UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 1996
Commission file number 1-10861
GUARANTY NATIONAL CORPORATION
.............................
(Exact name of registrant as specified in its charter)
Colorado 84-0445021
......... ...........
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9800 South Meridian Boulevard
Englewood, Colorado 80112
..................................................
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (303)754-8400
.............
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of October 31, 1996 there were 14,975,497 shares of
Registrant's $1.00 par value common stock issued and outstanding
exclusive of shares held by Registrant.
<PAGE>
GUARANTY NATIONAL CORPORATION
Form 10-Q Index
For the Quarter Ended September 30, 1996
Page
Number
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Review Report 3
Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 1996 and
December 31, 1995 4
Consolidated Statements of Earnings for the nine months
and three months ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2.Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART 2. OTHER INFORMATION 17
SIGNATURES 18
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
Guaranty National Corporation
We have reviewed the accompanying consolidated balance sheet of
Guaranty National Corporation and subsidiaries (the "Company") as
of September 30, 1996, and the related consolidated statements of
earnings and cash flows for the nine-month and three-month
periods ended September 30, 1996 and 1995. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information consists
principally of applying analytical procedures to financial data
and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such consolidated financial
statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet of
the Company as of December 31, 1995, and the related consolidated
statements of earnings, changes in shareholders' equity and cash
flows for the year then ended (not presented herein); and in our
report dated February 20, 1996, we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1995 is fairly
stated, in all material respects, in relation to the consolidated
financial statements from which it has been derived.
DELOITTE & TOUCHE LLP
Denver, Colorado
October 23, 1996
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
September 30, December31,
1996 1995
............ ............
(Unaudited)
Investments (Note 3):
Fixed maturities held to $79,648 $75,017
maturity, at cost
Fixed maturities available 378,622 395,198
for sale, at market
....... .......
458,270 470,215
Equity securities, at market 86,960 85,085
Other long-term investments 13,397 11,521
Short-term investments 87,720 52,257
....... .......
Total investments 646,347 619,078
Cash 8,833 6,794
Accrued investment income 6,250 7,603
Accounts receivable, (less
allowance of $400 - 1996
and 1995) 49,636 51,638
Reinsurance recoverables and
prepaids, (less allowance
of $200 - 1996 and 1995) 79,078 81,825
(Note 4)
Property and equipment (less
accumulated depreciation of
$12,390 - 1996; $9,326 - 30,422 31,573
1995)
Deferred policy acquisition 44,101 37,637
costs
Goodwill (less accumulated
amortization of
$ 6,143 - 1996; $5,263 - 34,919 33,133
1995)
Deferred income taxes 2,671 4,216
Other assets 2,337 1,676
......... .........
Total assets $ 904,594 $ 875,173
......... .........
......... .........
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses $294,758 $290,156
Unpaid loss adjustment
expenses 62,342 64,478
Unearned premiums 159,384 146,205
Notes payable 101,875 103,000
Reinsurance payables
and deposits 8,045 8,290
Other liabilities 51,587 47,493
........ .......
Total liabilities 677,991 659,622
........ .......
Commitments and contingencies
(Note 6)
Shareholders' equity:
Preferred stock, $.10 par value;
authorized, 6,000,000 shares;
none issued and outstanding
Common stock, $1 par value;
authorized, 30,000,000 shares;
issued 14,975,497 shares - 1996
and 14,961,354 shares - 1995 14,975 14,961
Capital in excess of par 121,264 121,050
Retained earnings 77,584 64,664
Net unrealized investment gains 12,780 15,520
Deferred compensation on (644)
restricted stock
........ ........
Total shareholders' equity 226,603 215,551
........ ........
Total liabilities and
shareholders' equity $904,594 $875,173
.......... ........
.......... ........
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
Nine Months Ended Three Months Ended
September 30, September 30,
1996 1995 1996 1995
..... ...... ...... ......
(Unaudited) (Unaudited)
Revenue:
Premiums earned (Note 4) $356,740 $ 271,751 $122,321 $110,679
Net investment income 28,418 21,641 9,899 8,264
Realized investment gains
(Note 3) 5,494 2,895 1,905 2,536
........ ......... ........ ........
390,652 296,287 134,125 121,479
........ ......... ........ ........
Expenses:
Losses and loss adjustment
expenses incurred (Note 4) 253,370 203,226 84,863 94,653
Policy acquisition costs 96,765 77,538 36,205 31,351
General and administrative 7,477 5,287 552 1,867
Interest 5,123 3,844 1,720 1,719
Nonrecurring tender offer 2,163
charge (Notes 5 and 6)
Other 1,166 631 383 238
........ ....... ........ .......
366,064 290,526 123,723 129,828
........ ....... ........ .......
Earnings (loss) before income
taxes 24,588 5,761 10,402 (8,349)
Income taxes 6,055 (745) 2,881 (4,236)
........ ....... ....... .......
Net earnings (loss) $ 18,533 $ 6,506 $7,521 $(4,113)
......... ....... ....... ........
......... ....... ....... ........
Earnings (loss) per common
share (Note 2) $ 1.24 $ 0.51 $ 0.50 $ (0.29)
......... ....... ....... ........
......... ....... ....... ........
Dividends per common share $ 0.375 $ 0.375 $ 0.125 $ 0.125
......... ........ ....... .......
......... ........ ....... .......
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
1996 1995
...... ......
(Unaudited)
Operating Activities:
Premiums collected $372,512 $273,736
Net investment income collected 29,889 21,011
Losses and loss adjustment expenses paid (252,435) (188,060)
Policy acquisition costs and general and
administrative expenses paid (109,456) (84,769)
Interest paid (5,036) (4,124)
Nonrecurring tender offer charge (1,199)
Federal income taxes paid (7) (3,861)
Other receipts 3,681 5,617
......... .........
Net cash provided by operating activities 37,949 19,550
......... .........
Investing Activities:
Maturities of fixed maturities held to
maturity 7,635 8,220
Maturities of fixed maturities available
for sale 36,403 6,399
Sales of fixed maturities available for
sale 40,284 14,132
Sales of equity securities 29,758 22,142
Net change in short-term investments (35,336) (10,393)
Sales of property and equipment 290 442
Purchases of fixed maturities held to
maturity (20,780) (8,871)
Purchases of fixed maturities available for
sale (58,826) (31,003)
Purchases of equity securities (23,852) (17,090)
Net change in other long-term investments (1,876) (588)
Acquisition of subsidiaries, net of cash
acquired (94,664)
Purchases of property and equipment (2,926) (1,898)
......... .........
Net cash (used in) investing activities (29,226) (113,172)
......... .........
Financing Activities:
Repayment of notes payable (1,125) (38,000)
Proceeds from sale of common stock 24,240
Proceeds from issuance of notes payable 108,636
Dividends paid (5,613) (4,785)
Proceeds from exercise of stock options 54 550
......... .........
Net cash used provided by (used in) in
financing activities (6,684) 90,641
......... .........
Net increase (decrease) in cash 2,039 (2,981)
Cash, beginning of period 6,794 9,609
......... .........
Cash, end of period $ 8,833 $ 6,628
......... .........
......... .........
Non-Cash Financing Transactions:
Conversion of affiliate debt $ $(8,667)
Issuance of common stock 2,652
Conversion of affiliate debt from treasury
stock 6,015
Restricted stock forfeitures (126)
See notes to consolidated financial statements.
<PAGE>
NOTE 1 - GENERAL
The accompanying unaudited consolidated financial statements of
Guaranty National Corporation and subsidiaries (the "Company")
have been prepared in accordance with generally accepted
accounting principles applicable to interim reporting and do not
include all of the information and footnotes required for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for
the year ending December 31, 1996.
On July 18, 1995, the Company acquired Viking Insurance Company
of Wisconsin ("Viking") in a business combination accounted for
as a purchase. In 1995, Viking's results of operations were
included in the consolidated financial statements from the date
of acquisition forward. Calendar year 1996 is the first full
year in which Viking's operating results are included in the
consolidated financial statements.
Although these financial statements are unaudited, they have
been reviewed by the Company's independent accountants, Deloitte
& Touche LLP, for conformity with accounting requirements for
interim financial reporting. Their report on such review is
included herein. These financial statements should be read in
conjunction with the financial statements and related notes
included in the Company's Annual Report to Shareholders and
Form 10-K for the year ended December 31, 1995, for the more
complete explanations therein.
Certain reclassifications have been made to the 1995 financial
statements to conform with presentations used in 1996.
NOTE 2 - EARNINGS PER SHARE
Earnings per common share has been computed using the weighted
average number of shares and equivalent shares outstanding of
14,970,580 and 12,853,374 for the nine months ended September 30,
1996 and 1995, and 14,977,140 and 14,203,867 for the three months
ended September 30, 1996 and 1995, respectively. The common
stock equivalents are stock options which result in a dilutive
effect from assumed exercise of the options.
