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 June 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 August 5, 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 June 30, 1996
Page
Number
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Review Report 3
Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 1996 and
December 31, 1995 4
Consolidated Statements of Earnings for the six months
and three months ended June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows for the six months
ended June 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 June 30, 1996, and the related consolidated statements of
earnings and cash flows for the six-month and three-month periods
ended June 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
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Denver, Colorado
July 24, 1996
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
June 30, December 31,
1996 1995
(Unaudited)
Investments (Note 3):
Fixed maturities held to
maturity, at cost $ 85,470 $ 75,017
Fixed maturities
available for sale, at market 366,044 395,198
451,514 470,215
Equity securities, at market 89,543 85,085
Other long-term investments 12,278 11,521
Short-term investments 64,284 52,257
Total investments 617,619 619,078
Cash 16,091 6,794
Accrued investment income 7,775 7,603
Accounts receivable,
(less allowance of $400 -
1996 and 1995) 52,489 51,638
Reinsurance recoverables
and prepaids, (less
allowance of $200 - 1996
and 1995) (Note 4) 78,762 81,825
Property and equipment
(less accumulated
depreciation of
$11,414 - 1996; $9,326 -
1995) 31,348 31,573
Deferred policy
acquisition costs 42,228 37,637
Goodwill (less
accumulated amortization
of $5,858 - 1996;
$5,263 - 1995) 34,974 33,133
Deferred income taxes 5,792 4,216
Other assets 1,739 1,676
Total assets $888,817 $875,173
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses $294,474 $290,156
Unpaid loss adjustment expenses 62,566 64,478
Unearned premiums 157,428 146,205
Notes payable 102,063 103,000
Reinsurance payables and deposits 6,141 8,290
Other liabilities 47,868 47,493
Total liabilities 670,540 659,622
Commitments and
contingencies (Notes 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 71,935 64,664
Net unrealized investment gains 10,103 15,520
Deferred compensation on
restricted stock (Note 5) (644)
Total shareholders' equity 218,277 215,551
Total liabilities and
shareholders' equity $888,817 $875,173
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
Six Months Ended Three Months Ended
June 30, June 30,
1996 1995 1996 1995
(Unaudited) (Unaudited)
Revenue:
Premiums earned
(Note 4) $234,419 $161,072 $118,949 $81,604
Net investment
income 18,519 13,377 9,266 6,912
Realized investment
gains (losses)
(Note 3) 3,589 359 1,608 (210)
256,527 174,808 129,823 88,306
Expenses:
Losses and loss
adjustment expenses
incurred (Note 4) 168,507 108,573 83,662 55,847
Policy acquisition
costs 60,560 46,187 31,478 23,111
General and
administrative 6,925 3,420 3,397 1,508
Interest 3,403 2,125 1,683 1,069
Other 783 393 495 196
Nonrecurring tender
offer charge
(Note 5) 2,163 2,163
242,341 160,698 122,878 81,731
Earnings before
income taxes 14,186 14,110 6,945 6,575
Income taxes 3,174 3,491 1,720 1,724
Net earnings $11,012 $10,619 $5,225 $4,851
Earnings per
common share $ 0.74 $ 0.87 $ 0.35 $ 0.40
Dividends per
common share $ 0.25 $ 0.25 $0.125 $0.125
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
1996 1995
(Unaudited)
Operating Activities:
Premiums collected $243,895 $157,671
Net investment income collected 18,463 12,820
Losses and loss adjustment expenses
paid (166,909) (106,910)
Policy acquisition costs and general
and administrative expenses paid (72,644) (53,612)
Interest paid (3,372) (2,767)
Federal income taxes paid (6) (3,307)
Nonrecurring tender offer charge (102)
Other receipts (57) 3,926
Net cash provided by operating
activities 19,268 7,821
Investing Activities:
Maturities of fixed maturities held to
maturity 2,000 7,646
Maturities of fixed maturities
available for sale 32,309 752
Sales of fixed maturities available for
sale 31,389 13,377
Sales of equity securities 17,811 7,334
Net change in short-term investments (11,925) 11,414
Sales of property and equipment 264 173
Purchases of fixed maturities held to
maturity (12,858) (4,938)
Purchases of fixed maturities available
for sale (43,944) (24,598)
Purchases of equity securities (17,397) (4,489)
Net change in other long-term
investments (757) 163
Acquisition of subsidiaries (802)
Purchases of property and equipment (2,238) (1,240)
Net cash, provided by (used in)
investing activities (5,346) 4,792
Financing Activities:
Repayment of notes payable (938) (53,000)
Proceeds from sale of common stock 24,247
Proceeds from issuance of notes payable 28,616
Dividends paid (3,741) (3,012)
Proceeds from exercise of stock options 54 550
Net cash (used in) financing activities (4,625) (2,599)
Net increase (decrease) in cash 9,297 10,014
Cash, beginning of period 6,794 9,609
Cash, end of period $16,091 $19,623
Non-Cash financing transactions:
Conversion of Orion debt $ $(8,667)
Issuance of common stock 2,652
Conversion of Orion debt from treasury
stock 6,015
Restricted stock forfeitures 81
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Six and Three Months Ended June 30, 1996
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 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 six months ended June 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
14,967,244 and 12,167,310 for the six months ended June 30, 1996
and 1995, and 14,972,525 and 12,274,530 for the three months
ended June 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 June 30, 1996 and December 31, 1995, the estimated
aggregate fair value of fixed maturities held to maturity was
$85,653,000 and $77,143,000, respectively, the cost of fixed
maturities available for sale was $365,097,000 and $383,135,000,
respectively, and the cost of equity securities was $74,947,000
and $73,271,000, respectively. At June 30, 1996 and December 31,
1995, the Company had investments in non-investment grade
securities with a cost of $49,384,000 and $36,641,000, which are
carried at fair values of $48,359,000 and $36,356,000,
respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Six and Three Months Ended June 30, 1996
Realized investment gains (losses), which include gains
(losses) on calls and maturities of fixed maturities, for the six
and three months ended June 30, 1996 and 1995, and write downs
for other-than-temporary investment impairments of approximately
$434,000 and $300,000 for the six and three months ended June 30,
1996, and approximately $750,000 for the six and three months
ended June 30, 1995, are as follows (in thousands):
Six Months Ended Three Months Ended
June 30, 1996 June 30, 1996
Fixed maturities held
to maturity:
Gains $ $
Losses
Fixed maturities available
for sale:
Gains 948 288
Losses (203) (183)
745 105
Equity securities:
Gains 4,048 2,242
Losses (1,204) 739
2,844 1,503
Total $3,589 $1,608
Six Months Ended Three Months Ended
June 30, 1995 June 30, 1995
Fixed maturities held
to maturity:
Gains $ 40 $ 40
Losses (269) (261)
(229) (221)
Fixed maturities available
for sale:
Gains 1,014 986
Losses (1,940) (1,940)
(926) (954)
Equity securities:
Gains 2,060 1,001
Losses (546) (36)
1,514 965
Total $ 359 $ (210)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Six and Three Months Ended June 30, 1996
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. Such reinsurance arrangements serve to
limit the Company's maximum loss per occurrence on individual
risks to $400,000, and for catastrophes to $500,000. Reinsurance
does not discharge the primary liability of the original insurer.
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):
Six Months Ended June 30, Three Months Ended June 30,
1996 1995 1996 1995
Written Earned Written Earned Written Earned Written Earned
Premiums:
Direct $247,392 $240,242 $173,689 $159,283 $122,190 $121,686 $87,072 $82,337
Assumed 22,990 19,276 16,682 25,761 11,153 9,717 8,721 11,636
Ceded (26,027) (25,099) (26,050) (23,972) (12,601) (12,454) (13,294)(12,369)
Net $244,355 $234,419 $164,321 $161,072 $120,742 $118,949 $82,499 $81,604
% Assumed
to Net 9.41% 10.15% 9.24% 10.57%
Incurred Incurred Incurred Incurred
Losses and loss
adjustment
expenses:
Direct $163,275 $117,924 $76,918 $66,857
Assumed 20,096 16,723 15,934 8,610
Ceded (14,864) (26,074) (9,190) (19,620)
Net $168,507 $108,573 $83,662 $55,847
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 announced that it had successfully
completed the Offer, and that it had 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. The
purchase of the tendered shares brings Orion's ownership interest
in the Company to approximately 80.3%, or 12,009,942 of the
current outstanding shares of the Company. 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>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Six and Three Months Ended June 30, 1996
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 brings Orion's ownership level in the
Company to 81.0%.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
As part of the 1995 Viking acquisition, the Company will pay the
Seller, as additional purchase price, two-thirds of any favorable
loss development up to $15,000,000, and one-third of any
favorable development between $15,000,000 and $20,000,000. The
amounts payable will be reduced by 35% to compensate for the
applicable tax rate. Included in the cost of the acquisition was
$3,250,000 paid to the Seller as additional purchase price, in
anticipation of favorable development of Viking's recorded 1994
and prior accident year loss and loss adjustment expense
reserves. The Company and the Seller will initially settle any
additional purchase price as of December 31, 1998, and will
finalize the settlement as of December 31, 2001. If adverse
development results, the Seller will repay to the Company an
offsetting amount, after allowance for the tax adjustment, not to
exceed the initial $3,250,000 paid to the Seller at the time of
acquisition.
Any payments to or receivables from the Seller, as a result of
the positive or negative loss development, will include accrued
interest from the acquisition closing date at an annual rate
equal to 6.28%, for the initial loss development settlement
payment as of December 31, 1998. For the final loss development
settlement payment, as of December 31, 2001, the interest rate
will equal the mid-term Applicable Federal Rate (as defined in
the Internal Revenue Service Code) in effect as of January 1,
1999.
Management estimates that a payment in excess of the $3,250,000
already paid will ultimately be made to the Seller, and has
included an estimated amount of approximately $4,104,000, as well
as the corresponding interest payable, in the accompanying
balance sheet. Loss and loss adjustment expense reserves of
Viking were recorded at the date of acquisition at amounts
consistent with the Company's estimates of the additional
purchase price that will be paid.
