reinsurers shall pay to
the Company the amount of Ultimate Net Loss up to $9,000,000 Ultimate Net
Loss each and every Loss Occurrence that takes place during the currency of
this Contract in excess of $21,000,000 Ultimate Net Loss in respect of each
and every Loss Occurrence.
Section 3
---------
REINSTATEMENT
- -------------
Each claim hereon reduces the amount of indemnity provided under this
Contract from the time of the loss occurrence by the amount paid. However,
the amount so reduced shall be immediately reinstated one time. For the
reinstated limit the Company shall pay the Reinsurer an additional premium
calculated at pro rata of the reinsurance earned premium payable under this
Exhibit. Such premium shall be pro rata as to the fraction of the face value
of the limit so reinstated and 100% as to time. Nevertheless, the
Reinsurer's liability hereunder shall never exceed $9,000,000 any one loss
occurrence nor $18,000,000 for all loss occurrences during the term of this
Contract.
-1-
PAGE
No. 3525-0090
EXHIBIT D
Section 4
---------
PREMIUM
- -------
(a) The Company shall pay to the Reinsurers a deposit reinsurance
premium of $395,500 in equal quarterly installments of $98,875, payable at
July 1 and October 1, 1996, and January 1 and April 1, 1997.
(b) Within 90 days after the end of each Agreement Year, the Company
shall furnish to the Reinsurers a statement of the Gross Net Earned Premium
Income of the Company for the Contract term and the reinsurance premium shall
be adjusted at a rate of .07% of the Company's Gross Net Earned Premium
Income. For the purposes of this calculation, 15% of the Company's earned
premium for Homeowners and Farmowners Policies and 35% for Businessowners
Policies shall be included. The debtor party shall immediately pay the
creditor the difference between the calculated premium and the deposit
premium payments. However, in no event shall the adjusted reinsurance
premium be less than $316,400.
Section 5
---------
REPORTS AND REMITTANCES
- -----------------------
(a) The Company will provide the Reinsurer with all necessary data
respecting premiums and losses, including reserves thereon, as at dates and
on forms mutually acceptable to the Company and the Reinsurer.
(b) Payment by the Reinsurer of its proportion of losses and loss
adjustment expenses paid or to be paid by the Company will be made by the
Reinsurer to the Company within 15 days after proof of the amount paid or to
be paid by the Company is received by the Reinsurer. The Company may give
the Reinsurer written notice of its intention to pay a loss, equal to or
greater than $500,000 to the layer, on a certain date and may require the
receipt of payment of the Reinsurer's share of the loss by such date,
provided the Reinsurer in any event shall have a period of 48 hours after
receipt of said written notice to mail or otherwise dispatch the payment.
-2-
PAGE
No. 3525-0090
EXHIBIT D
This Exhibit D is attached to and forms part of Reinsurance Agreement
No. 3525-0090 issued to the SELECTIVE INSURANCE COMPANY OF AMERICA and
SELECTIVE WAY INSURANCE COMPANY and SELECTIVE INSURANCE COMPANY OF THE
SOUTHEAST and SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA and EXCHANGE
INSURANCE COMPANY.
-3-
PAGE
No. 3525-0090
EXHIBIT E
EXHIBIT E
---------
FIFTH CASUALTY EXCESS OF LOSS
-----------------------------
Section 1
---------
COVER
- -----
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amounts of ultimate net loss which the Company may pay as a
result of losses occurring on and after 12:01 A.M., July 1, 1996, as respects
policies in force at 12:01 A.M., Standard Time, July 1, 1996, and new and
renewal policies becoming effective on and after said date and subject to the
exclusions set forth in Article V of this Agreement and the limits set forth
in Section 2 of this Exhibit.
Section 2
---------
LIMITS OF COVER
- ---------------
Subject to the Limits and Retention hereof, the Reinsurers shall pay to
the Company the amount of Ultimate Net Loss up to $10,000,000 Ultimate Net
Loss each and every Loss Occurrence that takes place during the currency of
this Contract in excess of $30,000,000 Ultimate Net Loss in respect of each
and every Loss Occurrence.
Section 3
---------
REINSTATEMENT
- -------------
Each claim hereon reduces the amount of indemnity provided under this
Contract from the time of the loss occurrence by the amount paid. However,
the amount so reduced shall be immediately reinstated one time. For the
reinstated limit the Company shall pay the Reinsurer an additional premium
calculated at pro rata of the reinsurance earned premium payable under this
Contract. Such premium shall be pro rata as to the fraction of the face
value of the limit so reinstated and 100% as to time. Nevertheless, the
Reinsurer's liability hereunder shall never exceed $10,000,000 any one loss
occurrence nor $20,000,000 for all loss occurrences during the term of this
Contract.
-1-
PAGE
No. 3525-0090
EXHIBIT E
Section 4
---------
PREMIUM
- -------
(a) The Company shall pay to the Reinsurers a deposit reinsurance
premium of $339,000 in equal quarterly installments of $84,750, payable at
July 1 and October 1, 1996, and January 1 and April 1, 1997.
(b) Within 90 days after the end of each Agreement Year, the Company
shall furnish to the Reinsurers a statement of the Gross Net Earned Premium
Income of the Company for the Contract term and the reinsurance premium shall
be adjusted at a rate of .06% of the Company's Gross Net Earned Premium
Income. For the purposes of this calculation, 15% of the Company's earned
premium for Homeowners and Farmowners Policies and 35% for Businessowners
Policies shall be included. The debtor party shall immediately pay the
creditor the difference between the calculated premium and the deposit
premium payments. However, in no event shall the adjusted reinsurance
premium be less than $271,200.
Section 5
---------
REPORTS AND REMITTANCES
- -----------------------
(a) The Company will provide the Reinsurer with all necessary data
respecting premiums and losses, including reserves thereon, as at dates and
on forms mutually acceptable to the Company and the Reinsurer.
(b) Payment by the Reinsurer of its proportion of losses and loss
adjustment expenses paid or to be paid by the Company will be made by the
Reinsurer to the Company within 15 days after proof of the amount paid or to
be paid by the Company is received by the Reinsurer. The Company may give
the Reinsurer written notice of its intention to pay a loss, equal to or
greater than $500,000 to the layer, on a certain date and may require the
receipt of payment of the Reinsurer's share of the loss by such date,
provided the Reinsurer in any event shall have a period of 48 hours after
receipt of said written notice to mail or otherwise dispatch the payment.
-2-
PAGE
No. 3525-0090
EXHIBIT E
This Exhibit E is attached to and forms part of Reinsurance Agreement
No. 3525-0090 issued to the SELECTIVE INSURANCE COMPANY OF AMERICA and
SELECTIVE WAY INSURANCE COMPANY and SELECTIVE INSURANCE COMPANY OF THE
SOUTHEAST and SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA and EXCHANGE
INSURANCE COMPANY.
-3-
PAGE
No. 3525-0090
EXHIBIT F
EXHIBIT F
---------
SIXTH CASUALTY EXCESS OF LOSS
-----------------------------
Section 1
---------
COVER
- -----
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amounts of ultimate net loss which the Company may pay as a
result of losses occurring on and after 12:01 A.M., July 1, 1996, as respects
policies in force at 12:01 A.M., Standard Time, July 1, 1996, and new and
renewal policies becoming effective on and after said date and subject to the
exclusions set forth in Article V of this Agreement and the limits set forth
in Section 2 of this Exhibit.
Section 2
---------
LIMITS OF COVER
- ---------------
Subject to the Limits and Retention hereof, the Reinsurers shall pay to
the Company the amount of Ultimate Net Loss up to $10,000,000 Ultimate Net
Loss each and every Loss Occurrence that takes place during the currency of
this Contract in excess of $40,000,000 Ultimate Net Loss in respect of each
and every Loss Occurrence.
Section 3
---------
REINSTATEMENT
- -------------
Each claim hereon reduces the amount of indemnity provided under this
Contract from the time of the loss occurrence by the amount paid. However,
the amount so reduced shall be immediately reinstated one time. For the
reinstated limit the Company shall pay the Reinsurer an additional premium
calculated at pro rata of the reinsurance earned premium payable under this
Contract. Such premium shall be pro rata as to the fraction of the face
value of the limit so reinstated and 100% as to time. Nevertheless, the
Reinsurer's liability hereunder shall never exceed $10,000,000 any one loss
occurrence nor $20,000,000 for all loss occurrences during the term of this
Contract.
-1-
PAGE
No. 3525-0090
EXHIBIT F
Section 4
---------
PREMIUM
- -------
(a) The Company shall pay to the Reinsurers a deposit reinsurance
premium of $282,500 in equal quarterly installments of $70,625, payable at
July 1 and October 1, 1996, and January 1 and April 1, 1997.
(b) Within 90 days after the end of each Agreement Year, the Company
shall furnish to the Reinsurers a statement of the Gross Net Earned Premium
Income of the Company for the Contract term and the reinsurance premium shall
be adjusted at a rate of .05% of the Company's Gross Net Earned Premium
Income. For the purposes of this calculation, 15% of the Company's earned
premium for Homeowners and Farmowners Policies and 35% for Businessowners
Policies shall be included. The debtor party shall immediately pay the
creditor the difference between the calculated premium and the deposit
premium payments. However, in no event shall the adjusted reinsurance
premium be less than $226,000.
Section 5
---------
REPORTS AND REMITTANCES
- -----------------------
(a) The Company will provide the Reinsurer with all necessary data
respecting premiums and losses, including reserves thereon, as at dates and
on forms mutually acceptable to the Company and the Reinsurer.
(b) Payment by the Reinsurer of its proportion of losses and loss
adjustment expenses paid or to be paid by the Company will be made by the
Reinsurer to the Company within 15 days after proof of the amount paid or to
be paid by the Company is received by the Reinsurer. The Company may give
the Reinsurer written notice of its intention to pay a loss, equal to or
greater than $500,000 to the layer, on a certain date and may require the
receipt of payment of the Reinsurer's share of the loss by such date,
provided the Reinsurer in any event shall have a period of 48 hours after
receipt of said written notice to mail or otherwise dispatch the payment.
-2-
PAGE
No. 3525-0090
EXHIBIT F
This Exhibit F is attached to and forms part of Reinsurance Agreement
No. 3525-0090 issued to the SELECTIVE INSURANCE COMPANY OF AMERICA and
SELECTIVE WAY INSURANCE COMPANY and SELECTIVE INSURANCE COMPANY OF THE
SOUTHEAST and SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA and EXCHANGE
INSURANCE COMPANY.
-3-
PAGE
INTERESTS AND LIABILITIES CONTRACT
----------------------------------
(hereinafter referred to as the "Contract")
to the
CASUALTY EXCESS OF LOSS REINSURANCE AGREEMENT
---------------------------------------------
(hereinafter referred to as the "Agreement")
between
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
(hereinafter referred to either individually or collectively
as the "Company")
and
VARIOUS INSURANCE AND/OR REINSURANCE COMPANIES
(hereinafter referred to as the "Subscribing Reinsurer")
It is mutually agreed by and between the Company on the one part and the
Subscribing Reinsurer on the other part that the Subscribing Reinsurer's
share in the interests and liabilities of the Reinsurers as set forth in the
Contract, to which this Agreement is attached, shall be for %.
The share of the Subscribing Reinsurer in the interests and liabilities of
the Reinsurers in respect of said Contract shall be separate and apart from
the shares of such other subscribing reinsurers, if any, to said Contract.
The interests and liabilities of the Subscribing Reinsurer shall not be joint
with those of such other subscribing reinsurers and in no event shall the
Subscribing Reinsurer participate in the interests and liabilities of such
other subscribing reinsurers.
This Agreement shall become effective commencing 12:00 a.m., Eastern Standard
Time, July 1, 1996, in respect of business in force at such date or business
incepting, renewing or having an anniversary date on and after such date, and
shall remain in effect until canceled according to the provisions of the
Commencement and Termination Article.
-1-
The interests and liabilities of the Subscribing Reinsurer therein may not be
changed, altered and amended unless such change, alteration and amendment is
evidenced by Endorsement to this Agreement executed by the Company and the
Subscribing Reinsurer.
In Witness Whereof, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives this 17th day of
March, 1997.
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
/s/ Peter Anderson
------------------
Peter Anderson
and on this 19th Day of , 19 .
VARIOUS INSURANCE AND/OR
REINSURANCE COMPANIES
/s/
-----------------
EXHIBIT 11
----------
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------------------------
COMPUTATION OF EARNINGS PER SHARE
---------------------------------
(Dollars in thousands,
except per share amounts)
- ----------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994
Primary earnings per share:
- ---------------------------
Net income $ 55,551 53,042 38,276
Weighted average number of
shares of common stock
outstanding 14,542,018 14,285,683 13,879,658
Net income per share of
common stock $ 3.82 3.71 2.76
========== ========== ==========
Fully diluted earnings per share:
- ---------------------------------
Earnings applicable to common stock
on a fully diluted basis:
Net income $ 55,551 53,042 38,276
Interest on convertible
debentures 623 640 804
Amortization of debt expenses 13 8 15
Tax effect on interest and
debt expenses (223) (227) (286)
---------- ---------- ----------
$ 55,964 53,463 38,809
========== ========== ==========
Weighted average number of shares
outstanding on a fully diluted
basis:
Weighted average number of
common shares outstanding 14,542,018 14,285,683 13,879,658
Additional shares assuming
conversions of debentures 501,180 517,380 713,230
---------- ---------- ----------
15,043,198 14,803,063 14,592,888
========== ========== ==========
Fully diluted income per
share of common stock $ 3.72 3.61 2.66
========== ========== ==========
ANNUAL REPORT PAGES 18 THRU 53, AND 57
PAGE
INVESTMENTS
- -----------
PIE CHART - reflecting the following relationships
- ------------------------------------------------------------
Classification of Investments
Dollar Percentage
------ ----------
Taxable debt securities $ 767.4 47%
Tax-advantaged debt securities 650.8 40%
Equity securities 161.1 10%
Short-term investments 33.9 2%
Other 10.5 1%
------ ---
Total Investments $1,623.7 100%
- ------------------------------------------------------------
Investments and investment policy
- ---------------------------------
Investment income is an important source of revenue for the Company, and
the return on its investment portfolio has a material effect on the
Company's net income. The Company's investment policy is conservatively
structured with the long-term objective of maximizing after-tax yield while
providing liquidity and maintaining the preservation of assets and
stockholders' equity. These factors dictate the investment mix, with 87% of
the investment portfolio in debt securities, 10% in equity securities and 3%
in short-term and other investments.
Investments are made in compliance with regulatory requirements and with
careful attention to the present and prospective Federal income tax
positions. Company investment policy requires that debt securities must be
"A" rated or better, although up to 5% (of debt securities) may be in issues
rated lower than "A." Credit quality has always been a cornerstone of the
Company's investment strategy. This high quality strategy is evident by the
fact that over 99% of the debt security portfolio is of investment grade.
Further emphasizing this superior quality is the fact that 44% have a
Moody's rating of "Aaa" (or its Standard & Poor's equivalent), which is
considered to be the highest credit quality. Though not the sole
consideration, investment commitments are made with considerable emphasis
on limiting credit risk.
Liquidity requirements are emphasized in response to an unpredictable
underwriting environment and the need to minimize the risk of catastrophic
events. To provide liquidity while maintaining consistent performance, the
Company's debt securities are distributed so that some issues are always
approaching maturity, thereby providing a source of predictable cash flow.
BAR GRAPH
- ----------------------
Bond Maturities
(in millions)
Years $ Amount
- ----- --------
1 $101.2
2 $142.5
3 $181.4
4 $149.7
5 $137.6
6 $142.8
7 $121.4
8 $117.8
9 $199.7
10 $ 80.4
11 $ 30.4
12 $ 7.5
13 $ 5.3
14 $ 0
15 $ 0
15+ $ 0.5
Total Carry Value: $1,418.2
Average Life: 5.1 Years
- ---------------------------
CHART
- ---------------------------------------
Bond Quality Analysis
(Moody's Rating/Standard & Poor' Rating)
Rating Percent
------ -------
Aaa/AAA 43.8%
Aa/AA 25.7
A/A 26.2
Baa/BBB 3.9
Other .4
-----
100.0%
- ----------------------------------------
Page 18
PAGE
At year end approximately 70% of the Company's debt securities were
classified as available-for-sale. This classification provides greater
portfolio management flexibility.
To reduce the sensitivity to interest rate fluctuations, the Company has
been investing in intermediate-term debt securities. At year end 1996, 96%
of the portfolio was ten years or less to maturity compared to 93% at the end
of 1995. At December 31, 1996, the debt securities had an average life of 5.2
years compared with 5.7 years at December 31, 1995.
Net investment income earned, after taxes, increased 4% in 1996 to $74
million compared to $71 million in 1995. The increase in 1996 reflected the
growth in investment assets from cash provided by operations in 1996 and
1995. However, the increase was partially offset by maturities and
redemptions of higher yielding securities.
During 1996, the equity portfolio experienced an increase in net unrealized
gains, before tax, of $21 million, which represented approximately 35% of the
statutory surplus growth for 1996. At year end 1996, the equity portfolio
represented 10% of the Company's total investments compared to 7% at December
31, 1994. The growth, for the most part, reflected the extraordinary rise in
the U.S. equity markets coupled with additional securities purchased by the
Company.
The Company will continue the investment philosophy that has historically
proven successful. In 1997, the strategy will be to continue to purchase
intermediate-term debt securities in sectors that represent the most
attractive relative value considering the Company's Federal income tax
position.
Managing the Company's investment risk by adhering to these strategies
should protect the interests of its stockholders as well as policyholders
and, at the same time, enhance our financial strength and underwriting
capacity.
