UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 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
..............
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $1.00 Par Value New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
None
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
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by non-
affiliates of the Registrant (2,789,405 shares) as of the close of
business on February 28, 1997, was $49,860,614 based on a $17.875
price per share.
As of February 28, 1997, there were 14,975,497 shares of
Registrant's $1.00 par value common stock issued and outstanding
exclusive of shares held by Registrant.
Documents incorporated by reference: The information required
under Part III (Items 10, 11, 12 and 13) of Form 10-K is included
within the definitive proxy statement to be filed within 120 days
after the end of Registrant's Fiscal Year.
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Guaranty National Corporation
Index
Part 1 Page Page
Item 1. Business 3 Item 8. Financial Statements
and Supplementary Data 33
General Description 3
Recent Corporate History 4 Item 9. Changes in and Disagreements
Operations 5 with Accountants on Accounting
Underwriting Activities 5 and Financial Disclosure 58
Claims 9
Reinsurance 10 Part III
Investment Portfolio 10
Reserves 12 Item 10. Directors and Executive
Rating 17 Officers of the Registrant 20, 58
Competition 17
Regulation 17 Item 11. Executive Compensation 58
Employees 19
Item 12. Security Ownership of Certain
Item 2. Properties 19 Beneficial Owners and Management 58
Item 3. Legal Proceedings 19 Item 13. Certain Relationships and
Related Transactions 58
Item 4. Submission of
Matter to a Vote of
Security Holders 19
Information Concerning
Executive Officers of
the Company 20 Part IV
Part II Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K 58
Item 5. Market for
Registrant's
Common Equity and
Related Consolidated FinancialStatements 58
Stockholder Matters 21 Financial Statement Schedules 58
List of Exhibits 59
Item 6. Selected Reports on Form 8-K 63
Financial Data 22
Item 7. Management's
Discussion Signatures of the Registrant 64
and Analysis of
Financial Condition
and Results of Operations 24 Signatures of the Directors 65
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PART 1
ITEM 1. BUSINESS
General Description
Guaranty National Corporation ("Guaranty") and its subsidiaries
(collectively, the "Company") principally underwrite and sell
specialty property and casualty insurance coverages which are not
readily available in traditional insurance markets. Personal and
commercial automobile insurance accounted for approximately 84% of
the Company's net premiums written during 1996. The Company's
personal lines business unit principally writes nonstandard
automobile insurance for individuals who do not qualify for
preferred or standard insurance because of their payment history,
driving record, age, vehicle type, or other factors, including
market conditions for standard risks. The Company's commercial
lines unit principally writes nonstandard commercial automobile
coverage. However, approximately 29% of the total commercial lines
unit net premiums written consists of standard commercial coverage.
Typical risks include local and intermediate trucking, garages,
used car dealers, public and private livery, and artisan
contractors. Other commercial lines coverages include property,
general liability, umbrella and excess insurance, standard multi-
peril packages and other coverages.
Nonstandard risks generally involve a potential for poor claims
experience because of increased risk exposure. Premium levels for
nonstandard risks are substantially higher than for preferred or
standard risks. In personal lines, the Company's loss exposure is
limited by the fact that nonstandard drivers typically purchase low
liability limits, often at a state's statutory minimum. The
nonstandard insurance industry is also characterized by the
insurer's ability to minimize its exposure to unprofitable business
by effecting timely changes in premium rates and policy terms in
response to changing loss and other experiences. In those states
where prior approval for rate changes is required, the Company has
generally gained approval in a timely manner. The Company also
writes business in states where prior approval to effectuate rate
changes is not required. Generally, nonstandard risks written by
the Company require specialized underwriting, claims management,
and other skills and experience.
The Company historically has focused its operations in the
nonstandard markets where it expects that its expertise and market
position will allow it to generate an underwriting profit. An
indicator of underwriting profit is a generally accepted accounting
principles ("GAAP") combined ratio of less than 100%. During 1996,
the Company's GAAP combined ratio was 100.1%, and in four of the
last six years the Company has achieved a GAAP combined ratio of
less than 100%. The Company's average GAAP combined ratio for all
its lines for the six-year period ending 1996 was 100.3%.
In July 1995, the Company acquired Viking, which is a property
and casualty insurance company writing non-standard personal
automobile insurance. The Viking acquisition has enabled the
Company to change its business mix, expand its personal lines
business into new territories, strengthen personal lines market
share in existing states, and provide flexibility in marketing the
Company's personal lines products. Additionally, Viking controls
Viking County Mutual Insurance Company ("VCM"), a Texas mutual
organization. As a result, the Company and its affiliates receive
100% reinsurance services in the state of Texas from VCM.
In 1995, the personal lines business was written through two
divisions: the Guaranty National division and the Viking division.
However, in 1996 Company management integrated the Guaranty
National and Viking personal lines divisions into one personal
lines business unit. As a result, personal lines information will
no longer be delineated by division.
The personal lines business unit provides nonstandard personal
automobile coverage, primarily in the state of California and the
Rocky Mountain and Pacific Northwest regions. This coverage is
sold through approximately 8,900 independent agents located in 28
states. In addition, this unit markets business through three
general agents.
Overall, the Company seeks to distinguish itself from its
personal lines competitors by providing a superior, highly
automated and responsive level of service to its agents and
insureds. In addition to high quality service, the Company's
personal lines business unit provides ease of payment for insureds
through low monthly installments.
Prior to 1996, the commercial lines business was written through
the commercial standard, commercial general and commercial
specialty divisions. However, during 1996, the Company's
management evaluated the commercial specialty
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and general divisions and decided that reorganizing these two
divisions into a contracts and brokerage division and a separate
programs department, would enable the Company to operate more
efficiently and to better serve its respective markets. The
commercial standard division will, however, remain separate. As a
result of this reorganization decision, the financial results of
the commercial lines unit will be discussed in total.
The nonstandard commercial lines business primarily offers
commercial coverages for transportation risks, regional programs,
specialized coverages for small to medium-sized businesses, and
umbrella coverages for a broad range of organizations. This
nonstandard commercial business is written through 69 general
agents and various brokers throughout the United States except for
some Northeastern states. These general agents specialize in
particular types of risks and/or geographic locations. The
Company's objective for its nonstandard commercial business is to
maintain long-term, mutually profitable relationships with a small
number of select general agents who follow strict underwriting
guidelines.
Colorado Casualty Insurance Company ("CCIC"), an insurance
subsidiary of the Company, writes primarily standard commercial
lines business. CCIC an insurance company writes small, standard
commercial package policies. The standard commercial business is
primarily written in the Rocky Mountain region, but has recently
expanded to states outside of the Rocky Mountain region, mainly in
the Southeast Region of the United States. CCIC has been
successful in serving a niche market of approximately 600 small to
medium retail agents. In addition, CCIC utilizes seven general
agents as branch offices. The standard business produced by CCIC
complements the nonstandard focus of the commercial lines unit.
The Company also writes collateral protection insurance,
primarily insuring automobiles pledged as security for loans for
which the borrower has not maintained physical damage coverage as
required by the lender. This business is written through 34
general agents across the country and in the Commonwealth of Puerto
Rico.
Personal lines, commercial lines and collateral protection
represented 48%, 37%, and 15%, respectively, of the Company's gross
premiums written during 1996.
A.M. Best Company currently rates Guaranty National Insurance
Company and its subsidiaries "A (Excellent)" and Viking Insurance
Company of Wisconsin and its affiliate "A- (Excellent)." A.M. Best
ratings are based upon factors of concern to policyholders, agents
and reinsurers and are not primarily directed toward the protection
of investors.
Recent Corporate History
On July 2, 1996, Orion Capital Corporation and certain of its
subsidiaries ("Orion") completed a cash tender offer (the "Offer")
and purchased 4,600,000 shares of the Company's common stock at a
price of $18.50 per share. Additionally, on July 17, 1996, Orion
purchased 120,000 shares of the Company's common stock in the open
market. The purchase of the tendered shares and the shares bought
in the open market brought Orion's ownership in the Company to 81%.
Prior to the Offer and open market purchases, Orion had owned
approximately 49% of the Company's common stock since November 20,
1991, when 51% of the Company's common stock was sold in a public
offering by Orion. From 1988 to 1991, Orion had owned all of the
Company's common stock.
In June 1995, the Company sold 1,550,000 shares of its common
stock in a European offering, at a price of $15.7575 per share.
The shares were placed with institutional investors located
principally in the United Kingdom and continental Europe. The
proceeds from the European placement were used to partially fund
the purchase price and related expenses of the Viking acquisition.
In conjunction with the 1995 European private placement, and in
order to increase the Company's stockholders equity and to
facilitate the procurement of financing for the Viking acquisition,
the Company and Orion amended the $20,896,000 subordinated notes
held by Orion ("Orion Notes") to include a common stock conversion
feature. In June 1995, the Company converted $8,667,000 of the
Orion Notes into 550,000 shares of common stock. The remaining
balance of the Orion Notes was converted into 776,128 shares of
common stock in October 1995, after shareholder
approval of the conversion.
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Operations
The Company, which is incorporated in the state of Colorado, has
three operating units: commercial lines, personal lines and
collateral protection. The Company has six insurance subsidiaries:
Guaranty National Insurance Company ("GNIC"), Landmark American
Insurance Company ("LAIC"), Peak Property and Casualty Insurance
Corporation ("PEAK"), CCIC, Guaranty National Insurance Company of
California ("GNICOC") and Viking Insurance Company of Wisconsin
("VICW"). Its six insurance subsidiaries are authorized as
multiple-line insurance carriers and may insure all types of
property and liability risks. With the recent approval to write in
the state of Michigan, one or more of the Company's subsidiaries
are now authorized in all states. The Company has an agreement
with and has used Orion to permit it to underwrite risks through
Orion's insurance subsidiaries in the states where the Company is
not authorized to write certain lines of business. The Company
also owns Intercon General Agency, Inc. ("Intercon"), through which
the collateral protection business is marketed, Auto Insurance
Centers, Inc. ("AIC"), an independent agency which produces
personal automobile business for the Company and other carriers in
Arizona and Indiana, and Guaranty National Warranty
Services ("GNWS"), through which automobile warranty business is
marketed and claims settled.
Underwriting Activities
In underwriting nonstandard automobile risks, the Company sets
premium rates which are substantially higher than standard rates.
Policy coverage periods are generally one or six months on personal
automobile policies, commercial policy coverage periods are
generally one year, while collateral protection policy coverage
periods generally range from one month to one year, although some
policies are issued for the term of the underlying loan. The
business of the Company and its insurance subsidiaries is not
materially dependent upon any single customer, group of customers,
or group of agents.
The following table sets forth the volume of direct premiums
written, premiums assumed, gross premiums written, premiums ceded
to reinsurers and net premiums written during the years indicated.
Year Ended
December 31,
1996 1995 1994
____ ____ ____
(In thousands)
Direct premiums written $493,660 $414,694 $295,714
Premiums assumed 44,376 36,819 69,277
-------- -------- --------
Gross premiums written 538,036 451,513 364,991
Premiums ceded (46,804) (53,614) (42,066)
-------- -------- --------
Net premiums written $491,232 $397,899 $322,925
======== ======== ========
Personal Lines Business Unit. The personal lines business
unit principally provides nonstandard private passenger automobile
insurance, with additional coverages offered for artisan-type light
trucks and motorcycles in selected states. The focus of
nonstandard automobile insurance relates to two customer types:
first, those who do not qualify for preferred or standard insurance
because of age, driving record, vehicle type or other factors;
second, those customers who have low down payment needs or are
transitioning from an uninsured to an insured status.
A critical decision reached during 1996 was to fully integrate
the personal lines operations of Viking and Guaranty National
Personal Lines. Prior to this decision, these two operations ran
as independent divisions. The decision to consolidate and
integrate was reached after a careful analysis of the nonstandard
market. Over the past ten years, the marketing of nonstandard
automobile insurance has evolved from a "cost-plus" orientation
where claims costs and operating expenses were totaled, a profit
margin added and the product price determined, to a "commodity"
orientation where absolute cost of product delivery has gained
significantly in importance in assuring market success.
Company management expects that the decision to integrate the
Viking and Guaranty National Personal Lines operations will
facilitate reduction of any overlap of functions plus gain
significant advantages through economies of scale. The anticipated
end result will be a lower expense ratio, which will lead to better
pricing and a better market position. A second advantage of this
integration is the creation of important new product offerings.