NOTE 3 - INVESTMENTS
At September 30, 1996 and December 31, 1995, the estimated
aggregate fair value of fixed maturities held to maturity was
$80,033,000 and $77,143,000, respectively, the cost of fixed
maturities available for sale was $374,746,000 and $383,135,000,
respectively, and the cost of equity securities was $71,173,000
and $73,271,000, respectively. At September 30, 1996 and
December 31, 1995, the Company had investments in non-investment
grade securities with a cost of $54,421,000 and $36,641,000,
which are carried at fair values of $54,691,000 and $36,356,000,
respectively.
<PAGE>
Realized investment gains (losses), which include gains
(losses) on calls and maturities of fixed maturities, for the
nine and three months ended September 30, 1996 and 1995, and
write downs for other-than-temporary investment impairments of
approximately $434,000 for the nine months ended September 30,
1996, and approximately $1,650,000 and $900,000 for the nine and
three months ended September 30, 1995, are as follows (in
thousands):
Nine Months Ended Three Months Ended
September 30, 1996 September 30, 1996
Fixed maturities held to maturity:
Gains $ $
Losses
.................. ..................
.................. ..................
Fixed maturities available for sale:
Gains 1,485 537
Losses (788) (585)
.................. ...................
697 (48)
.................. ...................
Equity securities:
Gains 6,415 2,367
Losses (1,618) (414)
.................. ...................
4,797 1,953
.................. ...................
Total $ 5,494 $ 1,905
.................. ...................
.................. ...................
Nine Months Ended Three Months Ended
September 30, 1995 September 30, 1995
.................. ..................
Fixed maturities held to maturity:
Gains $ 49 $ 9
Losses (269)
................... ..................
(220) 9
................... ..................
Fixed maturities available for sale:
Gains 1,136 122
Losses (2,849) (909)
.................... ..................
(1,713) (787)
.................... ..................
Equity securities:
Gains 5,418 3,358
Losses (590) (44)
.................... ..................
4,828 3,314
.................... ..................
Total $ 2,895 $ 2,536
.................... ..................
.................... ..................
<PAGE>
NOTE 4 - REINSURANCE
In the ordinary course of business, the Company reinsures
certain risks, generally on an excess of loss basis with other
insurance companies. Effective July 1, 1996, such reinsurance
arrangements serve to limit the Company's maximum loss per
occurrence on casualty losses to $400,000, on property losses to
$300,000 and for catastrophe losses to $600,000. Prior to July
1, 1996, such reinsurance arrangements served to limit the
Company's maximum loss per occurrence on individual risks to
$400,000 and for catastrophes to $500,000. Amounts recoverable
from reinsurers are recognized and estimated in a manner
consistent with the claim liabilities arising from the reinsured
policies and incurred but not reported losses.
Premiums, losses, and loss adjustment expenses, including the
effect of reinsurance, are comprised of (in thousands):
Nine Months Ended September 30, Three Months Ended September 30,
1996 1995 1996 1995
.............. .............. .............. ..............
Written Earned Written Earned Written Earned Written Earned
....... ...... ....... ...... ........ ...... ....... ......
Premiums:
Direct $373,079 $365,259 $292,611 $272,122 $125,687 $125,017 $118,922 $112,839
Assumed 32,905 27,546 26,445 37,080 9,915 8,270 9,763 11,319
Ceded (37,325) (36,065) (41,251) (37,451) (11,298) (10,966) (15,201) (13,479)
......... ........ ....... ......... ........ ........ ....... .........
Net $368,659 $356,740 $277,805 $271,751 $124,304 $122,321 $113,484 $110,679
......... ........ ....... ........ ........ ........ ........ ........
......... ........ ....... ........ ........ ........ ........ ........
% Assumed
to Net 8.93% 9.52% 7.98% 8.60%
......... ....... ........ ........
......... ....... ........ ........
Incurred Incurred Incurred Incurred
........ ........ ........ ........
Losses and loss
adjustment
expenses:
Direct $ 257,403 $210,655 $94,128 $92,731
Assumed 19,466 30,585 (630) 13,862
Ceded (23,499) (38,014) (8,635) (11,940)
........... ......... ........ .......
Net $ 253,370 $203,226 $84,863 $94,653
.......... ......... ........ .......
.......... ......... ........ .......
NOTE 5 - NONRECURRING TENDER OFFER CHARGE
On May 8, 1996, Orion Capital Corporation and certain of
its subsidiaries ("Orion" or "Purchasers") commenced a cash
tender offer (the "Offer") to purchase up to 4,600,000 shares of
common stock of the Company at price of $17.50 per share. At the
time the tender offer was made, Orion owned approximately 49.5
percent of the Company's outstanding common stock.
As a result of the Offer the Company incurred costs of
approximately $2,163,000, in the second quarter of 1996, for
legal fees, investment advisor fees, printing fees, director's
fees, and compensation expense resulting from the acceleration of
unvested restricted stock grants and stock options.
On July 2, 1996, Orion successfully completed the Offer and
purchased the 4,600,000 shares of the Company's common stock at
an amended price of $18.50 per share. According to the
Depository for the Offer, 6,774,515 shares of the Company's
shares were tendered and not withdrawn pursuant to the Offer.
The proration factor used by Orion to purchase the tendered
shares was .67901168. For further information related to the
Orion Offer refer to the Company's report on Schedule 14D-9,
filed with the Securities and Exchange Commission on May 22,
1996, and amendments thereto, filed on June 1, 1996, June 7, 1996
and June 19, 1996.
<PAGE>
On July 17, 1996, Orion purchased an additional 120,000
shares of the Company's common stock in the open market. The
purchase of these additional shares brought Orion's ownership
level in the Company to 12,129,942 shares, or 81.0%
NOTE 6 - COMMITMENTS AND CONTINGENCIES
As part of the 1995 Viking acquisition, and based upon
Viking's favorable loss development since the acquisition date,
the Company estimates that it will pay the Seller additional
purchase price in the maximum amount agreed to in the purchase
agreement. This amount, which is approximately $4,333,000 plus
interest at 6.28%, will be payable to the Seller as of December
31, 1998. The Company has accrued this amount and the related
interest payable in the accompanying balance sheet.
As discussed in the Company's report on Schedule 14D-9, filed
with the Securities and Exchange Commission on May 22, 1996, as
amended on June 1, 1996, June 7, 1996 and June 19, 1996, three
separate complaints naming the Company and one or more of its
directors, and Orion, as defendants were filed on behalf of the
Company's shareholders, alleging that the Orion tender offer was
unfair and inadequate. On July 2, 1996, counsel for Orion and
the Company signed a Memorandum of Understanding providing for
the settlement and dismissal of the three cases, based on the
revisions which the Purchasers had made in the terms of the Offer
to Purchase. In the judgment of the Company's management, the
costs incurred to defend and settle these complaints will not
have a materially adverse effect on the results of the Company's
operations. The estimated settlement costs have been accrued in
the Company's financial statements as of September 30, 1996, as
part of the nonrecurring charge discussed in Note 5.
In addition to the three complaints described above, the
Company is subject to litigation in the normal course of
operating its insurance business. The Company is not engaged in
any such litigation which it believes would have a material
adverse impact on its financial condition or results of
operations, taking into account the reserves established
therefore and giving effect to insurance.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results for the First Nine Months of 1996 Compared to the First
Nine Months of 1995
Guaranty National Corporation and its subsidiaries (the
"Company") manage their property and casualty business in three
operating units. Gross premiums written and GAAP combined ratios
by operating unit, for the nine months ended September 30, 1996
and 1995 are summarized below:
Nine Months Ended
September 30,
1996 1995
.... ....
(dollars in thousands)
Personal Lines:
Gross premiums written $192,629 $132,631
GAAP combined ratio 98.5% 104.7%
Commercial Lines:
Gross premiums written $156,254 $150,239
GAAP combined ratio 104.2% 108.6%
Collateral Protection:
Gross premiums written $57,101 $ 36,186
GAAP combined ratio 97.0% 95.6%
Total:
Gross premiums written $405,984 $319,056
GAAP combined ratio 100.2% 105.4%
On July 18, 1995, the Company completed its acquisition of
Viking Insurance Company of Wisconsin ("Viking"). The Viking
acquisition has enabled the Company to increase its nonstandard
private passenger automobile premiums, as well as allow the
Company to expand its personal lines business into new
territories, strengthen its personal lines market share position
in existing states, and provide further flexibility in marketing
the Company's personal lines products. Calendar year 1996 is the
first full year in which Viking's operating results are included
in the consolidated financial statements. During 1995, Viking's
operating results were included in the financial statements from
the acquisition closing date forward.
In July 1996, Company management announced a decision to
integrate the Viking and Guaranty National personal lines
divisions into one personal lines unit. As a result of this
decision, personal lines financial information will no longer be
delineated by division. Currently, the integration effort is
well under way. The Company intends to make the management and
staffing assignments first, and then to focus on agency,
geographic and product integration. A president of the personal
lines unit is expected to be named during the fourth quarter of
1996.
The personal lines unit gross premiums written increased 45%
for the first nine months of 1996 compared to the first nine
months of 1995. The premium volume growth was the result of the
Viking acquisition. Before the acquisition of Viking in 1995,
the Company did not write business in the state of California.