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 June 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 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 Six Months of 1996 Compared to the First
Six 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 six months ended June 30, 1996 and
1995, are summarized below:
Six Months Ended
June 30,
1996 1995
(Dollars in thousands)
Personal Lines:
Gross premiums written $127,244 $ 70,777
GAAP combined ratio 99.8% 99.4%
Commercial Lines:
Gross premiums written $105,143 $ 97,393
GAAP combined ratio 103.4% 97.7%
Collateral Protection:
Gross premiums written $ 37,995 $ 22,201
GAAP combined ratio 96.9% 95.9%
Total:
Gross premiums written $270,382 $190,371
GAAP combined ratio 100.7% 98.3%
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 written, as well as
allowing 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, management announced a decision to merge the
Viking and Guaranty National personal lines divisions into one
integrated personal lines unit. The Company will continue to
offer both the Viking one-month down product and the Guaranty
National six-month product. Management believes that the
combination of these complementary products will offer the
broadest range of downpayment and total price options available
in selected markets. Management also feels that providing a
single point of contact for claims handling, processing, customer
service and sales, with respect to these multiple product
offerings, will create efficiencies within the Company. As a
result, personal lines financial information will no longer be
delineated by division.
Personal lines gross premiums written, which includes the
Guaranty National and Viking divisions, increased approximately
80% for the first six months of 1996, compared to the first six
months of 1995. The premium volume growth was a result of the
Viking business, particularly in California. This state had not
been served by the Company before the Viking acquisition. The
state of California represented approximately $39,378,000, or
31%, of the unit's gross premiums written for the six months
ended June 30, 1996. The increase resulting from the California
business was offset by decreases in gross premiums written in
Colorado, Ohio, Virginia and other smaller premium states.
During the first half of 1996, the personal lines unit introduced
new products in Indiana, Minnesota and Oregon, and entered a new
market in Pennsylvania.
The personal lines loss (incurred losses and loss adjustment
expense) ratio for the first six months of 1996 was 74.4%,
compared to 73.0% for the first six months of 1995. The
increased loss ratio was caused mainly by higher claim frequency.
The personal lines expense ratio was 25.4% for the first six
months of 1996, compared to 26.4%
<PAGE>
for the first six months of 1995. The lower expense ratio was
caused primarily by reduced commissions, coupled with continued
efforts to improve operating efficiencies.
During the first six months of 1996, commercial lines gross
premiums written increased approximately 8% when compared to the
same period in the prior year. The overall increase was a
combination of 27% and 13% increases in the gross premiums
written in the specialty and standard divisions, respectively,
offset by a 5% decrease in gross premiums written in the general
division. Approximately 51% of the growth in the specialty
division came from its personal automobile physical damage
program in California, which was implemented in mid-1995. This
program accounted for $6,080,000 of this division's gross
premiums written during the first half of the year. The standard
division growth was from new business generated outside of the
Rocky Mountain region. Although the general division's gross
premiums written declined slightly during the first six months of
1996 when compared to the same period in the prior year, this
division generated higher gross premiums written in the second
quarter than during the first quarter of 1996. Management
believes that this division has begun to stabilize its premium
volume.
For several years, the Company has striven to reduce commercial
automobile liability gross premiums written, which are written
primarily through the general commercial division, and to
increase its other, more profitable, commercial coverages, such
as commercial automobile physical damage, general liability and
property. As a result, commercial automobile liability gross
premiums written decreased to 37% of total commercial lines
premiums for the first six months of 1996, compared to 42% for
the first six months of 1995.
The commercial lines loss ratio for the first six months of 1996
was 70.9%, compared to 67.3% for the same period last year. The
losses incurred and loss adjustment expense components increased
by 3.3 points and 0.3 points, respectively. The higher loss
ratio is primarily due to increased claim frequency and severity
related to specialty automobile programs, as well as a number of
large fire and hail storm losses within the specialty and
standard divisions. The commercial lines expense ratio increased
2.1 points for the first six months of 1996, compared to the same
period last year due to higher contingent commissions and a
slightly-higher front-end commission rate on growing commercial
programs written through the specialty division.
The collateral protection unit's gross premiums written
increased 71% for the first six months of 1996, compared to the
first six months of 1995, due primarily to geographic expansion
into the Northeast and its newest product, mortgage fire. The
Company does not expect the same percentage increase in this
unit's premium growth over the second half of 1996, as compared
to the first half of 1996.
The collateral protection unit's loss ratio was 63.5% and 49.5%
for the first six months of 1996 and 1995, respectively. The
majority, or 12.9 points, of the increase related to the losses
incurred component, while the remainder was attributable to the
loss adjustment expense component. The increased loss ratio is
due to higher loss experience in the Northeast blanket and the
Puerto Rico collateral protection programs, as a result of
increased loss frequency. In an effort to improve this unit's
loss ratio, the Company implemented underwriting and pricing
adjustments in the Northeastern United States, and the
problematic Puerto Rico account was canceled. The unit's expense
ratio decreased 13.0 points for the first six months of 1996,
compared to the first six months of 1995, due most significantly
to a reduction in agency commissions, which are proportionately
reduced by the increased loss ratio, which is discussed above.
The Company operates under a 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. This
primary reinsurance contract for 1996 is with National
Reinsurance Corporation ("NRC"), and serves to limit the
Company's maximum loss per occurrence on individual risks to
$400,000, and for catastrophes to $500,000. The Company also 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 NRC reinsurance contract, discussed above, is scheduled to
terminate in 1998, but is cancelable upon a change in control of
NRC. NRC has entered into a definitive merger agreement with
General Reinsurance Corporation. Once this merger is effective,
the Company plans to renegotiate its reinsurance coverage with
NRC, and expects a more favorable cost structure with similar
terms and conditions.
<PAGE>
The Company's insurance operating units in total showed
$251,000 of favorable development on 1995 and prior loss
reserves, net of reinsurance, in the first six months of 1996,
compared to $3,473,000 of adverse development in the first six
months of 1995 on 1994 and prior loss reserves, net of
reinsurance. This development equates to (0.2%) and 1.9% of net
loss reserves at the end of the previous years 1995 and 1994,
respectively. The commercial lines and personal lines units had
favorable development of $142,000 and $1,552,000, respectively,
due primarily to "incurred but not reported" losses being less
than expected. The collateral protection unit had adverse
development of $1,443,000, which is mainly attributable to the
increased loss frequency discussed above. This collateral
protection adverse development had only minimal impact on net
earnings because of a corresponding over-accrual of contingent
commissions.
During the first six months of 1996, the Company's known
exposure to environmental losses remained consistent with the
activity reported as of December 31, 1995. Considering the
minimal claim activity to date and the nature of the business
written, primarily commercial automobile coverage, the Company
continues to believe that a material exposure to environmental
losses does not exist.
For the six month period ended June 30, 1996, the Company's
catastrophe losses amounted to approximately $1,040,000, or seven
cents per share, net of tax and reinsurance recoveries. This
compares to catastrophe losses of $737,000, or six cents per
share, net of tax and reinsurance recoveries, during the six
month period ended June 30, 1995. These catastrophic losses
primarily related to storms in the Central United States. The
Company's management believes that its exposure to such
catastrophic losses is limited due to the spread of geographic
coverage and the prudent level of reinsurance retention in the
event of a single loss.
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, or $.12 per share, net of tax,
for expenses related to the Offer. These costs were classified
as nonrecurring in the Company's June 30, 1996 Consolidated
Financial Statements. See Note 5 to the Consolidated Financial
Statements for further discussion of these costs.
Overall, the Company reported net earnings for the first six
months of 1996 of $11,012,000, or $.74 per share, compared to net
earnings for the first six months of 1995 of $10,619,000, or $.87
per share. The decrease in earnings per share resulted from a
2,800,000 increase in the average shares outstanding for the
first six months of 1996, compared to the first six months of
1995. This reflects the shares issued during 1995 for a European
private placement and conversion of subordinated notes to common
stock.
The Company's interest expense increased 60% to $3,403,000 for
the first six months of 1996, compared to the first six months of
1995, due to an overall increase in borrowings during 1995. The
increased borrowings were used to finance the Viking acquisition,
and 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.
Pretax net investment income increased $5,142,000 in the first
six months of 1996, compared to 1995, while after-tax net
investment income increased to $14,405,000 from $10,579,000 for
the same period. These increases are due to an increase in
average invested assets, which resulted primarily from the
addition, effective July 18, 1995, of the Viking investment
portfolio and positive operating cash flow. Viking's investment
portfolio amounted to approximately $177,400,000 at the date of
acquisition.
The investment yield, on an after-tax basis, for the first six
months of 1996 remained constant at approximately five percent.
After-tax realized investment gains in the first six months of
1996 and 1995 were $2,333,000 and $234,000, respectively. The
after-tax realized investment gains for the first six months of
1996 and 1995, include the effects of a $282,000 and $488,000,
respectively, after-tax, permanent investment impairment recorded
by the Company. The increase in after-tax realized investment
gains was attributable to sales from the Company's equities and
fixed maturities available for sale portfolios. During the first
six months of 1996, the strong equity market enabled the Company
to take the realized gains without reducing its total investments
in equities. The sale of fixed maturities available for sale
securities were made in order to reduce the Company's average
duration of its bond
<PAGE>
portfolio. The Company's overall investment portfolio continues
to be invested primarily in fixed maturities and short-term
investments, which represented 84% of the portfolio at both June
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. Such criteria include
investment grade bonds with stated maturities of less than ten
years. The Company classified all of Viking's investment
portfolio, added as of the acquisition date, as securities
available for sale. The unrealized investment gains on fixed
maturities available for sale and on equity securities as of
June 30, 1996, were $947,000 and $14,596,000, respectively. This
compares to unrealized investment gains on fixed maturities
available for sale and on equity securities as of December 31,
1995 of $12,063,000 and $11,814,000, respectively. The market
value of the Company's fixed maturity investments generally
varies inversely with changes in the general level of interest
rates. The market 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 six 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 54% at June 30, 1996, and 55% at December 31, 1995.
The Company continues to maintain a low level of real estate
related investments, consisting primarily of federal agency
mortgage pools.