The personal lines business unit's motto of "Easy to Start, Easy to
Stay" requires a product pipeline with consumer need-satisfying
products designed to match as broad a cross-section of nonstandard
customers as possible. The one-month product focus at Viking
complements the six-month product focus at Guaranty National to
form the foundation for offering a packaged,
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multiple policy term, multiple commission level and multiple
customer quality level product for the independent agent
distribution network. Test marketing of the combined packaged
products commenced in the state of Indiana in late 1996.
Product design and pricing of the integrated personal lines
business unit will be completed using a product management
approach. Product managers have "ownership" of the product design,
pricing and marketing strategy for a multiple-state area. Product
managers rely on a combination of traditional insurance actuarial
pricing techniques plus innovative niche pricing methodologies in
an effort to identify and market to important market niches.
Customer service and policy processing operations are a
critical part of the personal lines business unit. Operation
centers are currently located in Freeport, Illinois; Denver,
Colorado; Salt Lake City, Utah; and Salem, Oregon. Multiple
locations in multiple time zones contribute to efficient volume
routing, as well as providing a convenient disaster recovery
mechanism. In the customer service area, use of an Interactive
Voice Response system permits efficient, automated answering of
routine agent and customer questions.
The ability to interact efficiently with a geographically
diverse agent force has become a critical building block for
successful market players. During 1996, significant attention and
resources were devoted to two different electronic interface
methodologies. In California, a large portion of new business
submissions were received electronically. Electronic interface
activities were also present in several other states. Furthermore,
efforts in 1997 will concentrate on establishing the best
technological platform to significantly expand agent electronic
interface. The advantages of electronic interface to the agent
include quicker policy issuance, quicker identification of
underwriting problems with a particular application submission, and
less paperwork. From the Company standpoint, electronic interface
permits better field underwriting, prior to the submission of a
policy application, through a higher level of accuracy of the data
on the application, plus an elimination of duplication of data
entry. With significant electronic agent interface the Company's
focus shifts from processing to customer service, which permits a
better alignment between the Company and the agents' needs.
Effective electronic interface also facilitates lower operating
costs, which contributes to long-term success in the nonstandard
marketplace.
The personal lines business unit distributes its products
through independent agents. The personal lines business unit's
independent agents are paid commissions at competitive rates,
including cash incentive payments which are contingent on
profitability as measured by the agent's loss ratio and premium
volume. Overall, these contingent commissions accounted for
approximately five percent of the total compensation paid to such
agents in 1996. During 1997, two important steps in building the
independent agent network will be the cross-appointment of Viking
and Guaranty National Personal Lines agents, as well as evaluation
of increased coverage in selected markets.
California continues to be the largest premium volume state
for the personal lines business unit. Volume in this state
approached $90,000,000 during 1996. Effective January 1, 1997,
California became a mandatory insurance state, which historically
has led to significant new business opportunities in the one-month
product line.
The personal lines business unit markets policies in 28
states, primarily in the state of California, as discussed above,
and the Rocky Mountain and Pacific Northwest regions. In 1996, new
states entered by this unit were Pennsylvania and Rhode Island.
The table below shows the Company's gross premiums written for
personal automobile insurance in the eight states in which it wrote
the largest amount of such business in 1996 and corresponding
volume in 1995, as compared to total personal gross premiums
written.
Year Ended December 31,
------------------------------------
1996 1995
------------------------------------
(Dollars in thousands)
California (a) $88,756 34.5% $29,846 15.1%
Washington 24,082 9.4 17,611 8.9
Utah 19,525 7.6 21,461 10.9
Oregon 17,121 6.7 17,137 8.7
Arizona 15,408 6.0 14,517 7.4
Colorado 13,776 5.4 16,549 8.4
Texas 10,564 4.1 9,596 4.9
Idaho 7,953 3.1 6,663 3.4
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(a) The gross premiums written in California are written
through Viking. If Viking's gross premiums written for the entire
calendar year 1995 had been included, the state of California would
have represented $67,099,000, or 23.8%, of total 1995 personal
lines business unit gross premiums written.
Commercial Lines Unit. The Company's commercial lines unit is
comprised of three divisions covering a broad range of nonstandard
and standard product lines and classes. Lines of business consist
of automobile insurance and, to a lesser extent, general liability,
property, and umbrella and excess insurance coverages. The
emphasis in the current and previous few years has been to reduce
commercial automobile liability and emphasize more profitable
commercial coverages. A breakdown of gross premiums written by
specific product lines is provided for the years indicated below:
Year Ended December 31,
---------------------------------------------
1996 1995 1994
------------- ------------ -------------
(Dollars in thousands)
Automobile liability $72,467 36.0% $80,153 40.0% $100,684 51.6%
Property 38,144 18.9 30,655 15.3 23,789 12.2
Automobile physical damage 36,528 18.1 32,405 16.2 21,480 11.0
General liability 35,477 17.6 34,456 17.2 32,498 16.7
Umbrella 18,921 9.4 22,559 11.3 16,577 8.5
------- ---- ------- ---- ------- ----
Total $201,537 100.0% $200,228 100.0% $195,028 100.0%
======== ===== ======== ===== ======== =====
Nonstandard commercial lines automobile risks are generally
comprised of insurance for local and intermediate trucking, such as
sand and gravel haulers; garages, such as used car dealers and
automobile repair facilities; and public vehicles, such as buses
and limousines. Typically, automobile physical damage has been
written on accounts along with automobile liability coverages.
However, in 1995, this unit began underwriting programs with
physical damage coverage only. One of these programs insured
private passenger risks in the state of California, but due to poor
loss experience in this program, notice of cancellation was given
to the agent during 1996.
In addition to the automobile line, the commercial unit offers
general liability coverage for the premise liability protection
needed by businesses in higher risk classes and small artisan
contractors. This unit writes property coverages on risks such as
vacant buildings, bars, restaurants and motor-truck cargo. It also
writes commercial umbrella and excess coverages across a broad
spectrum of business classes, and standard commercial package
policies for small businesses in small cities and rural areas. The
commercial program division writes several multi-line programs such
as day care centers and convenience stores.
The Company has historically generated better-than-industry
operating results in commercial lines through controlled pricing,
risk selection, and agency management. However, beginning in 1993,
the Company experienced a deterioration in commercial automobile
liability underwriting results. As a result, the commercial lines
unit business strategies were revised. These revisions included
the termination of unprofitable agents, the implementation of more
stringent underwriting practices and pricing increases, a re-
evaluation of states in which the Company had written commercial
business, and an evaluation of states in which to seek commercial
business opportunities. These revised business strategies have
helped the commercial automobile liability underwriting results
improve in 1996.
Commercial lines' business is written throughout the United
States, with a limited presence in the Northeast region. The table
below shows the Company's commercial lines concentration of gross
premiums written in the eight states in which the Company it wrote
the its largest amounts of such business in 1996 and corresponding
volume in the corresponding gross premiums written in 1995, as
compared to total commercial gross premiums written.
Year Ended December 31,
----------------------------------
1996 1995
----------- --------------
(Dollars in thousands)
Texas $24,844 12.3% $25,890 12.9%
California 24,326 12.1 30,807 15.4
Colorado 15,503 7.7 14,569 7.3
Florida 11,817 5.9 8,550 4.3
Arizona 10,718 5.3 10,592 5.3
Louisiana 8,349 4.1 7,342 3.7
New Mexico 8,317 4.1 7,837 3.9
Utah 6,783 3.4 6,331 3.2
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Nonstandard commercial lines products and programs are marketed
primarily through general agents, most of whom specialize in
particular types of nonstandard or difficult to place risks. Some
of these general agents also specialize in certain geographic
locations. Nonstandard commercial agent relationships are
established by the Company only after an extensive review of the
agent's underwriting expertise, historical loss experience,
financial condition, and other considerations. Such a review is
necessitated by the Company's philosophy of establishing an agent
relationship only if it has long-term potential. Such long-term
affiliations are generally beneficial to both the Company and the
agent. Currently, the length of the average nonstandard commercial
general agency relationship is eight years.
Strict underwriting controls are a primary objective of the
nonstandard commercial business. The Company has devoted extensive
resources to the development and maintenance of detailed
underwriting guidelines and related training so that its agents can
consistently price and select risks. Management believes that
these are important factors in maintaining strong relationships
with its agents.
Nonstandard commercial policies are either underwritten directly
by the Company, such is the case with umbrella business, or, for
risks that are bound by the general agents, re-underwritten by the
Company. The Company has 60 days from the policy effective date to
cancel any policy that does not meet its nonstandard commercial
underwriting standards. A monthly reporting system provides the
Company and each agent with information relating to the agent's
underwriting activities to date, premiums written as compared to
the Company's business plan for the agent, and other pertinent
data. The Company also performs on-site reviews and underwriting
audits of general agents on an ongoing basis. Underwriting
authority is given to each agent in accordance with a three tier
structure based on the Company's review of the agent's past
performance and expertise.
Standard commercial products, written by CCIC, are primarily
marketed through rural small to medium retail agents in the Rocky
Mountain region., who are granted only limited underwriting
authority. In addition, to further geographic expansion efforts,
CCIC has appointed seven general agents who have been granted
underwriting and policy issuance authority. The retail agents are
granted only limited binding authority. The retail agents submit
business to CCIC, or its general agents, who underwrite the risk
prior to policy issuance. CCIC maintains underwriting manuals that
are used for rating and evaluating risks by the general agents and
home office underwriters. CCIC performs periodic underwriting
reviews of the general agents to ensure compliance with established
underwriting standards. The selection and appointment of CCIC
retail and general agents is based on criteria to those discussed
above for nonstandard commercial agents. above.
The Company's commercial lines unit has incentive bonus programs
which are contingent on profitability as measured by the agent's
loss ratio and premium volume. Such contingent commissions
accounted for approximately nine percent of the total compensation
the Company paid to such agents by the Company in 1996.
Collateral Protection Unit. Collateral protection insurance
coverage primarily insures automobiles pledged as security for
loans for which the borrower has not produced evidence of physical
damage coverage as required by the lender. This coverage is
currently marketed in 41 states, the District of Columbia and the
Commonwealth of Puerto Rico through general agents. In addition,
this unit offers nonstandard private passenger insurance in
California and Kansas.
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In recent years, this unit has grown by expanding its marketing
into the Northeastern United States and into the Commonwealth of
Puerto Rico, as well as by product expansion. Specifically, during
1995, Intercon introduced its newest product, mortgage fire
insurance. Mortgage fire insurance is forced placed fire insurance
on real estate with no other fire coverage. A breakdown of gross
premiums written by specific product lines is provided for the
years indicated below:
Year Ended December 31,
---------------------------------------
1996 1995 1994
-------- -------- ---------
Forced placed
collateral protection $21,265 26.9% $31,989 59.1% 22,125 57.0%
Blanket vendor single
interest 18,573 23.5 9,945 18.4 7,157 18.4
Automobile physical damage 13,185 16.7 7,697 14.2 8,001 20.6
GAP 12,596 15.9 713 1.3
Forced placed mortgage fire 5,979 7.6 1,328 2.4
Automobile liability 5,803 7.3 755 1.4
Other 1,688 2.1 1,711 3.2 1,557 4.0
------- ---- ------- ---- ------- ----
Total $79,089 100.0% $54,138 100.0% $38,840 100.0%
======= ===== ======= ===== ======= =====
The table below shows the Company's gross premiums written
for the collateral protection unit in the eight states in which it
wrote the largest amount of such business in 1996 and corresponding
volume in 1995, as compared to total collateral protection gross
premiums written.
Year Ended December 31,
---------------------------------
1996 1995
--------- ---------
(Dollars in thousands)
New Jersey $10,569 13.4% $ 917 1.7%
New York 10,399 13.1 5,619 10.4
California 8,682 11.0 9,650 17.8
Florida 8,295 10.5 2,959 5.5
Texas 7,454 9.4 7,684 14.2
Kansas 6,523 8.2 1,718 3.2
Oklahoma 5,839 7.4 4,896 9.0
Puerto Rico 5,259 6.6 8,541 15.8
The collateral protection unit has an incentive bonus
program for most agents which is contingent on profitability as
measured by the agent's loss ratio and premium volume. Such
contingent commissions accounted for approximately 11% of the total
compensation paid to such agents by this unit in 1996.