For the first nine months of 1996, this state accounted for
approximately $62,989,000, or 33%, of the unit's gross premiums
written. The increase resulting from the California business was
partially offset by decreases in gross premiums written in
several other states where above average rate increases have been
taken in an effort to improve profitability.
The personal lines unit loss ratio (incurred losses and loss
adjustment expense) for the first nine months of 1996 was 72.8%
compared to 78.1% for the first nine months of 1995. The
incurred losses component decreased 6.9 points and the loss
adjustment expense component increased 1.6 points from the prior
year. The decreased incurred losses component resulted from
lower claim severity, as well as incurred but not reported losses
being lower than expected. The increase in the loss adjustment
expense component is due to this unit's emphasis on fighting
insurance fraud, which has resulted in increased legal expenses
and increased staffing in the unit's Special Investigative Unit.
Also, in the third quarter of the prior year, the Company
strengthened its personal lines loss reserves by $5,010,000. No
such reserve strengthening occurred during the first nine months
of 1996.
<PAGE>
The personal lines expense ratio was 25.7% for the first nine
months of 1996 compared to 26.6% for the first nine months of
1995. The decrease was primarily due to lower contingent
commission accruals and increased operating efficiencies.
During the third quarter of 1996, the Company evaluated the
commercial specialty and general divisions and decided that
combining these two divisions will enable the Company to operate
more efficiently and better serve its market. Thus, the
commercial specialty and general divisions will be combined into
one Guaranty National Insurance Company commercial division.
For the first nine months of 1996, the commercial lines unit
gross premiums written increased four percent, when compared to
the first nine months of 1995. This slight improvement was
primarily due to the expansion of existing programs and new
programs, as well as geographic expansion outside of the Rocky
Mountain region. In addition, in June 1995, the commercial lines
unit introduced an automobile physical damage program in
California. This program accounted for $3,593,000 of the total
increase in the commercial lines unit gross premiums written
during the first nine months of 1996, compared to the same period
in the prior year. However, due to the poor loss experience in
this program, notice of cancellation has been given to the agent.
Thus, the gross premiums written related to this program are
expected to decline significantly in the coming months.
Commercial automobile liability gross premiums written
decreased to 36% of total commercial lines premiums for the first
nine months of 1996 compared to 41% for the first nine months of
1995. This decline is a result of the Company's efforts over the
past few years to reduce commercial automobile liability gross
premiums written, and to increase other more profitable
commercial coverages.
The commercial lines unit loss ratio for the first nine months
of 1996 was 71.4% compared to 77.8% for the same period last
year. The incurred loss and loss adjustment expense components
decreased by 6.2 points and 0.2 points, respectively. The 1996
loss ratio reflected lower claims severity. In addition, the
high 1995 ratio was attributable to the loss reserve
strengthening charge of $8,961,000 in the third quarter of 1995.
The commercial lines expense ratio increased to 32.8% for the
first nine months of 1996, compared to 30.8% for the first nine
months of 1995. The fluctuation is attributable to the higher
program writings, such as the automobile physical damage program
discussed above, which have a higher commission rate, as well as
increased contingent commissions. Also, during the third quarter
of 1996, the commercial lines unit expensed approximately
$490,000 in costs associated with a software development project
which was abandoned.
The collateral protection unit's gross premiums written
increased 58% for the first nine months of 1996 compared to the
first nine months of 1995. This significant increase is
primarily due to geographic expansion in the Northeastern United
States and its newest product, mortgage fire insurance.
The collateral protection unit's loss ratio increased 11.3
points for the first nine months of 1996 compared to the first
nine months of 1995. The majority of the total increase, or 10.5
points, related to the incurred losses component. The remaining
0.8 point increase related to the loss adjustment expense
component. The higher loss ratio resulted from increased
frequency in the Northeast blanket vendor single interest and
Puerto Rico collateral protection programs. The unit has taken
actions to correct the higher loss ratio, including the
implementation of underwriting and pricing adjustments and
canceling problematic accounts.
The unit's expense ratio decreased to 34.6% for the first nine
months of 1996 compared to 44.5% for the first nine months of
1995. The improved expense ratio primarily relates to lower
agency contingent commissions, which have been proportionately
reduced by the increased loss ratio, discussed above.
The Company operates under a primary reinsurance contract that
provides both excess of loss and property catastrophe coverage up
to $6,000,000 per occurrence for all major lines of business.
The primary reinsurance contract for 1996 is with National
Reinsurance Corporation ("NRC"), which is now owned by General
Reinsurance Corporation, and serves to limit the Company's
maximum loss per occurrence on individual risks to $400,000 and
for catastrophes to $500,000, through June 30, 1996. As a
result of the acquisition of National Reinsurance Corporation by
General Reinsurance Corporation, the Company's contract allowed
for the renegotiation of the agreement at a more favorable rate,
effective July 1, 1996. Also, the contract will now terminate
December 31,
<PAGE>
1997 rather than December 31, 1998. The Company's maximum loss
per occurrence on casualty losses remained at $400,000. However,
on property losses it was reduced to $300,000, and on catastrophe
losses it was increased to $600,000.
The Company has purchased an additional layer of catastrophe
coverage up to 95% of $14,000,000 per loss occurrence, for total
catastrophe protection of $20,000,000. The Company continues to
utilize facultative reinsurance for certain risks, primarily
umbrella and property coverages.
The Company's insurance operating units in total showed $789,000
of adverse development on 1995 and prior loss reserves, net of
reinsurance, in the first nine months of 1996. This compares to
$12,417,000 of adverse development in the first nine months of
1995 on 1994 and prior loss reserves, net of reinsurance. The
development equates to 0.3% and 6.9% of net loss reserves at
December 31, 1995 and 1994, respectively. The small amount of
adverse development in the first nine months of 1996 was mainly
due to general liability and collateral protection losses
developing higher than expected for both outstanding claims and
incurred but not reported losses. During 1995, the Company
recognized adverse loss reserve trends, primarily in the
automobile liability line of business, and significantly
strengthened loss reserves. During 1996, the loss reserve trends
have indicated that the Company reserved its claims adequately
as of September 30, 1996.
During the first nine months of 1996, the Company's known
exposure to environmental losses, such as asbestos and pollution
contamination, did not materially change. Based on the claim
activity to date and the nature of the business written, the
Company does not believe that it has a material exposure to
environmental losses.
For the nine month period ended September 30, 1996, the
Company's catastrophe losses amounted to approximately
$1,978,000, or nine cents per share, net of tax and reinsurance
recoveries. This compares to catastrophe losses during the first
nine months of 1995 of $1,430,000, or eleven cents per share, net
of tax and reinsurance recoveries. The catastrophic losses
mainly affected the commercial and personal lines operating
units, and primarily related to storms in the Central United
States. The Company experienced only minimal losses on the
hurricanes that occurred during the third quarter of 1996. The
Company's management believes that its prudent level of
reinsurance, as discussed above, and spread of coverage over a
variety of geographic areas, limits the Company's exposure to
catastrophic events.
On May 8, 1996, Orion Capital Corporation and certain of its
subsidiaries ("Orion"), commenced a cash tender offer (the
"Offer") to purchase up to 4,600,000 shares of the Company's
common stock. As a result of the Offer, the Company incurred
costs of approximately $1,778,000, net of tax, or $0.12 per
share, for expenses related to the Offer. These costs were
classified as nonrecurring in the Company's September 30, 1996
Consolidated Financial Statements. See Note 5 to the
Consolidated Financial Statements for further discussion of these
costs.
Overall, the Company's net earnings increased $12,027,000, to
$18,533,000 during the first nine months of 1996 when compared to
the first nine months of 1995. Net earnings per common share
were $1.24 as of September 30, 1996, versus $0.51 per common
share as of September 30, 1995. The majority of the improvement
in the Company's net earnings and net earnings per common share
was related to the prior year net earnings and earnings per
common share being substantially reduced by the reserve
strengthening charges within the personal and commercial units,
which were discussed above.
The Company's management continues to be optimistic about
future performance. Management expects the Company's year end
1996 operating earning per common share (earnings per common
share before realized capital gains and nonrecurring charges) to
slightly exceed the $1.50 operating earnings per common share
previously disclosed.
The Company's interest expense for the first nine months of
1996 increased 33% compared to the first nine months of 1995.
This increase was due to an increase in bank borrowings during
1995 related to the Viking acquisition. The 1995 increased
borrowings are pursuant to a reducing, revolving credit facility,
which provides for a floating interest rate. In order to reduce
the risk of changing interest rates, the Company hedged
$80,000,000 of the total borrowings until 1998 via two interest
rate swap agreements. The agreements give the Company a fixed
interest rate of approximately 6.5% on the total notional amount
hedged.
<PAGE>
Pretax net investment income increased $6,777,000 in the first
nine months of 1996 compared to 1995, while after-tax net
investment income increased to $22,006,000 from $17,275,000 for
the same periods. These increases were mainly attributable to
the inclusion of the Viking portfolio beginning in July 1995, as
well as positive operating cash flow, which resulted in an
overall increase in average invested assets.