Results for the Quarters Ended June 30, 1996 and June 30, 1995
Gross premiums written and GAAP combined ratios by operating
unit, for the quarters ended June 30, 1996 and 1995, are
summarized below:
Three Months Ended
June 30,
1996 1995
(Dollars in thousands)
Personal Lines:
Gross premiums written $ 61,962 $ 33,386
GAAP combined ratio 98.8% 99.4%
Commercial Lines:
Gross premiums written $ 53,179 $ 50,184
GAAP combined ratio 102.4% 98.6%
Collateral Protection:
Gross premiums written $ 18,202 $ 12,223
GAAP combined ratio 96.3% 96.3%
Total:
Gross premiums written $133,343 $ 95,793
GAAP combined ratio 99.6% 98.6%
Personal lines gross premiums written increased 86% for the
second quarter of 1996, compared to the second quarter of 1995.
The increase in gross premiums written was due principally to
premium generated from the Viking division, which was offset by a
decline in premiums in several states as a result of significant
rate increases that were implemented over the previous few
quarters. The 0.6 point decrease in the GAAP combined ratio was
caused principally by "incurred but not reported" losses being
lower than expected.
The commercial lines gross premiums written reflected growth
of 6% for the second quarter of 1996, compared to the second
quarter of 1995. The growth was due primarily to increases in
the specialty and standard commercial divisions of 17% and 19%,
respectively, offset by a 5% decrease in the general commercial
division. The commercial lines GAAP combined ratio increased
3.8 points for the second quarter of 1996, compared to the second
quarter of 1995. Of the total increase in the GAAP combined
ratio, 2.4 points was the result of increased expenses due to
higher commissions. The remaining increase was due primarily to
a higher losses incurred component, which is attributable to
higher claim frequency in certain automobile programs, as well as
the frequency of losses incurred from hail storms.
<PAGE>
The collateral protection unit's gross premiums written
increased 49% for the second quarter of 1996, compared to the
second quarter of 1995, due to geographic expansion and two of
its newest products: GAP and mortgage fire. The unit's GAAP
combined ratio remained constant at 96.3% for the three month
period ended June 30, 1996, compared to the same period in the
prior year. The consistent GAAP combined ratio resulted from an
increased loss ratio, which was offset proportionately by a
decreased expense ratio.
Liquidity and Capital Resources
Positive cash flow from operations of $19,268,000 was generated
for the first six months of 1996 compared to $7,821,000 for the
first six months of 1995. The significant increase in operating
cash flow was primarily the result of higher premiums and net
investment income collected, which were offset by increased loss
payments and acquisition expenses related to premium production,
as well as increased interest expense in the first six months of
1996, compared to the same period in 1995. Two items, in
particular, affected the increase in operating cash flow during
the first half of 1996. First, the Company paid $1,720,000 less
in agent contingent commissions, compared to the first half of
1995. The lower contingent commission payments were due to
higher loss ratios and lower profitability in 1995. Second,
during the first six months of 1995 the Company made a
nonrecurring payment of $1,346,000 to Chicago Insurance Company
for collateral protection business ceded to them as part of a
quota share reinsurance agreement. This payment resulted in
decreased operating cash flow during the first half of 1995.
There was no payment of this nature made during the first half of
1996.
Net cash used in investing activities was $5,346,000 for the
first six months of 1996, compared to net cash provided from
investing activities of $4,792,000 for the first six months of
1995. The increase in funds used in investing activities in 1996
relates primarily to increases in all types of investments,
including fixed maturities, equity securities, short and long
term investments. These increased investment acquisitions were
partially offset by cash proceeds received from maturities of
short term and fixed maturity investments, as well as sales of
equity and fixed maturity securities. Overall, the change in
funds provided by investing activities in 1995 compared to funds
used in 1996 corresponds to the increase in cash flow from
operations.
Cash used in financing activities was $4,625,000 and $2,599,000
for the first six months of 1996 and 1995, respectively. The
Company declared and paid a regular quarterly dividend of $.125 a
share in the first two quarters of 1996 and 1995. During the
first six months of 1996, the Company made approximately $938,000
in principal payments on its 6.5% term loan, which was entered
into during 1994 in order to purchase furniture and fixtures for
the home office facility. The Company will continue to make
principal payments on this loan, amounting to $187,500 each
quarter, until it is paid off on April 1, 1999. As of June 30,
1996, the Company had $10,000,000 available under its reducing,
revolving credit facility, which was entered into in 1995 and
used in part to fund the Viking acquisition.
The Company's level of short-term investments was 10.4% and
8.4% of total invested assets at June 30, 1996, and December 31,
1995, respectively. The increase is due to a decision made by
the Company's management to reduce the average duration of its
bond portfolio, as discussed above, and to shift its investment
mix to more liquid investments. In addition, the Company's level
of cash available has increased overall to $16,091,000 at June
30, 1996 from $6,794,000 at December 31, 1995. This significant
increase in cash on hand was principally due to the funds
received from the sale of investments, as discussed above, as
part of its effort to reduce the duration of the Company's
investment portfolio. Overall, the Company maintains sufficient
liquidity in its investment portfolio through its short-term
investment holdings to meet operating cash payment 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 $4,104,000,
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 announced that it had consummated its
cash tender offer, which is 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,
<PAGE>
1996, Orion purchased an additional 120,000 shares of the
Company's common stock in the open market, bringing its ownership
percentage of the Company to 81%. See Note 5 to the Consolidated
Financial Statements for further discussion related to these
Orion transactions.
As a result of Orion's tender offer, the Company, together with
one or more of its directors, and Orion, were named as defendants
in 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 at the end of
the year. In addition, on this same date, the Company's Board of
Directors approved two other appointments. First, Larry D.
Hollen, president and chief operating officer of Orion, was
elected to the new post of vice chairman of the Company's Board
of Directors. Second, W. Marston Becker, vice chairman and
chairman and CEO-elect of Orion, was also elected to the
Company's Board of Directors. Mr. Becker's election increases
the number of the Company's directors from eleven to twelve.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is routinely engaged in litigation incidental to
its business. At June 30, 1996, there were three lawsuits
outstanding, which were related to the Orion Offer. However,
subsequent to June 30, 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 June 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
At the Annual Meeting of Shareholders held on May 15, 1996,
14,961,354 shares of Guaranty National Corporation's ("Guaranty")
Common Stock were outstanding and entitled to vote (the
"Outstanding Common Stock"), and a quorum of 13,139,177 shares of
the Outstanding Common Stock or 87.8% were represented at the
meeting in person or by proxy. At that meeting, the following
nominees were elected as the Board of Directors of Guaranty:
Number of Shares Number of Shares
Voted For Withheld
Alan R. Gruber 13,113,391 25,786
Larry D. Hollen 13,113,391 25,786
Robert B. Sanborn 13,114,391 24,786
William J. Shepherd 13,116,391 22,786
Roger B. Ware 13,114,391 24,786
Carroll D. Speckman 13,111,391 27,786
Richard R. Thomas 13,114,391 24,786
Dennis J. Lacey 13,111,391 27,786
M. Ann Padilla 13,111,391 27,786
Tucker Hart Adams 13,111,041 28,136
James R. Pouliot 13,116,391 22,786
Consequently, all directors received the affirmative vote of at
least 13,111,041 shares, or 87.6%, of the Outstanding Common
Stock (99.8% of the shares voted at the meeting). The
appointment of Deloitte & Touche LLP as the auditors of Guaranty
for 1996 was ratified by the affirmative vote of 13,046,859
shares, or 87.2%, of the Outstanding Common Stock (99.3% of the
shares voted at the meeting), with 87,018 shares voting against
the proposal and 5,300 shares abstaining. There were no "broker
non-votes" on either of the two proposals.
ITEM 5. OTHER INFORMATION
None
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 100% Quota Share Reinsurance Treaty between
Viking County Mutual Insurance Company, Texas, and
Landmark American Insurance Company, Oklahoma.
10.2 Multiple Line Excess of Loss Agreement No.
3973-05 between National Reinsurance Corporation and
Guaranty National Insurance Company and its subsidiaries
and affiliates and Viking Insurance Company of
Wisconsin and its affiliate, which replaces and continues the
previous Multiple Line Excess of Loss Reinsurance Agreement No
3973-05 which became effective of January 1, 1993 and was
subsequently amended by Endorsements numbered 1
through 14.
10.3 Endorsement No. 1, dated April 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.
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: August 5, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM GUARANTY NATIONAL CORPORATION'S FINANCIAL STATEMENTS FOR THE SIX
MONTHS ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 366,044
<DEBT-CARRYING-VALUE> 85,470
<DEBT-MARKET-VALUE> 85,653
<EQUITIES> 89,543
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 617,619
<CASH> 16,091
<RECOVER-REINSURE> 75,728
<DEFERRED-ACQUISITION> 42,228
<TOTAL-ASSETS> 888,817
<POLICY-LOSSES> 357,040
<UNEARNED-PREMIUMS> 157,428
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 102,063
0
0
<COMMON> 136,239
<OTHER-SE> 82,038
<TOTAL-LIABILITY-AND-EQUITY> 888,817
234,419
<INVESTMENT-INCOME> 18,519
<INVESTMENT-GAINS> 3,589
<OTHER-INCOME> 0
<BENEFITS> 168,507
<UNDERWRITING-AMORTIZATION> 60,560
<UNDERWRITING-OTHER> 6,925
<INCOME-PRETAX> 14,186
<INCOME-TAX> 3,174
<INCOME-CONTINUING> 11,012
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,012
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.74
<RESERVE-OPEN> 286,339
<PROVISION-CURRENT> 168,824
<PROVISION-PRIOR> (317)
<PAYMENTS-CURRENT> 82,859
<PAYMENTS-PRIOR> 84,050
<RESERVE-CLOSE> 287,937
<CUMULATIVE-DEFICIENCY> (317)
</TABLE>
100% QUOTA SHARE REINSURANCE TREATY
between
VIKING COUNTY MUTUAL INSURANCE COMPANY
Texas
and
LANDMARK AMERICAN INSURANCE COMPANY
Oklahoma
PREAMBLE:
This Reinsurance Treaty (hereinafter called the "Agreement")
is made as of September 1, 1995, to be effective as of
September 1, 1995 by and between VIKING COUNTY MUTUAL INSURANCE
COMPANY, a Texas mutual insurance company (hereinafter called the
"COMPANY"), on the one part, and LANDMARK AMERICAN INSURANCE
COMPANY (hereinafter called the "REINSURER"), on the other part.