Claims
The Company's claims operations are handled in separate claims
departments within each respective operating unit, rather than
being handled by a centralized department. This structure allows
each operating unit to administer all claims and direct all legal
and adjustment aspects of the claim process. The specialized
nature of the operating units' nonstandard product lines requires
specific skills to settle claims successfully. To achieve this,
each operating unit maintains a separate staff of highly trained
claim adjusters. Independent adjusters are utilized from time to
time in certain geographic areas. The goal of each operating unit
is to establish initial contact directly with claimants within 48
hours of a claim being reported.
To maximize operating efficiencies the nonstandard commercial
unit operates from a centralized department in the Englewood,
Colorado office. The department is organized to closely align
claim staff with underwriting departments. A nationwide TeleClaim (trademark
symbol) number is used which gives claimants the ability to telephone in
claim reports. The on-line computer system used by this unit is
simultaneously updated allowing for quick claim department
response. This system is designed to provide the agents for this
unit, as well as the insureds, a high level of quality claims
service.
The personal lines business unit administers claims operations
through branch offices. These branch offices perform all of the
administrative, legal and adjustment aspects of the claim process.
Independent adjusters are used periodically for claims.
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Claims integration is an important focus of the personal lines
business unit. Work is well underway in integrating the Viking and
Guaranty National Personal Lines claims organizations, which should
both improve operational efficiency and contribute to delivering
better customer service. Best operating practices from each
organization will be identified and form the basis for an expanded
claims presence in 1997.
Part of the personal lines business unit's claims focus is a
strong emphasis on a Special Investigative Unit (SIU). SIU has
evolved to be an indispensable part of any successful claims
operation, especially in the nonstandard marketplace. The SIU
trains the adjuster force to identify fraudulent claims,
establishes procedures for handling those claims, and completes
individual file field investigations when appropriate. During
1996, personal lines claim results improved significantly, partly
as the result of the influence of SIU.
Reinsurance
The Company purchases reinsurance to reduce liability on
individual risks and to protect against catastrophic losses.
Reinsurance involves an insurance company transferring or "ceding"
all or a portion of its exposure on insurance written by it to
another insurer (the "reinsurer"). The reinsurer assumes the
exposure in return for a portion of the premium. The ceding of
insurance does not discharge the insurer from its primary liability
for the full amount of the policies should the reinsurer fail to
meet its obligations under the reinsurance agreement.
In 1993, the Company entered into a reinsurance treaty with
National Reinsurance Corporation ("NRC") covering all major lines
of business. Beginning in 1996, the commercial standard division
property business was also covered under this treaty. In 1996, NRC
was acquired by General Reinsurance Corporation ("General Re"), and
as a result of this acquisition the Company's contract was
renegotiated under the terms of the reinsurance treaty. This
agreement is the Company's primary reinsurance contract, and
provides both excess of loss and property catastrophe coverage up
to $6,000,000 per occurrence. From January 1, 1996 through June
30, 1996, the Company's maximum loss per occurrence was limited to
$400,000 on individual risks and to $500,000 for catastrophes.
Effective July 1, 1996, the Company's rate was lowered and the
retentions were modified. The maximum loss per occurrence on
casualty losses remained at $400,000, but on property losses it was
reduced to $300,000 and on catastrophe losses it was increased to
$600,000. The NRC contract expires in 1997 and is subject to
typical renewal and cancellation provisions. General Re is rated
"A++ (Superior)" by A.M. Best.
In 1996, the Company also had in effect a property catastrophe
treaty with a group of reinsurers. The two largest reinsurers in
this group are Nationwide Mutual Insurance Company and Munich
Reinsurance of Germany, both of which were rated "A+ (Superior)" by
A.M. Best. The treaty coverage provided an additional layer of
catastrophe coverage up to 95% of $14,000,000 per loss occurrence,
in excess of the $6,000,000 coverage provided by the primary
reinsurance contract, described above. Thus, this treaty brought
the Company's total catastrophe protection to $20,000,000.
Additionally, the Company uses facultative reinsurance for
individual large risks, primarily umbrella and property coverages,
and quota-share reinsurance for certain programs.
Investment Portfolio
The Company's investment philosophy is to achieve an attractive
long-term rate of return while maintaining a high level of quality
and liquidity in its portfolio. The Company maintains a
diversified portfolio comprised of a broad spectrum of issuers and
types of securities. At December 31, 1996 and 1995, 85% and 84%,
respectively, of the Company's total invested assets consisted of
investments in fixed maturities and short-term investments. Other
long-term investments are principally comprised of interests in
several investment limited partnerships and a surplus debenture
issued by VCM to Viking. The Company has no direct real estate or
mortgages in its investment portfolio as of December 31, 1996,
other than investments in federal agency mortgage pools.
Securities are classified as available for sale and carried at
estimated fair value, unless they meet the Company's criteria to be
classified as held to maturity. Such criteria include investment
grade bonds with stated maturities less than ten years. The
average stated maturity of the Company's fixed maturity portfolio
is nine and a half years as of December 31, 1996, excluding
investments of $48,316,000 in federal agency mortgage pools which
have a stated maturity of up to 30 years, but are generally
expected to prepay significantly earlier. Furthermore, the Company
has
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<PAGE>
significant holdings in fixed maturity available for sale
securities which can be prepaid prior to maturity based on
predetermined call dates. The Company estimates that the average
duration of the fixed maturity portfolio is approximately four
years using interest rate assumptions as of December 31, 1996.
Since 1984, the Company's investment portfolio has been managed
primarily by Orion's investment managers, except for a portion of
the equity securities portfolio which, starting in 1992, has been
managed by an unaffiliated portfolio manager. The Company directs
and oversees the investments of both portfolio managers. For its
investment management services, Orion was paid an annual fee of
$650,000 in 1996. The Orion investment management contract will
continue in effect for one year unless terminated by either party
upon 90 days prior written notice. The fee paid to the outside
manager is based on a percent of the market value of the assets
managed.
The following tables set forth the composition, by amortized
cost and estimated fair value, of the investment portfolio of the
Company at December 31, 1996 and 1995, detailing the fixed
maturities by rating category, utilizing Standard & Poor's rating,
and reflecting the segregation of the fixed maturities portfolio.
Both the fixed maturities and equity investments consist primarily
of readily marketable securities. Securities which are not rated
by independent rating services are assigned the equivalent rating
usedas assigned by the National Association of Insurance
Commissioners at December 31, 1996. The after-tax net investment
yield (reduced by investment expenses) on average invested assets
shown below is determined on a GAAP basis.
December 31, 1996
----------------------------------------
Estimated
Amortized Cost Fair Value (a)
--------------- ---------------
(Dollars in thousands)
Fixed maturities held to maturity:
AAA $ 46,287 7.2% $ 46,454 7.0%
AA 27,832 4.3 28,650 4.3
A 6,152 1.0 6,326 0.9
--------- ----- --------- -----
80,271 12.5 81,430 12.2
Fixed maturities available
for sale:
AAA 167,503 26.1 169,465 25.3
AA 82,639 12.9 86,012 12.9
A 49,569 7.7 50,471 7.6
BBB 27,499 4.3 27,865 4.2
BB 24,586 3.8 24,781 3.7
B 30,483 4.8 31,381 4.7
D 136 0.1 315 0.0
---------- ---- --------- -----
382,415 59.7 390,290 58.4
---------- ---- --------- -----
Total fixed maturities 462,686 72.2 471,720 70.6
Equity securities:
Common stocks 42,689 6.7 59,415 8.9
Nonredeemable preferred stocks 26,969 4.2 28,687 4.3
----------- ---- --------- ----
Total equity securities 69,658 10.9 88,102 13.2
Other long-term investments 13,585 2.1 13,600 2.0
Short-term investments 94,993 14.8 94,993 14.2
----------- ---- --------- ----
Total investments $640,922 100.0% $668,415 100.0%
=========== ===== ========= =====
Net after-tax investment
yield on average invested assets 4.8%
===
(Continued)
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<PAGE>
December 31, 1995
------------------------------------------
Estimated
Amortized Cost Fair Value (a)
--------------- --------------
(Dollars in thousands)
Fixed maturities held
to maturity:
AAA $33,915 5.7% $34,643 5.6%
AA 32,930 5.5 34,071 5.5
A 6,160 1.0 6,414 1.0
BBB 2,012 0.3 2,015 0.3
------- --- ------- ---
75,017 12.5 77,143 12.4
Fixed maturities available
for sale:
AAA 171,097 28.7 176,036 28.3
AA 93,151 15.7 98,149 15.8
A 54,771 9.2 56,588 9.1
BBB 27,475 4.6 28,069 4.5
BB 23,364 3.9 23,394 3.8
B 12,848 2.2 12,732 2.1
D 429 0.1 230 0.0
-------- ---- ------- ----
383,135 64.4 395,198 63.6
-------- ---- ------- ----
Total fixed maturities 458,152 76.9 472,341 76.0
Equity securities:
Common stocks 41,994 7.1 52,139 8.4
Nonredeemable preferred
stocks 31,277 5.3 32,946 5.3
------- ---- ------- ----
Total equity securities 73,271 12.4 85,085 13.7
Other long-term investments 11,521 1.9 11,572 1.9
Short-term investments 52,257 8.8 52,257 8.4
------- ----- ------- ----
Total investments $595,201 100.0% $621,255 100.0%
======== ===== ======== =====
Net after-tax investment
yield on average invested assets 5.0%
===
(a) Represents the estimated fair value as defined in Note 1 to
the Consolidated Financial Statements.
The financial condition of the issuers of securities owned by
the Company is closely monitored and, in cases where the values of
investments are deemed to be other than temporarily impaired,
realized losses are recognized. In 1996, no realized losses were
recognized for other-than-temporary investment impairments.
However, in 1995, after-tax, other-than-temporary investment
impairments of $1,388,000 were recorded as realized losses. At
December 31, 1996 and 1995, total, after-tax, other-than-temporary
investment impairments were $1,105,000 and $1,388,000,
respectively.
As of December 31, 1996, the largest holding by the Company
of securities of a single issuer, other than investments in
securities of the United States Government and its agencies, was
revenue bonds issued by The Chicago, Illinois Metro Water District,
with a market value of $6,102,000. These revenue bonds were rated
AA by Standard & Poor's.
Reserves
Loss reserves and loss adjustment expense ("LAE") reserves,
collectively ("loss reserves"), represent estimates of amounts
needed in the future to pay losses, and the expenses related to the
final settlement of such losses, with respect to insured events
which have occurred as of the balance sheet date. Such reserves
are determined using the Company's, as well as the industry's,
historical experience with claims arising from reported losses and
LAE in a particular line of business. Loss and LAE reserves are
estimates of the ultimate costs of claims incurred but not settled,
before any losses that are recoverable under reinsurance contracts.
Since the settlement of such claims is dependent upon numerous
complex factors, the Company closely monitors its loss and LAE
reserves for each line of business, and the factors underlying the
methods used in determining such amounts, on a regular basis.
Several methods are used to analyze loss reserves by line of
business, including paid and incurred loss development. Other
factors that are analyzed and considered in the determination of
loss reserves include: incurred claim counts and average claim
costs; claim
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<PAGE>
emergence and settlement patterns and changes in such patterns from
year to year; trends in the frequency and severity of loss; changes
in reinsurance coverages; changes in the mix and classes of
business; and changes in claims handling procedures as determined
by discussions with claims and operating staff and through claims
audits.
The reserve estimation process is reviewed quarterly, and is
adjusted to consider all pertinent information that is currently
available. During the third quarter of 1995, the Company performed
an analysis of the results for the first six months of 1995. This
analysis indicated several adverse claim trends which ultimately
led to a special actuarial review of the Company's loss reserves.
After conclusion of the actuarial review, the Company strengthened
its loss reserves by recording a pre-tax charge to earnings in
September 1995, of $13,971,000. Of the total $13,971,000 charge,
approximately half was attributed to 1994 and the prior two
accident years. No such reserve strengthening occurred or was
required during 1996.
Company management believes that the loss and LAE reserves of
the Company's insurance subsidiaries make reasonable provisions for
the ultimate net cost of all losses and claims incurred at year end
1996. Notwithstanding the foregoing, no assurances can be given
that further reserve development may not occur in the future as the
process of establishing loss and LAE reserves is, by nature,
imprecise. Any and all adjustments to loss and LAE reserves are
reflected in the operating results of the periods in which they are
made.