The investment yield, on an after-tax basis, for the first nine
months of 1996 decreased slightly to 4.7% as compared to 5.0% for
the first nine months of 1995. After-tax realized investment
gains in the first nine months of 1996 and 1995 were $3,571,000
and $1,882,000, respectively. This was despite the Company
recording other-than-temporary investment impairments of $282,000
and $1,073,000, after tax, for the nine month periods ending
September 30, 1996 and 1995, respectively. The increase in after-
tax realized investment gains is primarily related to the strong
stock market during the first nine months of 1996, in which the
Company sold certain equity securities that had appreciated in
value. The sale of these equity securities resulted in
approximately $3,118,000 of the total after-tax realized
investment gains. The majority of the Company's investment
portfolio continues to be invested in fixed maturities and short-
term investments which represented 84% of the portfolio at both
September 30, 1996 and December 31, 1995.
Securities are classified as available for sale and recorded at
fair value, unless they meet the Company's criteria for
classification as held to maturity. The Company's held to
maturity criteria include investment grade bonds with stated
maturities of less than ten years. The unrealized investment
gains on fixed maturities available for sale and on equity
securities as of September 30, 1996, were $3,876,000 and
$15,787,000, respectively. The unrealized investment gains on
fixed maturities available for sale and on equity securities as
of December 31, 1995 were $12,063,000 and $11,814,000,
respectively. The fair value of the Company's fixed maturity
investments generally varies inversely with changes in the
general level of interest rates. The fair value of federal
agency and other mortgage pool securities is subject to
additional market value volatility due to the impact of changes
in prepayment rates on the mortgages which underlie such
securities.
The Company's holdings in noninvestment grade bonds for the
first nine months of 1996 were approximately eight percent of
total invested assets, compared to approximately six percent of
total invested assets at December 31, 1995. Total investments
held by the Company include highly rated fixed maturities (rated
AAA or AA) of 51% at September 30, 1996 and 55% at December 31,
1995. The Company continues to maintain a low level of real
estate related investments, which consist primarily of federal
agency mortgage pools.
Results for the Quarters Ended September 30, 1996 and September
30, 1995
Gross premiums written and GAAP combined ratios by operating
unit, for the quarters ended September 30, 1996 and 1995, are
summarized below:
Three Months Ended
September 30,
1996 1995
.... ....
(Dollars in thousands)
Personal Lines:
Gross premiums written $65,385 $61,854
GAAP combined ratio 96.0% 110.7%
Commercial Lines:
Gross premiums written $51,111 $52,846
GAAP combined ratio 105.8% 130.0%
Collateral Protection:
Gross premiums written $19,106 $13,985
GAAP combined ratio 97.1% 95.1%
Total:
Gross premiums written $135,602 $128,685
GAAP combined ratio 99.4% 115.5%
<PAGE>
The personal lines unit gross premiums written increased six
percent for the third quarter of 1996, compared to the third
quarter of 1995. The increase in gross premiums written was a
combination of the Viking acquisition, the unit's new products
and geographic expansion. The majority, or 14.1 points, of the
14.7 point decrease in the GAAP combined ratio was due to a
decrease in the unit's loss ratio. The lower loss ratio was
attributable to two main factors. First, claim severity
decreased during the third quarter of 1996 compared to the third
quarter of 1995. Second, in the prior year third quarter the
personal lines unit strengthened its loss reserves. No reserve
strengthening was made during the third quarter of 1996.
The commercial lines unit gross premiums written decreased
slightly by three percent during the third quarter of 1996,
compared to the third quarter of 1995. Of the total decline,
approximately 19% related to a decrease in gross premiums written
from the California automobile physical damage program which was
introduced in June 1995. As discussed above, this program was
canceled in June 1996 due to unfavorable loss experience. The
remaining decline in gross premiums written for the third quarter
of 1996, compared to the third quarter of 1995, resulted from
decreased gross premiums written in certain states which were
experiencing high loss ratios. The commercial lines unit GAAP
combined ratio decreased 24.2 points for the third quarter of
1996, compared to the third quarter of 1995. The decrease was
primarily due to a lower loss ratio, which was offset slightly by
a higher expense ratio, as discussed previously.
The collateral protection unit's gross premiums written
increased 37% for the third quarter of 1996, compared to the
third quarter of 1995. The increase was attributable to
geographic expansion and its newest product, mortgage fire
insurance. This unit's GAAP combined ratio increased 2.0 points
during the third quarter of 1996, compared to the same period of
1995. The deterioration was due to a 6.8 point increase in the
loss ratio, which was partially offset by a 4.8 point decrease in
the expense ratio. The loss ratio increase related to
unfavorable loss experience on the unit's Northeast blanket
vendor single interest and Puerto Rico collateral protection
business, as discussed above. The improvement in the expense
ratio resulted from lower agency contingent commissions.
Third quarter 1996 net earnings and net earnings per common
share were $7,521,000 and $0.50, respectively. This represented
a significant improvement from the third quarter of 1995, when
the Company reported a net loss and net loss per common share of
$4,113,000 and $0.29, respectively. The improvement resulted
primarily from the prior year third quarter being affected by an
after-tax reserve strengthening charge of $9,081,000, or $0.64
net loss per common share.
Liquidity and Capital Resources
Positive cash flow from operations of $37,949,000 was generated
for the first nine months of 1996 compared to $19,550,000 for the
first nine months of 1995. The $18,399,000 increase in operating
cash flow was primarily the result of higher premiums and net
investment income collected, as well as lower income tax
payments. These increases were partially offset by higher loss
and loss adjustment expense payments, acquisition expenses and
interest paid during the first nine months of 1996 compared to
the same period in the prior year. Additionally, the Company
paid less agency contingent commissions during the first nine
months of 1996, when compared to the first nine months of 1995.
Net cash used in investing activities was $29,226,000 and
$113,172,000 for the first nine months of 1996 and 1995,
respectively. The $83,946,000 decrease in funds used in
investing activities resulted mainly from a reduction in funds
used to acquire the subsidiaries. During the first nine months
of 1995, the Company acquired Viking. The decrease in funds used
to acquire subsidiaries was offset, in part, by increased
investment acquisitions of all types of investments. Although
the Company acquired more fixed maturities, equity securities and
short and long term investments during the first nine months of
1996, compared to the first nine months of 1995, it also had
increased sales and maturities of equity and fixed maturity
securities.
Net cash used in financing was $6,684,000 for the first nine
months of 1996, compared to net cash provided by financing
activities of $90,641,000 for the first nine months of 1995. The
cash provided by financing activities during the first nine
months of the prior year was used to finance the Viking
acquisition, which is discussed above. During the first nine
months of 1996, the company made approximately $1,125,000 in
principal payments on its 6.5% term loan. The Company will
continue to make quarterly principal payments on this loan, of
$187,500, until it is paid off on April 1, 1999. As of September
30, 1996, the Company had $10,000,000 of funds available under
<PAGE>
its reducing, revolving credit facility. The Company declared and
paid a regular quarterly dividend of $.125 a share in each of the
first three quarters of 1996 and 1995.
The Company's level of short-term investments at September 30,
1996 and December 31, 1995 was 13.6% and 8.4%, respectively, of
total invested assets. The increase was a result of management's
decision to reduce the average duration of its investment
portfolio and to shift its investment mix to securities with more
liquidity. Overall, the Company maintains sufficient liquidity
in its investment portfolio through its short-term investment
holdings to meet operating cash requirements.
In May 1996, Viking moved its Freeport, Illinois operations
from a leased facility into an office building which was acquired
by Viking in February 1996, for approximately $1,000,000.
In conjunction with the Viking acquisition, there is an
additional purchase price amount which may ultimately be paid to
the seller depending on Viking's future loss development. The
Company has estimated this amount to be approximately $4,333,000,
and has included such amount within the balance sheet. See Note
6 to the Consolidated Financial Statements for further discussion
of this obligation.
On July 2, 1996, Orion consummated its cash tender offer, which
was discussed above, and purchased 4,600,000 shares of the
Company's common stock at a price of $18.50 per share. In
addition, on July 17, 1996 Orion purchased an additional 120,000
shares of the Company's common stock in the open market, bringing
their ownership percentage of the Company to 81%. See Note 5 to
the Consolidated Financial Statements for further discussion
related to these Orion transaction.
As a result of Orion's tender offer, the Company was served
with three separate complaints alleging that the Orion tender
offer price was unfair and inadequate. See Note 6 to the
Consolidated Financial Statements for more discussion related to
these complaints.
On July 16, 1996, the Board of Directors of Guaranty National
Corporation announced that James R. Pouliot, president of the
Viking Division, had been promoted to executive vice president,
and will succeed Roger B. Ware as president and chief executive
officer of the Company upon Mr. Ware's retirement in December
1996. In addition, on this same date, the Company's Board of
Directors elected W. Marston Becker, Vice Chairman and Chairman
and CEO-elect of Orion, to the Company's Board of Directors. Mr.
Becker's election increased the number of the Company's directors
from eleven to twelve.
On September 12, 1996, Orion announced that Larry D. Hollen,
President and Chief Operating Officer, had resigned from Orion
and as one of Orion's director representatives on the Board of
the Company. On October 29, 1996, Vincent Papa, Vice President
and Treasurer - Orion Capital Corporation and Chairman - Wm. H.