NOW THEREFORE, in consideration of mutual undertakings set
forth below and other good and continuing relationships between
the parties hereto, it is hereby agreed as follows:
ARTICLE I
REINSURANCE OBLIGATION:
A. The Company obligates itself to cede to the REINSURER,
and the REINSURER obligates itself to accept as pro-rata
participating reinsurance of the COMPANY, 100% of the COMPANY's
gross liability under all policies, contracts, binders, or
agreements (hereinafter called "policies"), of automobile
liability and physical damage insurance issued by the COMPANY
during the term of this AGREEMENT through the independent agents
appointed by the COMPANY and approved by the REINSURER.
B. This Agreement is limited to risks originating in the
State of Texas.
C. All policies, endorsement forms, and rates and
underwriting rules used by the COMPANY on business, coming within
the scope of this AGREEMENT, shall be submitted by the COMPANY to
the REINSURER for the REINSURER's prior approval before their
usage by the COMPANY.
ARTICLE II
COMMENCEMENT OF LIABILITY:
The liability of the REINSURER shall commence obligatorily
and simultaneously with that of the COMPANY as soon as the
COMPANY becomes liable, and the premium on account of
<PAGE>
such liability shall be credited to the REINSURER from the
original date of the COMPANY's liability.
ARTICLE III
REINSURANCE FOLLOWS PRIMARY POLICIES:
All reinsurance for which the REINSURER shall be liable, by
virtue of this Agreement, shall be subject, in all respects, to
the same rates, terms, conditions, interpretations, waivers, the
exact proportion of premiums paid to the COMPANY without any
deduction for brokerage, and to the same modifications,
alterations, and cancellations, as the respective insurance of
the COMPANY to which such reinsurance relates, the true intent of
this AGREEMENT being that the REINSURER shall in every case to
which this AGREEMENT applies and in the proportion specified
herein, follow the fortunes of the COMPANY.
ARTICLE IV
COMMISSIONS. PAYMENTS, AND ASSESSMENTS:
A. It is agreed that the COMPANY shall pay a ceding
reinsurance premium monthly of 100% of the net premiums written
(i.e., premiums less cancellations and all other return
premiums), less ceding commission as set forth below, to be paid
monthly. Policy fees shall be included in the net premiums
written.
It is understood that the REINSURER will allow a ceding
commission to the COMPANY of .75% of net written premium for each
month.
Upon termination of this AGREEMENT, the fee shall become
fully earned, and there shall be no return of unearned fee during
the run-off of the business when net return premiums are being
processed.
The ceding commissions or brokerage fee set out above shall
be paid to the COMPANY each month.
B. The REINSURER shall reimburse the COMPANY for all the
commissions allowed to the producing agents of business under
their contracts with the COMPANY. On all return premiums, the
COMPANY, to the extent received by it from the agents, shall
return to the REINSURER at the same rate of advance commission as
paid by the COMPANY to producing agents. In addition to such
reimbursements, the REINSURER shall pay premium taxes at the
applicable rate to the COMPANY monthly.
<PAGE>
C. The REINSURER shall indemnify and reimburse the COMPANY
for 100% of any assessment made on the COMPANY by the
Commissioner of Insurance of Texas, including, but not limited
to, those for taxes, guarantee funds, or pursuant to the
provisions of Article 21.28C (Texas Property and Casualty
Insurance Guaranty Act) of the Texas Insurance Code, or any
amendment or revision thereof, which assessment is applicable to
or based on the risks reinsured hereunder. The REINSURER shall
be entitled to receive from the COMPANY on or prior to the 31st
day of March of each year thereafter a sum equal to the premium
tax credit that is taken by or could be taken by the COMPANY with
respect to such assessment. The COMPANY shall promptly return to
the REINSURER any amount of such assessment refunded to or
credited to the COMPANY pursuant to the provisions of such
Article 21.28C of the Texas Insurance Code.
ARTICLE V
LOSS SETTLEMENTS:
A. The REINSURER shall assume 100% of the risks covered by
this AGREEMENT and shall be liable for 100% of all losses,
judgments, settlements, and expenses incurred by the COMPANY in
connection with the investigation or settlement or contesting the
validity of claims or losses covered under this AGREEMENT; the
REINSURER shall, on the other hand, be credited with 100% of any
amounts received by the COMPANY as salvage or recovery.
B. The COMPANY will immediately notify REINSURER of any
claim, suit, or action against the COMPANY under any of the
policies, and will immediately furnish to REINSURER all summons,
citations, complaints, petitions, counterclaims, and other
pleadings and legal instruments served upon COMPANY in connection
therewith. Upon request, COMPANY shall furnish to the REINSURER
any or all documents and correspondence relating to the subject
matter hereof.
C. All records pertaining to claims arising under
insurance policies issued by the COMPANY under this AGREEMENT,
shall be deemed to be jointly owned records of the COMPANY and
the REINSURER, and shall be made available to the COMPANY or the
REINSURER or its representatives or any duly appointed examiner
for any State within the United States. The COMPANY and the
REINSURER agree that neither will destroy any of such records in
their possession without the prior written approval of the other.
<PAGE>
D. The COMPANY shall establish a separate claim register
or method of registering claims arising under the policies
covered by this AGREEMENT so that all claims may be segregated
and identified separate and apart from other records of the
COMPANY, with such claim register to identify each claim on an
individual case basis both as to identity of the insureds) and
the claimant and the reserve for loss and adjusting expense.
Such claim register shall be kept in a form whereby the
REINSURER, can, at anytime, determine the status of any claim
arising under policies of insurance covered by this AGREEMENT.
Such records shall reflect whether or not an individual claim is
opened or closed, and if open, the amount of reserves established
for the individual claim and the date when such reserve was
established for the individual claim and the date when such
reserve was established, and if closed, whether such claim was
closed with or without payment and if with payment, the amount
paid thereon.
ARTICLE VI
OTHER DUTIES OF REINSURER:
A. In addition to the other duties of REINSURER expressed
or implied herein, REINSURER shall be totally responsible for
reimbursing the COMPANY for expenses associated with the
Company's conducting business on behalf of the Reinsurer,
including but not limited to commissions, premium taxes,
guarantee funds and other assessments.
B. REINSURER shall perform its obligations under this
AGREEMENT in compliance with Texas law, regulations, or
directives from the Board of Insurance, and shall cooperate with
the COMPANY to the extent necessary to permit the COMPANY to
comply with such law, regulations, or directives.
C. REINSURER shall guarantee payment to the COMPANY of any
premium or other amounts due to the COMPANY from any agent
appointed pursuant to the terms of the attached agency
agreements. Reinsurer shall be solely responsible for notifying
such agents of this AGREEMENT and of any termination hereof, and
for the consequences of any failure to provide such notification.
D. REINSURER hereby promises and undertakes to indemnify
and save the COMPANY harmless from and against every claim,
demand, liability, loss, damage, cost, charge, counsel fee, suit,
order, judgment, and adjudication whatsoever incurred by the
COMPANY in connection with or arising out of this AGREEMENT or
the conduct of the agents appointed hereunder.
<PAGE>
ARTICLE VII
ERRORS AND OMISSIONS:
The COMPANY shall not be prejudiced, in any way, by any
omission through clerical error, accident, or oversight to cede
to the REINSURER any reinsurance rightly falling to its share
under the terms of this AGREEMENT, or by erroneous cancellation,
either partial or total, of any cession, or by omission to
report, or by erroneously reporting any losses, or by any other
error or omission, but any such error or omission shall be
corrected immediately upon discovery.
ARTICLE VIII
RATES AND UNDERWRITING:
A. Initial rates and underwriting rules for insurance
written under this AGREEMENT have been determined by agreement
between COMPANY and REINSURER, and the rates so agreed upon have
been duly filed by COMPANY with the State Board of Insurance.
REINSURER and COMPANY agree that they are in possession of exact
copies of such rates so filed.
B. The parties hereto agree that this AGREEMENT is
initially predicated on the rates so determined and that
REINSURER would and could not reasonably agree to this
Reinsurance Contract except as it is predicated on rates which
are predetermined and agreed upon by the parties hereto.
Subsequent changes in rates or underwriting rules must be agreed
upon by COMPANY and REINSURER. If COMPANY and REINSURER fail to
agree on rates and underwriting revisions, this AGREEMENT can be
terminated by either party in the manner set forth herein.
ARTICLE IX
ACCOUNTS AND REPORTS:
The COMPANY shall furnish, or cause to be furnished to, the
REINSURER, within forty-five (45) days after the close of each of
the respective periods indicated below (on forms agreeable to
both parties hereto), with monthly, quarterly, and annual reports
showing the following statistical data in respect to the business
reinsured hereunder:
Monthly.
(a) Net premiums written (i.e., gross less returns during
the month).
(b) Net losses paid (i.e., gross losses less salvages and
other recoveries during the month).
<PAGE>
(c) Incurred losses and loss payments.
(d) Net loss adjustment expenses paid during the month.
(e) Ceded commission of .75% of net written premiums.
Quarterly, with the data segregated by major classes.
(a) Original premiums, and the unearned premiums thereon, on
business in force hereunder at the close of the quarter.
(b) Estimated net losses and net loss adjustment expenses
outstanding at the end of the quarter.
Thereafter, within forty-five (45) days after the end of
each month, the debtor party shall pay in cash to the creditor
party the ceding commission outlined in Article IV and the
premiums and losses outlined above.
Annually, with the data segregated by major classes.
Annual summaries of net premiums written, net losses paid,
net adjusting expenses paid during the year in such form so
as to enable the REINSURER to record such data in its
convention annual statement. Such information to be
furnished not later than February 15th of the following
year.
Other Data.
In order to facilitate the handling of the business
reinsured under this AGREEMENT, the COMPANY agrees to furnish the
REINSURER with any additional reports necessary to provide the
information needed by the REINSURER to prepare its monthly,
quarterly, and annual statements to regulatory authorities.