Accident Year Loss and LAE Analysis. An accident year is
an accumulation period for loss and LAE experience that is updated
in subsequent calendar years until all losses and LAE related to
that given period have been settled. Accident year loss ratios
relate losses associated with accidents whose occurrence lies
within a given calendar year to premiums earned during the same
year.
The table below shows that the Company's reported calendar
year loss ratio decreased in 1996, compared to 1995. The
significant increase in the calendar year loss ratio for 1995,
compared to 1994, reflected the Company's reserve strengthening
charge, which is discussed above, for losses and LAE expenses
relating to business written in prior years. The following table
also shows that the Company's accident year loss ratio, developed
through December 31, 1996, has increased over the last three years.
Reported
Accident Year Calendar Year
Year Loss Ratio Loss Ratio
1996 70.3% 70.1%
1995 70.1 75.3
1994 69.2 66.3
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<PAGE>
Calendar Year Loss Reserve Analysis. An analysis of the
Company's calendar year loss and LAE reserves is presented below:
Direct and Direct and
Assumed less Ceded (Net) Assumed (Gross)
Year Ended December 31, Year Ended December 31,
---------------------------- --------------------------
1996 1995 1994 1996 1995 1994
----- ---- ----- ---- ---- ----
(In thousands) (In thousands)
Balance at
beginning of
year $286,339 $179,775 $165,800 $354,634 $241,221 $220,965
Reserves
acquired as
a result of
a business
combination 80,692 80,964
--------- -------- -------- -------- ------- --------
Adjusted
beginning
reserves 286,339 260,467 165,800 354,634 322,185 220,965
Add:
Provision for
incurred losses
and LAE:
Current year 338,779 280,726 212,458 381,202 308,787 227,282
Prior years (995) 12,787 1,047 903 32,792 19,793
------- ------- ------- ------- ------- -------
337,784 293,513 213,505 382,105 341,579 247,075
Less:
Payments for
incurred losses
and LAE:
Current year 194,667 159,208 111,418 200,902 162,548 112,647
Prior years 144,775 108,433 88,112 167,429 146,582 114,172
-------- ------- ------- ------- ------- -------
339,442 267,641 199,530 368,331 309,130 226,819
-------- ------- ------- ------- ------- -------
Balance at end
of year $284,681 $286,339 $179,775 $368,408 $354,634 $241,221
======== ======== ======== ======== ======== ========
Included in gross 1995 and 1994 payments, above, were $13,000,000
and $15,375,000, respectively, of claim payments on prior years
resulting in adverse gross development due to the claims originally
being established net of reinsurance. These claims should have been
established gross of losses that were recoverable under reinsurance
contracts. The recoveries were collected from reinsurers resulting
in no adverse development on a net basis. There were no claim
payments of this nature during 1996. Also, included above, in net
1995 payments on prior years' business is $13,142,000 of payments
made by Viking, which are not included in the Company's reserve
development.
The adverse (favorable) development of loss reserves
attributable to major lines of business for the years indicated is
as follows:
Direct and Direct and
Assumed less Ceded (Net) Assumed (Gross)
Year Ended December 31, Year Ended December 31,
-------------------------- --------------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
(In thousands) (In thousands)
Personal lines $(4,038) $ 2,504 $ (550) $(4,547) $ 2,277 $ (990)
Commercial lines 1,675 10,056 1,563 3,957 30,288 20,749
Collateral protection 1,368 227 34 1,493 227 34
------ ------- ------ ------- ------- -------
$ (995) $12,787 $1,047 $ 903 $32,792 $19,793
======== ======= ====== ======= ======= =======
The favorable development in personal lines in 1996 was mainly
due to estimated incurred but not reported losses at the beginning
of the year developing lower than expected, as well as the
successful implementation of claims operational changes, which
resulted in better than expected development on 1995 personal lines
acquired reserves. In 1996, except for storm related claims in the
first quarter, claim frequency levels stabilized, while claim
severity improved. The adverse development in personal lines in
1995 was principally caused by the reserve strengthening recorded
in the third quarter of 1995, as discussed above. This
strengthening decision was made, in part, because the private
passenger automobile liability outstanding claims and incurred but
not reported losses developed higher than expected. Other
contributing factors to the 1995 adverse development included
continued higher trends in frequency of automobile claims. The
favorable development in personal lines in 1994 was the result of
claims settling for lower amounts than expected and lower re-
estimates of incurred but not reported losses.
The adverse development in commercial lines in 1996 was mainly
attributable to general liability losses and loss adjustment
expenses developing higher than expected on reported claims. The
adverse development in commercial lines in 1995 related
predominately to commercial automobile liability outstanding claims
and incurred but not reported
-14-
<PAGE>
losses developing higher than expected due to higher claim severity
in 1992 through 1994. This adverse development in the commercial
automobile line of business was a significant component of the
strengthening of the Company's loss reserves during the third
quarter of 1995, as discussed above. The remaining 1995 adverse
development in commercial lines was from general liability and
other smaller lines of business. The reason for the adverse
development in 1994 relates primarily to loss development on
professional, general and commercial automobile liability claims
occurring prior to 1985. Adverse development on accident years
1985 and prior was insignificant to the total commercial lines'
adverse development in 1996, compared to $920,000 and $1,300,000 of
adverse development in 1995 and 1994, respectively. This reflects
a continued decrease from the level incurred in prior calendar
years.
The development in general liability during 1995 and 1994
resulted from the continued settlement of environmental claims.
Environmental claims reported to the Company to date, such as
asbestos and pollution contamination, have primarily related to
policies written during the period 1978 to 1984. In 1985, the
Company added an absolute pollution exclusion clause to general
liability policies to significantly reduce exposure to such
claims. The Company's known exposure to environmental losses is
not considered to be material as they have amounted to
approximately three percent of cumulative payments on general
liability claims for the accident years 1978 to 1984 and there are
less than $600,000 in net outstanding claim reserves, and
approximately $2,000,000 in total loss and loss adjustment expense
reserves, at December 31, 1996. Based on the claim activity to
date and the nature of the business written during this period and
subsequent periods, the Company does not believe that there is a
material exposure to such risks in the future. The adverse
development in professional liability relates to medical
malpractice coverages on hospitals. These classes of risk were
not written subsequent to 1985.
The increased adverse development in the collateral protection
unit during 1996 was primarily due to an under- estimation of
unreported claims, as of December 31, 1995, for the Blanket Vendor
Single Interest and Puerto Rico business.
The following tables present the development of the balance sheet
reserve liability on a net basis for 1996 through 1986 and a gross
basis for 1996 through 1992. The amounts shown for each year on
the top line of the net development table represents the Company's
estimate of its liability for future payments of losses and LAE as
of the balance sheet date. The upper portion of the table
represents the cumulative amount of the initial liability that has
been paid in the succeeding years. The lower portion of the table
represents a re-estimation of the initial balance sheet liability
at the end of each succeeding year. The bottom line of the table
represents the change from the initial estimate to the latest re-
estimate. The gross development table shows a reconciliation of
gross and net loss and LAE reserves, and shows the gross basis
cumulative deficiency in a more condensed format. As indicated
below, the Company anticipates the gross loss and LAE development
to be more volatile. Therefore, the Company utilizes reinsurance
for its less predictable business in order to minimize its loss
exposure and to reduce the volatility of its net earnings.
-15-
<PAGE>
<TABLE>
Reserve Development
Direct and Assumed, less Ceded (Net)
Year Ended December 31,
--------------------------------------------------------------------------------------------------
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------ ------ ------ ------ ------ ------ ------ ------ ------ ----- ------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for
unpaid
losses
and LAE-net $284.7 $286.3 $179.8 $165.8 $144.5 $133.9 $132.2 $117.4 $102.7 $87.7 $74.1
Paid (cumulative) as of:
One year later 144.8 95.3 88.1 71.2 66.2 68.3 63.3 53.0 42.7 39.2
Two years later 144.1 130.3 112.8 103.1 105.3 92.6 80.4 67.9 62.6
Three years later 152.8 133.5 125.5 125.0 109.9 92.2 82.7 79.6
Four years later 142.4 135.0 136.5 119.5 100.6 88.5 89.8
Five years later 138.6 140.8 125.1 106.6 94.0 92.5
Six years later 143.0 127.8 109.8 98.5 96.5
Seven years later 128.5 111.8 100.4 100.7
Eight years later 111.9 102.0 102.2
Nine years later 102.0 103.2
Ten years later 103.2
Liability re-estimated
as of:
End of year 284.7 286.3 179.8 165.8 144.5 133.9 132.2 117.4 102.7 87.7 74.1
One year later 285.3 192.6 166.8 146.8 136.9 134.2 118.5 105.4 92.5 84.1
Two years later 199.0 172.3 148.6 140.9 139.0 122.3 105.2 95.9 93.6
Three years later 175.8 152.2 142.4 142.8 125.6 106.3 94.4 96.6
Four years later 152.9 143.4 144.8 128.0 108.5 95.7 96.7
Five years later 143.0 145.9 129.5 110.8 97.9 96.9
Six years later 145.9 130.6 112.8 101.1 99.3
Seven years later 130.6 113.8 102.8 102.6
Eight years later 113.9 103.9 104.2
Nine years later 104.0 105.1
Ten years later 105.2
Net cumulative
redundancy
(deficiency) 1.0 (19.2) (10.0) (8.4) (9.1) (13.7) (13.2) (11.2) (16.3) (31.1)
</TABLE>
Reserve Development
Direct and Assumed (Gross)
Year Ended December 31,
------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In millions)
Liability for unpaid
losses and LAE-net $284.7 $286.3 $179.8 $165.8 $144.5
Reinsurance recoverable 83.7 68.3 61.4 55.2 47.0
------ ------ ------ ------ ------
Liability for unpaid
losses and LAE - gross 368.4 354.6 241.2 221.0 191.5
Liability re-estimated
as of:
End of year 368.4 354.6 241.2 221.0 191.5
One year later 355.5 274.0 240.8 194.2
Two years later 283.0 267.3 213.6
Three years later 273.2 233.6
Four years later 237.4
Gross cumulative
(deficiency) (0.9) (41.8) (52.2) (45.9)
A redundancy means that the latest estimate of the liability
for losses and LAE is lower than the liability that was initially
estimated. Whereas, a deficiency means that the latest estimate of
the liability for losses and LAE is higher than the liability that
was initially estimated. Conditions and trends, previously
discussed, that have affected development of
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<PAGE>
liability in the past may not necessarily occur in the future.
Accordingly, it may not be appropriate to extrapolate future
redundancies or deficiencies based on these tables.
Rating
During 1996, A.M. Best continued its rating of GNIC and its
subsidiaries as "A (Excellent)," and of VICW and its affiliate of
"A- (Excellent)." In general, A.M. Best ratings are based on an
analysis of the financial condition and operation of an insurance
company as they relate to the industry. These ratings are not
primarily designed for investors and do not constitute
recommendations to buy, sell or hold any security. A.M. Best
ratings fall into the following categories: A++ and A+ (Superior);
A and A- (Excellent); B++ and B+ (Very Good); C++ and C+ (Fair); C
and C- (Marginal); and D (Below Minimum Standards).
Management believes that a significant change in its A.M. Best
rating could affect its business, including its relationships with
its independent agents, positively in the case of an upgrade or
negatively in the case of a downgrade.
Competition
The insurance business is highly competitive. There are
approximately 3,200 property and casualty insurance companies in
the United States, although most of them are not significant
competitors for the specialty lines which the Company underwrites.
Some competing companies offer more diversified insurance coverage
and have greater financial resources than the Company. Competition
may include lower premiums, specialized products, more complete and
complex product lines, greater pricing flexibility, superior
service, different marketing techniques, or better agent
compensation. The Company largely limits its business to the
relatively small market for nonstandard lines of insurance, and
more recently to standard lines of commercial insurance in a
limited geographic area.
Management believes that one of its competitive advantages is
specializing in limited insurance lines. This specialization
allows the Company to refine its underwriting and claims
techniques, which in turn, provide agents and insureds with
superior service. In addition, management believes that the
"A (Excellent)" rating received from A.M. Best gives the Company a
competitive advantage over competitors with lower ratings.