BAR GRAPH
- ---------------------------------------------------------
Net Investment Income Earned
(dollars in millions)
Year 1992 1993 1994 1995 1996
Dollar Amount $73.5 $77.3 $80.7 $91.6 $97.0
After-tax yield 5.4% 5.1% 5.1% 5.0% 4.7%
Before-tax yield 7.2% 6.8% 6.5% 6.4% 6.1%
- ---------------------------------------------------------
BAR GRAPH
- ---------------------------------------
Investment Assets
(in millions)
$1.1 $1.2 $1.3 $1.6 $1.6
1992 1993 1994 1995 1996
- ---------------------------------------
BAR GRAPH
- ---------------------------------------
Total Assets
(in millions)
$1.6 $1.7 $1.9 $2.1 $2.2
1992 1993 1994 1995 1996
- ---------------------------------------
Page 19
PAGE
Ten Year Financial Highlights
- ------------------------------
(number of weighted average shares 1996 1995 1994 1993
and dollars in thousands, except per
share data)
Net premiums written 1 $ 692,239 757,021 697,941 607,462
Net premiums earned 1 694,947 742,817 680,270 594,919
Net investment income earned 96,952 91,640 80,657 77,326
Net realized gains on investments 2,786 900 4,230 4,528
Total revenues 798,972 839,098 768,330 679,598
Underwriting loss 2,3,4,5 (20,027) (16,725) (34,466) (53,985)
Operating income 7 53,740 52,457 35,526 19,735
Net income 6,7,8 55,551 53,042 38,276 22,678
Total assets 2,183,639 2,113,077 1,866,680 1,721,850
Debt outstanding 103,769 111,292 111,378 61,291
Stockholders' equity 474,299 436,749 329,164 322,807
Statutory premiums to surplus ratio 9 1.7:1 2.1:1 2.4:1 2.6:1
Statutory combined ratio 9 102.9% 101.6 104.3 108.5
GAAP combined ratio 102.9% 102.3 105.1 109.1
Yield on investment, before tax 6.1% 6.4 6.5 6.8
Debt to capitalization 18.0% 20.3 25.3 16.0
Return on average equity 12.2% 13.9 11.7 7.1
Earnings per share data:
Operating income:
Primary $ 3.70 3.67 2.56 1.45
Fully diluted 3.60 3.57 2.47 1.41
Net income:
Primary 6 3.82 3.71 2.76 1.66
Fully diluted 6 3.72 3.61 2.66 1.61
Dividends to stockholders 1.12 1.12 1.12 1.12
Stockholders' equity 32.61 30.33 23.23 23.47
Price range of common stock:
High 38 3/4 38 3/8 30 3/4 31
Low 31 24 1/2 23 20 1/2
Other:
Number of weighted average shares:
Primary 14,542 14,286 13,880 13,636
Fully diluted 15,043 14,803 14,593 14,472
Page 20
- ----------------------------------------------------------------------------
PAGE
Ten Year Financial Highlights
- ------------------------------
(number of weighted average shares 1992 1991 1990 1989
and dollars in thousands, except per
share data)
Net premiums written 1 $ 560,360 500,283 482,735 462,615
Net premiums earned 1 539,792 503,726 470,681 449,950
Net investment income earned 73,516 68,501 64,508 59,831
Net realized gains on investments 3,943 3,580 9,888 2,557
Total revenues 619,565 577,920 547,169 516,061
Underwriting loss 2,3,4,5 (41,674) (38,067) (38,444) (14,736)
Operating income 7 24,845 24,429 24,491 38,520
Net income 6,7,8 53,915 27,293 32,402 40,566
Total assets 1,634,302 1,318,917 1,240,407 1,188,516
Debt outstanding 63,681 14,470 15,173 35,755
Stockholders' equity 311,705 269,998 248,274 230,434
Statutory premiums to surplus ratio 9 2.5:1 2.5:1 2.7:1 2.6:1
Statutory combined ratio 9 107.9% 107.6 108.0 103.4
GAAP combined ratio 107.7% 107.6 108.2 103.3
Yield on investment, before tax 7.2% 7.6 7.5 7.5
Debt to capitalization 17.0% 5.1 5.8 13.4
Return on average equity 18.5% 10.5 13.5 18.3
Earnings per share data:
Operating income:
Primary $ 1.86 1.85 1.89 2.90
Fully diluted 1.79 1.79 1.82 2.70
Net income:
Primary 6 4.04 2.07 2.50 3.05
Fully diluted 6 3.82 1.99 2.38 2.84
Dividends to stockholders 1.10 1.04 1.02 .92
Stockholders' equity 23.19 20.34 18.91 18.36
Price range of common stock:
High 23 1/2 18 20 1/4 20
Low 16 13 12 1/2 14 1/2
Other:
Number of weighted average shares:
Primary 13,345 13,194 12,971 13,290
Fully diluted 14,343 14,218 14,077 14,844
- -----------------------------------------------------------------------------
Ten Year Financial Highlights
- ------------------------------
(number of weighted average shares 1988 1987
and dollars in thousands, except per
share data)
Net premiums written 1 $ 440,715 400,590
Net premiums earned 1 425,809 375,423
Net investment income earned 52,800 46,007
Net realized gains on investments 1,232 13,948
Total revenues 481,693 437,190
Underwriting loss 2,3,4,5 (4,818) (4,517)
Operating income 7 40,488 37,133
Net income 6,7,8 41,511 47,327
Total assets 1,054,200 954,244
Debt outstanding 23,836 26,359
Stockholders' equity 213,686 179,488
Statutory premiums to surplus ratio 9 2.6:1 2.6:1
Statutory combined ratio 9 101.1% 100.5
GAAP combined ratio 101.1% 101.2
Yield on investment, before tax 7.6% 7.6
Debt to capitalization 10.0% 12.8
Return on average equity 21.1% 28.9
Earnings per share data:
Operating income:
Primary $ 2.99 2.73
Fully diluted 2.78 2.50
Net income:
Primary 6 3.07 3.48
Fully diluted 6 2.85 3.17
Dividends to stockholders .80 .66 2/3
Stockholders' equity 15.72 13.22
Price range of common stock:
High 17 5/8 18 3/8
Low 12 7/8 11 1/2
Other:
Number of weighted average shares:
Primary 13,519 13,608
Fully diluted 15,175 15,344
1. Net premiums written and earned for 1993 were reduced by
approximately $41 million and $26 million, respectively, for premiums ceded
to the New Jersey Homeowners Quota Share Reinsurance Program and increased
by $41.5 million and $38.5 million, respectively, from business written by
Niagara Exchange Corporation. Net premiums written and earned for 1991 were
increased by $11.1 million due to an adjustment from the New Jersey
Unsatisfied Claim and Judgment Fund ("UCJF"). Net premiums written and
earned for 1995 were increased by $9.6 million reflecting a lower UCJF
assessment - see Financial Review for a more detailed discussion.
2. The 1993 underwriting loss included a $9.0 million restructuring
charge for the cost of the early retirement program, along with severance
benefits provided to terminated employees.
3. The 1996, 1995, 1994, 1993, 1992, 1991 and 1990 underwriting losses
included taxes and assessments imposed as a result of the Fair Automobile
Insurance Reform Act adopted in New Jersey in the amounts of $2.0 million,
$7.4 million, $7.1 million, $6.2 million, $12.8 million, $12.0 million and
$10.3 million, respectively.
4. The 1993, 1992 and 1991 underwriting losses included assessments from
the Market Transition Facility of New Jersey in the amount of $12.0 million,
$8.0 million and $11.0 million, respectively.
5. The 1991 underwriting loss included a $9.7 million increase in the
involuntary loss from business assigned to the Company from the National
Workers' Compensation Reinsurance Pool.
6. Net income for 1992 increased by $26.5 million due to the adoption of
two accounting policies, Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FASB 109"), and a change in the method of
deferring policy acquisition costs. FASB 109 increased net income by $20.3
million ($1.52 per primary share and $1.42 per fully diluted share) and the
change in deferred policy acquisition costs increased net income by $6.2
million ($.46 per primary share and $.43 per fully diluted share).
7. Operating income and net income for 1991, 1990, 1989, 1988 and 1987
included permanent tax benefits of $1.1 million, $2.6 million, $1.4 million,
$1.8 million and $4.7 million, respectively, resulting from the fresh start
deductions for loss reserve discounting under the Tax Reform Act of 1986 and
salvage and subrogation recoverable under the Budget Reconciliation Act of
1990.
8. Net income for 1987 included extraordinary credits of $1.8 million
attributable to the utilization of an operating loss carryforward.
9. Calculated on the basis of industry standards (statutory basis)
prescribed by the National Association of Insurance Commissioners, which
standards differ from generally accepted accounting principles.
Page 21
PAGE
FINANCIAL REVIEW
- ----------------
Results of operations
- ---------------------
Comparison of 1996 to 1995
- --------------------------
Financial Highlights
(dollars in thousands)
- ----------------------
Better
1996 1995 (Worse)
---- ---- ------
Net premiums written $ 692,239 757,021 (8.6)%
Net premiums written per employee $ 433 458 (5.5)%
Operating income $ 53,740 52,457 2.4 %
Statutory combined ratio 102.9% 101.6 (1.3)points
Return on average equity 12.2% 13.9 (1.7)points
Revenues
- --------
Net premiums written for 1996 decreased by 9%, or $65 million, compared to
1995. Most of the premium decline occurred in the Strategic Business Units
("SBUs") writing commercial insurance, where net premiums written were down
11%, or $60 million. In addition, the personal lines SBU net premiums
written were down 2%, or $5 million. The lower net premiums written
translated into a decline in total net premiums earned of 6%, or $48
million, in 1996 over 1995.
During 1996, net premiums written in both commercial and personal
automobile lines of insurance were adversely affected by higher ceded
premiums incurred for the New Jersey Unsatisfied Claim and Judgment Fund
("UCJF"). The Company recorded a total ceded premium assessment charge of
$7 million in 1996 compared to $1 million in 1995. The 1996 assessment was
comparable with assessments in years prior to 1995. The 1995 assessment
included a one-time benefit of an excess cash position at the UCJF, which
resulted in a lower assessment for that year.
The modest reduction in the personal lines SBU net premiums written for
1996 reflected higher UCJF ceded premiums of $4 million and a reduction in
the number of policies in-force in the personal automobile line of 4%, or
4,700 policies. These items were partially offset by additional premiums
written of approximately $6 million generated from rate increases in New
Jersey personal automobile insurance.
Most commercial lines SBUs experienced lower net premiums written for
1996, primarily due to: (i) higher premiums recorded in 1995 as a result of
the reduction in premium processing backlog of approximately $25 million;
(ii) lower premium volume of approximately $20 million due to agency
terminations; (iii) a reduction in existing business (renewal retention)
attributable to a highly competitive commercial lines marketplace as well as
non-renewals resulting from the Company's re-underwriting (re-evaluating) of
certain business classes and/or accounts; (iv) workers' compensation rate
decreases, which lowered premiums written by $8 million; and (v) a trend
towards self-insurance mechanisms and other alternative markets,
particularly in the public entities SBU, which reduced net premiums written
by approximately $5 million.
Alternative markets, such as self-insurance mechanisms, have become more
prevalent in the industry. This reduces the demand for traditional
insurance, but creates opportunities to offer services to self-insured
entities. In anticipation of the trend towards self-insurance, the Company
organized Selective Technical Administrative Resources, Inc. ("SelecTech")
in 1993 to provide third-party administrative services for public entities
that self-insure. The services provided include: claims administration,
loss control, risk management and reinsurance. SelecTech is now part of the
new Selective Risk Managers SBU, which expands the Company's operations in
the alternative insurance market.
The property and casualty insurance industry is presently very competitive
in commercial lines business. In these current conditions, the Company's
position is to maintain its pricing discipline and commitment to long-term
profitability by rejecting underpriced risks despite the impact on premium
volume.
Rate reductions in 1996 of approximately $8 million in premiums occurred
in the workers' compensation line of insurance principally due to the impact
of improving loss trends. The improvement in the loss trends reflected: (i)
reduced health care costs (approximately $3 million) due to managed care;
(ii) programs which permit injured employees to return to active work
earlier in alternative job categories; (iii) fee schedules which limit the
amount that health care providers can charge; (iv) loss control programs
which promote workplace safety; and (v) various favorable legislative
reforms.
Partially offsetting the reduction in net premiums written in 1996 was new
business aggregating approximately $85 million issued in the commercial
lines SBUs and the Company's revision of certain reinsurance programs. The
program revisions reduced ceded premiums and increased net premiums written
by $19 million (including a one-time adjustment of $8 million reflecting the
Company's buyout of certain ceded reinsurance unearned premium reserves at
June 30, 1996).
In 1997, net premiums written are expected to be affected by the following
factors: (i) a reduction in renewal premiums of approximately $22 million to
$30 million due to agency terminations; (ii) rate reductions in workers'
compensation due to improving loss trends expected to lower premium volume
by approximately $20 million; and (iii) reduced premiums as more accounts,
particularly public entities, move to self-insurance. In 1996, the premiums
generated from terminated agencies were approximately $50 million. Pursuant
to state regulations, all or some portion of that business may be moved to
other insurance companies within the next two years.
Bar Graph
- -----------------------------------------
Net Premium Written
(in millions)
$560.4 $607.5 $697.9 $757.0 $692.2
1992 1993 1994 1995 1996
- ------------------------------------------
Page 22
PAGE
The foregoing factors are expected to be partially offset by higher
premiums written in New Jersey personal automobile due to the timing of a
conversion of policies from a six-month to an annual contract. Because New
Jersey automobile rates have firmed and the Company does not anticipate
future significant increases in rates, the Company's goal is to reduce its
processing costs by eliminating the semi-annual transactions with its
agents. The Company estimates that the change to annual automobile policies
during 1997 will increase net premiums written, unearned premiums, as well
as premiums and other receivables by approximately $43 million. However,
this change will have no impact on net premiums earned.
Net investment income earned for 1996 increased 6%, or $5 million, over
1995. The increase was mainly due to the income generated from investments
acquired from cash provided by operating activities during 1996 and 1995.
The growth in investment income was partially offset by redemptions and
maturities of $229 million during 1996 and 1995 of higher yielding debt
securities reinvested at lower fixed income yields currently available in
the marketplace. These factors, together with the effect of the increase in
fair value of available-for-sale securities recognized during 1995, reduced
the Company's overall after-tax investment yield to 4.7% in 1996, down from
5.0% in 1995.
Bar Graph
- --------------------------------------
Statutory Loss and Loss Expense Ratio
69.5% 71.8% 71.7% 71.2% 71.3%
1992 1993 1994 1995 1996
- --------------------------------------
Expenses
- --------
The ratio of losses and loss expenses incurred to net premiums earned
remained consistent at slightly above 71% in 1996 and 1995. During 1996,
the Company incurred $18 million of losses, net of $7 million of
reinsurance, from weather-related catastrophe claims, which increased the
loss and loss expense ratio for 1996 by 2.7 points. Absent weather-related
catastrophe claims, this ratio improved over 1995, reflecting favorable
loss experience in the workers' compensation line of insurance which
lowered the overall loss and loss expense ratio by approximately 2 points.
The improved workers' compensation results reflected the positive loss
trends of reduced frequency and severity of claims attributable to: (i)
reduced health care costs (approximately $3 million) due to managed care;
(ii) programs which permit injured employees to return to work earlier in
alternative job categories; (iii) fee schedules which limit the amount that
health care providers can charge; (iv) loss control programs which promote
workplace safety; and (v) various favorable legislative reforms. The
favorable workers' compensation results were experienced throughout most of
the commercial lines SBUs.
The personal lines SBU loss and loss expenses for 1996, excluding
weather-related catastrophe claims, improved slightly as a result of better
loss experience in the homeowners line of insurance due to rate increases
and lower reinsurance costs as well as the continued favorable New Jersey
automobile business results. New Jersey personal automobile generated a loss
and loss expense ratio of 73.3%.
Profitability in New Jersey personal automobile insurance is of increasing
concern. There is an excess profits law in New Jersey, which sets a maximum
profit level on personal automobile insurance. Under New Jersey regulations,
an insurer's excess profits earned on direct insurance written in New Jersey
on private passenger automobiles, as determined pursuant to an actuarial
formula set forth in applicable regulations, are subject to refund or credit
to policyholders. An excess profits calculation must be made by an insurer
for this purpose and submitted to the New Jersey Department of Insurance
each year for the three-year period including such year and the two calendar
years immediately preceding such year.
The Company estimates that excess profits are incurred at combined ratios
below approximately 99%, and management evaluates profitability levels
with respect to potential exposure to such required refunds. If the
Company's current two-year profitability trend continues in New Jersey
personal automobile business, it is likely that the Company will incur an
excess profit for the three-year period ending December 31, 1997. The
Company has considered the potential effect of such excess profits in
establishing its reserves.
In addition, the Governor of New Jersey, in her 1997 State of the State
address, set forth a proposed agenda for personal automobile insurance
reform intended to reduce personal automobile insurance rates in the state.
The Governor's proposals include, among other things: (i) eliminating
automatic annual cost of living premium increases; (ii) eliminating
policyholder surcharges; (iii) modifying rights of insurers to decline
renewal of policies; and (iv) providing insureds with a range of policy
options encompassing varying levels of coverage. The Company is unable to
predict whether or in what form such initiatives might be implemented or
the effect, if any, on the Company.
Policy acquisition costs expressed as a percentage of net premiums earned
for 1996 was 30.7%, up from 29.9% in 1995. The ratio reflected an
approximate 1 point increase due to the relationship of labor costs and
other operating expenses expressed as a percentage of net premiums earned,
partially offset by lower premium taxes and assessments, due principally to
the $5 million reduction in the New Jersey Fair
Bar Graph
- --------------------------------------
Statutory Underwriting Expense Ratio
37.0% 35.5% 31.6% 29.4% 30.8%
1992 1993 1994 1995 1996
- --------------------------------------
Page 23
PAGE
Automobile Insurance Reform Act ("FAIRA") assessment in 1996. While the
total dollar amount of labor costs and other operating costs remained
relatively stable, the lower levels of premiums earned significantly
impacted this ratio.
During 1996, the Company reduced its work force by 50 employees to 1,600
by year end. Productivity, as measured by net premiums written per employee,
in 1996 was $433,000 down from $458,000 in 1995. The decrease was due to the
lower levels of net premiums written, as described above. However, over the
past five-year period net premiums written per employee increased by almost
70%.
Total Federal income tax expense in 1996 was $14 million (effective tax
rate of 19.6%) and $12 million (effective tax rate of 18.3%) in 1995. The
Company's effective tax rate differs from the Federal corporate rate of 35%
primarily as a result of the tax-exempt investment income.
Income
- ------
For the second consecutive year, operating income (income excluding net
realized gains on investments, net of tax effect) reached an all-time high,
increasing by 2% to $54 million in 1996, or $3.60 per fully diluted share,
compared to $52 million, or $3.57 per share in 1995. The Company recognized
net realized gains on the sale of investments (net of tax effect) for 1996
of $2 million, or $.12 per fully diluted share, compared to $1 million, or
$.04 per share, in 1995. Net income for 1996 increased 5% to $56 million, or
$3.72 per fully-diluted share, from $53 million, or $3.61 per share, in 1995.
Bar Graph
- --------------------------------------
Net Premiums Written Per Employee
(in thousands)
$272 $317 $386 $458 $433
1992 1993 1994 1995 1996
- --------------------------------------
Results of Operations
- ---------------------
Comparison of 1995 to 1994
- --------------------------
- -----------------------------------------------------------------------------
Financial Highlights
(dollars in thousands)
- ----------------------
1995 1994 Better
--------------------------------------
Net premiums written $ 757,021 697,941 8.5 %
Net premiums written per employee $ 458 386 18.7 %
Operating income $ 52,457 35,526 47.7 %
Statutory combined ratio 101.6% 104.3 2.7points
Return on average equity 13.9% 11.7 2.2points
Revenues
- --------
Net premiums written for 1995 increased by 8%, or $59 million, over 1994.
The premium growth occurred in both commercial and personal lines, where
net premiums written increased by 9%, or $45 million, and 7%, or $14
million, respectively. This growth was achieved despite agency
terminations, which reduced net premiums written in 1995 by approximately
$15 million. The growth in net premiums written translated into an increase
in total net premiums earned of 9%, or $63 million, in 1995 compared to
1994.
During 1995, both commercial and personal lines net premiums written were
favorably affected by a one-time benefit of lower ceded premiums recorded
for the UCJF. The Company recorded a ceded premium assessment charge of $1
million in 1995 compared to $11 million in 1994.
The increase in commercial lines net premiums written for 1995 primarily
reflected unit growth due to additional policies issued and enhanced
efficiencies which reduced the premium processing backlog. Also
contributing to the growth in net premiums written were rate increases
in workers' compensation business of $3 million and a reduction in ceded
premiums recorded for the UCJF of $3 million.
The increase in the personal lines SBU net premiums written of $14
million for 1995 reflected the lower ceded premiums of $6 million recorded
for the UCJF and rate increases of $8 million in the New Jersey personal
automobile line of insurance. The premium growth was achieved with a
reduction in the exposure as measured by the policy in-force counts, which
were down in the homeowners (8,000 policies) and personal automobile
(7,000 policies) lines of insurance.