ARTICLE X
ACCESS TO COMPANY'S RECORDS:
The REINSURER, or its duly appointed representatives, shall
have free access, at any and all reasonable times, to such books
and records of the COMPANY and its departmental or branch offices
as shall reflect premium and loss transactions of the COMPANY for
the purpose of obtaining any and all information concerning this
AGREEMENT or the subject matter thereof
<PAGE>
ARTICLE XI
TERM AND CANCELLATION:
A. This AGREEMENT shall take effect as of 12:01 a.m.,
Standard Time, as per the COMPANY's original policies, on
September 1, 1995, and shall remain continuously in force unless
canceled in accordance with the following conditions:
1) This AGREEMENT may be canceled as of any date by either
party giving the other party at least ninety (90) days advance
written notice by Certified Mail of the intent to cancel.
2) This AGREEMENT may also be canceled immediately by mutual
consent or in the event of insolvency of either party.
Interim and final accounting shall be made as set forth in
this AGREEMENT. Notwithstanding the above, the REINSURER shall
be entitled to, and the COMPANY shall account in the manner
herein provided, for all subrogation or salvage recoveries and
all premiums collected on the risk reinsured hereunder, whenever
realized.
B. In the event this AGREEMENT is canceled, the REINSURER
shall continue to participate in all insurance coming within the
terms of this AGREEMENT granted or renewed by the COMPANY up to
the effective date of cancellation, and shall remain liable up to
the natural expiration of the policies for its share of all
losses arising out of all reinsurance in force at the effective
date of cancellation.
C. In the event this AGREEMENT is canceled and terminated,
the REINSURER shall remain liable to and shall, within thirty
(30) days, reimburse the COMPANY for any assessment made upon the
COMPANY by the Commissioner of Insurance of Texas under Article
21.28C (Texas Property and Casualty Insurance Guaranty Act) of
the Texas Insurance Code, which applies to the risks reinsured
hereunder to the effective date of termination. The COMPANY
shall likewise remain liable for and account to the REINSURER for
any recovery of any such assessment under Section 7 or 9 of said
Article, or any credit allowed to it against its premium tax
pursuant to Section 15 thereof, applicable to the risks reinsured
hereunder.
D. Upon the termination of this AGREEMENT, the REINSURER
and the COMPANY shall not be relieved of or released from any
obligation in this AGREEMENT in relationship to payment,
expenses, reports, accounting, and handling, relating to the
outstanding
<PAGE>
business existing on the date of such termination. It is agreed
between the parties that they will cooperate in the handling of
all such business until the business has expired either by
cancellation or by the terms of the policy.
E. It is expressly agreed that the terms, conditions and
obligations of ARTICLES V, VI, and VII shall survive terminations
of this AGREEMENT.
ARTICLE XII
INSOLVENCY:
A. The REINSURER hereby agrees that, in the event of the
insolvency of the COMPANY, this AGREEMENT shall be so construed
that the reinsurance shall be payable directly to the COMPANY or
its liquidator, receiver, or statutory successor by the REINSURER
on the basis of the liability of the COMPANY under the contract
or contracts reinsured without diminution because of the
insolvency of the COMPANY. It is further agreed that the
liquidator, the receiver, or the statutory successor of the
COMPANY shall give written notice to the REINSURER of the
pendency of such claim against the COMPANY on the policy
reinsured within thirty (30) days after such claim is filed in
the insolvency proceedings; that during the pendency of such
claim, the REINSURER may investigate such claim and interpose, at
its own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses which it may deem available
to the COMPANY or its liquidator, receiver, or statutory
successor; that the expense thus incurred by the REINSURER shall
be chargeable, subject to court approval, against the COMPANY as
part of the expense of liquidation to the extent of a
proportionate share of the benefit which may accrue to the
COMPANY solely as a result of the defense undertaken by the
REINSURER.
B. 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 agreement as though such expense had
been incurred by the COMPANY.
C. It is further agreed and understood that as to all
reinsurance made, ceded, renewed, or otherwise becoming effective
hereunder, the reinsurance shall be payable by the REINSURER
directly to the COMPANY or its liquidator, receiver, or statutory
successor, except (a) where the contract specifically provides
another payee of such reinsurance in the event of the insolvency
of the COMPANY and (b) where the REINSURER, with the consent of
the direct
<PAGE>
insured or insureds, has assumed such policy obligations of the
COMPANY as direct obligations of the REINSURER to the payees
under such policy and in substitution for the obligations of the
COMPANY to such payee.
ARTICLE XIII
ARBITRATION:
As a condition precedent to any right of action hereunder,
in the event of any difference of opinion hereafter arising with
respect to this AGREEMENT, it is hereby mutually agreed that such
dispute or difference of opinion shall be submitted to
arbitration, one arbitrator to be chosen by the COMPANY, one by
the REINSURER, and an umpire, to be chosen by the two arbitrators
before they enter upon arbitration. In the event of either party
refusing or neglecting to appoint an arbitrator within ninety
(90) days after the other party requests it to do so, or if the
arbitrators fail to appoint an umpire within sixty (60) days
after they have accepted their appointments, such arbitrator or
umpire, as the case may be, shall, upon the applications of
either party, be appointed by the Commissioner of Insurance of
the State of Texas, and the arbitrator and the umpire shall
thereupon proceed to the reference as stipulated. The
arbitrators shall consider this AGREEMENT as an honorable
engagement rather than merely as a legal obligation and they are
relieved of all judicial formalities and may abstain from
following the strict rules of the law. The decision of the
arbitrators shall be final and binding on both parties, but
failing to agree, they shall call in the umpire and the decision
of the majority shall be final and binding on both parties. Each
party shall bear the expense of its own arbitrator and shall
jointly and equally bear with the other the expense of the umpire
and of the arbitration. Any such arbitration shall take place,
at some location mutually agreed to by the parties to this
AGREEMENT.
ARTICLE XIV
THE CONTRACT:
A. This is an AGREEMENT solely between Viking County
Mutual Insurance Company and Landmark American Insurance Company.
The acceptance of reinsurance hereunder shall not create any
right or legal relation whatsoever between Landmark American
Insurance Company and the insured under any policy of Viking
County Mutual Insurance Company for a risk which has been
reinsured hereunder.
<PAGE>
B. All acts and payments under this AGREEMENT are
performable and payable at the offices of the COMPANY in Madison,
Wisconsin. The address of the COMPANY, for the purpose of the
AGREEMENT, is 8501 Excelsior Drive, Madison, Wisconsin 53717.
The address of the REINSURER is 9800 South Meridian Boulevard,
Englewood, Colorado 80112.
IN WITNESS WHEREOF, this AGREEMENT is made and executed in
duplicate as of the day and year first written above.
VIKING COUNTY MUTUAL INSURANCE COMPANY
8501 Excelsior Drive
Madison, Wisconsin 53717
By s/Gregory S. Goodrich
Gregory S. Goodrich, Senior Vice President
LANDMARK AMERICAN INSURANCE COMPANY
9800 South Meridian Boulevard
Englewood, Colorado 80112
By s/Michael L. Pautler
Michael L. Pautler, Senior Vice President
NATIONAL RE CORPORATION
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 OF CALIFORNIA
Englewood, Colorado
VIKING INSURANCE COMPANY OF WISCONSIN
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>
MULTIPLE LINE
EXCESS OF LOSS 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 2
6 LOSS IN EXCESS OF ORIGINAL POLICY LIMITS 2
7 EXTRA CONTRACTUAL OBLIGATIONS 2
8 WARRANTIES 3
9 CLAIM REPORTS 3
10 LOSS SETTLEMENTS 4
11 OFFSET 4
12 STATISTICS 4
13 ERRORS AND OMISSIONS 4
14 ACCESS TO COMPANY RECORDS 5
15 TAXES 5
16 TERMINATION 5
17 COMMUTATION 6
18 ARBITRATION 6
19 INSOLVENCY 7
20 DEFINITIONS 7
21 RULING LAW 11
22 NOTICE TO REINSURANCE DEPARTMENT 11
23 NON-COLORADO DOMICILED COMPANIES 11
EXHIBIT A
FIRST MULTIPLE LINE
SECTION PAGE #
1 LIABILITY OF THE REINSURER 1
2 REINSURANCE PREMIUM 2
3 COMMISSION 2
4 PREMIUM REPORTS AND REMITTANCES 2
EXHIBIT B
CASUALTY CLASH/PROPERTY CATASTROPHE
SECTION PAGE #
1 LIABILITY OF THE REINSURER 1
2 REINSURANCE PREMIUM 1
3 COMMISSION 2
4 PREMIUM REPORTS AND REMITTANCES 2
5 REINSTATEMENT 2
ATTACHMENTS:
ADDENDUM A - EXCLUSIONS
ADDENDUM B - PROSPECTIVE RATING PLAN AND CONDITIONS
Nuclear Incident Exclusion Clauses - Liability - Reinsurance and
Physical Damage - Reinsurance
<PAGE>
-1-
It is understood and agreed between the COMPANY and
the REINSURER that this Agreement replaces and
continues the previous MULTIPLE LINE EXCESS OF LOSS
REINSURANCE AGREEMENT NO. 3973-05 which became
effective on January 1, 1993 and was subsequently
amended by Endorsements Numbered 1 through 14, and
that this Agreement (although it may modify) in no
way interrupts the continuity of such previous
Agreement, especially as regards any premium
adjustment provisions.
ARTICLE 1 - 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 parties
with respect to the business being reinsured hereunder and the
obligations of the parties are determined solely by the terms of
this Agreement. Any change or modification to this Agreement shall
be made by written amendment to the Agreement and signed by both
parties hereto.
ARTICLE 2 - COMMENCEMENT
This Agreement shall become effective at 12:01 a.m., Standard Time,
January 1, 1996, as respects in force, new and renewal business of
the COMPANY for losses occurring on or after such time and date and
shall remain in force thereafter, subject to the terms and
conditions for termination stipulated in the article entitled
TERMINATION.