Regulation
The Company's insurance subsidiaries are subject to regulation,
primarily by the states of their incorporation. GNIC, PEAK and
CCIC are incorporated in Colorado, LAIC is incorporated in
Oklahoma, GNICOC is incorporated in California, and VICW is
incorporated in Wisconsin. Each of the subsidiaries is are also
subject to regulation by other jurisdictions in which it they sell
insurance.
State regulatory agencies have broad administrative
powers, including powers relating to the licensing of insurers and
their agents, the form and content of policy forms and sales
literature, approval of cancellation procedures, premium notice
requirements, the form and content of financial statements, reserve
requirements, and limitations on permitted investments. In
general, such regulation is for the protection of policyholders
rather than shareholders.
All insurance companies must file annual statements with certain
regulatory agencies and are subject to regular and special
examinations by those agencies. The last regulatory financial
examination of GNIC was completed by the Colorado Insurance
Department in 1994 covering the four year period ended December 31,
1993. An examination of LAIC by the Oklahoma Insurance Department
was completed in 1994 covering the three year period ended
December 31, 1993. CCIC's latest examination was completed by the
Colorado Insurance Department in 1994 covering the two year period
ended December 31, 1993. PEAK's latest examination was completed
by the Colorado Insurance Department for the one year period ended
December 31, 1993. The last regulatory examination of GNICOC was
completed by the California Insurance Department for the period
ended December 31, 1990. However, GNICOC is currently under exam
as of December 31,1995. The Company's management does not expect
the results of the examination to have a material adverse impact on
the Company. The most recent examination of VICW was completed by
the Wisconsin Insurance Department for the five year period ended
December 31, 1993. No significant adjustments resulted from any of
these examinations.
In some instances, various states routinely require deposits of
assets for the protection of policyholders either in those states
or for all policyholders. As of December 31, 1996, securities
representing approximately four percent of
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<PAGE>
carrying value of the Company's investment portfolio were on
deposit with various state treasurers or custodians. Such deposits
must consist of securities which comply with standards that the
particular state has established.
The Company is also subject to state laws regulating insurance
holding company systems. Most states have enacted legislation or
adopted administrative regulations affecting insurance holding
companies and the acquisition of control of insurance companies, as
well as transactions between insurance companies and persons
controlling them. The nature and extent of such legislation and
regulations currently in effect vary from state to state. However,
most states require administrative approval of the acquisition of
10% or more of the outstanding shares of an insurance company
incorporated in the state. The acquisition of 10% of such shares
is generally deemed to be the acquisition of "control" for the
purpose of the holding company statutes and requires not only the
filing of detailed information concerning the acquiring parties and
the plan of acquisition, but also administrative approval prior to
the acquisition. In many states the insurance authority may find
that "control" in fact does or does not exist in circumstances
where there is no control over day-to-day management or where a
person owns or controls either a lesser or a greater amount of
securities.
The state jurisdictions in which the Company's insurance
subsidiaries are authorized to transact business on an admitted
basis all require participation in their respective guaranty funds.
Insurers authorized to transact business in such jurisdictions are
required to cover losses of insolvent insurers and can be assessed
generally between one to two percent of direct premiums written in
that jurisdiction each year to pay the claims of insolvent
insurers. In 1996 and 1995,the net assessments paid by the Company
totaled $303,000 and $131,000, respectively. The likelihood and
amount of any future assessment cannot be reasonably estimated
until after an insolvency has occurred. Insurance companies also
must participate in automobile insurance plans and other
specialized coverage plans (windstorm, etc.) mandated by some
states in which they sell insurance.
Most states have insurance laws requiring that rate schedules
and other information be filed with the state's regulatory
authority, either directly or through a rating organization with
which the insurer is affiliated. The regulatory authority may
disapprove a rate filing if it finds that the rates are inadequate,
excessive, or unfairly discriminatory. Rates vary by class of
business, hazard covered and size of risk. Nonstandard and special
risks are generally not limited to the standard rates of national
rating bureaus. The Company is permitted to file rates which are
usually higher than those charged for standard risks, reflecting
the higher probability of loss. Several states have recently
adopted laws or their legislatures are considering proposed laws
which, among other things, limit the ability of insurance companies
to effect rate increases and orto cancel, orreduce or not renew
coverage with respect to existing policies, particularly personal
auto insurance.
A number of state legislatures and the United States Congress
are considering, or have now enacted, some type of legislative
proposals which alter the rules for tort claims and increase the
states' or federal authority to regulate insurance companies. In
some instances, these initiatives have expanded the states'
regulation over rates and have also and also have increased data
reporting requirements. The Company is not aware of any proposed
state legislation which would have a material adverse impact on
business.
Although the federal government generally does not directly
regulate the business of insurance, federal initiatives often
effect the business in a variety of ways. There are various
current proposed federal measures which may significantly affect
the Company's insurance business, including, among other proposals,
superfund reform and automobile-choice no-fault legislation. The
economic and competitive effects on the Company of these proposals
will depend upon the final form such of any legislation which may
be enacted. might take.
The state of domicile of the Company's insurance subsidiaries
require that they furnish to it financial and other information
concerning the operations of companies within a holding company
system. All transactions within a holding company system affecting
insurers must be fair and reasonable, and the insurer's
policyholders' surplus following any transaction must be both
reasonable in relation to its outstanding liabilities and adequate
for its needs. Notice to applicable regulators is required prior
to the consummation of certain transactions affecting insurance
subsidiaries of the holding company system.
The principal source of cash available to Guaranty is
dividends from GNIC and VICW. The ability of GNIC and VICW to
declare dividends is governed by the insurance laws of the state of
incorporation. The Colorado dividend restriction law limits the
annual dividend a Colorado domiciled insurance company may pay to
its parent holding company during a twelve-month period to the
greater of 10% of GNIC's statutory surplus or the statutory net
income, excluding realized capital gains, as reported at the end of
the preceding calendar year. When a dividend is declared by
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<PAGE>
GNIC, the Colorado Insurance Department must be notified of such
declaration within five days thereafter, and at least ten business
days before the payment of the dividend. The Wisconsin dividend
restriction law limits the annual dividend a Wisconsin domiciled
insurance company may pay to its parent holding company during a
twelve-month period to the lesser of 10% of VICW's statutory
surplus as of the end of the preceding calendar year or the greater
of either the statutory net income of VICW for the preceding
calendar year, less realized capital gains, or the aggregate of the
net income of VICW for the three calendar years preceding the date
of the dividend, less realized capital gains for those calendar
years minus dividends paid or credited and distributions made
within the first two of the preceding three calendar years. See
Note 13 to the Consolidated Financial Statements for disclosure of
statutory policyholders' surplus and the maximum annual dividends
currently payable by GNIC and VICW. No state insurance laws or
regulations restrict dividend payments by Guaranty.
Insurance regulators have broad powers to prevent reduction of
statutory surplus to inadequate levels, and there is no assurance
that dividends of the maximum amounts calculated under any
applicable formula would be permitted.
Employees
As of December 31, 1996, the Company had approximately 1,030
employees. The Company's employees are not members of any labor
union. The Company believes that it smaintains good relations with
its employees are good.
ITEM 2. PROPERTIES
The Company's relocated operations are principally located in a
150,000 square foot facility located in Englewood, Colorado, a
64,000 square foot building located in Madison, Wisconsin, a 23,000
square foot building in Salem, Oregon and a 35,000 square foot
facility in Freeport, Illinois. All four of these facilities are
owned by the Company, and are currently adequate for the Company's
needs and are anticipated to remain adequate for future needs.
ITEM 3. LEGAL PROCEEDINGS
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, which
is discussed above, 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 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 1996 consolidated financial
statements. See Note 17 to the Consolidated Financial Statements
for further discussion of these costs.
In addition to the three complaints described above, the Company
is subject to litigation in the normal course of operating its
insurance business. In the judgment of the Company's management,
at December 31, 1996 the Company is not engaged in any such
litigation which it believes would have a material adverse impact
on its financial condition or results of operation, taking into
account the reserves established therefore and giving effect to
insurance.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
INFORMATION CONCERNING EXECUTIVE OFFICERS OF THE COMPANY
The following is a summary of certain information regarding the
executive officers of the Company. All officers of Guaranty and
its subsidiaries serve at the pleasure of their respective Boards
of Directors.
James R. Pouliot has been President and Chief Executive
Officer (CEO) of the Company since December 1996 and CEO of Viking
from 1992. Mr. Pouliot has been a Company Director since 1995.
Prior to taking over as President and CEO of the Company, Mr.
Pouliot served as Executive Vice President and CEO-Elect from July
1996. From 1990 to 1992, Mr. Pouliot served as Vice President of
Marketing for Great American Insurance Company; age 43.
Richard M. Beverage has been Senior Vice President (SVP)-Chief
Actuary for the Company since February 1996. From 1992 through
1996, Mr. Beverage was a Senior Manager - Reserving Studies with
Deloitte & Touche LLP. He served as Chief Pricing Actuary for
Zurich-American Insurance Company of Illinois from 1991 through
1992; age 45.
Shelly J. Hengsteler has been Controller and Assistant Treasurer
and Principal Accounting Officer of the Company since January 1996.
Ms. Hengsteler joined Guaranty National in 1989. From 1991 until
1994, she was a Financial Reporting Manager and from 1994 through
1995 she served as Director of Corporate Finance; age 34.
Arthur J. Mastera has been SVP-Chief Administrative Officer of
the Company since October 1996. Prior to becoming Chief
Administrative Officer, Mr. Mastera was President of the Guaranty
National Personal Lines Division since November 1995. Mr. Mastera
rejoined GNIC as SVP-Administration and Corporate Information
Systems in February 1992. From 1989 until 1992, he was Senior Vice
President of Planning and Administration at Orion Capital
Companies. Mr. Mastera originally joined GNIC in 1983; age 56.
Jacqueline L. Melton has been SVP of the Company since December
1996. She has also been SVP-GNIC and SVP-Human Resources since
1991. Ms. Melton joined GNIC in 1980 and from 1986 to 1991 she
served as Vice President of Human Resources; age 46.
Michael L. Pautler joined GNIC in 1981 and since 1988 has been
SVP-Finance and Treasurer of the Company;
age 42.
Fred T. Roberts has been SVP of the Company and President of the
Commercial Lines Unit since November 1995. He served as SVP of
GNIC Claims from 1984 to 1995; age 55.
Charles B. Ruzicka has been SVP-Information Systems since
December 1996. From August 1996, until assuming his current
position, Mr. Ruzicka was Vice President-Personal Lines Information
Systems. From 1993 through 1996, Mr. Ruzicka was Vice President of
Viking. From 1987 to 1993, Mr. Ruzicka was employed with
Progressive Insurance Company and was a Vice President from 1992
through 1993; age 43.
Philip H. Urban has been SVP of the Company and President of the
Personal Lines Business Unit since November 1996. From 1990 to
1996, Mr. Urban was SVP-Personal Lines for Great American Insurance
Company; age 44.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Principal Market.
The principal market on which the Company's Common
Stock is traded is the New York Stock Exchange.
(b) Stock Price and Dividend Information
The table below presents the high and low market prices
and dividend information for the Company's Common Stock for 1996 and 1995.
Cash
Stock Prices Dividends
High Low Declared
---- --- ---------
1996:
Quarter Ended December 31 $17.125 $15.375 $0.125
Quarter Ended September 30 17.875 13.50 0.125
Quarter Ended June 30 18.00 15.00 0.125
Quarter Ended March 31 17.00 13.375 0.125
------
Total $0.50
======
1995:
Quarter Ended December 31 $16.875 $13.75 $0.125
Quarter Ended September 30 19.00 15.75 0.125
Quarter Ended June 30 18.50 15.25 0.125
Quarter Ended March 31 18.25 15.50 0.125
------
Total $0.50
======
(c) Approximate Number of Holders of Common Stock
The approximate number of holders of the Company's
Common Stock, as of February 28, 1997, was 2,400, including both
record and beneficial shareholders in security position listings.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes information with respect to the
operations of the Company for the five-year period ended December 31, 1996.