McGee & Co., Inc., was elected to replace Mr. Hollen on the
Company's Board of Directors. Additionally, on this same date,
Carroll D. Speckman retired from the Company's Board of
Directors. Mr. Dennis J. Lacey, CPA, replaced Mr. Speckman as
Chairman of the Audit Committee.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is routinely engaged in litigation incidental to
its business. At September 30, 1996, there were three lawsuits
outstanding, which were related to the Orion Offer. However,
during the third quarter of 1996 the Company signed a Memorandum
of Understanding with respect to the settlement and dismissal of
the three complaints. See Note 6 to the Consolidated Financial
Statements for further discussion related to these complaints.
In the judgment of the Company's management, there were no
pending legal proceedings at September 30, 1996, net of reserves
established therefore and giving effect to reinsurance, that will
have a materially adverse effect on the results of the Company's
operations.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.4 Commercial Umbrella Excess of Loss Facultative
Automatic Reinsurance Agreement No. 06AC960032,
effective February 1, 1996 to February 1, 1997, between Guaranty
National Insurance Company, Landmark American
Insurance Company, Peak Property and Casualty
Insurance Corporation, Guaranty National Insurance Company of
California and National Reinsurance Corporation.
10.5 Endorsement No. 2, dated July 1, 1996, to the
Multiple Line Excess of Loss Agreement
No. 3973-05.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the
Registrant during the quarter.
<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.
Guaranty National Corporation
By: s/Roger B.Ware
Roger B. Ware, President and
Chief Executive Officer
(Principal Executive Officer)
By: s/Michael L. Pautler
Michael L. Pautler, Senior Vice
President-Finance and Treasurer
(Principal Financial Officer)
By: s/Shelly J. Hengsteler
Shelly J. Hengsteler
Controller and Assistant Treasurer
(Principal Accounting Officer)
DATE: October 31, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM GUARANTY NATIONAL CORPORATION'S FINANCIAL STATEMENTS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 378,622
<DEBT-CARRYING-VALUE> 79,648
<DEBT-MARKET-VALUE> 80,033
<EQUITIES> 86,960
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 646,347
<CASH> 8,833
<RECOVER-REINSURE> 75,545
<DEFERRED-ACQUISITION> 44,101
<TOTAL-ASSETS> 904,594
<POLICY-LOSSES> 357,100
<UNEARNED-PREMIUMS> 159,384
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 101,875
0
0
<COMMON> 136,239
<OTHER-SE> 90,364
<TOTAL-LIABILITY-AND-EQUITY> 904,594
356,740
<INVESTMENT-INCOME> 28,418
<INVESTMENT-GAINS> 5,494
<OTHER-INCOME> 0
<BENEFITS> 253,370
<UNDERWRITING-AMORTIZATION> 96,765
<UNDERWRITING-OTHER> 7,477
<INCOME-PRETAX> 24,588
<INCOME-TAX> 6,055
<INCOME-CONTINUING> 18,533
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,533
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.24
<RESERVE-OPEN> 286,339
<PROVISION-CURRENT> 252,581
<PROVISION-PRIOR> 789
<PAYMENTS-CURRENT> 139,752
<PAYMENTS-PRIOR> 112,683
<RESERVE-CLOSE> 287,274
<CUMULATIVE-DEFICIENCY> 789
</TABLE>
COMMERCIAL UMBRELLA EXCESS OF LOSS
FACULTATIVE AUTOMATIC REINSURANCE AGREEMENT
NO. 06AC960032
between
GUARANTY NATIONAL INSURANCE COMPANY
Englewood, Colorado
LANDMARK AMERICAN INSURANCE COMPANY
Oklahoma City, Oklahoma
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
Englewood, Colorado
GUARANTY NATIONAL INSURANCE COMPANY OF CALIFORNIA
Englewood, Colorado
(hereinafter collectively referred to as the "COMPANY")
and
NATIONAL REINSURANCE CORPORATION
Stamford, Connecticut
(hereinafter referred to as the "REINSURER")
<PAGE>
COMMERCIAL UMBRELLA EXCESS OF LOSS
FACULTATIVE AUTOMATIC REINSURANCE AGREEMENT
INDEX OF ARTICLES
ARTICLE PAGE #
1 PARTIES TO THE AGREEMENT 1
2 COMMENCEMENT 1
3 BUSINESS COVERED 1
4 SPECIAL ACCEPTANCES 1
5 TERRITORY 1
6 LIABILITY OF THE REINSURER 2
7 UNDERLYING POLICIES 2
8 UNDERWRITING GUIDELINES 3
9 REINSURANCE PREMIUM 3
10 CEDING COMMISSION 3
11 PREMIUM REPORTS AND REMITTANCES 4
12 CLAIM REPORTS 4
13 LOSS SETTLEMENTS 5
14 OFFSET 5
15 STATISTICS 5
16 UNDERWRITING AUDITS 6
17 ACCESS TO COMPANY RECORDS 6
18 TAXES 6
19 TERMINATION 6
20 ARBITRATION 7
21 INSOLVENCY 8
22 DEFINITIONS 8
23 RULING LAW 9
ATTACHMENTS:
EXHIBIT A - EXCLUSIONS
NUCLEAR INCIDENT EXLUSION CLAUSE - LIABILITY - REINSURANCE
<PAGE>
-1-
ARTICLE I - PARTIES TO THE AGREEMENT
This Agreement is solely between the COMPANY and the REINSURER. When
more than one COMPANY is named as a party to this Agreement, the first
COMPANY named shall be the agent of the other companies as to all
matters pertaining to this Agreement. Performance of the obligations
of each party under this Agreement shall be rendered solely to the
other party. In no instance shall any insured of the COMPANY, any
claimant against an insured of the COMPANY, or any other third party
have any rights under this Agreement.
This Agreement constitutes the entire Agreement between the COMPANY and
the REINSURER, and the obligations: of these parties are determined
solely by the terms of the Agreement. Any change or modification to
the Agreement shall be null and void unless made by written amendment
to the Agreement and signed by both parties.
ARTICLE 2 - COMMENCEMENT AND TERM
This Agreement shall be effective from 12:01 a.m., Standard Time,
February 1, 1996, to 12:01 a.m., Standard Time, February 1, 1997, and
shall apply to claims and losses occurring under policies written or
renewed during the term hereof, subject to the terms and conditions for
termination stipulated in the article entitled TERMINATION.
ARTICLE 3 - BUSINESS COVERED
The COMPANY, subject to the terms and conditions hereunder, and the
exclusions set forth in EXHIBIT A, shall cede to the REINSURER and the
REINSURER shall accept from the COMPANY all Commercial
Umbrella/Following Form Excess Business, under any and all binders,
policies, or contracts of insurance (all hereinafter referred to as
"policies") issued by the COMPANY in accordance with the COMPANY'S
Umbrella/Following Form Excess underwriting guidelines dated May 1995
(and revisions thereto, mutually agreed upon by the parties hereto),
provided the policy is properly ceded to this Agreement in accordance
with the Article entitled PREMIUM REPORTS AND REMITTANCES.
ARTICLE 4 - SPECIAL ACCEPTANCES
Business not within the terms and conditions of this Agreement must be
submitted to the REINSURER for special acceptance. It will then be the
REINSURER'S decision whether to accept such a risk into the program, to
provide facultative support outside the program, or to decline such it
submission. If for any reason an underwriter of the COMPANY is unsure
of the qualification of a risk, it shall contact the REINSURER for
clarification.
ARTICLE 5 - TERRITORY
This Agreement shall follow the territorial limits. of the COMPANY'S
original policies but is limited to policies issued to and covering
insureds whose principal locations are in the United States of America,
its territories and possessions, Puerto Rico, and Canada.
<PAGE>
-2-
ARTICLE 6 - LIABILITY OF THE REINSURER
The REINSURER shall be liable to the COMPANY for the amount of net loss
sustained by the COMPANY in excess of the COMPANY'S Retention, but not
exceeding the Limit of Liability of the REINSURER as stipulated in the
Schedule of Reinsurance.
SCHEDULE OF REINSURANCE COVERAGE
COMPANY Limit of Liability
Class of Business Retention (Net and Treaty) of the REINSURER
Commercial Umbrella/ $5,000,000 Each Policy, $5,000,000 Each Policy,
Following Form Excess Each Occurrence, Aggregate Each Occurrence,
where applicable Aggregate where
applicable
The REINSURER shall be liable to the COMPANY for loss adjustment
expenses in the proportion that the loss incurred by the REINSURER
bears to the total amount of the loss incurred by the COMPANY under the
applicable policy. The REINSURER'S proportion of loss adjustment
expenses shall be in addition to its Limit of Liability.
The foregoing notwithstanding, it is understood between the COMPANY and
the REINSURER that no loss adjustment expenses shall be allocated to
policies the subject matter of this Agreement when the COMPANY (or
other acceptable carrier where applicable) is obligated to pay such
loss adjustment expenses under any underlying insurance policy issued
by the COMPANY (or other acceptable carrier where applicable).