Net investment income earned for 1995 increased 14%, or $11 million, over
1994. The increase was mainly due to the income generated from investments
acquired from cash provided by operating activities during 1995 and 1994 as
well as the proceeds received on August 12, 1994, from the issuance of the
$54 million 8.77% Senior Notes, due August 1, 2005 ("8.77% Senior Notes").
However, the growth in investment income was negatively affected by
redemptions and maturities of $96 million in 1995 and $94 million in 1994 of
higher yielding debt securities reinvested at lower fixed income yields
available in the marketplace at the time of reinvestment. These factors when
combined with the increase in fair value of securities available-for-sale in
1995 reduced the Company's annualized after-tax yields to 5.0% in 1995 from
5.1% in 1994.
Page 24
PAGE
Expenses
- --------
The ratio of losses and loss expenses incurred to net premiums earned
declined to 71.2% in 1995 from 71.7% in 1994. Without taking into account
the effect of the 1994 weather-related property losses and loss expenses of
$14 million, net of reinsurance, the 1995 ratio was 71.2% compared to 69.7%
in 1994, an increase of 1.5 points. This higher ratio was impacted, for the
most part, by adverse loss and loss expense reserve development in the
general liability and commercial automobile lines of insurance. Overall,
the Company experienced adverse reserve development of $13 million, which
increased the ratio by 1.7 points. For additional discussion on reserve
development, see analysis of reserves for losses and loss expenses, page 28.
Partially offsetting the adverse reserve development was an improvement in
the loss and loss expense ratio in the workers' compensation and personal
automobile lines of insurance, mainly due to rate increases and, for
personal automobile, a lower UCJF assessment. In addition, workers'
compensation also reflected better loss experience in the involuntary
market.
Policy acquisition costs expressed as a percentage of net premiums earned
for 1995 declined to 29.9% from 32.4% in 1994. The decline in the ratio
primarily reflected: (i) lower commission expenses; (ii) reduced labor
costs; and (iii) a decrease in other acquisition expenses as a percentage of
net premiums earned.
The Company's commission expenses expressed as a percentage of net
premiums earned decreased from 16.5% in 1994 to 15.8% in 1995. This decrease
reflected: (i) assumed workers' compensation business previously written at
higher underwriting costs is now being written directly by the Company at an
estimated savings of $2 million per year; and (ii) the absence of $3 million
of return commissions to reinsurers due to the 1994 storms.
As a result of the implementation of the Commercial Lines Automated
System, as well as other automation projects and attrition, the Company
reduced its work force by 160 employees to 1,650 at December 31, 1995. The
Company's overall labor costs (including claim functions) expressed as a
percentage of net premiums earned declined to 11.3% for 1995 from 12.6% in
1994. The portion of those costs allocated to the underwriting function
declined to 7.0% from 8.0% in 1995.
Productivity, as measured by net premiums written per employee, increased
by 19% to $458,000 in 1995 from $386,000 in 1994. In addition, the efforts
to control operating expenses while increasing productivity resulted in
lower other acquisition expenses.
Interest expense for 1995 increased $3 million over 1994, reflecting the
issuance of the 8.77% Senior Notes.
Total Federal income tax expense was $12 million (effective tax rate of
18.3%) for 1995 and $5 million (effective tax rate of 11.8%) for 1994. The
Company's effective tax rate differs from the Federal corporate rate of 35%
primarily as a result of the tax-exempt investment income.
Income
- ------
Operating income (income excluding net realized gains on investments, net
of tax effect) increased 48% to $52 million, or $3.57 per fully diluted
share, compared to $35 million, or $2.47 per share for 1994. The Company
recognized net realized gains on the sale of investments (net of tax effect)
for 1995 of $1 million, or $.04 per fully diluted share, compared to $3
million, or $.19 per share in 1994. Net income for 1995 increased 39% to $53
million, or $3.61 per fully diluted share, from $38 million, or $2.66 per
share in 1994.
Federal income taxes
- --------------------
The Company's total net deferred tax asset amounted to $31 million at
December 31, 1996. This deferred tax asset reflected, for the most part, the
required discounting of loss and loss expense reserves for tax purposes that
began in 1987 and the ability to deduct only 80% of the unearned premium
reserve. The decrease in the deferred tax asset of $1 million from December
31, 1995, reflected the deferred tax benefits related to the reduction in
unrealized gains recognized on securities, available-for-sale.
The Company had taxable income and pretax financial statement income for
the periods presented as follows:
- ------------------------------------------------------
(in thousands) 1996 1995 1994
- ------------------------------------------------------
Current taxable
income $32,607 48,044 28,235
Pretax financial
statement income $69,089 64,898 43,408
As of December 31, 1996, the Company can fully realize the deferred tax
asset in the available tax loss carry-back years. Based on the Company's
historical levels of current taxable income and pretax financial statement
income, the Company believes that it is more likely than not that the
existing net deductible temporary differences will reverse during periods in
which the Company will generate net taxable income. However, there can be no
assurance that the Company will generate any earnings or any specific level
of earnings in future years.
Page 25
PAGE
Financial condition; liquidity and capital resources
- ----------------------------------------------------
Selective Insurance Group, Inc. ("Parent") is an insurance holding
company, the principal assets of which are its investments in its insurance
subsidiaries. The primary means of meeting its liquidity requirements is
through dividends from its insurance subsidiaries, the payment of which is
governed by state regulatory requirements. Dividends are generally payable
only from earned surplus as reported on the insurer's annual statement as
of the preceding December 31.
The Parent's cash requirements principally include: (i) dividends to
stockholders; (ii) interest payments on its outstanding debt; (iii) annual
principal payments of $7.1 million on the $50 million 7.84% Senior Notes,
due November 15, 2002 ("7.84% Senior Notes"); and (iv) general corporate
expenses. As of December 31, 1996, these cash requirements, net of
applicable income taxes, aggregated approximately $30 million annually
(assuming the current dividend level). However, the Parent generates cash
from the sale of its common stock under various stock plans and a dividend
reinvestment program that reduces the demand on subsidiary dividends by
approximately $5 million annually to $25 million.
Bar Graph
- ----------------------------------------
Operating Cash Flow
(in millions)
$105.9 $78.3 $119.4 $174.7 $90.9
1992 1993 1994 1995 1996
- ----------------------------------------
Based upon the 1996 statutory financial statements, the insurance
subsidiaries are able to pay the Parent, in 1997, ordinary dividends in the
aggregate amount of $60 million. There can be no assurance that the
insurance subsidiaries will be able to pay dividends to the Parent in the
future in an amount sufficient to enable the Parent to meet its liquidity
requirements. For additional information regarding regulatory limitations
on the payment of dividends by the insurance subsidiaries to the Parent and
amounts available for the payment of such dividends, see note 12 to the
consolidated financial statements.
The Parent's cash requirements also include the cost of any shares of
common stock repurchased under its common stock repurchase program. On July
29, 1996, the Parent's Board of Directors (the "Board") authorized
management to repurchase up to one million shares of Selective common stock.
The stock may be repurchased from time to time in the open market or in
privately negotiated transactions. The determination to make such purchases
will be made based on market conditions, available cash and alternative
investment opportunities. As of December 31, 1996, the Parent purchased
128,500 shares at a total cost of $4.3 million.
Dividends to the Parent's stockholders are declared and paid at the
discretion of the Board based upon the Company's operating results,
financial condition, capital requirements, legal restrictions and other
relevant factors. The Parent paid regular quarterly cash dividends to its
stockholders for 68 consecutive years and plans to continue to pay
quarterly cash dividends. For information regarding restrictions on the
Parent's ability to pay dividends to its stockholders, see note 7(b) to the
consolidated financial statements.
Cash provided by operating activities amounted to $91 million, $175
million and $119 million in 1996, 1995 and 1994, respectively. The decrease
in cash provided by operating activities in 1996 compared to 1995 was
primarily due to: (i) lower levels of premiums; (ii) increased loss and
loss expenses paid of $40 million (including $16 million due to
weather-related storm claims); (iii) an increase in the 1996 UCJF
assessment payment of $5 million; and (iv) an increase in the 1995
incentives and profit sharing amounts totaling $4 million paid during 1996.
The increase in cash provided by operating activities in 1995 compared to
1994 was mainly a result of: (i) the increase in premium volume; (ii) a
reduction in underwriting expenses; and (iii) a reduction in
weather-related catastrophe claims of $8 million in 1995 over 1994.
Since cash inflow from premiums is received in advance of required cash
outflow to settle claims, the Company accumulates funds from which it
invests, and investments represent 74% of the Company's total assets as of
December 31, 1996. However, cash outflow can be unpredictable due to
uncertainties regarding settlement dates for unpaid claims and the potential
for large and/or catastrophic losses occurring either individually or in the
aggregate. The Company maintains reinsurance programs to ensure the
availability of funds and to protect the Company against unusually serious
occurrences or catastrophes in which a number of claims could produce an
extraordinary aggregate loss. In addition, the Company's investment program
is structured so that liquidation of debt securities, available-for-sale
should not be necessary in the ordinary course of business.
Bar Graph
- -------------------------------------
Dividends Declared And Paid Per Share
$1.10 $1.12 $1.12 $1.12 $1.12
1992 1993 1994 1995 1996
- -------------------------------------
Page 26
PAGE
Effective July 1, 1996, the Company revised certain reinsurance programs
from a surplus share and facultative arrangement to a treaty excess of loss
arrangement in order to reduce reinsurance costs and retain more of its
premium volume. The new treaty excess of loss programs cover each property
occurrence in excess of $400,000 up to $10 million and each casualty
occurrence in excess of $1 million up to $50 million, except for commercial
umbrella which is reinsured up to $10 million. In certain instances where
greater capacity is needed for a larger property or casualty risk,
facultative reinsurance is purchased. The revised reinsurance agreements
will result in the Company retaining approximately $15 million of additional
annual net premiums written and the related loss exposure.
The Company's property catastrophe reinsurance program is in five layers
and covers 95% of the losses in excess of $10 million up to $125 million.
In addition to the catastrophe program, the Company maintains a New Jersey
Homeowners Quota Share Program ("Homeowners Quota Share Program"). Under
this program, the Company cedes 85.0% of the direct New Jersey premiums
written and earned and 85.0% of the direct losses and allocated loss
expenses incurred to its reinsurers and receives from the reinsurers a
commission of 37%. In New Jersey, when the property catastrophe program is
combined with the $95 million per occurrence limits of the Homeowners Quota
Share Program, the Company has a total catastrophe cover of $210 million
(excluding the 5% participation) in excess of $1 million.
Effective January 1, 1997, the Company revised its property catastrophe
program. The new program is in three layers and covers 95% of losses in
excess of $10 million up to $55 million and 95% of losses in excess of $75
million up to $135 million. In New Jersey, when combined with the per
occurrence limits of the Homeowners Quota Share Program of $95 million, the
Company has a total catastrophe program of $140 million (excluding the 5%
participation) in excess of $1 million and $60 million (excluding the 5%
participation) in excess of $161 million. For the most part, the new
program increases the Company's net retention in New Jersey (the largest
catastrophe exposure) from $1 million to $21 million, with $20 million of
the net retained amount to be incurred in excess, only in the event of
losses, of $141 million. Over the past 124 years, New Jersey has had little
historical incidence of catastrophe experience. The Company expects its
1997 costs for both the catastrophe and Homeowner Quota Share programs to
be reduced by approximately $2 million.
Total assets at December 31, 1996, were $2.2 billion, representing an
increase of $71 million, or 3%, from December 31, 1995. The growth in total
assets was primarily due to an increase in total investments of $60 million
and an increase in reinsurance recoverable on unpaid losses and loss
expenses of $29 million. The growth in the Company's investment portfolio
reflected the cash provided by operating activities partially offset by a
$6 million decrease in the net unrealized gains on available-for-sale
securities. Partially offsetting these increases was a decline in premiums
and other receivables of $13 million.
The rise in total liabilities of $33 million, or 2% from December 31,
1995, to December 31, 1996, mainly resulted from increases in reserves for
losses and loss expenses of $70 million. The increase in loss and loss
expense reserve was partially offset by: (i) a $19 million decrease in
other liabilities due, in part, to the $8 million payment of the 1996
FAIRA assessment; (ii) a $12 million decrease in unearned premiums, due to
lower levels of premiums written; and (iii) a $7 million decrease in notes
payable due to the principal payment on the 7.84% Senior Notes.
Insurance regulation
- --------------------
The Company is subject to regulation under applicable insurance statutes,
including insurance holding company statutes, of the various states in
which the Company operates. Insurance regulation is intended to provide
solvency and other safeguards for policyholders rather than to protect
stockholders of insurance companies or insurance holding companies.
Insurance laws of the various states establish regulatory agencies with
broad administrative powers, including the power to grant or revoke
licenses to transact insurance business, and to regulate trade practices,
investments, premium rates, the deposit of securities, the form and content
of financial statements, insurance policies, accounting practices, the
maintenance of specified reserves and capital, the payment of dividends,
and establish maximum levels of profits or returns for a line of insurance.
Bar Graph
- ------------------------------------------
Stockholders' Equity Per Share
$23.19 $23.47 $23.23 $30.33 $32.61
1992 1993 1994 1995 1996
- ------------------------------------------
Page 27
PAGE
Analysis of reserves for losses and loss expenses
- --------------------------------------------------
Significant periods of time can elapse between the occurrence of an
insured loss, the reporting of the loss to the insurer and the insurer's
payment of that loss. To recognize liabilities for unpaid losses and loss
expenses, insurers establish reserves as balance sheet liabilities
representing estimates of amounts needed to pay reported and unreported
net losses and loss expenses.
When a claim is reported to an insurance subsidiary, its claims personnel
establish a "case reserve" for the estimated amount of the ultimate payment.
The amount of the reserve is primarily based upon a case-by-case evaluation
of the type of claim involved, the circumstances surrounding each claim and
the policy provisions relating to the type of losses. The estimate reflects
the informed judgment of such personnel based on general insurance
reserving practices, as well as the experience and knowledge of the claims
person. Until the claim is resolved, these estimates are revised as deemed
necessary by the responsible claims personnel based on subsequent
developments and periodic reviews of the cases.
In accordance with industry practice, the Company also maintains reserves
for estimated losses and loss expenses incurred but not yet reported
("IBNR"). The Company projects its estimate of ultimate losses and loss
expenses at each reporting date. The difference between (i) projected
ultimate losses and loss expense reserves and (ii) case loss reserves and
loss expense reserves thereon is carried as the IBNR reserve. (See note
1(h) and note 15 to the consolidated financial statements for a discussion
of assumptions used in establishing IBNR reserves.)
By using both individual estimates of reported claims and generally
accepted actuarial reserving techniques, the Company estimates the ultimate
net liability for losses and loss expenses. The ultimate liability may be
higher or lower than reserves established. The Company does not discount to
present value that portion of its loss and loss expense reserves expected to
be paid in future periods. However, loss reserves anticipate recoveries from
salvage and subrogation.
Reserves are reviewed for adequacy on a periodic basis. When reviewing
reserves, the Company analyzes historical data and estimates the impact of
various factors such as: (i) per claim information; (ii) Company and
industry historical loss experience; (iii) legislative enactments, judicial
decisions, legal developments in the imposition of damages and changes in
political attitudes; and (iv) trends in general economic conditions,
including the effects of inflation. This process assumes that past
experience, adjusted for the effects of current developments and
anticipated trends, is an appropriate basis for predicting future events.
There is no precise method, however, for subsequently evaluating the impact
of any specific factor on the adequacy of reserves because the eventual
deficiency or redundancy is affected by many factors.
The anticipated effect of inflation is implicitly considered when
estimating reserves for net losses and loss expenses. While anticipated
increases due to inflation are considered in estimating ultimate claim
costs, the increase in the average severity of claims is caused by a number
of factors that vary with the individual type of policy written. Future
average severities are projected based on historical and anticipated trends
and also are adjusted for anticipated changes in general economic trends.
The table below is a roll-forward of the Company's reserves for losses
and loss expenses for 1994 through 1996. After taking into account all
relevant factors, the Company believes that the provision for losses and
loss expenses at December 31, 1996, was adequate to provide for the
ultimate net costs of claims incurred as of that date. Establishment of
appropriate reserves is an inherently uncertain process and there can be
no certainty that currently established reserves will prove adequate in
light of subsequent actual experience. The Company receives an actuarial
opinion as to the adequacy of its reserves from its Vice President and
Actuary, but does not receive an independent actuarial opinion as to such
reserves.
This table provides a roll-forward of beginning and ending reserve
balances and the effects on income for the years 1996, 1995 and 1994. The
roll-forward shows a reserve decrease, or redundancy, of $9 million in
1996, a reserve increase, or deficiency, of $13 million in 1995 and a
reserve redundancy of $3 million in 1994.
The $9 million redundancy experienced in 1996 was principally due to a
$9 million redundancy in the workers' compensation line. This redundancy
included reserve reductions (approximately $11 million) in the National
Workers' Compensation Reinsurance Pool business ("NCCI"). Effective...
- ----------------------------------------------------------------------------
Roll-forward Of Reserves For Losses
And Loss Expenses
(in thousands)
- ----------------------------------------------------------------------------
1996 1995 1994
Net reserves for losses and loss expenses
at beginning of year $ 998,683 887,854 803,675
Provision for losses and loss expenses
for claims occurring in the current year 504,843 516,219 490,641
Increase (decrease) in estimated losses
and loss expenses for claims
occurring in prior years (9,178) 12,682 (2,653)
--------- --------- ---------
1,494,348 1,416,755 1,291,663
--------- --------- ---------
Losses and loss expenses paid
for claims occurring during:
Current year 174,398 158,692 179,248
Prior years 280,365 259,380 224,561
--------- --------- ---------
454,763 418,072 403,809
--------- --------- ---------
Net reserves for losses and loss expenses
at end of year 1,039,585 998,683 887,854
Reinsurance recoverable on unpaid losses
and loss expenses at end of year 150,208 121,369 111,550
--------- --------- ---------
Gross reserves for losses and loss
expenses at end of year $ 1,189,793 1,120,052 999,404
========= ========= =========
Page 28
PAGE
...January 1, 1995, Selective withdrew from the New Jersey NCCI and chose to
accept direct assignments of involuntary workers' compensation coverage in
an effort to reduce processing costs and improve the loss experience of this
business through better loss control, managed care and risk management.
During 1996, incurred loss estimates for the NCCI decreased due to greater
than anticipated savings from the use of managed care and various favorable
legislative reforms. The workers' compensation redundancy was partially
offset by a $4 million reserve deficiency in general liability insurance. In
general liability insurance, the Company increased its estimates of ultimate
loss and loss expense due to a continuation in the increase in average paid
claim costs.
The reserve deficiency experienced in 1995 resulted from higher estimates
of ultimate loss and loss expense costs in the commercial automobile and
general liability lines of insurance. In 1995, the emergence of higher than
expected paid and incurred losses and loss expenses for commercial
automobile caused the Company to increase its estimate of ultimate loss and
loss expense costs. In general liability, the Company increased its
estimate of ultimate loss and loss expense due to an increasing average paid
cost per claim.