Year Ended December 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share amounts and ratios)
Income Statement Data:
Gross premiums written $538,036 $451,513 $364,991 $322,613 $300,293
Premiums ceded 46,804 53,614 42,066 38,573 60,506
-------- -------- -------- -------- --------
Net premiums written $491,232 $397,899 $322,925 $284,040 $239,787
Premiums earned $481,648 $390,017 $321,638 $257,540 $220,033
Net investment income 39,439 30,976 23,576 22,551 22,701
Realized investment gains 8,455 3,291 3,007 5,996 2,342
Other income 2 69 424
-------- --------- -------- -------- -------
Total revenue 529,542 424,284 348,223 286,156 245,500
-------- --------- -------- -------- -------
Losses and loss
adjustment expenses 337,784 293,513 213,505 173,500 144,586
Policy acquisition
costs 133,931 110,341 93,103 76,725 64,946
General and
administrative 10,422 6,458 7,206 6,280 5,395
Interest 6,851 5,708 3,218 2,592 2,565
Other expenses (a) 3,673 932 1,604 2,433 676
-------- -------- ------- -------- ------
Total expenses 492,661 416,952 318,636 261,530 218,168
-------- -------- ------- -------- -------
Earnings before
income taxes 36,881 7,332 29,587 24,626 27,332
Income taxes 9,375 (1,597) 7,036 5,341 7,061
-------- --------- -------- --------- ------
Earnings before
accounting changes 27,506 8,929 22,551 19,285 20,271
Cumulative accounting
changes 1,106
-------- ---------- -------- --------- ------
Net earnings $27,506 $ 8,929 $22,551 $20,391 $20,271
========= ========== ======== ========= =======
Earnings per share
before
accounting change $ 1.84 $ 0.67 $ 1.86 $ 1.54 $ 1.62
Cumulative accounting
changes .09
------- ------- ------- ------- -------
Net earnings per
common share $ 1.84 $ 0.67 $ 1.86 $ 1.63 $ 1.62
======= ======= ======= ======= =======
Weighted average common
and equivalent
shares outstanding 14,973 13,324 12,136 12,538 12,479
======= ====== ====== ======= ======
Statutory Operating Ratios:
Loss 70.1% 75.3% 66.3% 67.3% 65.7%
Expense 31.2 30.3 30.5 31.3 32.4
---- ---- ---- ---- ----
Combined 101.3% 105.6% 96.8% 98.6% 98.1%
===== ===== ==== ==== ====
GAAP Operating Ratios:
Loss 70.1% 75.3% 66.3% 67.4% 65.7%
Expense 30.0 30.0 31.2 32.2 32.0
---- ---- ---- ---- ----
Combined 100.1% 105.3% 97.5% 99.6% 97.7%
===== ===== ==== ==== ====
Dividends:
Dividends paid
per common share $ 0.50 $ 0.50 $ 0.50 $ 0.50 $ 0.50
(Continued)
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<PAGE>
Year Ended December 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share amounts and ratios)
Balance Sheet Data:
Total cash and
investments $671,229 $625,872 $387,942 $386,250 $327,572
Total assets (b) 929,092 875,173 605,088 575,083 477,484
Unpaid losses and
loss adjustment
expenses (b) 368,408 354,634 241,221 220,965 191,508
Notes payable 101,688 103,000 52,896 38,896 32,896
Shareholders' equity 238,039 215,551 144,759 152,489 130,123
Statutory
policyholders'
surplus 253,815 220,621 133,229 122,452 105,931
Book value per share $15.90 $14.41 $12.02 $12.22 $10.44
Ratio of Net Premiums
Written to
Policyholders'
Surplus (b) 1.94 2.19 2.42 2.32 2.26
(a) 1996 includes a nonrecurring tender offer charge of
$2,163,000; 1994 includes a nonrecurring relocation charge of $838,000;
1993 includes a $1,750,000 nonrecurring charge for settlement of litigation.
(b) 1995 net premiums written to policyholders surplus ratio was
calculated using a full year of Viking net premiums written, rather than
using Viking net premiums written from the acquisition closing date forward.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Guaranty National Corporation ("Guaranty") and its subsidiaries
(collectively, the "Company") manage their property and casualty
business in three operating units: commercial lines, personal
lines and collateral protection insurance. Gross premiums written
and GAAP combined ratios by operating unit for the three years
ended December 31, 1996, 1995 and 1994, respectively, are
summarized below:
Year Ended December 31,
----------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
Personal lines:
Gross premiums written $257,410 $197,147 $131,123
GAAP combined ratio 97.6% 104.9% 96.5%
Commercial lines:
Gross premiums written $201,537 $200,228 $195,028
GAAP combined ratio 105.5% 108.5% 98.6%
Collateral protection:
Gross premiums written $79,089 $54,138 $38,840
GAAP combined ratio 96.3% 95.7% 97.1%
Total:
Gross premiums written $538,036 $451,513 $364,991
GAAP combined ratio 100.1% 105.3% 97.5%
On July 18, 1995, the Company completed its acquisition of
Viking. The Viking acquisition has enabled the Company to increase
its nonstandard private passenger automobile premiums, as well 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 its 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 consolidated financial statements from the
acquisition closing date forward. See Note 3 to the Consolidated
Financial Statements for further discussion related to the Viking
acquisition.
In July 1996, Company management announced a decision to
integrate the Viking and Guaranty National personal lines divisions
into one personal lines business unit. This decision was reached,
in part, by the recognition of a trend in the nonstandard personal
lines insurance industry which emphasizes the importance of a lower
expense ratio. During the fourth quarter of 1996, a personal lines
business unit President was named. The new President and the
personal lines leadership group have begun to make management and
staffing assignments for the personal lines business unit, and to
focus on agency, geographic and product integration. The personal
lines integration effort will continue throughout 1997. In
addition to the decision to integrate the personal lines business
unit, Company management evaluated the commercial specialty and
general divisions during the third quarter of 1996. This
evaluation led to a decision to reorganize into a contracts and
brokerage division and a programs department. Company management
expects this reorganization will enable the Company to operate more
efficiently and to better serve its respective markets. The
commercial standard division will, however, remain separate.
Reorganization activities within these two commercial divisions
will continue into 1997. As a result of these recent management
decisions, the financial results of the personal lines business
unit will no longer be delineated by division and the financial
results of the commercial lines unit will be discussed in total.
The Company's investment philosophy is aimed at achieving an
attractive long-term rate of return while maintaining a high level
of quality and liquidity in its portfolio. The Company maintains a
diversified portfolio comprised of a broad spectrum of industries
and types of securities. At December 31, 1996 and 1995, the
Company's portfolio consisted primarily of investments in fixed
maturities and short-term investments. Such investments
represented 85% and 84%, respectively, of the Company's total
invested assets. At December 31, 1996, the total equity securities
portfolio at estimated fair value was comprised of $59,415,000 in
common stocks and $28,687,000 in nonredeemable preferred stocks.
The remaining investments at December 31, 1996, were primarily
several investment limited partnerships. In addition, during 1995,
Viking County Mutual ("VCM"), a county mutual organization
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<PAGE>
controlled by Viking, issued a $1,300,000 surplus debenture to
Viking. See Note 14 to the Consolidated Financial Statements for
further discussion of this surplus debenture. As of December 31,
1996, the Company had no direct real estate or mortgages in its
investment portfolio, other than investments in federal agency
mortgage pools.
The Company maintains 62% of its investment portfolio in
investment grade (rated "BBB" or above) fixed maturities. It
invests a portion of its assets in noninvestment grade (rated "BB"
or below) bonds and preferred stocks in order to increase its
overall yield on its investment portfolio. At December 31, 1996,
the Company had noninvestment grade fixed maturity securities of
$55,205,000 with an estimated fair value of $56,477,000. Such
securities were approximately eight percent of total invested
assets at December 31, 1996, compared to approximately six percent
at December 31, 1995. Securities which are not rated by
independent rating services are assigned the comparable rating of
the National Association of Insurance Commissioners. At
December 31, 1996, less than one percent of total fixed maturity
investments were not current on interest payments.
Results of Operations
Year Ended December 31, 1996 Compared to the Year Ended December
31, 1995
Overall, gross premiums written increased 19% to $538,036,000 in
1996, from $451,513,000 in 1995. The majority of the growth was
attributable to increases in the Company's personal lines and
collateral protection operating units. Consolidated net premiums
written for 1996 increased $93,333,000, or 23%, compared to 1995,
due to a higher volume and change in mix of business. Premiums
ceded to reinsurers, as a percentage of gross premiums written,
decreased approximately three percent during 1996. The decline
resulted primarily from a reduction in commercial lines premiums,
as a percentage of total premiums. Commercial coverages are more
heavily reinsured than the premiums from the personal lines and
collateral protection units, which write business at lower limits
than the commercial lines unit.
The personal lines business unit experienced a $60,263,000, or
31%, increase in gross premiums written in 1996 compared to 1995.
The premium volume growth was the result of the Viking acquisition.
Prior to the acquisition of Viking in 1995, the Company did not
write personal lines business in the state of California. During
1996, this state accounted for 34% of the unit's total gross
premiums written. The remaining net increase in this unit's gross
premiums written represented the net effect of both increases in
other states in which Viking writes business, and decreases in
gross premiums written in several states where actions have been
focused on improving the unit's profitability.
The personal lines business unit GAAP combined ratio decreased
to 97.6% for the year ended December 31, 1996. The 7.3 point
improvement was the result of a lower loss ratio (incurred losses
and loss adjustment expense). The lower loss ratio resulted from a
9.3 point decrease in the incurred losses component, which was
offset by a 2.0 point increase in the loss adjustment expense
component. The decreased incurred losses component was primarily
due to lower claim severity, as well as estimated incurred but not
reported losses at the beginning of the year developing lower than
expected. The increased loss adjustment expense component was due
to this unit's emphasis on improved claim handling and on fighting
insurance fraud, which resulted in increased legal expenses and
increased staffing in the unit's Special Investigative Unit.
Additionally, in the prior year the Company strengthened its
personal lines loss and loss adjustment expense reserves by
$5,010,000. Conversely, during 1996, prior year reserves were
decreased as the result of lower than expected claim costs on
settlement.
The commercial lines unit gross premiums written increased
slightly, by $1,309,000, to $201,537,000 in 1996, compared to
1995. The increase is the net effect of both increases in the
commercial standard division offset by decreases in certain
nonstandard lines of business, primarily commercial automobile
liability. In accordance with the Company's ongoing, planned,
business mix change, which has been in progress over the past few
years, commercial automobile liability gross premiums written were
reduced to 36% of total commercial lines premiums for 1996 compared
to 40% for 1995. While commercial automobile liability gross
premiums written declined during 1996, the unit's 1996 property
gross premiums written increased from 15% to 19% of total
commercial lines gross premiums written, compared to the prior
year. Also, in July 1995, this unit introduced an automobile
physical damage program in California, which was 50% quota-share
reinsured. This program accounted for $1,765,000 of the total
increase in, and $10,454,000 of the 1996 commercial lines unit
gross premiums written. However, due to poor loss experience in
this program, the agent has been given notice of cancellation. As
a result, the Company expects the gross premiums written for this
program to be insignificant during 1997. The expected 1997 premium
decline on this California physical damage program is expected to
be offset by increased premium production in the commercial
standard lines of business.
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<PAGE>
The commercial lines unit GAAP combined ratio decreased by 3.0
points to 105.5% in 1996, compared to 1995. The decrease resulted
primarily from a 5.9 point improvement in the unit's loss ratio,
which was partially offset by a 2.9 point deterioration in the
unit's expense ratio. The lower loss ratio was attributable to
lower overall commercial claims frequency and severity during 1996.
Also, the 1995 loss ratio was unusually high because of the loss
and loss adjustment expense reserve strengthening for prior year
claims recorded in 1995. No significant reserve strengthening
occurred during 1996. The higher expense ratio was due to more
commercial business written in programs having higher commission
rates, as well as increased contingent commissions.
Collateral protection insurance, the Company's third operating
unit, increased 1996 gross premiums written 46% to $79,089,000,
compared to 1995. This significant increase was primarily due to
this unit's two newest products, GAP and mortgage fire insurance.
The gross premiums written from GAP and mortgage fire insurance
increased approximately $16,534,000 over the prior year.
Additionally, premiums from this unit's automobile business
increased approximately $10,266,000 in 1996, compared to 1995.
These increases were partly offset by a $3,282,000 decrease in
gross premium written in Puerto Rico.