ARTICLE 7 - UNDERLYING POLICIES
A. Unless otherwise agreed to by the REINSURER, no reinsurance shall
be bound hereunder on any policy where the limits of the
underlying primary polices are less than the following:
General Liability $1,000,000 Each Occurrence
$1,000,000 General Aggregate
$1,000,000 Products and Completed
Operations Aggregate
Automobile Liability: $1,000,000 Combined Single Limit
Employers Liability: $100,000 Each Accident
$500,000 Policy Limit
$100,000 Each Employee
by Disease
or
$10,000 Self Insured Retention
whichever shall apply
<PAGE>
-3-
B. Underlying primary coverages not written by the COMPANY shall be
written only by insurance companies possessing a Best's rating of
"B" or better.
ARTICLE 8 - UNDERWRITING GUIDELINES
1. The maximum term for any policy the subject matter hereof shall be
18 months.
2. Any risk with an individual loss in excess of $500,000 or total
annual aggregate losses in any of the past 3 years in excess of
$500,000 will be submitted to the REINSURER prior to quoting for
special acceptance.
3. No umbrella binding authority shall be granted to agents.
ARTICLE 9 - REINSURANCE PREMIUM
The COMPANY shall cede to the REINSURER a reinsurance premium based on
the following rates:
A. 15% - $25% of the total gross written premium charge for the first
$5,000,000 of Umbrella/Following Form Excess policy limits,
subject to a minimum premium of $1,000 gross per million of
exposure hereunder.
B. 25% - 30% of the total gross written premium charge for the first
$5,000,000 of policy Umbrella/Following Form Excess policy limits,
subject to a minimum premium of S1,000 gross per million of
exposure hereunder for all risks primarily involved in trucking--
for hire, ready mix concrete, sand and gravel hauling, and
flammable fuels hauling not subject to exclusions 11-d.
If the annual premium charged for the first $5,000,000 of
Umbrella/Following Form Excess policy limit is $6,000 gross or less,
the minimum premium per million of exposure hereunder may be lowered to
$750.00 gross per million.
ARTICLE 10 - CEDING COMMISSION
The REINSURER shall allow the COMPANY a commission of 30% on premiums
ceded under this Agreement.
Such commission allowance shall include provision for all commissions,
brokerages, taxes, board,
exchange or bureau assessments. and for all other expenses of whatever
nature, excepting loss
adjustment expenses.
<PAGE>
-4-
ARTICLE 11 - PREMIUM REPORTS AND REMITTANCES
1. Within 30 days after the last day of each calendar month, the
COMPANY shall furnish to the REINSURER (at its home office with a
copy sent to the Dallas Branch Office) a Premium Activity
Bordereau with respect to each risk becoming effective during the
month, containing, but not limited to, the following information:
- Policy Number
- Named Insured
- Location of Insured
- Total Policy Limit
- Effective/Expiration Date
- Total written premium for each policy
- Ceded Premium for each policy
- Subsequent premium transactions
If a policy is not included on the bordereau of the month in which
it was bound, such policy will not be covered by this Agreement.
2. The premium due the REINSURER for the month, calculated in
accordance with the provisions of the Article entitled REINSURANCE
PREMIUM, shall be paid (less applicable ceding commission) with
the above Bordereau.
ARTICLE 12 - CLAIM REPORTS
The COMPANY shall give written notice to the REINSURER'S home office of
any claim or loss which in the judgment of the COMPANY may result in a
net loss to the REINSURER. The COMPANY shall indicate its estimate of
loss and loss adjustment expense and shall provide subsequent written
reports to the REINSURER when such estimates Change. In addition, the
COMPANY shall give Written notice to the REINSURER of all claims having
an indemnity reserve equal to or exceeding $2,500,000, or involving any
of the following:
1. Brain damage or alleged brain damage;
2. Quadriplegics;
3. Paraplegics;
4. Amputations of one or more limbs or loss of use of one or more
limbs;
5. Major burns;
6. Severe lacerations or disfigurement involving serious cosmetic
deformity;
7. Fatalities;
8. Loss of sight;
<PAGE>
-5-
9. Unusual exposure, including but not limited to Child molestation;
10. Psycho-Neurotic Illness; or
11. Permanent Total or Extended Disability
ALL information received by the COMPANY, written notice of which must
be sent to the REINSURER, shall be sent promptly upon the COMPANY
having received such information.
On open claims, follow up reports shall be submitted at least annually.
important developments (Such as major reserve increases or decreases,
settlements, or new information changing the liability situation or
value) shall be reported as they occur.
ARTICLE 13 - LOSS SETTLEMENTS
The COMPANY shall investigate and settle or defend all claims arising
under policies reinsured under this Agreement.
When requested by the REINSURER, the COMPANY shall permit the
REINSURER, at the expense of the REINSURER, to be associated with the
COMPANY in the defense or control of any claim, loss, or legal
proceeding which involves or is likely to involve the REINSURER.
All payments of claims or losses by the COMPANY within the limits,
terms, and conditions of its policies and within the limits, terms, and
conditions of this Agreement shall be binding upon the REINSURER.
Upon receipt of proof of loss payment, the REINSURER shall promptly pay
the COMPANY for that share of the net loss and loss adjustment expense
due in accordance with the reinsurance stipulated in this Agreement.
ARTICLE 14 - OFFSET
The COMPANY or the REINSURER may offset any balance, whether on account
of premium, commission, claims or losses, loss adjustment expenses,
recoveries, salvage, or any other amount due from one party to the
other under this Agreement. This right of offset shall not be affected
by the insolvency of either the COMPANY or the REINSURER except as may
be otherwise provided by a governmental agency having jurisdiction over
this Agreement.
ARTICLE 15 - STATISTICS
The COMPANY shall furnish such other statistics as may be required by
the REINSURER for the completion of the REINSURER'S statutory
requirements and internal records.
<PAGE>
-6-
ARTICLE 16 - UNDERWRITING AUDITS
The COMPANY shall allow the REINSURER to conduct underwriting audits at
least se annually. The COMPANY shall allow the REINSURER or its
authorized representatives inspect all papers, books, accounts,
documents, files and other records of the COMPANY necessary for a
thorough underwriting audit.
ARTICLE 17 - ACCESS TO COMPANY RECORDS
The COMPANY shall comply with the REINSURER'S request for any
information relating to this Agreement. Additionally, the REINSURER or
its authorized representatives shall have the right to inspect at any
reasonable time at the office of the COMPANY all papers, books,
accounts, documents, claims files and other records of the COMPANY
relating to this Agreement. The REINSURER'S right of inspection shall
continue to exist after the termination of this Agreement.
ARTICLE 18 - TAXES
The COMPANY shall be liable for paying all taxes other than income or
profit taxes levied on the REINSURER for business reinsured under this
Agreement. If the REINSURER is obligated to pay taxes other than
income or profit taxes for business reinsured under this Agreement the
COMPANY shall reimburse the REINSURER, provided that the COMPANY shall
not be required to pay the same tax twice
ARTICLE 19 - TERMINATION
A. Termination of Agreement
Either party may terminate this Agreement at any time by giving to
the other party (and to the Insurance Department of the State of
Colorado) not less than 90 days advance notice of termination in
writing by registered or certified mail to the principal office of
the other part
Unless otherwise mutually agreed, the REINSURER shall remain
liable for policies in force at the time and date of termination
until the natural expiration or anniversary of such policies
whichever comes first, but in no event longer than 12 months. The
COMPANY agrees that no cessions to this Agreement shall be made
during the notice period except as respects policies placed under
binder effective before the 60 day notice period.
B. Termination of Individual Policies:
Except with respect to policies which, under applicable laws, may
not be canceled mid-term except for specific reasons stated in law
or a regulation of the governmental body having jurisdiction, the
REINSURER may terminate reinsurance in respect of any policy
falling within the scope of this Agreement at any time by sending
to the COMPANY, by registered mail to its principal office, notice
stating the time and date when, not less than 60 days after the
date of mailing- of such notice, termination shall be effective.
The REINSURER may
<PAGE>
-7-
terminate reinsurance as respects any such policy at any
anniversary therof by sending to the COMPANY by registered mail to
their principal office, notice of such termination at least 90
days prior to the anniversary date of such policy. However, if
the COMPANY is obligated by law to continue the policy for a fixed
period beyond anniversary, reinsurance shall continue for the
duration of such period, but in no event longer than twelve (12)
months, whichever comes first.
C. Special Termination Provisions
If any amount payable under this Agreement becomes more than 30
days overdue, the party due to be paid may terminate this
Agreement, by sending to the other party, by registered or
certified mail, notice stating the time and date when, not less
than 15 days after the mailing of such notice, termination shall
be effective. The REINSURER shall not be liable for any loss(es)
taking place after the effective time and date of termination, in
consideration of which the REINSURER shall return to the COMPANY
the unearned premium (calculated on the monthly pro rata basis) as
respects policies in force at such time and date.
ARTICLE 20 - ARBITRATION
All unresolved differences of opinion between the COMPANY and the
REINSURER relating to this Agreement, including its formation and
validity, shall be submitted to a Board of Arbitration consisting of
one arbitrator chosen by the COMPANY, one arbitrator chosen by the
REINSURER, and a third arbitrator chosen by the first two arbitrators.