ARTICLE 3 - BUSINESS COVERED
The REINSURER, subject to the terms and conditions hereunder,
inclusive of the EXHIBITS and ADDENDA attached hereto, agrees to
indemnify the COMPANY in respect of the net excess liability
stipulated in this Agreement which may accrue to the COMPANY as a
result of each loss on any one risk as respects Property Business,
and as a result of one or more losses arising out of any occurrences
as respects Casualty Business, which may occur during the currency
of this Agreement under any and all binders, policies, or contracts
of insurance issued by the COMPANY (all hereinafter referred to as
'policies') and classified by the COMPANY as Property Business or
Casualty Business.
ARTICLE 4 - SPECIAL ACCEPTANCES
Business not within the terms and conditions of this Agreement may
be submitted to the REINSURER for special acceptance and, if accepted by the
REINSURER, shall be subject to all of
<PAGE>
-2-
the terms and conditions of this Agreement except as modified by the
special acceptance.
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 domiciled in the United States of America, its territories
and possessions, the Dominion of Canada, and Mexico, only as
respects the COMPANY'S Mexican Automobile Program covering losses
occurring within the United States.
ARTICLE 6 - LOSS IN EXCESS OF ORIGINAL POLICY LIMITS
One Hundred percent (100%) of any loss in excess of the limit of its
original policy may be included in the COMPANY'S net loss, such loss
in excess of the limit of its original policy having been incurred
because of failure by the COMPANY to settle within the policy limits
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.
However, this Article shall not apply where the loss has been
incurred due to the fraud of a member of the Board of Directors or a
corporate officer of the COMPANY acting individually or collectively
or in collusion with any individual or corporation or any other
organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.
ARTICLE 7 - EXTRA CONTRACTUAL OBLIGATIONS
One Hundred (100%) percent of any Extra Contractual Obligations,
arising from losses occurring during the currency of this Agreement,
shall be included in the calculation of net loss when the REINSURER
is given written notice of said claim. 'Extra Contractual
Obligations" are defined as those liabilities not covered under any
other provision of this Agreement and which arise from the handling
of any claim on business covered hereunder, such, liabilities
arising because of, but not limited to, the following: Failure by
the COMPANY to settle within the policy limit, or by reason of
alleged or actual negligence, fraud or bad faith in rejecting an
offer of settlement or in the preparation of the defense or in the
trial of any action against its insured 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 net loss.
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.
<PAGE>
-3-
ARTICLE 8 - WARRANTIES
It is warranted by the COMPANY that in the event it issues a policy
providing limits in excess of the following respective amounts:
a. Primary Automobile and General Liability $5,000,000
b. Umbrella $5,000,000
c. Property $5,000,000
the excess thereof shall be deemed to have been reinsured elsewhere.
ARTICLE 9 - CLAIM REPORTS
The COMPANY shall give written notice to the REINSURER 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
casualty claims arising under policies with limits in excess of the
COMPANY'S Retention, involving any of the following:
1. Claims having an indemnity reserve equal to or exceeding 50% of
the COMPANY'S Retention;
2. Brain damage or alleged brain damage;
3. Quadriplegics;
4. Paraplegics;
5. Amputations of one or more Limbs or loss of use of one or more
limbs;
6. Major bums;
7. Severe lacerations or disfigurement involving serious cosmetic
deformity;
8. Extended hospital, wheelchair or walker confinement;
9. Fatalities;
10. Severe injuries with high residual impairment;
11. Serious back injury involving multiple surgeries (including
laminectomies/fusions);
12. Loss of sight or hearing;
13. Child molestation; and,
<PAGE>
-4-
14. High wage loss or total loss of economic livelihood.
On open claims, follow up reports shall be submitted every six
months. 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.
The COMPANY shall furnish the REINSURER, upon request, paid and
outstanding losses and loss adjustment expenses, subject to this Agreement,
with respect to catastrophe losses.
ARTICLE 10 - 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. Additionally, as respects EXHIBIT A coverage, the
COMPANY shall first exhaust the funds Held Account, up to the agreed
upon amounts, before seeking recovery hereunder.
ARTICLE 11 - OFFSET
The COMPANY or the REINSURER may offset any balance allowed by
Colorado law, statute or regulation, 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 or any other agreement heretofore or hereafter
entered into between the COMPANY and the REINSURER, whether acting
as assuming reinsurer or ceding company. This right of offset shall
not be affected by the insolvency of either the COMPANY or the
REINSURER.
ARTICLE 12 - 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.
ARTICLE 13 - ERRORS AND OMISSIONS
The REINSURER shall not be relieved of liability because of an error
or accidental omission by the
<PAGE>
-5-
COMPANY in reporting any claim, loss, or any business reinsured
under this Agreement, provided that the error or omission is
rectified promptly after discovery and the REINSURER'S rights
hereunder have not been prejudiced. The REINSURER shall be
obligated only for the return of the premium paid for business
reported but not reinsured under this Agreement.
ARTICLE 14 - 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 15 - 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 16 - TERMINATION
This Agreement is unlimited as to its duration but may be terminated
at any time after December 31, 1998, 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.
However, the COMPANY or the REINSURER may also 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 notice of termination in writing by registered or certified
mail, in the event of any of the following:
1. If any amount payable under this Agreement becomes more than 30
days overdue. the party due to be paid may terminate this
Agreement;
2. If a state insurance department or other competent authority
has ordered either party to cease writing business, either
party may terminate this Agreement;
3. If either party has become insolvent, or has been put into
liquidation or receivership (whether voluntary or involuntary),
or there have been instituted against it proceedings for the
appointment of a receiver, liquidator, rehabilitator,
conservator, or trustee in bankruptcy or other agent known by
whatever name, to take possession of its assets or control of
its operations, either party may terminate this Agreement;
4. If either party has become merged with, acquired or controlled
by any company, corporation,
<PAGE>
-6-
individual or individuals not controlling that party's
operations previously, the other party may terminate this
Agreement;
5. If either party's policyholder's surplus is reduced to 50% or
less of the amount of its policyholder's surplus at either the
inception of this Agreement or at the latest renewal or
anniversary date of this Agreement, the other party may
terminate this Agreement;
6. If either party has lost any part of, or has reduced its paid
up capital, the other party may terminate this Agreement.
In any instance where the COMPANY or the REINSURER terminates this
Agreement, the REINSURER shall not be liable for losses taking place
after the effective time and date of termination.
ARTICLE 17 - COMMUTATION
The COMPANY may, at its option, commute all outstanding liabilities
(known and/or unknown) under this Agreement as of the time and date
of termination or on each of the next two anniversaries of
termination. In consideration of the COMPANY'S reassumption of all
such liabilities the REINSURER shall return to the COMPANY 100% of
all the earned portion of premiums ceded hereunder during the entire
term of this Agreement, less applicable ceding commission, less paid
losses (including debits to the COMPANY'S Funds Held Account), and
less the applicable reinsurance expenses as follows:
- 6.0% of net written premium ceded, if commuted at termination;
- 11.0% of net written premium ceded, if commuted 12 months after
termination; or,
- 16.0% of net written premium ceded, if commuted 24 months after
termination.
ARTICLE 18 - ARBITRATION
All unresolved differences of opinion between the COMPANY and the
REINSURER relating to this Agreement, including its foliation 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 arbitrator shall name three
candidates within ten days thereafter, two of whom shall be declined
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
<PAGE>
-7-
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.
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 19 - 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 20 - 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
<PAGE>
-8-
deductions for all inuring reinsurance, whether collectible or not,
and all other recoveries, including salvage and subrogation
recoveries. Net loss shall include liability for loss adjustment expenses.
Net loss shall also include any Loss in Excess of Original Policy Limits
and any Extra Contractual Obligations in accordance with the
provisions of the Articles so entitled.
It is agreed, however, that the existence of underlying reinsurance,
if any, placed with the REINSURER, shall be entirely 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.
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 salvage, 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.
Risk
The COMPANY shall establish what constitutes one risk and shall make
such determination based on the peril of fire, provided:
1. A building and its contents, including time element coverages,
shall never be considered more than one risk; and,
2. When two or more buildings and their contents, including time
element coverages, are situated at the same general location, the
COMPANY shall identify on its records at the time of acceptance
by the COMPANY those individual buildings and their contents,
including time element coverages, that are considered to
constitute each risk; if such identification is not made, each
building and its contents, including time element coverages,
shall be considered to be a separate risk.
<PAGE>
-9-
Building
The term "building" shall mean each separately roofed structure
enclosed within exterior walls.
Subject Earned Premium
The term "subject earned premium" shall mean the net earned premium
of the COMPANY in respect of business covered under this Agreement.
The term "net earned premium" shall mean the total of the net
written premium during the period under review, plus the pro rata
unearned premium at the close of the preceding period, less the pro
rata unearned premium at the close of the period under review; said
pro rata unearned premium to be calculated on the monthly pro rata
basis.
The term " net written premium" shall mean gross written premium in
respect of business covered under this Agreement, less return
premium, and less written premium ceded for reinsurance, recoveries
under which inure to the benefit of this Agreement.
Subject Written Premium
The term "subject written premium" shall mean the net written
premium of the COMPANY in respect of business covered under this Agreement.
The term "net written premiums" shall mean gross written premium in
respect of business covered under this Agreement, less return
premium, and less written premium ceded for reinsurance, recoveries
under which inure to the benefit of this Agreement.
Occurrence
As respects Casualty Business, the term "occurrence" shall mean each
accident or occurrence (as such terms may be defined in the
policy(ies) of the COMPANY), or series of such accidents or
occurrences arising out of one event, whether or not involving one
or more of the COMPANY'S policies.
The foregoing notwithstanding, Occupational Disease under Workers'
Compensation provisions shall be deemed to be an occurrence within
the meaning of this Agreement, and each case of an employee
contracting any disease by which the COMPANY may be held liable
shall be considered as constituting a separate and distinct
occurrence. A loss as respects each employee affected by the
disease shall be deemed to have been sustained by the COMPANY at the
date that compensable disability of the employee commenced and at no
other date.