- ---------------------------------------------------------------------------
Analysis Of Net Loss And
Loss Expense Development
(in millions)
- ---------------------------------------------------------------------------
1986 1987 1988 1989
Gross reserves for unpaid
losses and loss expenses
at December 31 $404.0 475.3 534.5 622.8
Reinsurance recoverable
on unpaid losses
and loss expenses
at December 31 $(84.4) (85.3) (80.2) (100.5)
Net reserves for unpaid
losses and loss expenses
at December 31 $319.6 390.0 454.3 522.3
Net reserves estimated as of:
One year later 327.2 388.7 446.8 523.8
Two years later 324.7 382.8 445.3 528.2
Three years later 321.9 382.4 448.1 523.8
Four years later 326.8 389.1 447.0 520.3
Five years later 332.6 390.5 443.5 523.7
Six years later 336.3 389.3 447.2 529.7
Seven years later 337.1 392.3 454.7 530.0
Eight years later 340.0 399.7 457.3
Nine years later 345.8 403.2
Ten years later 349.3
Cumulative redundancy
(deficiency) $(29.7) (13.2) (3.0) (7.7)
===== ===== ===== =====
Cumulative amount of
net reserves paid
through:
One year later $104.9 131.3 135.0 158.2
Two years later 179.4 203.0 222.4 264.5
Three years later 221.6 254.0 285.4 335.8
Four years later 247.6 288.4 322.7 385.8
Five years later 263.1 307.8 350.7 413.7
Six years later 274.0 322.6 366.3 430.0
Seven years later 281.9 330.8 376.6 443.5
Eight years later 287.0 337.6 387.2
Nine years later 291.9 345.5
Ten years later 298.4
- --------------------------------------------------------------------------
Analysis Of Net Loss And
Loss Expense Development
(in millions)
- --------------------------------------------------------------------------
1990 1991 1992 1993
Gross reserves for unpaid
losses and loss
expenses at
December 31 $ 669.2 731.5 870.2 917.7
Reinsurance recoverable
on unpaid losses
and loss expenses at
December 31 $ (87.0) (91.9) (132.6) (114.0)
Net reserves for unpaid
losses and loss
expenses at
December 31 $ 582.2 639.6 737.6 803.7
Net reserves estimated as of:
One year later 585.7 634.3 734.8 801.0
Two years later 583.1 626.3 732.5 790.0
Three years later 577.0 626.5 718.7 788.5
Four years later 581.2 626.8 716.5
Five years later 583.6 625.3
Six years later 582.8
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative redundancy
(deficiency) $ (0.6) 14.3 21.1 15.2
====== ===== ===== =====
Cumulative amount of
net reserves paid
through:
One year later $ 174.5 183.7 219.5 224.6
Two years later 288.1 308.8 352.3 382.3
Three years later 371.7 391.3 451.4 497.7
Four years later 422.5 447.7 517.2
Five years later 452.0 481.4
Six years later 472.8
Seven years later
Eight years later
Nine years later
Ten years later
- --------------------------------------------------------------------------
Analysis Of Net Loss And
Loss Expense Development
(in millions)
- --------------------------------------------------------------------------
1994 1995 1996
Gross reserves for unpaid
losses and loss
expenses at
December 31 $ 999.4 1,120.01 1,189.8
Reinsurance recoverable
on unpaid losses
and loss expenses at
December 31 $(111.5) (121.4) (150.2)
Net reserves for unpaid
losses and loss
expenses at
December 31 $ 887.9 998.7 1,039.6
Net reserves estimated as of:
One year later 900.6 989.5
Two years later 899.5
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative redundancy
(deficiency) $(11.6) 9.2
==== ====
Cumulative amount of
net reserves paid
through:
One year later $259.4 280.4
Two years later 443.4
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Page 29
PAGE
The table on page 29 represents the development of balance sheet net
reserves for 1986 through 1996. The top three lines of the table reconcile
gross Generally Accepted Accounting Principles ("GAAP") reserves to net
GAAP reserves for unpaid losses and loss expenses recorded at the balance
sheet date for each of the indicated years. The upper portion of the table
shows the re-estimated amount of the previously recorded net reserves based
on experience as of the end of each succeeding year. The estimate is
increased or decreased as more information becomes known about the
frequency and severity of claims for individual years.
The "cumulative redundancy (deficiency)" represents the aggregate change
in the estimates over all prior years. For example, the 1991 reserve
developed a $14 million redundancy over the course of the succeeding five
years. That amount has been included in income over the past five years.
The cumulative deficiency in 1986 and 1987 reflected the adverse reserve
development in automobile and commercial other liability, principally due
to claim severity, higher defense costs and environmental claims. In
addition, the 1986 deficiency also included adverse reserve development on
Florida workers' compensation business. The Company discontinued its
participation in the Florida market for workers' compensation in July 1984.
The development experienced in 1994 reflected the emergence of higher than
expected paid and incurred losses and loss expenses for commercial
automobile, as well as an increasing average paid costs per claim in the
commercial other liability line of insurance.
The lower section of the table shows the cumulative amount paid with
respect to the previously recorded reserves as of the end of each
succeeding year. For example, as of December 31, 1996, the Company paid
$387 million of the currently estimated $457 million of losses and loss
expenses that were incurred through the end of 1988; thus, the difference,
an estimated $70 million of losses and loss expenses incurred through 1988
remained unpaid as of December 31, 1996.
In evaluating this information, it should be noted that each amount
includes the total of all changes in amounts for prior periods. For
example, the amount of redundancy to losses settled in 1996, but incurred
in 1993, will be included in the cumulative redundancy (deficiency) amounts
in 1993, 1994, and 1995. This table does not present accident or policy
year development data, which certain readers may be more accustomed to
analyzing. Conditions and trends that have affected development of the
reserves in the past may not necessarily occur in the future. Accordingly,
it may not be appropriate to extrapolate redundancies or deficiencies based
on this table.
Environmental Claim Activity
- ----------------------------
1996 1995 1994
Asbestos Related Claims (1) ----- ----- -----
- --------------------------
Claims at beginning of year 1,449 1,252 1,053
Claims received during year 360 250 303
Claims closed during year (94) (53) (104)
----- ----- -----
Claims at end of year 1,715 1,449 1,252
===== ===== =====
Average net loss settlement on closed claims $ 717 102 225
Non-Asbestos Related Claims (1)
- -------------------------------
Claims at beginning of year 306 274 323
Claims received during year 238 271 211
Claims closed during year (238) (239) (260)
----- ---- ----
Claims at end of year 306 306 274
===== ==== ====
Average net loss settlement on closed claims $9,331 7,769 8,361
(1) The number of environmental claims presented in the tables includes all
multiple claimants who are associated with the same site or incident.
Environmental reserves
- ----------------------
Reserves established for liability insurance continue to reflect exposure
to environmental claims, both asbestos and non-asbestos. These claims have
arisen primarily under older policies containing exclusions for
environmental liability, which certain courts, in interpreting such
exclusions, have determined do not bar such claims. The emergence of these
claims is slow and highly unpredictable. Since 1986, policies issued by the
insurance subsidiaries contain a more expansive exclusion for losses
related to environmental claims. There are significant uncertainties in
estimating the Company's exposure to environmental claims resulting from
lack of historical data, long reporting delays, uncertainty as to the
number and identity of claimants and complex legal and coverage issues.
The Company refers all environmental claims to a centralized
environmental claim unit, which specializes in the claim management of
these exposures. The Company's asbestos and non-asbestos environmental
claims have arisen primarily from exposures in municipal government, small
commercial risks and homeowners policies.
"Asbestos claims" means those claims presented to the Company in which
bodily injury is alleged to have occurred as a result of exposure to
asbestos and/or asbestos-containing products. During the past two decades,
the insurance industry has witnessed the emergence and development of an
increasing number of asbestos claims. Over this time period, the various
issues concerning coverage and the industry's obligations under its
policies have largely been resolved, thus permitting the Company to
reserve with a higher degree of certainty; however, the overall number of
claims presented to the Company has continued to increase. At December 31,
1996, asbestos claims constituted 85% of the Company's total outstanding
environmental claims. Although individual asbestos claims constitute a
large percentage of the total number of the Company's environmental claims,
the net case reserves constitute 6% of the total net reserves for
environmental claims at December 31, 1996.
Page 30
PAGE
"Non-asbestos claims" means all pollution and environmental claims
alleging bodily injury or property damage presented to the Company other
than asbestos. These claims include landfills, leaking underground storage
tanks, oil spills, air pollution, lead poisoning and general contamination.
In contrast to asbestos claims, the number of non-asbestos claims received
during 1996 decreased slightly from 1995, despite the fact that the Company
received claims from 27 different insureds arising out of three landfills
located in New Jersey. One of the three landfills represented claims
presented to the Company by 23 insureds. However, the Company's exposure at
this landfill was substantially reduced due to the existence of the
Absolute Pollution Exclusion in some of the policies issued to these
insureds and the successful resolution of a legal issue which found that
the plaintiffs had not been able to establish a nexus between a certain
number of the Company's insureds and the landfill.
The Company evaluates its environmental reserves on a case-by-case basis.
As cases progress, the Company's ability to assess potential liability
often improves. Reserves are then adjusted accordingly. In addition, each
case is reviewed in light of other factors affecting liability, including
judicial interpretation of coverage issues.
At December 31, 1996, the Company's reserves for environmental claims
amounted to $63 million on a gross basis and $50 million net of
reinsurance (net basis). The Company's case reserves for known
environmental claims, excluding IBNR, was $31 million on a gross basis
and $21 million on a net basis in connection with 2,021 claims, including
multiple claimants who are associated with the same site or incident.
These claims involved about 1,400 lawsuits. Of the 2,021 total outstanding
environmental claims, 1,715 claims are asbestos related, of which 1,630
claims involve only two insureds. One such insured manufactured
asbestos-containing products, while the other supplied asbestos-containing
products. The reserve associated with the two insureds amounted to $6
million on a gross basis and $2 million on a net basis. About 120 of the
non-asbestos claims involve approximately 35 landfills. The landfill sites
account for approximately $17 million on a gross basis and $11 million on a
net basis. The remaining claims, which represent about $8 million, involve
leaking underground storage tanks, air pollution, as well as other asbestos
claims. Litigation costs associated with environmental claims have been
significant, particularly for landfill claims.
As of December 31, 1996, the Company's total IBNR reserves for
environmental exposures was $32 million on a gross basis and $29 million
on a net basis. The net IBNR reserve represented approximately 7 years of
newly reported claims. There are significant uncertainties in estimating
the Company's exposure to environmental IBNR claims resulting from lack of
historical data, long reporting delays, uncertainty as to the number and
identity of claimants and complex legal and coverage issues on which courts
have reached different and sometimes inconsistent conclusions. The
standards for establishing appropriate environmental IBNR reserves are
still developing.
The Company's "survival ratio," which is the number of years it would
take a company to exhaust its present net environmental reserves based on
its current environmental claims payout pattern over the past three years,
was approximately 14 years at December 31, 1996. According to A.M. Best,
the industry's average survival ratio is expected to be about 9 years at
December 31, 1996.
- ---------------------------------------------------------------------------
Roll-forward Of Environmental Incurred Losses and Expenses
(in thousands)
- ---------------------------------------------------------------------------
1996
----
Asbestos Gross Net
- --------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year $ 7,801 7,801
Incurred losses and loss expenses 2,407 (1,702)
Less losses and loss expenses paid (226) (226)
----- -----
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year 9,982 5,873
===== =====
Non-Asbestos
- ------------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year 45,465 45,465
Incurred losses and loss expenses 14,289 3,312
Less losses and loss expenses paid (6,333) (4,247)
------ ------
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year 53,421 44,530
====== ======
Total Environmental Claims
- --------------------------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year 53,266 53,266
Incurred losses and loss expenses 16,696 1,610
Less losses and loss expenses paid (6,559) (4,473)
------ ------
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year $ 63,403 50,403
====== ======
- ---------------------------------------------------------------------------
1995
----
Asbestos Gross Net
- --------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year $ 7,501 7,501
Incurred losses and loss expenses 489 489
Less losses and loss expenses paid (189) (189)
----- -----
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year 7,801 7,801
===== =====
Non-Asbestos
- ------------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year 41,344 41,344
Incurred losses and loss expenses 6,779 6,779
Less losses and loss expenses paid (2,658) (2,658)
------ ------
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year 45,465 45,465
====== ======
Total Environmental Claims
- --------------------------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year 48,845 48,845
Incurred losses and loss expenses 7,268 7,268
Less losses and loss expenses paid (2,847) (2,847)
------ ------
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year $ 53,266 53,266
====== ======
- ---------------------------------------------------------------------------
1994
----
Asbestos Gross Net
- --------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year $ 7,111 7,111
Incurred losses and loss expenses 574 574
Less losses and loss expenses paid (184) (184)
----- -----
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year 7,501 7,501
===== =====
Non-Asbestos
- ------------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year 38,598 38,598
Incurred losses and loss expenses 6,155 6,155
Less losses and loss expenses paid (3,409) (3,409)
------ ------
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year 41,344 41,344
====== ======
Total Environmental Claims
- --------------------------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year 45,709 45,709
Incurred losses and loss expenses 6,729 6,729
Less losses and loss expenses paid (3,593) (3,593)
------ ------
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year $ 48,845 48,845
====== ======
Page 31
PAGE
The table on page 31 provides a roll-forward of the Company's gross and
net environmental incurred losses and loss expenses and related reserves
thereon. The $9 million increase in the Company's total environmental
claims gross incurred losses and loss expenses in 1996, compared to 1995,
was due to several factors including a $12 million increase in IBNR. During
1996, the Company was able to achieve a greater quantification of potential
liabilities and actuarial modeling to project future ultimate settlement
costs and related IBNR amounts. In 1996, the Company successfully concluded
several significant claims, which reduced the Company's non-asbestos
environmental gross incurred losses and loss expenses by approximately $1
million. These claims included an insured dry cleaning company alleged to
have contributed to contamination at a Superfund site, an insured who owned
and operated a landfill site listed on the Federal Government's National
Priorities List and a carbon monoxide death claim. After reinsurance, the
Company's total environmental claims net incurred losses and loss expenses
for 1996 amounted to $2 million.
The increase in the Company's total environmental reserves at the end of
1995 compared to 1994 was primarily due to reserve increases on existing
claims as well as new claims reported. Reserve development on several
claims contributed to the increased reserves. One such claim involved
carbon monoxide poisoning. The Company initiated litigation seeking
clarification of its responsibility under the policy and thereafter
adjusted its exposure. Another claim involved a landfill site owned and
operated by an insured in which the reserve was increased to reflect higher
litigation expenses. In addition, the development of several claims
involving contamination caused by leaking underground storage tanks caused
the Company to increase its reserves relative to these cases by
approximately $1 million in 1995.
Based on the Company's aggregate reserve for net losses and loss expenses
at December 31, 1996, the Company does not expect that liabilities
associated with environmental and nonenvironmental claims will have a
materially adverse impact on its future liquidity, financial position and
results of operations. However, given the complexity of coverage and other
legal issues and the significant assumptions used in estimating
environmental claims, actual results could significantly differ from the
Company's current estimates.
For additional information on environmental reserves see note 15 to the
consolidated financial statements.
Impact of inflation
- -------------------
Inflation affects the Company, like other companies in the property and
casualty insurance industry, by contributing to higher losses, loss
expenses and operating costs, as well as greater investment income
resulting from the higher interest rates which can prevail in an
inflationary period. Premium rates, however, may not keep pace with
inflation since regulation and competitive forces generally limit the
Company's ability to increase premium rates.
The Company considers inflationary trends in estimating its reserves for
claims reported and for incurred but not reported claims. The Company
believes that its policy of timely recording and settling claims has helped
it to lessen the potential effect that inflation can have on claims which
remain open for several years.
Page 32
PAGE
INDEPENDENT AUDITORS REPORT
- ---------------------------
The Board of Directors and Stockholders
Selective Insurance Group, Inc.
- ---------------------------------------
We have audited the accompanying consolidated balance sheets of
Selective Insurance Group, Inc. and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Selective Insurance Group, Inc. and subsidiaries at December 31, 1996 and
1995, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1996, in conformity
with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the
company adopted the provisions of the Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 115, "Accounting for
certain Investments in Debt and Equity Securities" in 1994.
SS// KPMG Peat Marwick LLP
Short Hills, New Jersey
January 17, 1997
Page 33
PAGE
CONSOLIDATED BALANCE SHEETS
- ---------------------------
December 31, 1996 1995
(dollars in thousands)
- ----------------------------------------------------------------------------
ASSETS
- ------
Investments:
- -----------
Debt securities, held-to-maturity at amortized cost
(fair value: $445,273-1996; $460,444-1995) $ 432,792 439,585
Debt securities, available-for-sale at fair value
(amortized cost: $965,965-1996; $902,375-1995) 985,372 949,004
Equity securities, available-for-sale at fair value
(cost: $99,383-1996; $76,858-1995) 161,096 117,522
Short-term investments
(at cost which approximates fair value) 33,924 47,306
Other investments
(at cost which approximates fair value) 10,530 10,721
--------- -------
Total investments 1,623,714 1,564,138
Interest and dividends due or accrued 24,167 23,619
Premiums and other receivables, net of allowance
for uncollectible accounts of:
$3,302-1996; $3,450-1995 152,008 165,194
Reinsurance recoverable on paid losses
and loss expenses 7,863 5,169
Reinsurance recoverable on unpaid losses
and loss expenses 150,208 121,369
Prepaid reinsurance premiums 30,813 39,952
Deferred Federal income tax 30,771 32,202
Real estate, furniture and equipment at cost, net of
accumulated depreciation of:
$38,527-1996; $35,013-1995 48,993 49,373
Deferred policy acquisition costs 83,150 82,200
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of:
$3,068-1996; $2,601-1995 9,894 10,362
Other assets 22,058 19,499
--------- ---------
Total assets $2,183,639 2,113,077
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
- -----------
Reserve for losses $1,015,601 953,251
Reserve for loss expenses 174,192 166,801
Unearned premiums 332,040 343,887
Convertible subordinated debentures 6,912 7,292
Notes payable 96,857 104,000
Current Federal income tax 3,729 1,993
Other liabilities 80,009 99,104
--------- ---------
Total liabilities 1,709,340 1,676,328
--------- ---------
Stockholders' Equity:
- --------------------
Common stock of $2 par value per share:
Authorized shares: 90,000,000
Issued: 17,911,087-1996; 17,647,178-1995 35,822 35,294
Additional paid-in capital 53,882 46,071
Net unrealized gains on securities, available-for-sale,
net of deferred income tax effect 52,728 56,740
Retained earnings 386,601 347,318
Treasury stock at cost
(shares: 3,366,631-1996; 3,247,189-1995) (50,680) (46,429)
Deferred compensation expense and notes receivable
from stock sales (4,054) (2,245)
--------- ---------
Total stockholders' equity 474,299 436,749
Commitments and contingencies (notes 8 and 15) --------- --------
Total liabilities and stockholders' equity $2,183,639 2,113,077
========= =========
See accompanying notes to consolidated financial statements.
Page 34
PAGE
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------
Year ended December 31, 1996 1995 1994
(in thousands, except per share data)
- ----------------------------------------------------------------------------
Revenues:
- --------
Net premiums written $ 692,239 757,021 697,941
Net decrease (increase) in unearned
premiums and prepaid reinsurance premiums 2,708 (14,204) (17,671)
------- ------- -------
Net premiums earned 694,947 742,817 680,270
Net investment income earned 96,952 91,640 80,657
Net realized gains on investments 2,786 900 4,230
Other income 4,287 3,741 3,173
------- ------- -------
Total revenues 798,972 839,098 768,330
------- ------- -------
Expenses:
- --------
Losses incurred 420,943 448,291 412,520
Loss expenses incurred 74,722 80,610 75,468
Policy acquisition costs 213,372 222,418 220,293
Dividends to policyholders 5,035 7,530 6,896
Interest expense 9,185 9,296 6,552
Other expenses 6,626 6,055 3,193
------- ------- -------
Total expenses 729,883 774,200 724,922
------- ------- -------
Income before Federal income tax 69,089 64,898 43,408
------- ------- -------
Federal income tax expense (benefit):
- ------------------------------------
Current 9,947 16,736 9,907
Deferred 3,591 (4,880) (4,775)
------- ------- -------
Total Federal income tax expense 13,538 11,856 5,132
------- ------- -------
Net income $ 55,551 53,042 38,276
======= ======= =======
Earnings per share:
- ------------------
Net income primary $ 3.82 3.71 2.76
Net income fully diluted $ 3.72 3.61 2.66
See accompanying notes to consolidated financial statements.