The collateral protection unit GAAP combined ratio increased 0.6
points for 1996, compared to the prior year. The increase was due
to an 8.1 point increase in the unit's loss ratio for 1996,
compared to 1995. The higher loss ratio was a result of increased
frequency in the Northeast blanket vendor single interest and
Puerto Rico collateral protection programs. The unit has
implemented underwriting and pricing adjustments and has canceled
problematic accounts in an effort to correct the higher loss ratio.
The unit's higher loss ratio was partially offset by its lower
expense ratio. The expense ratio for 1996 was 36.0%, compared to
43.5% for 1995. The improvement in the expense ratio related to
lower agency contingent commissions, which were proportionately
reduced by the increased loss ratio.
The Company operates under a primary reinsurance contract that
provides both excess of loss and property catastrophe coverage up
to $6,000,000 per occurrence for all major lines of business. The
primary reinsurance contract for 1996 was with National Reinsurance
Corporation ("NRC"), which is now owned by General Reinsurance
Corporation ("General Re"), and served to limit the Company's
maximum loss per occurrence on individual risks to $400,000 and for
catastrophes to $500,000, through June 30, 1996. Effective
July 1, 1996, as a result of the acquisition of NRC by General Re,
the Company's contract was renegotiated under the terms of the
treaty at a more favorable rate and the retentions were modified.
The Company's maximum loss per occurrence on casualty losses
remained at $400,000. However, on property losses it was reduced
to $300,000, and on catastrophe losses it was increased to
$600,000. Also, the contract will terminate December 31, 1997
rather than December 31, 1998.
The Company has purchased an additional layer of catastrophe
coverage up to 95% of $14,000,000 per loss occurrence, for total
catastrophe protection of $20,000,000. The Company continues to
utilize facultative reinsurance for certain risks, primarily
umbrella and property coverages, and quota-share reinsurance.
The Company's insurance operating units, in total, experienced
$995,000 of favorable development in 1996 on 1995 and prior loss
reserves, net of reinsurance. This compares to $12,787,000 of
adverse development in 1995 on 1994 and prior loss reserves, net of
reinsurance. The development equates to (0.3%) and 7.1% of loss
reserves carried at December 31, 1995 and 1994, respectively. The
small amount of redundant development in 1996 was primarily due to
estimated incurred but not reported (IBNR) losses at the beginning
of the year developing lower than expected, as well as better than
expected settlement on 1995 personal lines acquired reserves. The
favorable development within the personal lines business unit was
partially offset by general liability losses and loss adjustment
expenses on reported claims developing higher than expected, and
collateral protection incurred but not reported losses developing
higher than expected. The high adverse development in 1995 on
prior accident years was primarily due to personal and commercial
automobile liability losses on both reported and unreported claims
developing higher than expected.
During 1996, the Company's known exposure to environmental
losses, such as asbestos and pollution contamination, did not
materially change. Based on the minimal claim activity to date and
the nature of the business written, the Company does not believe
that it has a material exposure to environmental losses.
During 1996, the Company's catastrophic losses amounted to
$1,689,000, or $0.11 per share, net of tax and reinsurance
recoveries. This compares to $1,615,000 in catastrophic losses, or
$0.12 per share, net of tax and reinsurance recoveries, during
1995. The catastrophic losses mainly affected the commercial and
personal lines operating units, and primarily related to storms in
the Central United States, Hurricane Fran and Hurricane Bertha.
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<PAGE>
Company management believes that its prudent level of reinsurance,
as discussed above, and spread of coverage over a variety of
geographic areas limits the Company's exposure to catastrophic
events.
The Company's 1996 interest expense increased $1,143,000, or
20%, compared to 1995. This increase was due to an overall
increase in bank borrowings during mid-1995. The 1995 borrowings
were used to fund 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, in 1995 the Company entered into two interest rate swap
agreements to hedge $80,000,000 of the total borrowings until 1998.
These agreements have given the Company a fixed interest rate,
including the applicable London Interbank Offered Rate (LIBOR)
margin outlined in the Company's reducing, revolving credit
facility, of approximately 6.3% on the $80,000,000. See Note 11 to
the Consolidated Financial Statements for further discussion of the
interest rate swap transactions.
Pretax net investment income increased $8,463,000 in 1996,
compared to 1995, and after-tax net investment income increased
$5,592,000 for the same period. These increases were primarily due
to an overall increase in average invested assets, which resulted
primarily from the July 1995, addition of the Viking investment
portfolio and positive operating cash flow. Additionally, the
Company had stronger earnings from its limited partnership
investments during 1996, when compared to 1995. Specifically,
earnings from limited partnership investments increased $1,718,000
during 1996. The investment portfolio yield, on an after-tax
basis, decreased slightly to 4.8% in 1996, compared to 5.0% in
1995.
After-tax realized investment gains in 1996 and 1995, were
$5,496,000 and $2,139,000, respectively. The significant increase
in 1996 after-tax realized investment gains, compared to 1995, was
predominately due to the strong stock market during 1996. The sale
of equity securities resulted in approximately 94% of the total
realized investment gains.
On May 8, 1996, Orion Capital Corporation and certain of its
subsidiaries ("Orion"), commenced a cash tender offer (the "Offer")
to purchase up to 4,600,000 shares of the Company's common stock.
As a result of the Offer, the Company incurred costs of
approximately $1,778,000, net of tax, or $0.12 per share, for
expenses related to the Offer. These costs were classified as
nonrecurring in the Company's December 31, 1996 Consolidated
Financial Statements. See Note 17 to the Consolidated Financial
Statements for further discussion of these costs.
The income tax expense was 25.4% of pre-tax income in 1996
versus a 21.8% income tax benefit of pre-tax income in 1995. The
1996 income tax expense differed from the Federal statutory rate
due to nontaxable interest income and the dividends received
deduction on stock dividends. The 1995 income tax benefit resulted
from a combination of underwriting losses and nontaxable interest
income and dividends received deduction.
Overall, the Company's net earnings increased $18,577,000, to
$27,506,000, for the year ended December 31, 1996, compared to the
year ended December 31, 1995. Net earnings per common share were
$1.84 at year end 1996, versus $0.67 at year end 1995. The
majority of the improvement in the Company's net earnings and net
earnings per common share was attributable to increased
profitability in the Company's personal lines business unit. In
the prior year, net earnings and net earnings per common share were
substantially reduced by a $9,081,000, or $0.68 per share, net of
tax, reserve strengthening charge within the personal and
commercial units.
Year Ended December 31, 1995 Compared to the Year Ended December
31, 1994
Gross premiums written increased 24% to $451,513,000 in 1995,
from $364,991,000 in 1994. The personal lines business unit,
experienced a $66,024,000, or 50%, increase in gross premiums
written in 1995 compared to 1994. The majority of the premium
volume growth was a result of the acquisition of Viking, which
accounted for $61,766,000 of the overall increase in the personal
lines business unit gross premiums written during 1995. The
remaining increase in gross premiums written was primarily due to
expansion into Indiana, Louisiana, and Ohio.
The personal lines business unit GAAP combined ratio increased
to 104.9% for the year ended December 31, 1995. The increase was
the result of a higher loss ratio caused by the reserve
strengthening recorded in the third quarter of 1995, combined with
higher frequency of automobile physical damage claims, as well as
catastrophe losses. The increased loss ratio was offset slightly
by a lower expense ratio resulting from improved operating
efficiencies.
-27-
<PAGE>
During 1995, the commercial lines unit gross premiums written
remained relatively constant, with only a three percent increase,
when compared to 1994. This consistent level was a result of
standard division new business generated outside the Rocky Mountain
region, as well as the expansion of existing specialty programs and
umbrella business, and the introduction of a new automobile
physical damage program in California. These increases were offset
by decreases in other commercial lines of business. In accordance
with the Company's planned business mix change, commercial
automobile liability gross premiums written were reduced to 40% of
total commercial lines premiums for 1995 compared to 52% for 1994.
The commercial lines unit GAAP combined ratio increased by 9.9
points to 108.5% in 1995, due primarily to a higher loss ratio
resulting from the reserve strengthening in commercial automobile
liability recorded in the third quarter of 1995, and continued high
severity in 1995. In addition, the commercial lines unit expense
ratio increased slightly during 1995 compared to 1994.
Collateral protection insurance increased gross premiums written
39% to $54,138,000. This significant increase was primarily due to
geographic expansion in the Commonwealth of Puerto Rico, increased
market penetration in existing states, and growth in blanket single
interest insurance product line, as well as the introduction of a
new product, mortgage fire. The new business written in Puerto
Rico comprised 16% of gross premiums written by the collateral
protection unit during the twelve months ended December 31, 1995.
The growth in the blanket single interest, GAP and mortgage fire
product lines increased collateral protection gross premiums
written by approximately $4,829,000 during 1995.
The collateral protection business is characterized by a loss
ratio that is significantly lower, and an expense ratio that is
significantly higher, than most other lines of business. However,
during 1995 this unit improved its expense ratio by 5.0 points due
to lower overall agency commissions. Additionally, during 1995
more blanket single interest policies were sold, which normally
have a lower acquisition cost.
The consolidated net premiums written increased $74,974,000, or
23%, in 1995, compared to the previous year, primarily due to a
higher volume of business as explained above. Premiums ceded to
reinsurers, as a percentage of gross premiums written, remained
constant during 1995. Increased commercial lines reinsurance costs
were offset by increased personal lines business, which has a lower
reinsurance charge than commercial lines due to the lower liability
limits on personal lines policies. The Company maintains
reinsurance treaties which cover almost all lines of business on an
excess of loss basis, and which limit the Company's liability on
catastrophe losses.
In an analysis of the results for the first six months of 1995,
the Company observed several adverse claim trends which led to a
special actuarial review of the Company's loss (losses and loss
adjustment expenses) reserves. This extensive actuarial review
indicated that higher frequency and severity trends were causing
the unanticipated higher claim costs. As a result, the Company
strengthened its loss reserves by recording a pre-tax charge to
earnings of $13,971,000 during the third quarter. Approximately
one-half of this $13,971,000 charge was attributed to 1994 and the
prior two accident years.
The Company's loss ratio in 1995 was 75.3%, up from the 66.3%
reported in 1994. The significant increase in the loss ratio was
mainly due to the reserve strengthening, which was recorded in the
third quarter of 1995, as discussed above. The commercial lines
loss ratio increased 9.7 points to 78.0%, primarily as a result of
the reserve strengthening and higher severity in 1995. In personal
lines, the loss ratio increased to 78.6% from 69.4%, due to the
reserve strengthening, as well as higher frequency of automobile
physical damage claims, and catastrophe losses. The collateral
protection unit loss ratio increased in 1995 to 52.2% compared to
48.6% in 1994.
Including the reserve strengthening charge, the Company's
insurance operating units, in total, experienced $12,787,000 of
adverse development in 1995 on 1994 and prior loss reserves, net of
reinsurance. This compares to $1,047,000 of adverse development in
1994 on 1993 and prior loss reserves, net of reinsurance. The
development equates to 7.1% and 0.6% of loss reserves carried at
December 31, 1994 and 1993, respectively. The adverse development
in 1995 was principally caused by commercial automobile and private
passenger automobile liability outstanding claims and incurred but
not reported losses developing higher than expected. The remainder
was from general liability and other lines.
During 1995, the Company's known exposure to environmental
losses, such as asbestos and pollution contamination, did not
materially change. Based on the minimal claim activity to date and
the nature of the business
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<PAGE>
written, primarily automobile coverage, the Company does not
believe that it has a material exposure to environmental losses.
During 1995, the Company experienced catastrophic losses, net of
reinsurance recoveries, amounting to $1,615,000, or $0.12 per
share, net of tax and reinsurance recoveries. This compares to
$1,080,000 in catastrophic losses, or $0.09 per share, net of tax
and reinsurance recoveries, during 1994. For the most part the
catastrophic losses affected the commercial and personal lines
operating units, and primarily related to hurricanes and wind and
hail storms.
The Company's expense ratio in 1995 was 30.0% compared to 31.2%
in 1994. The improvement in the expense ratio is due to higher
personal lines business unit premiums coupled with improved
operating efficiencies in this unit.