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
which occurs within the area of one state of the United States of
America 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 during any 168 consecutive hours arising
out of and directly occasioned by the same event except that the
term loss
<PAGE>
-10-
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. The maximum
duration of 72 consecutive hours may be extended in respect of
individual losses which occur beyond such 72 consecutive hours
during the continued occupation of an insured's premises by
strikers, provided such occupation commenced during the aforesaid
period.
3. As regards flood, all individual losses sustained by the COMPANY
in a territory forming one and the same river basin. The term
'river basin' means the basin of a river, including the basins of
all tributaries of such river, which flows directly into an
ocean, sound, bay or gulf or into one of the Great Lakes of North
America.
4. 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.
5. 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 1. and 2. above,
the COMPANY may choose the date and time when any such period of
consecutive hours commences, provided that it is not earlier than
the date and time of the occurrence of the first recorded individual
loss sustained by the COMPANY arising out of that disaster, accident
or loss and provided that only one such period of 168 consecutive
hours shall apply with respect to one event.
However, as respects those loss occurrences referred to in 1. and 2.
above, if the disaster, accident or loss occasioned by the event is
of greater duration than 72 consecutive hours, then the COMPANY may
divide that disaster, accident or loss into two or more loss
occurrences provided no two periods overlap and no individual loss
is included in more than one such period and provided that no period
commences earlier than the date and time of the occurrence of the
first recorded individual loss sustained by the COMPANY arising out
of that disaster, accident or loss.
Loss resulting from a combination of two or more of the perils
reinsured under this Agreement at the same time and at the same
general location shall be treated as one loss and not as a separate
loss for each peril.
No individual loss 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.
<PAGE>
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Combination Loss
The term "Combination Loss' shall mean the accumulated COMPANY
retentions resulting from the same event involving a Property Per
Risk and a Casualty loss described in the Schedule of Reinsurance
appearing in EXHIBIT A. It is agreed, however, that not more than
one property risk shall be considered in such accumulation of
COMPANY Retentions.
Agreement Year
The first Agreement Year shall be from 12:01 a.m., Standard Time,
January 1, 1996, to 12:01 a.m., January 1, 1997 and thereafter each
Agreement Year shall consist of 12 months to begin concurrently with
the expiration of the previous Agreement Year.
ARTICLE 21 - RULING LAW
It is understood 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.
ARTICLE 22 - NOTICE TO REINSURANCE DEPARTMENT OF
EXHAUSTED COVERAGE
As respects any coverage hereunder whereby the total annual
liability of the REINSURER is limited by an "annual aggregate limit
of Liability" provision, the REINSURER, in accordance with Colorado
Regulation 3-3-2 Section VIII, D., shall give immediate notice to
the Colorado Insurance Commissioner when such coverage is no longer
available to the COMPANY, due to the exhaustion of such limit.
ARTICLE 23 - NON-COLORADO DOMICILED COMPANIES
It is understood and agreed between the parties hereto that any
reference(s) made to the State of Colorado, its Statutes or its
Department of Insurance shall be understood to be references to
Wisconsin, its Statutes or its Department of Insurance as respects
Viking Insurance Company of Wisconsin and references to California,
its Statutes or its Department of Insurance as respects Guaranty
National Insurance Company of California.
<PAGE>
- 12 -
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in Englewood, Colorado, in duplicate this fifth day of
June, 1996.
GUARANTY NATIONAL INSURANCE COMPANY
s/Roger Ware
ATTEST: s/Patricia T. Hemley
And in Stamford, Connecticut, this third day of June, 1996.
NATIONAL REINSURANCE CORPORATION
s/Don Worthley
ATTEST: s/E.H. Vieux
<PAGE>
EXHIBIT A
FIRST MULTIPLE LINE EXCESS OF LOSS
REFERENCE NO. 3973-O5A
Attached to and Made a part of the
MULTIPLE LINE EXCESS OF LOSS
REINSURANCE AGREEMENT NO. 3973-05
SECTION I - 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
Class of Business COMPANY Limit of Liability
Retention of the REINSURER
Property $400,000 Each Risk $4,600,000
Each risk, subject to
a maximum of
$9,200,000 in any one
Loss Occurrence.
Casualty $400,000 Each $5,600,000
(including Umbrella) Occurrence Each Occurrence
Combination of above $400,000 Each $400,000 Each
Retentions Combination Loss Combination Loss
Property Catastrophe $500,000 Each $1,500,000 Each
(involving 2 or more Loss Occurrence Loss Occurrence
risks) not to exceed
$3,000,000 any
one Agreement
Year
Except as provided 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.
<PAGE>
- 2 -
SECTION 2 - REINSURANCE PREMIUM
The COMPANY shall pay to the REINSURER an annual reinsurance
premium, calculated by applying to the subject written premium a
Gross Base Rate of II. 91 %. Thereafter the annual Gross Base Rate
shall be modified in accordance with the provisions of ADDENDUM B -
PROSPECTIVE BASE RATE ADJUSTMENT FORMULA.
As soon as practicable after the effective time and date of this
Agreement the COMPANY shall cede to the REINSURER 0.77 % of the
subject unearned premium with respect to business the subject matter
hereof already in force at the effective time and date hereof.
SECTION 3 - COMMISSION
The REINSURER shall allow the COMPANY a commission of 32.5 % on
premiums ceded under
this Exhibit.
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.
SECTION 4 - PREMIUM REPORTS AND REMITTANCES
Within 30 days after the end of each month (each quarter as
applicable) during the currency of this Exhibit, the COMPANY shall
report to the REINSURER the subject written premium (indicating the
subject earned portion thereof) for the month (quarter as
applicable) by line of business.
Within 45 days after the end of each quarter during the currency of
this Exhibit, the COMPANY shall remit to the REINSURER the net
earned portion of the reinsurance premium due for the quarter,
calculated as stipulated in the article entitled REINSURANCE
PREMIUM. The REINSURER shall assume the unearned premium reserve as
a liability on its books.
Notwithstanding the foregoing, the COMPANY shall hold, as Funds
Held, during the initial Agreement year S6,000,000, to be deducted
in two equal installments of S3,000,000, from the first and second
quarter remittances. At the beginning of each year thereafter, the
funds held amount shall be mutually agreed upon by the parties
hereto.
<PAGE>
EXHIBIT B
CASUALTY CLASH/PROPERTY CATASTROPHE
EXCESS OF LOSS
REFERENCE NO. 3973-O5B
Attached to and Made a part of the
MULTIPLE LINE EXCESS OF LOSS
REINSURANCE AGREEMENT NO. 3973-05
SECTION I - 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
Casualty $6,000,000 $4,000,000
Each Occurrence Each Occurrence
Property Catastrophe $2,000,000 Each $4,000,000 Each
(involving 2 or more risks) Loss Occurrence Loss Occurrence
The REINSURER'S total annual aggregate Limit of Liability, as
respects the Catastrophe Coverage above shall not exceed $4,000,000
plus the amount of reinstatement the COMPANY may choose to purchase
in accordance with the provisions of the Section entitled
REINSTATEMENT. In no event, however, shall the total aggregate
Limit of Liability, as respects the Catastrophe Coverage, exceed
$8,000,000, unless additional reinstatements are mutually agreed
upon.
Recoveries under the Property Per Risk coverage in Exhibit A shall
inure to the benefit of the Property Catastrophe Coverage.
SECTION 2 - REINSURANCE PREMIUM
The COMPANY shall pay to the REINSURER an annual reinsurance
premium, calculated by applying to the subject written premium for
the annual period a rate of .42%.
<PAGE>
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SECTION 3 - COMMISSION
The REINSURER shall allow the COMPANY a commission of 32.5 % on
premiums ceded under
this Exhibit.
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.
SECTION 4 - PREMIUM REPORTS AND REMITTANCES
Within 30 days after the end of each month (each quarter as
applicable) during the currency of this Exhibit, the COMPANY shall
report to the REINSURER the subject written premium (indicating the
subject earned portion thereof) for the month (quarter as
applicable) by line of business.
Within 45 days after the end of each quarter during the currency of
this Exhibit, the COMPANY shall remit to the REINSURER the net
earned portion of the reinsurance premium due for the quarter,
calculated as stipulated in the article entitled REINSURANCE
PREMIUM. The REINSURER shall assume the unearned premium reserve as
a Liability on its books.
SECTION 5 - REINSTATEMENT
In the event of any portion of the coverage under this Exhibit being
exhausted by loss, the COMPANY, at its option, shall have the amount
so exhausted reinstated for the balance of the term of this
Agreement. The COMPANY agrees to pay to the REINSURER an additional
premium calculated by applying to 100% of the annual reinsurance
premium (deemed to be $250,000) the fraction that the amount so
reinstated bears to the loss stated occurrence limit of liability
(i.e. $4,000,000). Nevertheless, the REINSURER'S liability
hereunder shall never be more than $4,000,000 as respects any one
loss occurrence, nor more than an aggregate of $8,000,000 for the
entire Agreement Year.
Reinstated limits shall not apply to any loss occurrence taking
place prior to the COMPANY giving
notice to the REINSURER of its decision to purchase such reinstated
amounts.
Further reinstatements may be negotiated at terms and conditions to
be mutually agreed upon.
<PAGE>
ADDENDUM A - EXCLUSIONS
This Agreement does not apply to:
1 Reinsurance assumed by the COMPANY, excepting reinsurance of
primary business assumed from affiliated companies;
2. Any loss or damage which is occasioned by war, invasion,
hostilities, acts of foreign enemies, civil war, rebellion,
insurrection, military or usurped power, or martial law, or
confiscation by order of any government or public authority,
but not excluding loss or damage which would be covered under a
standard form of policy containing a standard war exclusion
clause;
3. Policies covering liability of any insurer or reinsurer for
alleged misconduct in the handling of claims or in any of its
dealing with policyholders;
4. Any loss or liability beyond statutory limits accruing to the
COMPANY directly or indirectly from any insurance written by or
through any pool, association, or syndicate, including pools,
associations, or syndicates in which membership by the COMPANY
is required under any statute or regulation, except as provided
in the final paragraph of this Addendum.
5. Any liability of the COMPANY arising from its participation or
membership, whether voluntary or involuntary, in any insolvency
fund.