Page 35
PAGE
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- ----------------------------------------------
Year ended December 31, 1996 1995 1994
(dollars in thousands, except per share amounts)
- -----------------------------------------------------------------------------
Common stock:
- ------------
Beginning of year $ 35,294 34,812 33,972
Dividend reinvestment plan
(shares: 34,052-1996; 36,628-1995;
44,315-1994) 68 73 89
Convertible subordinated debentures
(shares: 26,816-1996; 6,065-1995;
276,140-1994) 54 12 552
Stock purchase and compensation plans
(shares: 203,041-1996; 198,359-1995;
99,748-1994) 406 397 199
------- ------- -------
End of year 35,822 35,294 34,812
------- ------- -------
Additional paid-in capital:
- --------------------------
Beginning of year 46,071 39,365 32,918
Dividend reinvestment plan 1,079 1,091 1,077
Convertible subordinated debentures 326 72 3,297
Stock purchase and compensation plans 6,406 5,543 2,073
------- ------- -------
End of year 53,882 46,071 39,365
------- ------- -------
Net unrealized gains (losses) on securities,
available-for-sale, net of deferred income
tax effect:
- --------------------------------------------
Beginning of year 56,740 (8,149) 14,394
Increase in net unrealized gains on securities,
available-for-sale due to reclassification
in 1995 and accounting change in 1994, net
of deferred income tax effect - 12,896 14,655
(Decrease) increase in net unrealized gains on
securities, available-for-sale, net of
deferred income tax effect (4,012) 51,993 (37,198)
------- ------- -------
End of year 52,728 56,740 (8,149)
------- ------- -------
Retained earnings:
- -----------------
Beginning of year 347,318 310,272 287,545
Net income 55,551 53,042 38,276
Cash dividends to stockholders
($1.12 per share) (16,268) (15,996) (15,549)
------- ------- -------
End of year 386,601 347,318 310,272
------- ------- -------
Treasury stock:
- --------------
Beginning of year (46,429) (46,144) (46,022)
Acquisition of treasury stock
(shares: 119,442-1996; 9,371-1995;
4,443-1994) (4,251) (285) (122)
------- ------- -------
End of year (50,680) (46,429) (46,144)
------- ------- -------
Deferred compensation expense and notes
receivable from stock sales:
- ---------------------------------------
Beginning of year (2,245) (992) -
Deferred compensation expense and notes
receivable from stock sales (2,984) (1,753) (992)
Amounts received on notes and amortization of
deferred compensation expense 1,175 500 -
------- ------- -------
End of year (4,054) (2,245) (992)
------- ------- -------
Total stockholders' equity
(per share: $32.61 1996; $30.33 1995;
$23.23 1994) $474,299 436,749 329,164
======= ======= =======
The Company also has authorized, but not issued, 5,000,000 shares of
preferred stock without par value of which 300,000 shares have been
designated Series A junior preferred stock without par value.
See accompanying notes to consolidated financial statements.
Page 36
PAGE
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
Year ended December 31, 1996 1995 1994
(in thousands)
- ----------------------------------------------------------------------------
OPERATING ACTIVITIES
- --------------------
Net income $ 55,551 53,042 38,276
------ ------ ------
Adjustments to reconcile net income to
net cash provided by operating activities:
Increases in reserves for losses and loss
expenses, net of reinsurance recoverable
on unpaid losses and loss expenses 40,902 110,829 84,179
Net (decrease) increase in unearned premiums
and prepaid reinsurance premiums (2,708) 14,204 17,671
Decrease (increase) in net Federal income tax 5,327 (6,914) (4,043)
Depreciation and amortization 5,950 5,939 5,767
Decrease (increase) in premiums and other
receivables 13,186 (8,856) (9,938)
Increase in deferred policy acquisition costs (950) (1,200) (2,400)
Increase in interest and dividends due or accrued (548) (1,798) (1,156)
(Increase) decrease in reinsurance recoverable
on paid losses and loss expenses (2,694) 1,020 (872)
Net realized gains on investments (2,786) (900) (4,230)
Other net (20,375) 9,348 (3,893)
------ ------ ------
Net adjustments 35,304 121,672 81,085
------ ------- ------
Net cash provided by operating activities 90,855 174,714 119,361
------ ------- -------
INVESTING ACTIVITIES
- --------------------
Purchase of debt securities, held-to-maturity (65,277) (168,414) (83,501)
Purchase of debt securities,
available-for-sale (173,506) (99,104) (252,422)
Purchase of equity securities,
available-for-sale (30,931) (26,374) (64,702)
Purchase of other investments - - (853)
Sale of debt securities, held-to-maturity - 2,000 -
Sale of debt securities, available-for-sale 49,626 25,467 95,696
Redemption and maturities of debt securities,
held-to-maturity 72,111 64,457 56,511
Redemption and maturities of debt securities,
available-for-sale 61,215 31,490 37,291
Sale of equity securities, available-for-sale 10,917 26,950 58,702
Proceeds from other investments 191 65 331
Decrease in net payable from security
transactions (1,377) (744) (17,428)
Net additions to real estate, furniture
and equipment (4,588) (2,969) (4,293)
------- ------- -------
Net cash used in investing activities (81,619) (147,176) (174,668)
------- ------- -------
FINANCING ACTIVITIES
- --------------------
Dividends to stockholders (16,268) (15,996) (15,549)
Acquisition of treasury stock (4,251) (285) (122)
Principal (payment) proceeds from notes payable (7,143) - 54,000
Net proceeds from dividend reinvestment plan 1,147 1,164 1,166
Net proceeds from stock purchase and
compensation plans 6,812 5,940 2,272
Increase in deferred compensation expense
and notes receivable from stock sale (2,915) (1,686) (992)
------- ------- -------
Net cash (used in) provided by financing
activities (22,618) (10,863) 40,775
------- ------- -------
Net (decrease) increase in short-term
investments (13,382) 16,675 (14,532)
Short-term investments at beginning of year 47,306 30,631 45,163
------- ------- -------
Short-term investments at end of year $ 33,924 47,306 30,631
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
- -------------------------------------
Cash paid during the year for:
- -----------------------------
Interest $ 9,597 9,156 4,895
Federal income tax 8,211 18,769 9,176
Supplemental schedule of noncash investing
and financing activities:
- -------------------------------------------
Conversion of convertible subordinated
debentures 380 84 3,849
Transfer from debt securities, held-to-maturity
to debt securities, available-for-sale at
amortized cost - 351,352 -
See accompanying notes to consolidated financial statements.
Page 37
PAGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
December 31, 1996, 1995, 1994
NOTE 1 Summary of Significant Accounting Policies
- --------------------------------------------------
(a) Consolidation Policy
- ------------------------
The consolidated financial statements include the accounts of Selective
Insurance Group, Inc. ("Selective") and its subsidiaries (collectively, the
"Company"). All significant intercompany accounts and transactions have been
eliminated in the accompanying consolidated financial statements.
(b) Investments
- ---------------
The Company adopted the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("FASB 115") effective
January 1, 1994. Under FASB 115, debt securities, held-to-maturity are
carried at amortized cost because management has the ability and intent to
hold such securities until maturity, and securities, available-for-sale are
carried at fair value. Fair values are based on quoted market prices, if
available, or from independent pricing services. Net unrealized gains and
losses on debt securities, held-to-maturity are not reflected in
consolidated net income or stockholders' equity. Net unrealized gains and
losses on securities, available-for-sale, net of deferred income tax
effect, are not reflected in consolidated net income, but are included as a
separate component of stockholders' equity. None of the Company's
investments were non-income producing for the years ended December 31, 1996
and 1995.
Realized gains and losses on the sale of investments are determined on
the basis of the cost of specific investments sold and are credited or
charged to income. However, when a decline in fair value of these
investments is considered to be other than temporary, such investments are
written down to their net realizable value.
In November 1995, a Special Report was issued from the Financial
Accounting Standards Board allowing a transfer of securities between
investment categories. During the fourth quarter of 1995, the Company
transferred certain securities, held-to-maturity with an amortized cost of
$351,352,000 to the securities, available-for-sale category to provide
greater portfolio management flexibility. The transfer of securities
resulted in an unrealized gain, net of deferred income tax effect, of
$12,896,000.
(c) Reinsurance
- ---------------
The Company records its ceded reinsurance transactions on a gross basis
on the balance sheet which results in reinsurance recoverables on unpaid
losses and loss expenses and ceded unearned premiums. The Company also
discloses reinsurance amounts for ceded premiums written and earned and
ceded loss and loss expenses incurred.
(d) Stock-Based Compensation
- ----------------------------
The Company adopted the FASB Statement of Financial Accounting Standard
No. 123, "Accounting for Stock-Based Compensation" ("FASB 123") effective
January 1, 1996. FASB 123 establishes financial accounting and reporting
standards for stock-based compensation plans which includes requirements
for the computing of "fair value" for stock options at date of grant using
a mathematical model and expensing the charges over the related service
period based on this calculated value. As permitted by FASB 123, the
Company will continue to use the accounting method prescribed by Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees"
("APB 25"). Under APB 25, the Company's compensation cost is measured as
the excess, if any, of the quoted market price of the Company's common
stock at the date of grant over the amount an employee must pay to acquire
the stock. For stock appreciation rights ("SARs") and restricted stock,
additional compensation expense is recognized based on the increases or
decreases in the fair value of the Company's common stock. Companies using
APB 25 are required to make pro forma footnote disclosures of net income
and earnings per share as if the fair value method of accounting, as
defined in FASB 123, had been applied.
(e) Real Estate, Furniture and Equipment
- ----------------------------------------
The value of real estate, furniture and equipment is stated at cost less
accumulated depreciation. Provisions for depreciation are computed using the
straight-line method over the estimated useful lives of the assets, which
range from three to forty years for financial statement purposes and the
straight-line method and various accelerated methods for Federal income tax
purposes.
(f) Deferred Policy Acquisition Costs
- -------------------------------------
Policy acquisition costs are directly related to the writing of an
insurance policy and consist primarily of commissions, labor costs, state
premium taxes and assessments, and other direct underwriting expenses.
These costs are deferred and amortized over the life of the policies as
premiums are earned in order to facilitate a matching of revenues and
expenses. The deferred policy acquisition costs are limited to the sum of
unearned premiums and anticipated investment income less anticipated
losses and loss adjustment expenses, policyholder dividends and other
expenses for maintenance of policies in force. The investment yields
assumed for each reporting period, which are based upon the Company's
actual average investment yield, before tax, were 6.1%, 6.4% and 6.5% for
1996, 1995 and 1994, respectively.
(g) Goodwill
- ------------
Goodwill from the excess of the cost over the fair market value of the net
assets of acquired companies is being amortized using the straight-line
method over periods ranging from twenty-five to forty years.
The Company continually evaluates the amortization period of its
intangible assets. Estimates of useful lives are revised when circumstances
or events indicate that the original estimate is no longer appropriate.
Page 38
PAGE
(h) Reserves for Losses and Loss Expenses
- -----------------------------------------
When a claim is reported to an insurance subsidiary, its claims personnel
establish a "case reserve" for the estimated amount of the ultimate payment.
The amount of the reserve is primarily based upon a case-by-case evaluation
of the type of claim involved, the circumstances surrounding each claim and
the policy provisions relating to the type of loss. The estimate reflects
the informed judgment of such personnel based on general insurance reserving
practices, as well as the experience and knowledge of the claims person.
Until the claim is resolved, these estimates are revised as deemed necessary
by the responsible claims office based on subsequent developments and
periodic reviews of the cases.
In accordance with industry practice, the Company also maintains reserves
for estimated losses and loss expenses incurred but not yet reported
("IBNR"). The Company projects its estimate of ultimate losses and loss
expenses at each reporting date. The difference between (i) projected
ultimate loss and loss expense reserves and (ii) case reserves and loss
expense reserves thereon is carried as IBNR reserve.
The internal assumptions considered by the Company in the estimation of
the IBNR amounts for both environmental and non-environmental reserves at
the Company's reporting dates are based on: (i) an analysis of both paid
and incurred loss and loss expense development trends; (ii) an analysis of
both paid and incurred claim count development trends; (iii) the exposure
estimates for reported claims; (iv) recent development on exposure
estimates with respect to individual large claims and the aggregate of all
claims; (v) the rate at which new environmental claims are being reported;
(vi) actuarial modeling of environmental claims; and (vii) patterns of
events observed by claims personnel or reported to them by defense counsel.
External factors identified by the Company in the estimation of IBNR for
both environmental and non-environmental IBNR reserves include: (i)
legislative enactments, judicial decisions, legal developments in the
determination of liability and the imposition of damages; and (ii) trends
in general economic conditions, including the effects of inflation.
Adjustments to IBNR are made periodically to take into account changes in
the volume of business written, claims frequency and severity, the mix of
business, claims processing and other items as described above that are
expected by management to affect the Company's reserves for losses and loss
expenses over time.
By using both individual estimates of reported claims and generally
accepted actuarial reserving techniques, the Company estimates the ultimate
net liability for losses and loss expenses. The ultimate liability may be
higher or lower than reserves established. The Company does not discount to
present value that portion of its loss reserves expected to be paid in
future periods, however, loss reserves anticipate recoveries for salvage and
subrogation claims. Such salvage and subrogation amounted to $28,664,000 and
$28,479,000 in 1996 and 1995, respectively.
Reserves are reviewed for adequacy on a periodic basis. When reviewing
reserves, the Company analyzes historical data and estimates the impact of
various factors such as: (i) per claim information; (ii) Company and
industry historical loss experience; (iii) legislative enactments, judicial
decisions, legal developments in the imposition of damages and changes in
political attitudes; and (iv) trends in general economic conditions,
including the effects of inflation. This process assumes that past
experience, adjusted for the effects of current developments and
anticipated trends, is an appropriate basis for predicting future events.
There is no precise method, however, for subsequently evaluating the impact
of any specific factor on the adequacy of reserves because the eventual
deficiency or redundancy is affected by many factors. Based upon such
reviews, the Company believes that the estimated reserves for losses and
loss expenses are adequate to cover the ultimate cost of claims. The
changes in these estimates, resulting from the continuous review process
and the differences between estimates and ultimate payments, are reflected
in the consolidated statements of income for the period in which such
estimates are changed.
(i) Premium Revenue
- -------------------
Premiums written include direct writings plus reinsurance assumed and
estimates of premiums earned but unbilled on the workers' compensation line
of insurance less reinsurance ceded to other insurers.
Premiums written are recognized as revenue over the period that coverage
is provided using the semimonthly pro rata method. Unearned premiums
represent that portion of premiums written that are applicable to the
unexpired terms of policies in force.
(j) Federal Income Tax
- ----------------------
The Company uses the asset and liability method of accounting for income
taxes. Deferred Federal income taxes arise from the recognition of temporary
differences between financial statement carrying amounts and the tax bases
of the Company's assets and liabilities, as well as tax on net unrealized
gains or losses on securities, available-for-sale. A valuation allowance is
provided when it is more likely than not that some portion of the deferred
tax asset will not be realized. The effect of a change in tax rates is
recognized in the period of enactment date.
Page 39
PAGE
(k) Per Share Computations
- --------------------------
Primary earnings per share is based on the weighted average number of
shares of common stock outstanding during each year. Fully diluted earnings
per share assumes conversion at an effective conversion price of $14.17 per
share of the 8.75% Convertible Subordinated Debentures due 2008
("Debentures") into common stock at the beginning of the year and is based
on net income adjusted by adding back the after-tax interest and debt
expenses on the Debentures. The effect of stock options is not significant
to the earnings per share computations as reported.
(l) Statement of Cash Flows
- ---------------------------
Short-term investments comprise highly liquid investments that are
readily convertible into known amounts of cash. Such investments have
maturities of 90 days or less from the date of purchase.
(m) Fair Values of Financial Instruments
- ----------------------------------------
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
(1) Investment Securities: Fair values for debt securities,
held-to-maturity are based on quoted market prices where available. For
debt securities, held-to-maturity not actively traded, fair values are
estimated using values obtained from independent pricing services. The
fair values for debt securities, available-for-sale and equity securities,
available-for-sale, which also represent the carrying amounts, are based
on quoted market prices. Fair values for other investments are not
material and are carried at cost, which approximates fair value.
(2) Indebtedness: The fair value of the Debentures is based on quoted
market prices. The fair values of the 7.84% Senior Notes due November 15,
2002 ("7.84% Senior Notes") and the 8.77% Senior Notes due August 1, 2005
("8.77% Senior Notes") were estimated using a cash flow analysis based upon
Selective's current incremental borrowing rate for the remaining term of
the loan.
(n) Use of Estimates
- --------------------
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported financial statement
balances, as well as the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
(o) Reclassifications
- ---------------------
Certain amounts in the Company's prior years' consolidated financial
statements have been reclassified to conform with the 1996 presentation.
Such reclassifications had no effect on the Company's net income or
stockholders' equity.
NOTE 2 Recent Accounting Pronouncements
- ----------------------------------------
The FASB issued Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("FASB 125"), which provides consistent
standards for distinguishing transfers of financial assets that are
considered sales (transferor surrenders control), from transfers that are
considered secured borrowings. Determination of a secured transfer
identified as a secured borrowing versus a sale is based primarily on
whether and when control of the asset is actually passed to another party.
FASB 125 defines control and establishes criteria for determining when
control is relinquished. The accounting provisions focus on whether and
when assets and liabilities related to the financial assets are recognized
and not recognized in the financial statements. In December of 1996, FASB
subsequently issued Statement of Financial Accounting Standards No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB 125" ("FASB
127"), which defers certain requirements of FASB 125. The adoption of FASB
125 shall be effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, except
for those requirements deferred in FASB 127. FASB 125 is not expected to
have a material adverse effect on the Company's results of operations or
financial condition.