The party demanding arbitration shall communicate its demand for
arbitration to the other party by registered or certified mail,
identifying the nature of the dispute and the name of its arbitrator,
and the other party shall then be bound to name its arbitrator within
thirty days after receipt of the demand.
Failure or refusal of the other party to so name its arbitrator shall
empower the demanding party to name the second arbitrator within thirty
days thereafter. If the first two arbitrators are unable to agree upon
a third arbitrator within thirty days after the second arbitrator is
named, each shall be declined arbitrator shall name three candidates
within ten days thereafter, two of whom by the other arbitrator within
fifteen days after receiving their names, and within the next five days
the choice shall be made between the two remaining candidates by
drawing lots. The arbitrators shall be impartial and shall be active
or retired officers of property or casualty insurance or reinsurance
companies authorized to transact business in the United States of
America.
The Board of Arbitration shall have the power to fix all procedural
rules for the holding of the arbitration, including discretionary power
to make orders as to any matters which it may consider proper in the
circumstances of the case with regard to pleadings, discovery,
inspection of documents, examination of witnesses, and any other matter
whatsoever relating to the conduct of the arbitration. The Board of
Arbitration shall have the power to receive and act upon such evidence,
whether oral or written, Strictly admissible or not, as it shall in its
discretion think fit. It is expressly agreed that the jurisdiction of
the arbitrators to make or render any decision or award shall be
limited by the limits of liability expressly set forth in this
Agreement.
<PAGE>
-8-
The decision of the majority of the arbitrators shall be in writing and
shall be final and binding upon the parties. If either of the parties
fails to comply with this decision, the other party may apply for its
enforcement to a court of competent jurisdiction in which the party in
default is domiciled, or has assets, or carries on business.
Each party shall bear the cost of its own arbitrator and shall jointly
and equally bear with the other party the expense of the third
arbitrator. In the event both arbitrators are chosen by one party, the
fees of all arbitrators shall be equally divided between the parties.
The remaining costs of the arbitration proceeding shall be allocated by
the Board of Arbitration.
The arbitration shall be held at the times and places agreed upon by
the Board of Arbitration.
ARTICLE 21 - INSOLVENCY
In the event of the insolvency of the COMPANY, claims or losses arising
under this Agreement shall be payable by the REINSURER directly to the
COMPANY or its liquidator, receiver or statutory successor without
diminution because of such insolvency, except as otherwise specified in
the statutes of any state having jurisdiction of the insolvency
proceedings or except where this Agreement specifically provides
another payee of such reinsurance in the event of the insolvency of the
COMPANY. The REINSURER shall be given written notice of the pendency
of each claim or loss which may involve the reinsurance afforded by
this Agreement within a reasonable time after such claim or loss is
filed in the insolvency proceeding
The REINSURER shall have the right to investigate each such claim or
loss and interpose, at its own expense, in the proceeding where the
claim or loss is to be adjudicated, any defense which it may deem
available to the COMPANY or its liquidator, receiver or statutory
successor. A proportionate share of the expense thus incurred by the
REINSURER shall be chargeable, subject to court approval, against the
insolvent COMPANY as part of the expense of liquidation to the extent
of the benefit accruing to the COMPANY solely as a result of the
defense undertaken by the REINSURER.
ARTICLE 22 - DEFINITIONS
Net Loss
The term "net loss" shall mean the sum actually paid or to be paid by
the COMPANY in settlement of losses for which it is liable, including
prejudgment interest on such losses, after making deductions for all
inuring facultative reinsurance, whether collectible or not, find all
other recoveries, including salvage and subrogation recoveries. Net
loss shall not include liability for loss adjustment expenses; however
loss adjustment expenses shall be reinsured as stipulated in the
Article entitled LIABILITY OF THE REINSURER. Also, net loss shall not
include liability for damages, whether compensatory or punitive,
assessed against the COMPANY because Of its Own allegedly wrongful acts
in the handling of claims or in any of its dealings with its insureds
or other third parties, or for any loss adjustment expenses relating to
such actions or dealings.
It is agreed, however, that the existence of underlying treaty
reinsurance, if any, shall be entirely
<PAGE>
-9-
disregarded in arriving at the COMPANY'S net loss.
Nothing in this definition shall imply that losses are not recoverable
under this Agreement until
the COMPANY'S net loss has been finally ascertained.
Loss Adjustment Expenses
The term "loss adjustment expenses" shall mean court costs,
postjudgment interest, and allocated investigation, adjustment and
legal expenses, but shall not include office expenses and salaries and
expenses of employees and officials of the COMPANY or of outside claim
administrators/adjusters.
Loss adjustment expenses shall not include any expenses incurred by the
COMPANY in bringing
or in defending a Declaratory Action.
Recoveries
The COMPANY shall pay to or credit the REINSURER with the REINSURER'S
portion of any recovery connected with a net loss obtained from
subrogation, or other insurance. Expenses of the COMPANY in obtaining
any such recovery shall be apportioned between the COMPANY and the
REINSURER in the proportion that the benefit to each party from such
recovery bears to the total amount of the recovery.
Any such recoveries subsequent to any loss settlement hereunder shall
be applied as if received prior to the aforesaid loss settlement and
all necessary adjustments in such regard shall be transacted
accordingly.
The REINSURER shall be subrogated to the rights of the COMPANY to the
extent of its loss payments to the COMPANY. The COMPANY agrees to
enforce its right of salvage, subrogation, and its rights against
insurers.
ARTICLE 23 - RULING LAW
It is under stood and agreed between the parties hereto that all the
terms and conditions of this agreement shall be subject to the laws,
statutes, rules and regulations now or hereinafter in effect in the
State of Colorado. It is specifically understood and agreed that any
arbitration, in the event of the insolvency of the COMPANY, shall also
be subject to such laws, statutes, rules and regulations.
<PAGE>
-10-
This Agreement No. 06AC960032 made and executed in Englewood, Colorado
this 26th day
of March, 1996.
GUARANTY NATIONAL INSURANCE COMPANY
s/Lawrence H. Schenk
ATTEST: s/Kathryn J. Booth
And in Stamford, Connecticut, this 15th day of February, 1996
NATIONAL REINSURANCE CORPORATION
s/Lex Smart
Second Vice President
ATTEST: Gerard Anaszewicz
<PAGE>
EXHIBIT A - EXCLUSIONS
This Agreement does not apply to:
1. Reinsurance assumed by the COMPANY, except as respects
intercompany reinsurance;
2. Any 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,
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;
3. Loss or Liability excluded by the Nuclear Incident Exclusion
Clause - Liability -Reinsurance attached to this Agreement.
4. War risk, bombardment, invasion, insurrection, rebellion,
revolution, military or usurped power, or confiscation by order of
any government or public authority, as excluded under a standard
policy containing a standard war exclusion clause;
5. All business derived from any Pool, Association (including Joint
Underwriting Associations), Syndicate, Exchange, Plan, or other
facility directly as a member subscriber, or participant, or
indirectly by way of reinsurance; and,
6. Any risk not placed into the National Reinsurance Treaty No. 3973-
05 for the First $5,000,000 with at least 50% participation by the
COMPANY. Any such business shall be considered for special
acceptance in accordance with the terms of the Article entitled
SPECIAL ACCEPTANCES;
7. All exclusions contained within the referenced Treaty No. 3973-05;
8. Pollution liability, except for hostile fire or upset and
overturn;
9. Environmental impairment Liability;
10. Asbestos as excluded by the COMPANY'S Asbestos exclusion;
11. Automobile liability insurance including garage liability relating
to the ownership, maintenance, or use of:
a. Vehicles leased or rented to others if the lessor's
principle business operation involves the lease or rental of
automobiles;
b. Taxicabs, public or private liveries (except bus fleets
in conjunction with municipalities not subject to exclusion
12.k.);
c. Insureds in the business of long haul for hire with over
20% long haul exposure. "Long haul" is defined as
customarily operating beyond a 300 mile radius;
<PAGE>
-2-
d. Any fleet of 50 or more extra heavy and/or truck tractor
units involved in trucking hire, ready mix concrete, sand and
gravel hauling or flammable fuels hauling;
12. Liability other than automobile insurance relating to risks
involved
a. Any risk with gross receipts greater than $250,000,000;
b. General contractors with gross receipts excess of $50,000,0
c. General contractors whose primary business is residential
home construction
d. Amusement parks, carnivals, and circuses
e. Underground mining operation
f. Tunnel or subway construction;
g. Navigation, towing, construction, repair, conversion,
cleaning, work on, stevedoring demolition, wrecking,
uprighting, or salvage of any commercial vessel, barge, dry
dock oil rig, and any other commercial vessel;
h. Offshore or subaqueous operations;
i. Railroads, including street railways, except sidetrack
agreements;
j. Governmental subdivisions, bodies, authorities, or
agencies over 100,000 people population;
k. Oil and Ps refinery operation
1. Onshore and offshore gas and oil drilling operations;
m. Manufacture of explosives, caps, primers, or detonators
and other similar material fireworks, ammunition, or ammonium
nitrate;
n. Gas and electric utility companies;
o. Shoring, underpinning, or moving, of buildings or structures;
p. Manufacture, blending, mixing, repackaging, relabeling,
handling, or distribution of agricultural and industrial
chemicals;
q. Malpractice or professional liability and/or errors and
omissions insurance including liability of any insurer or
reinsurer for alleged misconduct in the handling of claims or
in any of its dealings with policyholders, except for
incidental malpractice, beauticians, barbers, morticians,
opticians, optometrists, hearing aid specialists, and
clergymens counseling, Emergency Medical Technicians, nurses,
nursing home professional, veterinaries, druggists, personal
trainers and law enforcement legal liability;
<PAGE>
-3-
r. Directors and Officers, Public Officials, Security
Exchange Commission, and ERI liability, except for Public
Officials written in conjunction with a municipality;
s. Liquor law liability other than host liquor when liquor
receipts are greater than 75% of total receipts;
t. Products and completed operations as respects:
1. The manufacture, sale, handling, or
distribution of aircraft, aerospacecraft, satellite and
missiles and parts for. or components of, aircraft,
aerospacecraft, satellites, a missiles;
2. The manufacture, blending, mixing,
repackaging, relabeling, importing, or wholes
distribution of ethical and non-ethical drugs,
cosmetics, and health and beauty aid
3. The manufacture, or wholesale distribution of
tobacco based products; and,
4. The manufacture of all motorized vehicles,
mobile equipment, heavy equipment machinery, home power
tools, and oil drilling equipment;
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE
(1) This reinsurance does not cover any loss or liability
accruing to the COMPANY as a member of, or subscriber to, any
association of insurers or reinsurers formed for the purpose of
covering nuclear energy risks or as a direct or indirect reinsurer of
any such member, subscriber or association.