6. Nuclear Incident as provided in the Nuclear Incident Exclusion
Clauses - Liability Reinsurance and Physical Damage -
Reinsurance, which are attached to and made a part of this
Agreement;
7. Business written on a co-indemnity basis not controlled by the
COMPANY;
8. Fidelity, surety, mortgage impairment, boiler and machinery,
credit and financial guarantee business;
9. Automobile liability insurance including garage liability
relating to the ownership, maintenance, or use of:
a. Vehicles in speed contests or races;
b Vehicles used for the transportation of any explosive
substance (Note: An explosive substance is defined as any
substance manufactured for the express purpose of
exploding as differentiated from other commodities used
industrially which are fortuitously explosive such as
gasoline, celluloid, fuel gases, and dyestuffs);
10. Liability other than automobile insurance relating to risks
involving:
a. Production of motion picture;
b. Tunnel operations;
c. Subway construction or contractors principally engaged in
tunneling over fifty (50) feet;
<PAGE>
-2-
d. Marine wrecking;
e. Offshore or subaqueous operations (gas or oil);
f. Airports or flight operations, not including hot air
balloon operations; and aircraft, except for industrial
aid aircraft that have the following minimum primary
limits: fixed wing aircraft - $1,000,000 per seat or
rotary powered aircraft - $5,000,000 per seat;
g. Malpractice or professional liability and/or errors and
omissions insurance for hospitals (except out-patient
clinics), medical doctors, engineers, and real estate
agents;
h. Advertisers, broadcasters and telecasters liability,
except with respect to coverage afforded by a broad form
general liability endorsement attached to a general
liability policy;
i. Products and completed operations as respects the
manufacture, assembly, sale, handling, or distribution of
aircraft, critical aircraft parts, spacecraft or
spacecraft components;
j. Products recall insurance;
11. Workers' Compensation and Employers Liability Business, except
for Employers Liability written as part of a Commercial
Umbrella Policy;
12. The following kinds of insurance and risks classified by the
COMPANY as Property Business:
a. Insurance against flood or earthquake, when written as
such;
b. Insurance on growing or standing crops, but not including
standing timber;
c. Risks having a total insurable value of more than
$50,000,000;
d. Any collection of fine arts with an insurable value of
$5,000,000 or more;
e. All bridges and tunnels;
f. Mobile homes;
g. All offshore property risks;
h. Railroad property;
i. Ocean marine;
j. Aviation;
<PAGE>
-3-
k. Inland Marine business with respect to the following:
1. Cargo insurance, when written as such, with respect
to ocean, lake, or inland waterway vessels;
2. Commercial negative film insurance and cast
insurance;
3. Drilling rigs;
4. Mining equipment while underground;
5. Radio and television broadcasting towers;
6. Registered mail and armored car insurance; and,
1. Petrochemical risks;
13. In addition to the above the following business is also
excluded as respects per risk property coverage and per
occurrence casualty coverage:
a. Western Re/North Shore property;
b. Collateral protection business;
c. Warranty business;
d. Facultative;
e. Vikco Automobile Physical Damage Program business;
f. Food Borne Illness Program business;
g. Insurance Network Services Automobile Physical Damage
Program; and,
14. All business identified as Med James Personal Automobile
Program Business.
The exclusions set forth in paragraph 10. above shall not apply when
the exposure subject to such exclusion is only incidental to the
major operation of the risk.
The exclusions set forth in paragraph 9. shall not apply where the
COMPANY is obligated to provide coverage by reason of membership in any
Automobile Insurance Plan or Facility.
<PAGE>
ADDENDUM B
PROSPECTIVE RATING PLAN SCHEDULE AND CONDITIONS
a. The rate set forth in SECTION 2 - REINSURANCE PREMIUM appearing
in EXHIBIT A, shall be deemed the BASE RATE.
b. The BASE RATE for each year thereafter shall be determined as
soon as practicable after September 30, 1995, (and each
September 30 thereafter), by applying an Exposure Factor to the
then existing BASE RATE.
c. The Exposure Factor shall represent the change in the Exposure
Rate from the previous year. To arrive at these factors, the
COMPANY and REINSURER shall agree to increased limit factors and
limits profiles to be used.
d. An Experience Factor shall be applied to the above revised BASE
RATE to arrive at the FINAL RATE to be charged for the
subsequent year, subject to a maximum annual increase/decrease
in the BASE RATE of 1.79 (gross) points. It is further agreed
that the BASE RATE increase/decrease for the period from January
1, 1998 through December 31, 1998 shall not exceed 10.0% of the
expiring BASE RATE.
e. The Experience Factor shall be determined from the following
schedules:
As of September 30, 1995, and each year thereafter:
Ultimate Loss Ratio(%) Experience Factor
Less than 77.5 .80
77.5 - 82.4 .85
82.5 - 87.4 .90
87.5 - 92.4 .95
92.5 - 97.4 1.00
97.5 - 102.4 1.05
102.5 - 107.4 1.10
07.5 - 112.4 1.15
Greater than 112.4 1.20
f. The Ultimate Loss Ratio shall be determined as follows:
THE SUM OF:
(1) The actual experience (inclusive of REINSURER'S Factored and
Additional Case Reserves) of the Agreement, consisting of
that portion of loss falling within a range of $700,000
excess of $300,000 each and every occurrence, from the
inception of this Agreement to December 31, 1995, plus that
portion of loss falling within a range of $600,000 excess of
S400,000 each and every occurrence, from January 1, 1996 to
the last day of the year just ended divided by the
appropriate IBNR and development factors, indicated below,
as applicable to each time period.
PLUS,
(2) 106% of the actual experience (inclusive of REINSURER'S
Additional Case
<PAGE>
-2-
Reserves), consisting of that portion of loss in excess of
$1,000,000 each and every occurrence, from the inception of
this Agreement to the last day of the year just ended.
DIVIDED BY:
The REINSURER'S total earned premiums for the period from the
inception of this Agreement to the last day of the year just ended.
g. The above developed rates are net and shall be grossed up for a
commission allowance of 32.5%.
h. IBNR and Development Factors in accordance with the following:
IBNR/DEVELOPMENT FACTOR SCHEDULE
Time Lapse from Inception
of Agreement (in months) Factor
21 .38
33 .47
45 .53
57 .63
69 .73
81 .80
93 .83
105 .86
117 .90
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
(1) This reinsurance does not cover any loss or liability
accruing to the COMPANY, 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 COMPANY, 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 installation, and "critical
facilities" as such, or
(c) Installation 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
(d) Installations other than those listed in paragraph
(2) (c) 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
COMPANY, 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 COMPANY 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 January 1, 1960 this
subparagraph (b) shall only apply provided the said
radioactive contamination exclusion provision has
been approved by the Governmental Authority having
jurisdiction thereof.
<PAGE>
-2-
(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
COMPANY, directly or indirectly, and whether as Insurer or
Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
(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 COMPANY 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) COMPANY to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
<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 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 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 arty 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 amendatory thereof;
'spent fuel" means any fuel element or fuel component,
solid or liquid, which has been used or exposed to
radiation in a nuclear reactor; "waste" means any waste
material (1) containing by-product material other than 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,
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(d) any structure, basin, excavation, premises or place
prepared or used for the storage or disposal of waste,
and includes the site on which any of the foregoing is
located, all operations conducted on such site and all
premises used for such operations; "nuclear reactor' means
any apparatus designed or used to sustain nuclear fission
in a self-supporting chain reaction or to contain a
critical mass of fissionable material;
(with respect to injury to or destruction of property. the
(word 'injury' or 'destruction'
("property damage" includes all forms of radioactive
(contamination of property.
(includes all forms of radioactive contamination
(of property.
V. The inception dates and thereafter of all original policies
affording coverages specified in this paragraph (3),
whether new, renewal or replacement, being policies which
become effective on or after 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. 1
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 OF CALIFORNIA
Englewood, Colorado
VIKING INSURANCE COMPANY OF WISCONSIN
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 -
A. IT IS MUTUALLY AGREED that effective at 12:01 a.m., January
1, 1996, ARTICLE 6 - LOSS IN EXCESS OF ORIGINAL POLICY LIMITS
of this Agreement is deleted and replaced by the following:
ARTICLE 6 - LOSS IN EXCESS OF ORIGINAL POLICY LIMITS
One Hundred percent (100%) of any loss in excess of the limit
of its original policy may be included in the COMPANY'S net
loss, such loss in excess of the limit of its original policy
having been incurred because of failure by the COMPANY to
settle within the policy limits 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.
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 is held to be invalid under
the law of any state, that provision shall be deemed to
comply with the minimum requirements of such law, giving due
consideration to the original intentions of the parties. But
this shall not affect the validity or enforceability of such
original provisions in any other jurisdiction.
B. IT IS MUTUALLY AGREED that effective at 12:01 a.m., April 1,
1996, ADDENDUM A - EXCLUSIONS of this Agreement is amended as
follows:
1. Exclusion 11. is deleted and replaced by the following:
11. Workers' Compensation and Employers Liability
Business, except for Employers Liability written as
part of a Commercial Umbrella Policy or when written as
part of a Package Policy or General Liability Policy in
states having Monopolistic Workers' Compensation Funds;
2. Exclusion 13. is deleted and replaced by the following:
13. In addition to the above the following business is
also excluded as respects per risk property coverage
and per occurrence casualty coverage:
a. Western Re/North Shore property;
b. Collateral protection business;
c. Warranty business;
d. Facultative;
<PAGE>
-3-
e. Vikco Automobile Physical Damage Program business;
f. Insurance Network Services Automobile Physical
Damage Program;
3. The following is added as Exclusion 15.
15. Tuition Guard Program.
All other terms and conditions remain unchanged.
IN WITNESS WHEREOF, the parties hereto have caused this
Endorsement No. 1 to Agreement No. 3973-05 to be executed in
Englewood, Colorado, in duplicate this 22 day of July 1996.
GUARANTY NATIONAL INSURANCE COMPANY
s/Roger Ware
President and Chief Executive Officer
ATTEST: Patricia T. Hemley
And in Stamford, Connecticut, this 15 day of July, 1996.
NATIONAL REINSURANCE CORPORATION
s/Don Worthley
Senior Vice President
ATTEST: Ed Vieux