Page 40
PAGE
NOTE 3 Investments
- -------------------
(a) The components of net investment income earned are as
follows:
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------
Debt securities $91,558 86,172 76,940
Equity securities 3,168 2,629 2,582
Short-term investments 1,983 2,394 1,391
Other 1,501 1,659 1,269
------ ------ ------
98,210 92,854 82,182
Investment expenses (1,258) (1,214) (1,525)
------ ------ ------
Net investment
income earned $96,952 91,640 80,657
====== ====== ======
(b) Net unrealized gains (losses) on debt securities, held-to-maturity are
as follows:
(in thousands) 1996 1995 1994
- ----------------------------------------------------------------
Net unrealized gains (losses) $12,481 20,859 (530)
Increase (decrease) in net ====== ====== ======
unrealized gains $ (8,378) 21,389 (81,603)
====== ====== ======
(c) Net unrealized gains (losses) on securities, available-for-sale are as
follows:
(in thousands) 1996 1995 1994
- ----------------------------------------------------------------
Debt securities:
Gains $23,877 46,948 944
Losses (4,470) (319) (28,330)
------ ------ ------
19,407 46,629 (27,386)
------ ------ ------
Equity securities:
Gains 64,979 40,905 17,998
Losses (3,266) (241) (3,149)
------ ------ ------
61,713 40,664 14,849
------ ------ ------
Net unrealized gains (losses)
on available-for-sale
securities 81,120 87,293 (12,537)
Deferred income tax
(expense) benefit (28,392) (30,553) 4,388
------ ------ ------
Net unrealized gains (losses)
net of deferred income tax $52,728 56,740 (8,149)
====== ====== ======
(Decrease) increase in net
unrealized gains, net
of deferred income tax $ (4,012) 64,889 (22,543)
====== ====== ======
(d) The amortized cost, estimated fair values and gross unrealized gains
(losses) of debt securities, held-to-maturity at December 31, 1996 and 1995,
respectively, are as follows:
Gross
Amortized Unrealized
Cost Gains
(in thousands) 1996 1995 1996 1995
- ---------------------------------------------------------------------------
U.S. government
and government
agencies $ 16,184 22,825 771 1,390
Obligations of states and
political subdivisions 371,799 378,440 12,007 18,955
Mortgage-backed securities 44,809 38,320 614 1,402
Total debt securities, ------- ------- ------ ------
held-to-maturity $432,792 439,585 13,392 21,747
======= ======= ====== ======
- ---------------------------------------------------------------------------
Gross
Unrealized Fair
Losses Value
(in thousands) 1996 1995 1996 1995
- ---------------------------------------------------------------------------
U.S. government
and government
agencies $ (100) (37) 16,855 24,178
Obligations of states and
political subdivisions (657) (847) 383,149 396,548
Mortgage-backed securities (154) (4) 45,269 39,718
Total debt securities, ----- ----- ------- -------
held-to-maturity $ (911) (888) 445,273 460,444
===== ===== ======= =======
(e) The cost/amortized cost, estimated fair values and gross unrealized
gains (losses) of securities, available-for-sale at December 31, 1996 and
1995, respectively, are as follows:
Cost/ Gross
Amortized Unrealized
Cost Gains
(in thousands) 1996 1995 1996 1995
- ---------------------------------------------------------------------------
U.S. government
and government
agencies $ 159,382 163,563 6,334 12,268
Obligations of states and
political subdivisions 287,006 285,548 7,744 10,860
Corporate securities 430,387 358,578 8,820 21,570
Asset-backed securities 61,797 70,180 568 1,079
Mortgage-backed securities 27,393 24,506 411 1,171
------- ------- ------ ------
Debt securities,
available-for-sale 965,965 902,375 23,877 46,948
Eqity securities,
available-for-sale 99,383 76,858 64,979 40,905
Total securities, --------- ------- ------ ------
available-for-sale $1,065,348 979,233 88,856 87,853
========= ======= ====== ======
- ---------------------------------------------------------------------------
Gross
Unrealized Fair
Losses Value
(in thousands) 1996 1995 1996 1995
- ---------------------------------------------------------------------------
U.S. government
and government
agencies $ (471) - 165,245 175,831
Obligations of states and
political subdivisions (795) (136) 293,955 296,272
Corporate securities (3,124) (60) 436,083 380,088
Asset-backed securities (67) (123) 62,298 71,136
Mortgage-backed securities (13) - 27,791 25,677
------ ----- ------- -------
Debt securities,
availabe-for-sale (4,470) (319) 985,372 949,004
Equity securities,
available-for-sale (3,266) (241) 161,096 117,522
Total securities, ----- ----- --------- ---------
available-for-sale $ (7,736) (560) 1,146,468 1,066,526
===== ===== ========= =========
Page 41
PAGE
(f) Realized gains (losses) on investments are as follows:
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------
Debt securities,
held-to-maturity
Gains $ - 362 936
Losses - (98) (166)
Debt securities,
available-for-sale
Gains 845 544 780
Losses (569) (562) (2,088)
Equity securities,
available-for-sale
Gains 3,532 3,062 9,741
Losses (1,022) (2,408) (4,973)
----- ----- -----
Net realized gains on
investments $2,786 900 4,230
===== ===== =====
During 1995, the Company sold a debt security, held-to-maturity with a
$2,000,000 carrying value due to the deterioration of the issuer's
credit-worthiness. There was no gain or loss realized on the sale.
(g) The amortized cost and estimated fair value of debt securities at
December 31, 1996, by contractual maturity are shown below.
Mortgage-backed securities are included in the maturity tables using the
estimated average life. Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Listed below are debt securities, held-to-maturity:
Amortized Fair
(in thousands) Cost Value
- ------------------------------------------------------------------------
Due in one year or less $ 53,743 54,707
Due after one year through
five years 231,880 237,369
Due after five years through
ten years 140,432 145,788
Due after ten years through
fifteen years 6,263 6,745
Due after fifteen years 474 664
------- -------
Total debt securities,
held-to-maturity $ 432,792 445,273
======= =======
Listed below are debt securities, available-for-sale:
Amortized Fair
(in thousands) Cost Value
- --------------------------------------------------------------------------
Due in one year or less $ 46,786 47,450
Due after one year through
five years 364,428 376,141
Due after five years through
ten years 518,738 524,893
Due after ten years through
fifteen years 36,013 36,888
------- -------
Total debt securities,
available-for-sale $ 965,965 985,372
======= =======
(h) Certain securities were on deposit with various state regulatory
agencies to comply with insurance laws amounting to $12,870,000 and
$13,190,000 as of December 31, 1996 and 1995, respectively.
(i) The Company is not exposed to significant concentrations of credit risk
within the investment portfolio.
NOTE 4 Premium and Other Receivables
- -------------------------------------
The Company offers directly to the insured various payment plans for most
lines of insurance. Payment due dates are scheduled to minimize exposure to
premium balance charge-offs. The Company also maintains an agency billing
system with two billing options. Agents are either billed monthly or submit
an account current. Payment is due forty-five days following the end of the
accounting period for which the statement is prepared.
The Company reserves for any potential uncollectible premium amounts. The
amounts charged to expense for uncollectible items were $3,502,000,
$2,847,000 and $1,547,000 in 1996, 1995 and 1994, respectively.
NOTE 5 Policy Acquisition Costs
- --------------------------------
Changes in deferred policy acquisition costs and policy acquisition costs
expensed are summarized as follows:
(in thousands) 1996 1995 1994
- ------------------------------------------------------------------------
Deferred policy acquisition
costs:
Deferred, January 1 $ 82,200 81,000 78,600
------- ------- -------
Additions:
Commissions 110,635 117,767 117,267
Labor costs 39,509 38,381 38,317
Premium taxes and
assessments 13,041 19,846 18,108
Other 30,031 27,013 28,501
------- ------- -------
Total additions 193,216 203,007 202,193
------- ------- -------
Amortized to expense (192,266) (201,807) (199,793)
------- ------- -------
Deferred, December 31 $ 83,150 82,200 81,000
======= ======= =======
Policy acquisition costs:
Amortized to expense $ 192,266 201,807 199,793
Period costs 21,106 20,611 20,500
------- ------- -------
Total policy
acquisition costs $ 213,372 222,418 220,293
======= ======= =======
The additions to premium taxes and assessments include $7,455,000 and
$7,203,000 in 1995 and 1994, respectively, imposed as a result of
legislation adopted in New Jersey to fund the deficit of the New Jersey
Automobile Full Insurance Underwriting Association. The amounts amortized
to expense, related to the above legislation, were $1,987,000, $7,382,000
and $7,071,000 in 1996, 1995 and 1994, respectively.
Page 42
PAGE
NOTE 6 Federal Income Tax
- --------------------------
(a) A reconciliation of Federal income tax on pretax earnings at the
statutory corporate rate to the effective tax rate is as follows:
1996 1995 1994
- ------------------------------------------------------------------------
Computed "expected" at
statutory rate 35.0% 35.0 35.0
Tax-exempt interest (15.3) (17.6) (23.5)
Dividends received
deduction (1.0) (.8) (1.2)
Other .9 1.7 1.5
---- ---- ----
Effective tax rate 19.6% 18.3 11.8
==== ==== ====
(b) The tax effects of the significant temporary differences that give rise
to deferred tax liabilities and assets are as follows:
(in thousands) 1996 1995
- ------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs $ 29,103 28,770
Unrealized gains on securities,
available-for-sale 28,392 30,553
Accelerated depreciation 3,635 3,532
Other 4,729 4,367
------ ------
Total deferred tax liabilities 65,859 67,222
Deferred tax assets:
Net loss reserve discounting 66,439 66,059
Net unearned premiums 21,086 21,275
Accrual for insurance fund charges 2,093 5,137
Self-insured employee benefit reserves 1,735 1,812
Pension 1,678 1,569
Net operating loss carryforwards 855 1,010
Other 3,294 3,112
------ ------
Total deferred tax assets 97,180 99,974
Valuation allowance recognized for
deferred tax assets 550 550
------ ------
Net deferred tax assets $ 30,771 32,202
====== ======
The $2,443,000 pretax net operating losses are available, under certain
conditions, for utilization through the year 2004. The Company established
a valuation allowance of $550,000 for net operating losses acquired from
Niagara Exchange Corporation ("Niagara"). The Company has not recognized
valuation allowances on other deferred tax assets as it believes it is more
likely than not that the results of future operations will generate
sufficient taxable income to realize the deferred tax assets. There was no
change in the valuation allowance for the years ended December 31, 1996 and
1995.
NOTE 7 Indebtedness
- --------------------
(a) Debentures
- --------------
The Debentures were issued under an Indenture dated December 29, 1982,
("Indenture") in the principal amount of $25,000,000. The Debentures bear
interest at a rate of 8.75% per annum, which is payable on the unpaid
principal semiannually on January 1 and July 1 in each year to holders of
record at the close of business on the preceding December 15 and June 15.
The Debentures are convertible into common stock at an effective conversion
price of $14.17 per share. The principal amount of the Debentures, together
with accrued interest are due on January 1, 2008.
The Indenture requires Selective to retire, through the operation of a
mandatory sinking fund, 5% of the original $25,000,000 aggregate principal
amount of the Debentures on January 1 of each of the years 1994 to and
including 2007. Voluntary conversions have satisfied Selective's sinking
fund obligations through the year 2007.
(b) Senior Notes
- ----------------
(1) On August 12, 1994, the Company entered into a $54,000,000 note
purchase agreement with various lenders covering the 8.77% Senior Notes.
The Company is required to pay $18,000,000 principal amount of the 8.77%
Senior Notes in each year commencing on August 1, 2003 and ending on August
1, 2005, inclusive, together with interest accrued thereon to the date of
payment. The unpaid principal amount of the 8.77% Senior Notes accrues
interest and is payable semiannually on February 1 and August 1 of each
year until payment in full of the principal amount.
(2) On November 24, 1992, the Company entered into a $50,000,000 note
purchase agreement with various lenders covering the 7.84% Senior Notes.
The Company made its first required principal payment of the 7.84% Senior
Notes for $7,143,000 on November 15, 1996. The Company will continue to
make the required principal payments of $7,143,000 per annum, together with
interest accrued thereon to the date of payment, until November 15, 2001,
inclusive. The outstanding principal amount of the 7.84% Senior Notes
remaining on November 15, 2002, together with interest accrued thereon, is
due and payable on such date. The unpaid principal amount of the 7.84%
Senior Notes accrues interest and is payable semiannually on May 15 and
November 15 of each year until payment in full of the principal amount.
Both note purchase agreements contain restrictive covenants common to
such agreements that limit the Company's ability to declare dividends or
incur additional indebtedness. At December 31, 1996, the amount available
for dividends to stockholders under said restrictions was $121,643,000.
(c) Lines of Credit
- -------------------
The Company had available but unused lines of credit amounting to
$10,000,000 at December 31, 1996 and 1995, respectively. Interest on the
$10,000,000 line of credit is payable monthly based on the one-month London
InterBank Offering Rate plus 1%. There was no outstanding balance or unpaid
interest at December 31, 1996.
Page 43
PAGE
NOTE 8 Reinsurance
- -------------------
In the ordinary course of business, the insurance subsidiaries assume and
cede premiums with other insurance companies and various pools and
associations of which they are members. A large portion of the reinsurance
is effected under reinsurance contracts known as treaties and, in some
instances, by negotiation on each individual risk. In addition, there are
excess of loss and catastrophe reinsurance contracts which protect against
losses over stipulated amounts arising from any one occurrence or event. The
arrangements provide greater diversification of business and can serve to
limit the maximum net loss on catastrophes and large and unusually hazardous
risks.
The insurance subsidiaries are contingently liable to the extent that any
reinsurer becomes unable to meet its contractual obligations. The Company
reviews the financial condition of its existing reinsurers for any potential
write-offs of uncollectible amounts. At December 31, 1996, the Company had
prepaid reinsurance premiums and net reinsurance recoverables with American
Re-Insurance Company (rated "A+ Superior" by A.M. Best Company, Inc.) and a
state insurance fund that amounted to $86,290,000 and $35,118,000,
respectively. The Company has a $35,000,000 trust fund agreement with
American Re-Insurance Company to secure a portion of their recoverable
amounts.
The following is a table of assumed and ceded amounts by income statement
caption:
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------
Premiums written:
Assumed $ 27,908 41,449 61,651
Ceded (86,626) (98,379) (106,136)
Premiums earned:
Assumed 29,356 49,548 55,282
Ceded (95,765) (94,429) (104,722)
Losses incurred:
Assumed 16,158 34,289 40,122
Ceded (94,486) (52,075) (57,836)
Loss expenses incurred:
Assumed 2,165 2,275 2,325
Ceded (4,318) (1,576) (2,080)
NOTE 9 Retirement Plans
- ------------------------
(a) Retirement Savings Plan
- ---------------------------
The Company offers a voluntary defined contribution retirement savings
plan with an added 401(k) feature to employees who meet eligibility
requirements. The plan allows employees to make contributions to a number
of diversified investment options including the Company's common stock, on
a before- and/or after-tax basis. During 1996, 1,497 shares of the
Company's common stock were issued under this plan. The number of shares
of the Company's common stock available to be purchased under the plan was
498,503 at December 31, 1996. Employees can contribute up to a maximum of
12% of their defined compensation and these contributions, up to a maximum
of 6%, are matched 50% by the Company. The Company's contributions to the
plan amounted to $1,162,000, $1,210,000 and $1,223,000 in 1996, 1995 and
1994, respectively.
(b) Retirement Income Plan
- --------------------------
The Company has a noncontributory defined benefit retirement income plan
covering substantially all employees who meet eligibility requirements. The
Company's funding policy provides that payments to the pension trust shall
be equal to the minimum funding requirements of the Employee Retirement
Income Security Act plus additional amounts that may be approved by the
Company from time to time. The Company has made various amendments to the
plan in order to comply with certain Internal Revenue Code changes. The
total pension costs were $3,724,000, $3,373,000 and $4,220,000 in 1996,
1995 and 1994, respectively.
The plan's assets are generally invested in debt and equity securities.
The debt securities are invested 100% in investment grade quality
securities. The reconciliation of the funded status of the plan and net
periodic pension cost is as follows:
- ---------------------------------------------------------------------------
(in thousands) 1996 1995
- ---------------------------------------------------------------------------
Actuarial present value of pension
benefit obligations:
Vested benefits $ 26,840 26,967
Nonvested benefits 2,974 1,849
------ ------
Accumulated benefit obligation 29,814 28,816
Effect of projected future compensation
levels 14,322 16,347
------ ------
Projected benefit obligation 44,136 45,163
Fair value of plan assets (38,799) (31,799)
Items not yet recognized in earnings:
Unrecognized net gain (loss) 1,259 (7,626)
Unrecognized net loss on settlement - (35)
Unrecognized prior service cost (1,802) (1,220)
------ ------
Accrued pension costs $ 4,794 4,483
====== ======
- ---------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------
Net periodic pension cost:
Benefits earned during the year $ 3,203 2,574 3,099
Interest cost on projected
benefit obligation 3,110 2,744 2,551
Return on plan assets (3,811) (5,279) (430)
Net amortization and deferral 1,014 3,155 (1,165)
Amortization of prior service cost 208 179 165
----- ----- -----
Net periodic pension cost $ 3,724 3,373 4,220
===== ===== =====
Actuarial assumptions:
Discount rate 7.75% 7.0 8.25
Projected future compensation
increase 5.0% 5.0 5.5
Long-term expected return on plan
assets 8.5% 8.5 8.5
The Company also maintains a nonqualified, unfunded defined benefit
retirement income plan for directors. The estimated accrued costs for this
plan were not material.
Page 44
PAGE
(c) Postretirement Plan
- -----------------------
The Company provides life insurance benefits ("postretirement benefits")
for retired employees. Substantially all the Company's employees may become
eligible for these benefits if they reach retirement age while working for
the Company and meet a minimum of ten years of eligibility service. Those
who retired prior to January 1, 1991, receive decreasing life insurance
coverage that grades to an ultimate amount after ten years. Those retiring
on or after January 1, 1991, receive life insurance coverage in an amount
equal to 50% of their annual salary amount in effect at the end of their
active career. The estimated cost of these benefits is accrued over the
working lives of those employees expected to qualify for such benefits as a
level percentage of their payroll costs. The periodic postretirement benefit
cost to the Company for these benefits was $550,000, $504,000 and $504,000
in 1996, 1995 and 1994, respectively.
A reconciliation of the funded status of the plan and net postretirement
cost is presented as follows:
- --------------------------------------------------------------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------
Accumulated postretirement benefit
obligation:
Retirees $ (2,595) (2,995)
Active participants (1,413) (1,604)
Other participants (52) (107)
----- -----
Total (4,060) (4,706)
Items not yet recognized in earnings:
Unrecognized net transition obligation 686 732
Unrecognized net loss (gain) (606) 419
----- -----
Accrued postretirement benefit cost $ (3,980) (3,555)
===== =====
- ---------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------
Net periodic postretirement cost:
Service cost $ 159 153 164
Interest cost on accumulated
postretirement benefit
obligation 345 305 294
Net amortization and deferral 46 46 46
Net periodic postretirement --- --- ---
benefit cost $ 550 504 504
=== === ===
Actuarial assumptions:
Discount rate 7.75% 7.0 8.25
Projected future compensation
increase 5.0% 5.0 5.5
NOTE 10 Incentive Compensation Plans
- -------------------------------------
The Company has incentive compensation plans in which all employees are
eligible to participate based on corporate and individual performance goals.
the total compensation costs charged to expense in connection with the
plans were $4,753,000, $6,052,000 and $4,737,000 in 1996, 1995 and 1994,
respectively.
NOTE 11 Stock Compensation Plans
- ---------------------------------
The Company has adopted the pro forma footnote disclosure-only provisions
of FASB 123. Based on the fair value method consistent with the provisions
of FASB 123, the Company's net income and earnings per share would have
been reduced to the following pro forma amounts indicated below:
- ----------------------------------------------------------------------------
(in thousands, except per share data) 1996 1995
- ----------------------------------------------------------------------------
Net income:
As reported $ 55,551 53,042
Pro forma 54,493 52,322
Primary earnings per share:
As reported 3.82 3.71
Pro forma 3.75 3.66
Fully diluted earnings per share:
As reported 3.72 3.61
Pro forma 3.65 3.56
The fair value of each option grant is estimated on the date of grant
using the Black Scholes option-pricing model with the following weighted
average assumptions for 1996 and 1995, respectively: risk free interest
rate of 5.34% and 5.36% for the employee stock purchase plan and 6.04% and
5.92% for all other option plans; expected life of six months for the
employee stock purchase plan and five years for all other option plans;
dividend yield of 3.3% and 3.5%, and an expected volatility of 20% and 22%.