(2) Without in any way restricting the operation of paragraph (1)
of this Clause, it is understood and agreed that for all purposes of
this reinsurance all the original policies of the COMPANY (new, renewal
and replacement) of the classes specified in Clause H of this paragraph
(2) from the time specified in Clause El 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 May 1, 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 COMPANY on New York risks, until 90 days following
approval of the Limited Exclusion Provision by the
Governmental Authority having jurisdiction thereof.
(3) Except for those classes of policies specified in Clause II
of paragraph (2) and without in any way restricting the operation of
paragraph (1) of this Clause, it is understood and agreed that for all
purposes of this reinsurance the original liability policies of the
COMPANY (new, renewal and replacement) affording the following
coverages:
<PAGE>
-2-
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 (bodily injury, sickness, disease or death
(bodily injury) resulting from the hazardous properties of
bodily injury 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
<PAGE>
-3-
(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 thereat.
IV. As used in this endorsement:
"hazardous properties" include radioactive, toxic or
explosive properties; "nuclear material" means source
material, special nuclear material or by-product material;
"source material", 'special nuclear material", and 'by-
product material" have the meanings given them in the Atomic
Energy Act of 1954 or in any law thereof; "spent fuel" means
any fuel element or fuel component, solid amendatory or
liquid, which has been used or exposed to radiation in a
nuclear reactor; "waste" means any waste material (1)
containing by-product material other than the tailings or
wastes produced by the extraction or concentration of uranium
or thorium. from any ore processed primarily for its source
material content and (2) resulting from the operation by any
person or organization of any nuclear facility included
within the definition of nuclear facility under paragraph (a)
or (b) thereof-, "nuclear facility" means
(a) any nuclear reactor,
(b) any equipment or device designed or used for
(1) separating the isotopes of uranium or plutonium, (2)
processing or utilizing spent fuel. or (3) handling,
processing or packaging waste,
(c) any equipment or device used for the
processing, fabricating or alloying of special nuclear
material if at any time the total amount of such
material in the custody of the insured at the premises
where such equipment or device is located consists of or
contains more than 25 grams of plutonium or uranium 233
or any combination thereof, or more than 250 grams of
uranium 235,
<PAGE>
-4-
(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 selfsupporting chain reaction or to contain a critical mass
of fissionable material; (with respect to iniury to or
destruction of property, the (word "iniury" or "destruction"
("property damage" includes all forms of radioactive
(contamination of property. (includes all forms of
radioactive contamination of property.
V. The inception dates and thereafter of all original
policies affording coverages specified in this paragraph (3),
whether new, renewal or replacement, being policies which
become effective on or after May 1, 1960, provided this
paragraph
(3) shall not be applicable to
(a) Garage and Automobile Policies issued by the
COMPANY on New York risks, or
(b) 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 COMPANY
in Canada and that with respect to such policies this Clause shall be
deemed to include the Nuclear Energy Liability Exclusion Provisions
adopted by the Canadian Underwriters Association or the Independent
Insurance Conference of Canada-
* NOTE. The words underlined 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.
NATIONAL REINSURANCE CORPORATION
ENDORSEMENT NO. 2
Attached to and made a part of the
MULTIPLE LINE EXCESS OF LOSS
AGREEMENT NO. 3973 - 05
between
GUARANTY NATIONAL INSURANCE COMPANY
Englewood, Colorado
LANDMARK AMERICAN INSURANCE COMPANY
Oklahoma City, Oklahoma
COLORADO CASUALTY INSURANCE COMPANY
Englewood, Colorado
SECURITY INSURANCE COMPANY OF HARTFORD
Farmington, Connecticut
STATE AND COUNTY MUTUAL FIRE INSURANCE COMPANY
Waco, Texas
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
Englewood, Colorado
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
Englewood, Colorado
VIKING INSURANCECOMPANY 0F WISCONIN
Madison, Wisconsin
VIKING COUNTY MUTUAL INSURANCE COMPANY
Austin, Texas
(hereinafter collectively referred to as the "COMPANY")
and
NATIONAL REINSURANCE CORPORATION
Stamford, Connecticut
(hereinafter referred to as the "REINSURER")
<PAGE>
-2-
IT IS MUTUALLY AGREED that effective at 12:01 a.m., July 1, 1996, as
respects in force, new and renewal business, this Agreement is
amended as follows:
1. The first paragraph of ARTICLE 16 - TERMINATION is deleted and
replaced by the following:
This agreement is unlimited as to its duration but may be
terminated at any time after December 31, 1997, by either party
giving to the other party ( and to the Insurance Department of
the State of Colorado) hereto not less than 90 days notice of
termination in writing by registered or certified mail.
2. As respects losses occurring after the effective time and date
of this Endorsement SECTION 1 - LIABILITY OF THE REINSURER, of
EXHIBIT A, is deleted in its entirety and replaced by the following:
SECTION 1 - LIABILITY OF THE REINSURER
The REINSURER shall be liable to the COMPANY for the amount of
net loss sustained by the COMPANY in excess of the COMPANY'S
Retention, but not exceeding the Limit of Liability of the
REINSURER as stipulated in the Schedule of Reinsurance.
SCHEDULE OF REINSURANCE
COMPANY Limit of Liability
Class of Business Retention of the Reinsurer
Property $300,000 Each Risk $4,700,000 Each Risk
subject to a maximum
of $9,400,000 in any
one Loss Occurrence
Casualty $400,000 Each $5,600,000
(including Occurrence Each Occurrence
Umbrella)
Combination of $400,000 Each $300,000 Each
above Retentions Combination Loss Combination Loss
Property $600,000 Each Loss $1,400,000 Each Loss
Catastrophe Occurrence Occurrence not to
(involving 2 or exceed $2,800,000 any
more risks) one Agreement Year
Except as provide for in the definition of Net Loss or otherwise
agreed to, in writing, by the REINSURER, the COMPANY shall not
reinsure the COMPANY Retention indicated above but shall retain
such net for its own account.
Recoveries under the Property Per Risk coverage above shall inure
to the benefit of the Property Catastrophe Coverage.
T 3973-05 End. #2 @ 7/1/96
<PAGE>
-3-
3. SECTION 2 - REINSURANCE PREMIUM, of EXHIBIT A, is deleted in
its entirety and replaced by the following:
SECTION 2 - REINSURANCE PREMIUM
The COMPANY shall pay to the REINSURER an annual reinsurance
premium, calculated by applying to the subject written premium a
rate of 10.87%.
4. As of the effective time and date of this Endorsement the
parties hereto shall make all necessary changes to their books
reflecting the decrease in the reinsurance rate.
5. ADDENDUM B - PROSPECTIVE RATING PLAN SCHEDULE AND CONDITIONS is
deleted.
All other terms and conditions remain unchanged.
IN WITNESS WHEREOF, the parties hereto have caused this Endorsement
No. 2 to Agreement No. 3973-05 to be executed in Englewood,
Colorado, in duplicate this 24 day of October, 1996.
GUARANTY NATIONAL INSURANCE COMPANY
s/Roger B. Ware
ATTEST: s/Patricia T. Hemley
And in Stamford, Connecticut, this 24 day of October, 1996
NATIONAL REINSURANCE CORPORATION
s/Don Worthley
Senior Vice President
ATTEST: E. H. Vieux
T 3973-05 End. #2 @ 7/1/96