The weighted-average fair value of options and stocks granted during the
year for 1996 and 1995, respectively, is as follows:
- ---------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------
Stock option plans $ 6.38 6.33
Restricted stock 34.04 26.16
Employee stock purchase plan:
Six month option 2.07 1.65
15% of grant date market value 5.22 4.26
----- -----
Total 7.29 5.91
Executive stock grant - 38.00
Agents stock purchase plan:
5% of grant date market value 1.69 1.61
Page 45
PAGE
A summary of the option transactions under the stock option plans is as
follows:
- --------------------------------------------------------------------------
Stock Weighted
appre- average
Number ciation exercise
of shares rights price
- ---------------------------------------------------------------------------
Outstanding at
December 31, 1993 303,713 180,374 $18.13
Granted 1994 493,580 - 28.03
Exercised 1994 (64,003) (10,358) 21.50
Forfeited 1994 (13,913) (17,723) 19.54
------- ------- -----
Outstanding at
December 31, 1994 719,377 152,293 23.68
Granted 1995 167,850 - 35.96
Exercised 1995 (63,567) (10,242) 19.67
Forfeited 1995 (25,912) (31,917) 23.91
------- ------- -----
Outstanding at
December 31, 1995 797,748 110,134 27.40
Granted 1996 193,200 - 35.34
Exercised 1996 (53,402) (9,372) 21.17
Forfeited 1996 (27,522) (25,878) 26.56
------- ------- -----
Outstanding at
December 31, 1996 910,024 74,884 $29.51
======= ======= =====
The table above includes a 1994 grant of 47,000 options at an exercise
price of $24.63 per option, subject to a five-year vesting period. Due to
this vesting requirement, 28,200, 37,600 and 47,000 options are
unexercisable and outstanding for 1996, 1995 and 1994, respectively. The
grant must be exercised within 10 years and had a remaining contractual
life of 7.92 years as of 1996.
The following table summarizes information about stock options
outstanding and exerciseable under the stock option plans at December 31,
1996:
- --------------------------------------------------------------------------
Weighted
average
Range of remaining Weighted
exercise Number contractual life average
prices of shares in years exercise price
- --------------------------------------------------------------------------
$ 10 to 20 110,884 3.67 $16.72
20 to 30 434,090 7.05 27.97
30 to 40 336,850 9.33 36.10
------- ---- -----
$ 10 to 40 881,824 7.51 $29.51
======= ==== =====
(a) Stock Option Plan
- ---------------------
Under the Company's stock option plan, 74,884 shares of the Company's
common stock are reserved for issuance, upon exercise of stock options
outstanding, at December 31, 1996. This plan permitted the granting of
qualified and nonqualified stock options to key employees, which may or may
not have SARs attached. Options and related SARs were granted at not less
than fair value on the date of the grant, are required to be exercised
within ten years from the date of the grant and are exercisable immediately
upon the grant. This plan expired in August 1992, and was replaced with the
Company's stock option plan II.
Compensation expense, based on the increase or decrease in the fair value
of the Company's common stock, is charged or (credited) to other expense in
recognition of the SARs attached to the granted options. Such amounts were
$(456,000), $799,000 and $(1,129,000) in 1996, 1995 and 1994, respectively.
(b) Stock Option Plan II
- ------------------------
Under the Company's stock option plan II, 884,869 shares of the Company's
common stock are available for issuance at December 31, 1996. The plan
permits the granting of qualified and nonqualified stock options to
employees, which may or may not have SARs attached. Options and related SARs
may be granted at not less than fair value on the date of the grant and may
be subject to certain vesting periods as determined by the Company's
Compensation Committee ("Committee"). Each grant must be exercised within
ten years from the date of the grant. Under this plan, the Company granted
options of 173,700, 151,350 and 475,580 for 1996, 1995 and 1994,
respectively.
Under the Company's stock option plan II, the Committee may, in its
discretion, make restricted or unrestricted grants of common stock, or grant
rights to receive common stock, to employees in addition to or in
substitution for options and/or SARs granted. The Company granted a total of
84,227 restricted shares and 34,700 restricted shares for 1996 and 1995,
respectively, of which 6,100 shares and 150 shares were forfeited for 1996
and 1995, respectively. Each such grant is expressly subject to the
attainment of one or more performance-related objectives, determined by the
Committee and set forth in an award agreement. Each such grant also is
subject to a vesting period or other terms, conditions, restrictions and
limitations as determined by the Committee in its discretion and set forth
in an award, agreement.
During the vesting period, dividends are earned and held in escrow on the
restricted shares subject to the same vesting period and conditions as set
forth in the award agreement. Effective September 3, 1996, dividends earned
on the restricted shares are reinvested in the Company's common stock at
fair value. Included in the 1996 restricted shares granted were 1,877
shares issued through the dividend reinvestment feature.
Deferred compensation expense is recognized for the fair value of the
restricted shares when granted and is adjusted for the increases or
decreases in the fair value of the Company's common stock and is amortized
ratably over the vesting period. The unamortized amount is accounted for as
a reduction of stockholders' equity. At December 31, 1996 and 1995,
respectively, deferred compensation of $2,957,000 and $947,000 was recorded
as a reduction of stockholders' equity and the amounts amortized to expense
in 1996 and 1995, respectively, were $974,000 and $279,000.
(c) Stock Option Plan for Directors
- -----------------------------------
Under the Company's stock option plan for directors, 192,500 shares of
the Company's common stock are available for issuance. Each director who is
not a full-time employee of the Company participates in the plan and
automatically receives a non-qualified option to purchase 1,500 shares of
common stock at not less than fair value on March 1 of each year. Each
option becomes exercisable one year after the option was granted and
expires no more than ten years from the date the option is granted. Under
this plan, the Company granted options of 19,500, 16,500 and 18,000 for
1996, 1995 and 1994, respectively.
Page 46
PAGE
(d) Executive Stock Grant
- -------------------------
During 1995 an officer of the Company was granted 13,864 shares of
restricted stock. The grant contains a graduated vesting provision under
which shares vest over a four-year period beginning in 1995. At December
31, 1996, 6,932 shares were vested.
Deferred compensation is recognized for the fair value of the restricted
shares granted, and is amortized over the vesting period. The unamortized
amount of the grant is accounted for as a reduction of stockholders' equity.
At December 31, 1996 and 1995, respectively, deferred compensation of
$241,000 and $373,000 was recorded as a reduction of stockholders' equity
and the amounts charged to expense in 1996 and 1995, respectively, were
$132,000 and $154,000.
(e) Employee Stock Purchase Plan
- --------------------------------
Under the terms of the employee stock purchase savings plan, the number
of shares of common stock available to be purchased is 413,138. This plan
is available to all employees who meet the eligibility requirements and
provides for the issuance of options to purchase shares of common stock.
The purchase price is the lower of (i) 85% of the closing market price at
the time the option is granted or (ii) 85% of the closing price at the time
the option is exercised. The Company issued 28,886 shares, 29,494 shares
and 32,279 shares in 1996, 1995 and 1994, respectively, to employees and
charged to expense $210,000, $293,000 and $121,000 in 1996, 1995 and 1994,
respectively.
(f) Agents Stock Purchase Plan
- ------------------------------
Under the terms of the agents stock purchase plan, the number of shares of
common stock available to be purchased is 587,271. This plan provides for
four quarterly offerings in which independent insurance agents can purchase
the Company's common stock at a five percent discount. The Company issued
54,993 shares, 56,884 shares and 3,466 shares in 1996, 1995 and 1994,
respectively, to agents and charged to expense $93,000, $92,000 and $5,000
in 1996, 1995 and 1994, respectively.
(g) Stock Compensation Plan for Nonemployee Directors
- -----------------------------------------------------
In May 1996 the shareholders approved the stock compensation plan for
nonemployee directors, effective January 1, 1997. The purpose of this plan
is to provide for the payment of the annual compensation for the directors'
services in shares of the Company's common stock. The amount of common
shares available for issuance under the plan is 200,000.
NOTE 12 Stockholders' Equity
- -----------------------------
The Company maintains a dividend reinvestment and stock purchase plan,
under which 235,650 shares of common stock are available for issuance.
Shares purchased under this plan are issued at fair value.
Under a common stock repurchase program authorized by the Board of
Directors on July 29, 1996, the Company can repurchase up to 1,000,000
shares of its common stock. In 1996, the Company acquired 128,500 shares
at a total cost of $4,289,000.
Selective's ability to declare and pay dividends on common stock is
affected by the ability of its insurance subsidiaries to declare and pay
dividends to Selective under the regulatory limitations of the states in
which the insurance subsidiaries are domiciled. All of the jurisdictions
in which the insurance subsidiaries are domiciled, including New Jersey,
New York, North Carolina and South Carolina regulate the payment of
dividends. Dividends are generally payable only from earned surplus as
reported on the insurer's annual statement as of the preceding December 31.
In all such jurisdictions, domestic insurers are prohibited from paying
"extraordinary dividends" without approval of the insurance commissioner
of the relevant state. Extraordinary dividends are defined in New Jersey
and South Carolina as dividends which, together with dividends paid in the
previous twelve months, exceed the greater of (i) 10% of policyholders'
surplus at the preceding December 31 or (ii) net income, excluding realized
capital gains, for the twelve-month period ending the preceding December 31.
Extraordinary dividends are generally defined in North Carolina and New
York as dividends which, together with dividends paid in the previous
twelve months, exceed the lesser of (i) 10% of policyholders' surplus at
the preceding December 31 or (ii) net investment income, or in the case of
North Carolina, net income, excluding realized capital gains, for the
twelve-month period ending the preceding December 31. In determining
whether a dividend is "extraordinary," New York and North Carolina allow
insurance companies to carryforward undistributed net investment income
(New York) or net income (North Carolina) for two years.
In addition to the regulation of extraordinary dividends, New Jersey and
South Carolina require notice to the relevant state regulatory authorities
of the declaration of both ordinary and extraordinary dividends and
distributions. New Jersey requires that all dividends be reported within
five days of declaration and thirty days prior to payment. South Carolina
requires that all dividends be reported within five business days following
declaration and ten days prior to payment. During the notice period, the
relevant state regulatory authority may disallow all or part of the
proposed dividend if it determines that the insurer's surplus, as regards
to policyholders', is not reasonable in relation to the insurer's
outstanding liabilities and adequate to its financial needs or, in the
case of New Jersey, if the regulatory authority determines that the
insurer is otherwise in a hazardous financial condition.
Page 47
PAGE
Based on the 1996 statutory financial statements, the maximum dividends
that can ultimately be paid to Selective in 1997 by Selective Insurance
Company of America, Selective Way Insurance Company, Selective Insurance
Company of the Southeast, Selective Insurance Company of South Carolina and
Exchange Insurance Company are $34,938,000, $14,039,000, $2,759,000,
$5,979,000 and $2,639,000, respectively.
The National Association of Insurance Commissioners ("NAIC") has adopted
risk-based capital ("RBC") requirements that require insurance companies to
calculate and report information under a risk-based formula, which measures
statutory capital and surplus needs based on a regulatory definition of
risk in a company's mix of products and its balance sheet. The
implementation of RBC did not impact the operations of the Company's
insurance subsidiaries since all of its subsidiaries have an RBC amount
above the authorized control level RBC, as defined by the NAIC.
NOTE 13 Preferred Share Purchase Rights Plan
- ---------------------------------------------
On November 3, 1989, Selective's Board of Directors declared a dividend
of one preferred share purchase right for each share of Selective's common
stock held of record as of the close of business on November 17, 1989. Each
right entitles the registered holder to purchase one one-hundredth of a
share of series A junior preferred stock (a "preferred share" or the
"preferred shares") at an exercise price of $75. Each one-hundredth of a
preferred share has terms designed to make it the economic equivalent of
one share of common stock, but will have one one-hundredth of a vote. The
rights will be exercisable only if a person or group acquires 20% or more
of Selective's common stock or announces a tender offer, the consummation
of which results in ownership by a person or group of 20% or more of the
common stock.
If Selective is acquired in a merger or other business combination
transaction, each right will entitle its holder to purchase, at the right's
then current exercise price, a number of the acquiring company's common
shares having a fair value at the time of twice the right's exercise price.
In addition, if a person or group acquires 20% or more of Selective's
outstanding common stock, each right will entitle its holder (other than
such person or members of such group) to purchase, at the right's then
current exercise price, a number of shares of Selective's common stock
having a fair value of twice the right's exercise price. Under the plan,
300,000 preferred shares have been reserved for issuance.
NOTE 14 Reconciliation of Statutory to Generally Accepted Accounting
Principles Financial Statments
- ---------------------------------------------------------------------
(a) The following is a reconciliation of the differences between the
Statutory Financial Statements and the Generally Accepted Accounting
Principles ("GAAP") Financial Statements:
- --------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------
Consolidated insurance
subsidiaries - statutory basis
net income $ 66,207 55,481 35,481
Deferred policy acquisition
costs 950 1,200 2,400
Deferred Federal income taxes (3,830) 4,840 5,402
Net loss of subsidiaries (357) (148) (33)
Other, net (735) (988) (156)
Consolidated subsidiaries ------ ------ ------
- GAAP basis 62,235 60,385 43,094
Selective Insurance Group, Inc.,
net of intercompany equity
eliminations (6,684) (7,343) (4,818)
Consolidated financial ------ ------ ------
statement - GAAP basis
net income $ 55,551 53,042 38,276
====== ====== ======
- --------------------------------------------------------------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------
Consolidated insurance subsidiaries -
statutory surplus $ 417,664 358,266
Deferred policy acquisition costs 83,150 82,200
Deferred Federal income taxes 31,052 32,703
Loss reserves (1,497) (1,558)
Capital contribution from Selective (33,603) (33,603)
Net unrealized gains - debt securities,
available-for-sale 19,407 46,628
Nonadmitted assets 14,441 16,398
Net assets acquired from Niagara (23,795) (23,795)
Other, net (1,827) (2,429)
Consolidated subsidiaries - GAAP ------- -------
basis 504,992 474,810
Selective Insurance Group, Inc.
net of intercompany equity
eliminations (30,693) (38,061)
Consolidated financial statement - ------- -------
GAAP basis stockholders' equity $ 474,299 436,749
======= =======
Page 48
PAGE
(b) The insurance subsidiaries prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted
by the various states of domicile. Prescribed statutory accounting
practices include state laws, regulations and general administrative rules,
as well as a variety of publications of the NAIC. Permitted statutory
accounting practices encompass all accounting practices that are not
prescribed; such practices differ from state to state, may differ from
company to company within a state and may change in the future. Furthermore,
the NAIC has a project to codify statutory accounting practices, the result
of which is expected to constitute the only source of "prescribed" statutory
accounting practices. Accordingly, that project, when completed, will
likely change the definitions of what comprises prescribed versus permitted
statutory accounting practices and may result in changes to the accounting
policies that insurance enterprises use to prepare their statutory
financial statements. The insurance subsidiaries do not have any permitted
statutory accounting practices that materially affect statutory surplus or
RBC.
NOTE 15 Commitments and Contingencies
- --------------------------------------
(a) Reserves established for liability insurance continue to reflect
exposure to environmental claims both asbestos and non-asbestos. These
claims have arisen primarily under older policies containing exclusions for
environmental liability which certain courts, in interpreting such
exclusions, have determined do not bar such claims. The emergence of these
claims is slow and highly unpredictable. Since 1986, policies issued by the
insurance subsidiaries contain a more expansive exclusion for losses
related to environmental claims. There are significant uncertainties in
estimating the Company's exposure to environmental claims resulting from
lack of historical data, long reporting delays, uncertainty as to the
number and identity of claimants and complex legal and coverage issues.
Legal issues which arise in environmental cases include the determination
of whether a case is one for a Federal or state forum, choice of law,
causation, admissibility of evidence, allocation of damages and
contribution among joint defendants, successor and predecessor liability
and whether direct action against insurers can be maintained. Coverage
issues which arise in environmental cases include the interpretation and
application of policy exclusions, the determination and calculation of
policy limits, the determination of the ultimate amount of a loss, the
extent to which a loss is covered by a policy, if at all, the obligation
of an insurer to defend a claim and the extent to which a party can prove
the existence of coverage. Courts have reached different and sometimes
inconsistent conclusions on these legal and coverage issues. The Company
does not discount to present value that portion of its loss reserves
expected to be paid in future periods.
At December 31, 1996 the Company's reserves for environmental claims
amounted to $63,403,000 on a gross basis and $50,403,000 net of reinsurance
(net basis). The Company's case reserves for known environmental claims,
excluding IBNR, was $31,080,000 on a gross basis and $21,080,000 on a net
basis in connection with 2,021 claims, including multiple claimants who are
associated with the same site or incident. These claims involved about
1,400 lawsuits. Of the 2,021 total environmental claims, 1,715 claims are
asbestos related, of which 1,630 claims involve only two insureds. One such
insured manufactured asbestos-containing products, while the other supplied
asbestos-containing products. The reserve associated with the two insureds
amounted to $5,570,000 on a gross basis and $1,770,000 on a net basis.
About 120 of the total environmental claims involve approximately 35
landfills. The landfills sites account for reserves of approximately
$17,356,000 on a gross basis and $11,156,000 on a net basis. The remaining
claims, which represent about $8,154,000, involve leaking underground
storage tanks, air pollution, as well as other asbestos claims. Litigation
costs associated with environmental claims have been significant,
particularly for landfill claims.
At December 31, 1996, the Company established a range of reasonably
possible losses for known environmental exposures of approximately
$9,000,000 to $41,000,000 on a gross basis, and $6,000,000 to $28,000,000,
on a net basis. At December 31, 1996, the Company's total reserves for
environmental exposures amounted to $63,403,000, on a gross basis,
(including IBNR reserves of $32,323,000) and $50,403,000, on a net basis,
(including IBNR reserves of $29,323,000). As previously stated, there are
significant uncertainties in estimating the Company's exposure to
environmental IBNR claims resulting from lack of historical data, long
reporting delays, uncertainty as to the number and identity of claimants
and complex legal and coverage issues on which courts have reached
different and sometimes inconsistent conclusions. The standards for
establishing appropriate environmental IBNR reserves are still developing.
IBNR reserve estimation is also difficult because, in addition to other
factors, there are significant uncertainties associated with critical
assumptions in the estimation process such as average clean-up costs,
third-party costs, potentially responsible party shares, allocation of
damages, insurer litigation costs, insurer coverage defenses and potential
changes to state and Federal statutes. Moreover, normal historically-based
actuarial approaches do not apply because relevant history is not available.
In addition, while models can be applied, such models can produce
significantly different results with small changes in assumptions. Because
of the significant uncertainties discussed above, and the likelihood that
these uncertainties will not be resolved in the near future, management is
unable to make a reasonable estimate as to the amount or range of
reasonably possible IBNR losses for environmental claims at each reported
balance sheet date.
Page 49
PAGE
The following table provides a roll-forward of the Company's gross
and net environmental incurred losses and loss expenses and related
reserves thereon:
- --------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------
Asbestos Gross Net Gross Net Gross Net
Environmental reserves -----------------------------------------
(including IBNR)for losses and
loss expenses at the beginning
of year $ 7,801 7,801 7,501 7,501 7,111 7,111
Incurred losses and loss expenses 2,407 (1,702) 489 489 574 574
Less losses and loss expenses paid (226) (226) (189) (189) (184) (184)
----- ----- ----- ----- ----- -----
Environmental reserves
(including IBNR) for losses
and loss expenses at the end
of year $ 9,982 5,873 7,801 7,801 7,501 7,501
===== ===== ===== ===== ===== =====
Non-Asbestos
Environmental reserves
(including IBNR) for losses
and loss expenses at the
beginning of year $45,465 45,465 41,344 41,344 38,598 38,598
Incurred losses and
loss expenses 14,289 3,312 6,779 6,779 6,155 6,155
Less losses and loss
expenses paid (6,333)(4,247) (2,658)(2,658) (3,409)(3,409)
------ ------ ------ ------ ------ ------
Environmental reserves
(including IBNR) for losses
and loss expenses at the
end of year $53,421 44,530 45,465 45,465 41,344 41,344
====== ====== ====== ====== ====== ======
Total Environmental Claims
Environmental reserves
(including IBNR) for losses
and loss expenses $53,266 53,266 48,845 48,845 45,709 45,709
Incurred losses
and loss expenses 16,696 1,610 7,268 7,268 6,729 6,729
Less losses and loss
expenses paid (6,559)(4,473) (2,847)(2,847) (3,593)(3,593)
------ ------ ------ ------ ------ -------
Environmental reserves
(including IBNR) for losses
and loss expenses $63,403 50,403 53,266 53,266 48,845 48,845
====== ====== ====== ====== ====== ======
The Company has established a range of reasonably possible IBNR losses for
non-environmental net claims at December 31, 1996, of approximately
$422,000,000 to $524,000,000 and at December 31, 1995, of approximately
$410,000,000 to $508,000,000. For each major product line of business,
incurred and/or paid loss and loss expense projections were calculated using
standard actuarial techniques on both an optimistic and pessimistic basis to
construct an IBNR range for that product line. The overall range for
non-environmental IBNR was selected based on statistical combinations of
the ranges of the individual product lines. The Company's net IBNR reserves
for non-environmental claims were $496,000,000 and $473,000,000 at December
31, 1996 and 1995, respectively.
Based on the Company's aggregate reserve for net losses and loss expenses
at December 31, 1996, the Company does not expect that liabilities
associated with environmental and non-environmental claims will have a
materially adverse impact on its future liquidity, financial position and
results of operations. However, given the complexity of coverage and other
legal issues, and the significant assumptions used in estimating such
exposures, actual results could significantly differ from the Company's
current estimates.
(b) The Company purchases annuities from life insurance companies to
fulfill obligations under claim settlements which provide for periodic
future payments to claimants. As of December 31, 1996, the Company
purchased such annuities of $10,683,000 for settlement of claims on a
structured basis for which the Company is contingently liable. To the
Company's knowledge, none of the issuers of such annuities have defaulted
in its obligations thereunder.
(c) Selective has various operating leases for office space and equipment.
Such lease agreements, which expire at various times, are generally renewed
or replaced by similar leases. Rental expense under these leases amounted to
$4,936,000, $5,492,000 and $6,162,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
In addition, certain leases for rented premises and equipment are
noncancelable, and liability for payment will continue even though the space
or equipment may no longer be in use. At December 31, 1996, the total future
minimum rental commitments under noncancelable leases was $10,680,000 and
such yearly amounts are as follows:
- ---------------------------------------------------------------------------
(in thousands)
- ---------------------------------------------------------------------------
1997 $ 4,556
1998 3,779
1999 1,387
2000 716
2001 242
After 2001 -
------
Total minimum payment required $ 10,680
======
Page 50
PAGE
NOTE 16 Fair Values of Financial Instruments
- ---------------------------------------------
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments as of December 31, 1996 and
1995:
- ---------------------------------------------------------------------------
1996 1995
---------------------------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- ---------------------------------------------------------------------------
Financial assets:
Debt securities:
Held-to-maturity $ 432,792 445,273 439,585 460,444
Available-for-sale 985,372 985,372 949,004 949,004
Equity securities 161,096 161,096 117,522 117,522
Other investments 44,454 44,454 58,027 58,027
Financial liabilities:
8.77% Senior Notes 54,000 56,992 54,000 58,657
7.84% Senior Notes 42,857 43,039 50,000 51,223
------- ------- ------- -------
Notes payable 96,857 100,031 104,000 109,880
Debentures 6,912 18,524 7,292 18,230
The Company's carrying amounts shown in the table are included in the
consolidated balance sheets.
NOTE 17 Liability for Unpaid Claims and Claim Adjustment Expenses
- ------------------------------------------------------------------
The table below provides a roll-forward of reserves for losses and loss
expenses for beginning and ending reserve balances:
- --------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------
Gross reserves for losses
and loss expenses at
beginning of year $ 1,120,052 999,404 917,691
Less reinsurance recoverable
on unpaid losses and loss
expenses at beginning of
year 121,369 111,550 114,016
Net reserves for losses --------- --------- ---------
and loss expenses at
beginning of year 998,683 887,854 803,675
Provision for losses and loss
expenses for claims
occurring in the current
year 504,843 516,219 490,641
Increase (decrease) in estimated
losses and loss expenses for
claims occurring in prior
years (9,178) 12,682 (2,653)
--------- --------- ---------
1,494,348 1,416,755 1,291,663
--------- --------- ---------
Losses and loss expenses
paid for claims occurring
during:
Current year 174,398 158,692 179,248
Prior years 280,365 259,380 224,561
--------- --------- ---------
454,763 418,072 403,809
--------- --------- ---------
Net reserves for losses and
loss expenses at end of year 1,039,585 998,683 887,854
Reinsurance recoverable on
unpaid losses and loss
expenses at end of year 150,208 121,369 111,550
Gross reserves for losses --------- ------- -------
and loss expenses at
end of year $ 1,189,793 1,120,052 999,404
========= ========= =======
The 1996 losses and loss expenses incurred included the effect of prior
year reserve decrease or redundancy of $9,178,000. The reserve redundancy
was principally due to reserve reductions (approximately $11,000,000) in
the National Workers' Compensation Reinsurance Pool business ("NCCI").
During 1996, incurred loss estimates for the NCCI decreased due to greater
than anticipated savings from the use of managed care and various favorable
legislative reforms.
The 1995 losses and loss expenses incurred included the effect of prior
year reserve deficiency of $12,682,000. The reserve deficiency resulted
from higher estimates of ultimate loss and loss expense costs in the
commercial automobile and commercial other liability lines of insurance.
The ultimate loss and loss expense costs were increased (i) in commercial
automobile due to higher than expected paid and incurred loss and loss
expenses and (ii) in commercial other liability due to an increase in
average paid cost per claim.
Page 51
PAGE
NOTE 18 Related Party Transactions
- -----------------------------------
During the fourth quarter of 1994, certain officers of Selective
exercised stock options by giving Selective promissory notes ($992,000) in
payment for the stock purchased. The promissory notes are noninterest
bearing and are secured by shares of Selective's common stock. The officers
are required to pay approximately $69,000 of the principal amount each year
commencing in 1995 and ending in 2004, with a lump-sum principal payment in
the aggregate of approximately $298,000 to be paid in February 2005. The
promissory notes are full recourse and subject to certain employment
requirements. At December 31, 1996, the principal amount outstanding was
$856,000.
NOTE 19 Segment Information
- ----------------------------
The Company's operating subsidiaries are engaged in the writing of
property and casualty insurance. Inasmuch as these writings encompass
several lines of business, the Company has classified its business
accordingly into industry segments.
Income (loss) from underwriting operations consists of net premiums
earned less losses, loss expenses, underwriting expenses and dividends
to policyholders. In computing income (loss) from underwriting operations,
none of the following items have been added or deducted: net investment
income earned, net realized gains on investments, interest expense, net
general corporate expenses and Federal income tax. The Company does not
maintain distinct investment portfolios for each segment; and, therefore,
a meaningful allocation of identifiable assets, net investment income and
net realized gains on investments to each segment is considered
impracticable. The financial information by industry segment for net
premiums earned and income (loss) from underwriting operations are as
follows:
- ---------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------
Income Income Income
Net (loss) from Net (loss) from Net (loss) from
prem.'s und. prem.'s und. prem.'s und.
earned operations earned operations earned operations
- ---------------------------------------------------------------------------
Commercial $477,506 $(24,832) 521,196 (18,475) 472,218 (23,784)
Personal 217,473 4,819 221,587 1,762 207,988 (11,567)
Other (32) (14) 34 (12) 64 885
------- ------- ------- ------- ------- -------
Totals $694,947 $(20,027) 742,817 (16,725) 680,270 (34,466)
======= ======= ======= ======= ======= =======
Loss from
underwriting operations $(20,027) (16,725) (34,466)
Net investment
income earned 96,952 91,640 80,657
Net realized gains
on investments 2,786 900 4,230
Interest expense (9,185) (9,296) (6,552)
General corporate expenses (1,437) (1,621) (461)
Income before ------- ------- -------
Federal income tax $ 69,089 64,898 43,408
======= ======= =======
Page 52
PAGE
Quarterly Financial Information
- -------------------------------
1st Quarter 2nd Quarter
-------------------------------------------------
(unaudited, in
thousands, except
per share data) 1996 1995 1996 1995
- ---------------------------------------------------------------------------
Net premiums written $ 173,447 191,567 174,767 193,426
Net premiums earned 176,687 178,566 176,074 185,967
Net investment income
earned 24,011 21,724 23,783 22,464
Net realized gains (losses)
on investments 429 (87) 934 (313)
Operating income 1,2 8,611 12,901 14,963 12,509
Net income 1,2 8,890 12,845 15,570 12,305
Operating income per share:
Primary 1,2 .59 .90 1.03 .88
Fully diluted 1,2 .58 .88 1.00 .86
Net income per share:
Primary 1,2 .61 .90 1.07 .86
Fully diluted 1,2 .60 .88 1.04 .84
Dividends to stockholders 3 .28 .28 .28 .28
Price range of common stock: 4
High 38 3/4 28 3/4 36 33 l/2
Low 34 l/4 24 l/2 31 28 l/4
- ---------------------------------------------------------------------------
1. Operating and net income for the first quarter of 1996 were reduced by
$6.2 million, after reinsurance and taxes, due to higher losses incurred
from numerous winter storms, or $.43 per primary share and $.41 per fully
diluted share.
2. Operating and net income for the third quarter of 1996 were reduced by
$4.2 million, after reinsurance and taxes, due to higher losses incurred
from numerous storms, or $.28 per primary and fully diluted share.
3. See note 7(b)(2) and note 12 to the consolidated financial statements
and Financial Review for a discussion of dividend restrictions.
4. These ranges of high and low prices of the Company's common stock, as
reported by the Nasdaq National Market, represent actual transactions. All
price quotations do not include retail markups, markdowns and commissions.
The range of high and low prices for common stock for the period beginning
January 1, 1997 and ending February 28, 1997 was $43 1/2 to $36 5/8 and the
last sale price on February 28, 1997 was $42.
Quarterly Financial Information
- -------------------------------
3rd Quarter 4th Quarter
-------------------------------------------------
(unaudited, in
thousands, except
per share data) 1996 1995 1996 1995
- ---------------------------------------------------------------------------
Net premiums written $ 196,765 215,178 147,260 156,850
Net premiums earned 172,106 191,928 170,080 186,356
Net investment income
earned 23,908 22,866 25,250 24,586
Net realized gains (losses)
on investments (35) 216 1,458 1,084
Operating income 1,2 12,275 13,534 17,891 13,513
Net income 1,2 12,252 13,674 18,839 14,218
Operating income per share:
Primary 1,2 .84 .95 1.23 .94
Fully diluted 1,2 .82 .92 1.20 .91
Net income per share:
Primary 1,2 .84 .96 1.29 .99
Fully diluted 1,2 .82 .93 1.26 .96
Dividends to stockholders 3 .28 .28 .28 .28
Price range of common stock: 4
High 34 37 38 3/4 38 3/8
Low 31 30 3/4 33 1/4 35 l/2
- ----------------------------------------------------------------------------
1. Operating and net income for the first quarter of 1996 were reduced by
$6.2 million, after reinsurance and taxes, due to higher losses incurred
from numerous winter storms, or $.43 per primary share and $.41 per fully
diluted share.
2. Operating and net income for the third quarter of 1996 were reduced by
$4.2 million, after reinsurance and taxes, due to higher losses incurred
from numerous storms, or $.28 per primary and fully diluted share.
3. See note 7(b)(2) and note 12 to the consolidated financial statements
and Financial Review for a discussion of dividend restrictions.
4. These ranges of high and low prices of the Company's common stock, as
reported by the Nasdaq National Market, represent actual transactions. All
price quotations do not include retail markups, markdowns and commissions.
The range of high and low prices for common stock for the period beginning
January 1, 1997 and ending February 28, 1997 was $43 1/2 to $36 5/8 and the
last sale price on February 28, 1997 was $42.
Page 53
PAGE
Subsidiaries
- ------------
Selective Insurance Company
of America
Selective Way
Insurance Company
Selective Technical
Administrative Resources, Inc. (SelecTech)
Wantage Avenue
Holding Company, Inc.
40 Wantage Avenue
Branchville, New Jersey 07890-1000
Telephone (201) 948-3000
Selective Insurance Company
of the Southeast
Selective Insurance Company
of South Carolina
2550 West Tyvola Road, Suite 400
Charlotte, North Carolina 28217
Telephone (704) 357-1913
Niagara Exchange Corporation
Exchange Insurance Company
741 Delaware Avenue
Buffalo, New York 14209
Telephone (716) 884-8970
Branch Offices
- --------------
Allentown, Pennsylvania
5050 Tilghman Street, Suite 250
James McLain, Manager
Branchville, New Jersey
40 Wantage Avenue
Carl V. Casterlin, Manager
Buffalo, New York
741 Delaware Avenue
William S. Becker, Manager
Charlotte, North Carolina
2550 West Tyvola Road, Suite 400
Margaret C. Davis, Manager
Hamilton Township, New Jersey
One AAA Drive
Edward F. Drag, II, Manager
Hunt Valley, Maryland
4 North Park Drive
James A. Caragher, Manager
Richmond, Virginia
1100 Boulders Parkway, Suite 601
James M. Allonier, Manager
Field Offices
- -------------
Midwest Region
Bloomington, Illinois
1701 East Empire Street
Arron O. Lamp, Field Manager
Great Lakes Region
Indianapolis, Indiana
805 South Sunridge Court
Joseph W.Kinker, Field Manager
Information Systems Office
- --------------------------
Glastonbury, Connecticut
500 Winding Brook Drive
Bradford, S. Allen, Manager
Properties
- ----------
Situated on approximately 137 acres in Branchville, New Jersey, is our
315,000 square foot facility owned by Wantage Avenue Holding Company, Inc.
Exchange Insurance Company owns two office buildings (approximately 61,400
square feet) in Buffalo, New York. All branch office locations and the
information systems office, as indicated above, are leased.
Stockholders' Information
- -------------------------
Executive Office
40 Wantage Avenue
Branchville, New Jersey 07890-1000
Telephone (201) 948-3000
Registrar and Transfer Agent
- ----------------------------
First Chicago Trust Company
of New York
P.O. Box 2500
Jersey City, New Jersey 07303-2500
Telephone (800) 446-2617
Auditors
- --------
KPMG Peat Marwick LLP
150 John F. Kennedy Parkway
Short Hills, New Jersey 07078
Common Stock Information
- ------------------------
The Company's common stock trades on the Nasdaq National Stock Market tier
of The Nasdaq Stock Market under the symbol: SIGI. As of December 31, 1996,
there were approximately 3,340 registered stockholders. Quarterly dividend
and price range information are contained on page 53 of this report.
Form 10-K
- ---------
A copy of Form 10-K as filed with the Securities and Exchange Commission,
excluding exhibits, will be provided without charge to stockholders upon
written
request to:
Gregory E. Murphy
Senior Vice President and
Chief Financial Officer
Selective Insurance Group, Inc.
40 Wantage Avenue
Branchville, New Jersey 07890-1000
The Form 10-K provided to stockholders will include only a list of
exhibits to the Form 10-K. Exhibits will be furnished to stockholders
upon payment of reproduction and mailing expenses.
Page 57
EXHIBIT 21
----------
SELECTIVE INSURANCE GROUP, INC. SUBSIDIARIES
--------------------------------------------
Jurisdiction Percentage
in which Voting securities
Name organized Parent owned
- ---- ------------ ------ -----------------
Selective Insurance New Jersey Selective Insurance 100%
Company of America Group, Inc.
Selective Way New Jersey Selective Insurance 100%
Insurance Company Group, Inc.
Selective Insurance North Carolina Selective Insurance 100%
Company of the Group, Inc.
Southeast
Selective Insurance South Carolina Selective Insurance 100%
Company of South Group, Inc.
Carolina
Wantage Avenue New Jersey Selective Insurance 100%
Holding Company, Company of America
Inc.
Niagara Exchange Delaware Selective Insurance 100%
Corporation Group, Inc.
NIEX Funding New York Niagara Exchange 100%
Corporation Corporation
Exchange Insurance New York Niagara Exchange 81%
Company Corporation
EMIC Plan, Inc. New York Exchange Insurance 100%
Company
Selective Technical New Jersey Selective Insurance 100%
Administrative Group, Inc.
Resources, Inc.
EXHIBIT 23
----------
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors and Stockholders
Selective Insurance Group, Inc.
We consent to the incorporation by reference in Registration Statements
(Nos. 333-10465, 333-10477, 33-36368, 33-14620, 33-61864, 33-87534 and
33-22450) on Form S-8, and Registration Statements (Nos.2-80881, 33-28488
and 33-30833) on Form S-3 of Selective Insurance Group, Inc. (The Company)
of our reports dated January 17, 1997, relating to the consolidated balance
sheets of Selective Insurance Group, Inc. and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows and related schedules for each of the
years in the three-year period ended December 31, 1996, which reports appear
in the December 31, 1996 Annual Report on Form 10-K of Selective Insurance
group, Inc.
As discussed in note 1 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" in 1994.
March 25, 1997 /s/ KPMG Peat Marwick LLP
Short Hills, New Jersey ---------------------
KPMG Peat Marwick LLP
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
December 31, 1996 10K and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000230557
<NAME> SELECTIVE INS. GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 985,372
<DEBT-CARRYING-VALUE> 432,792
<DEBT-MARKET-VALUE> 445,273
<EQUITIES> 161,096
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,623,714
<CASH> 33,924
<RECOVER-REINSURE> 7,863
<DEFERRED-ACQUISITION> 83,150
<TOTAL-ASSETS> 2,183,639
<POLICY-LOSSES> 1,189,793<F1>
<UNEARNED-PREMIUMS> 332,040
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 103,769<F2>
0
0
<COMMON> 35,822
<OTHER-SE> 438,477
<TOTAL-LIABILITY-AND-EQUITY> 2,183,639
694,947
<INVESTMENT-INCOME> 96,952
<INVESTMENT-GAINS> 2,786
<OTHER-INCOME> 4,287
<BENEFITS> 495,665<F3>
<UNDERWRITING-AMORTIZATION> 213,372
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 69,089
<INCOME-TAX> 13,538
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,551
<EPS-PRIMARY> 3.82
<EPS-DILUTED> 3.72
<RESERVE-OPEN> 1,120,052<F4>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,189,793<F5>
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Equals the sum of Reserve for losses and the Reserve for loss expenses.
<F2>Equals the sum of Notes payable and Convertible subordinated debentures.
<F3>Equals the sum of Losses incurred and Loss expenses incurred.
<F4>Equals the sum of Reserve for losses and Reserve for loss expenses at the
beginning of the year.
<F5>Equals the sum of Reserve for losses and Reserve for loss expenses at the
end of the period.
</FN>
</TABLE>