As a result of an overall increase in borrowings during 1995,
the Company's interest expense increased $2,490,000, or 77%,
compared to 1994. The borrowings were used to finance the Viking
acquisition, discussed above and in more detail in Note 6 to the
Consolidated Financial Statements. The borrowings are pursuant to
a reducing, revolving credit facility entered into in June 1995,
which provides for a floating interest rate. In order to reduce
the risk of changing interest rates, during the third quarter of
1995 the Company hedged $80,000,000 of the total borrowings until
1998, by entering into two interest rate swap agreements, giving
the Company a fixed interest rate. See Note 11 to the Consolidated
Financial Statements for further discussion of the interest rate
swap transactions.
Pretax net investment income increased $7,400,000 in 1995,
compared to 1994, and after-tax net investment income increased
$5,698,000 for the same period. These increases are primarily due
to a 30% 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. Excluding Viking, the Company's after-tax net
investment income increased 14%, to approximately $21,601,000, in
1995. The investment yield, on an after-tax basis, remained
constant at approximately five percent. After-tax realized
investment gains in 1995, and 1994, were $2,139,000 and $1,955,000,
respectively. Other-than-temporary investment impairments of
$1,388,000, after-tax, were recorded during 1995, while no
impairments were deemed necessary during 1994.
The unrealized investment gains on fixed maturities available
for sale and on equity securities as of December 31, 1995, were
$12,063,000 and $11,814,000, respectively. The unrealized gain on
the fixed maturities held to maturity portfolio was $2,126,000 as
of December 31, 1995. 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 income tax benefit was 21.8% of pre-tax income in 1995
versus income tax expense of 23.8% in 1994. The 1995 income tax
benefit was a combination of underwriting losses and nontaxable
interest income and dividends received deduction.
Overall, the Company's net earnings decreased $13,622,000, for
the year ended December 31, 1995, compared to the year ended
December 31, 1994. Net earnings per common share were $0.67 for
1995, versus $1.86 for 1994. For the year ended December 31, 1995,
the strengthening of the Company's loss reserves accounted for
$9,081,000, or $0.68 per share, net of tax, of the decrease. The
remaining decrease in earnings per share for the year is
attributable to the increased loss ratios within the commercial and
personal operating units.
Liquidity and Capital Resources
The Company's operations have produced positive operating cash
flow during the past nine years. Net cash provided by operating
activities was $44,436,000, $29,101,000, and $39,478,000 for 1996,
1995 and 1994, respectively. The increase in operating cash flow
in 1996, compared to 1995, was mainly the result of higher premiums
and net investment income collected, as well as lower income tax
payments. Additionally, the Company paid less agency contingent
commissions during the current year, compared to the prior year.
These fluctuations were partially offset by higher levels of loss
and loss adjustment expense payments, policy acquisition costs and
interest paid during 1996, compared to 1995. Overall, during 1996
the ratio of losses and loss adjustment expenses paid to losses and
loss adjustment expenses incurred increased approximately 9%, when
compared to this same ratio for 1995.
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<PAGE>
Net cash used in investing activities amounted to $38,506,000,
$120,685,000, and $35,171,000 for 1996, 1995 and 1994,
respectively. The $82,179,000 decrease in cash used in investing
activities during 1996, compared to 1995, mainly related to a
decline in cash used to acquire subsidiaries. As discussed above,
in the prior year the Company acquired Viking. However, in the
current year there were no acquisitions of subsidiaries. The
decrease in funds used to acquire subsidiaries was offset, in part,
by a net increase in purchases of all types of investments. The
increased investment purchases were partially offset by increased
sales and maturities of equity and fixed maturity securities.
Net cash used in financing activities was $8,736,000 in 1996,
versus net cash provided by financing activities of $88,769,000 and
$1,315,000 in 1995 and 1994, respectively. The net cash provided
by financing activities during 1995 was used to finance the Viking
acquisition. During 1996, the Company paid approximately
$1,313,000 in principal payments on its 6.5% term loan, which is
discussed in Note 6 to the Consolidated Financial Statements. As
of December 31, 1996, the Company had $10,000,000 available under
its reducing, revolving credit facility. The Company declared and
paid a regular quarterly dividend of $0.125 in each of the four
quarters during 1996.
The Company's 1996 book value per share increased $1.49, to
$15.90. This increase was primarily due to the significant
increase in the Company's net earnings during 1996, compared to
1995, coupled with an increase in the unrealized investment gains
caused by the strong stock markets during 1996.
The Company's level of short-term investments at December 31,
1996 and 1995 was 14.2% and 8.4%, respectively, of total
investments. The increase resulted from management's decision to
reduce the average duration of its investment portfolio and to
shift its investment mix to securities with more liquidity.
Company management believes that it maintains sufficient liquidity
in its investment portfolio through its short-term investment
holdings to meet anticipated claim payments and other insurance
payment requirements.
Securities are classified as available for sale and carried at
estimated fair value, unless they meet the Company's criteria to be
classified as held to maturity. Such criteria include investment
grade bonds with stated maturities less than 10 years. The
unrealized investment gains on fixed maturities available for sale
and on equity securities as of December 31, 1996, were $7,875,000
and $18,444,000, respectively. Overall, the unrealized gains on
equity securities increased $6,630,000 during 1996, compared to
1995, due to the strong stock market. The December 31, 1996
unrealized gain on the fixed maturities held to maturity portfolio
was $1,160,000. The estimated fair value of the Company's fixed
maturity investments generally varies inversely with changes in the
general level of interest rates. The estimated fair value of
federal agency and other mortgage pool securities is subject to
additional fair value volatility due to the impact of changes in
prepayment rates on the mortgages which underlie such securities.
Guaranty's projected use of cash consists of debt service,
dividends to shareholders, income taxes, and administrative
expenses. These required cash disbursements will be funded
primarily from existing available cash and dividends from Guaranty
National Insurance Company ("GNIC") and Viking Insurance Company of
Wisconsin ("VICW"). GNIC paid no dividends to Guaranty during
1996. However, VICW paid dividends in the amount of $8,687,000 to
Guaranty in 1996. Payment of dividends by GNIC and VICW must
comply with insurance regulatory limitations. Under current
regulations, permitted dividends exceed Guaranty's projected cash
requirements. The Colorado dividend restriction law limits the
annual dividend which can be paid by GNIC to the greater of 10% of
the insurer's statutory surplus or statutory net income, excluding
realized capital gains, as reported at the end of the preceding
calendar year. The Wisconsin dividend restriction law limits the
annual dividend that VICW may pay to Guaranty to the lesser of 10%
of VICW's statutory surplus as of the end of the preceding calendar
year or the greater of either the statutory net income of VICW for
the preceding calendar year, less realized capital gains, or the
aggregate of the net income of VICW for the three calendar years
preceding the date of the dividend, less realized capital gains for
those calendar years minus dividends paid or credited and
distributions made within the first two of the preceding three
calendar years. Under these laws, approximately $25,307,000, in
total, is available to pay dividends to Guaranty in 1997. The
Company believes both GNIC and VICW will be in position to pay
comparable dividends to Guaranty in the future. Management
believes that in addition to the $10,000,000 available under the
Company's reducing, revolving credit facility, Guaranty has
substantial sources of further liquidity, if necessary, from
capital markets and bank borrowings.
On July 2, 1996, Orion 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, 1996 Orion purchased an additional 120,000
shares of the Company's common stock in the open market, increasing
their ownership percentage of
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<PAGE>
the Company from 49% to 81%. See Note 17 to the Consolidated
Financial Statements for further discussion related to these Orion
transactions.
As a result of Orion's tender offer, the Company was served with
three separate complaints alleging that the Orion tender offer
price was unfair and inadequate. See Note 12 to the Consolidated
Financial Statements for more discussion related to these
complaints.
On July 18, 1995, the Company acquired Viking for approximately
$94,681,000 in cash, including acquisition expenses and net of cash
acquired. In return, the Company received the common stock of
Viking, with net assets valued at $86,613,000. Additionally,
because Viking controls VCM, the Company and its affiliates receive
100% reinsurance services in the state of Texas from VCM. See Note
9 to the Consolidated Financial Statements for further discussion
of the 100% reinsurance arrangement.
From 1991 through 1995, the Company was indebted to Orion under
a $20,896,000 subordinated note agreement. However, subsequent to
the date of the original agreement various refinancing arrangements
and amendments were made. The last of these modifications took
place on June 14, 1995, and added a common stock conversion
feature. Thereafter, on June 22, 1995, the Company converted
$8,667,000 of the Orion Notes into 550,000 shares of common stock.
The remaining balance of these notes, $12,229,000, was converted
into 776,128 shares of common stock on October 30, 1995. Of the
total 1,326,128 common shares issued to Orion during 1995, as part
of the note conversion, 415,000 of these shares were re-issued
treasury shares. At December 31, 1994, the Company had a total of
438,200 shares of treasury stock, at a cost of $6,342,000, which
had been repurchased during 1994 pursuant to its stock repurchase
plan. However, in 1995 all of the treasury shares repurchased
during 1994 were re-issued either to Orion or in connection with
awards and the exercise of stock options under the Company's 1991
Long-Term Performance Incentive Plan.
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. This
additional purchase price amount is estimated to be $4,333,000.
See Note 3 to the Consolidated Financial Statements for further
discussion of this obligation. There are no other significant
contingencies or commitments known to management that would have a
material impact on the Company's liquidity or financial condition.
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 $1,300,000. In May
1994, the Company consolidated its Colorado operations to a new
facility, which provides facilities to support future growth.
Expenditures for the new facility totaled $16,208,000, primarily
funded from operating cash flow. Total nonrecurring relocation
charges were $838,000 in 1994.
On August 26, 1994, the Company acquired General Electric
Mortgage Insurance Corporation of California ("GEMIC") for
$6,363,000 in cash and received in exchange the common stock of
GEMIC, which had net assets valued at $5,508,000. The Company
renamed GEMIC as Guaranty National Insurance Company of California
("GNICOC"). The Company is utilizing GNICOC for its California
commercial and collateral protection business, reducing the need
for 100% reinsurance services from Orion. GNICOC retained no
liabilities from its previously written business and other
operations.
On December 17, 1996, James R. Pouliot was promoted to President
and Chief Executive Officer, following Roger B. Ware's retirement
on this same date. Also, during 1996, the Company's Board of
Directors elected W. Marston Becker, who was named Chairman and CEO
of Orion, to the Company's Board of Directors.
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<PAGE>
Forward Looking Statements
Some of the statements made in this Form 10-K Report, as well as
statements made by the Company in periodic press releases, oral
statements made by the Company's officials to analysts and
shareholders in the course of presentations about the Company and
conference calls following earnings releases, constitute "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Such forward-
looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or
achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by
the forward-looking statements. Such factors include, among other
things, (i) general economic and business conditions; (ii) interest
rate changes; (iii) competition and regulatory environment in which
the Company operates; (iv) claims frequency; (v) claims severity;
(vi) severe adverse weather conditions; (vii) the cost of
automobile repair; (viii) the number of new and renewal policy
applications submitted by the Company's agents; and (ix) other
factors over which the Company has little or no control.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The management of Guaranty National Corporation is responsible
for the consolidated financial statements and the information
included therein. The consolidated financial statements are fairly
presented and have been prepared in accordance with generally
accepted accounting principles and are appropriate in the
circumstances, and, where necessary, include amounts based on
management's informed estimates and judgments.
The Company has an internal control structure which it believes
provides reasonable assurance that assets are safeguarded from loss
or unauthorized use, transactions are recorded in accordance with
management's policies and that the financial records are reliable
for preparing consolidated financial statements. The internal
control structure includes written policies and procedures which
are communicated to all appropriate personnel and updated as
necessary.
Compliance with the internal control structure is continuously
maintained and monitored by management. The internal audit staff
of the Company evaluates and reports on the adequacy of and
adherence to these controls, policies and procedures. In addition,
as part of its audit of the consolidated financial statements,
Deloitte & Touche LLP, the independent auditors for the Company,
evaluate the Company's internal control structure to the extent
they consider necessary to express an opinion on the consolidated
financial statements. Recommendations concerning the internal
control structure are provided by both the internal auditors and
Deloitte & Touche LLP, and management takes actions which are
believed to be appropriate responses to these recommendations.
The Audit Committee of the Board of Directors is comprised of
independent directors, and has general responsibility for oversight
of financial controls and audit activities of the Company and its
subsidiaries. The Audit Committee, which reports to the Board,
annually reviews the qualifications of the independent auditors and
meets periodically with them, the internal auditors and management
to review the plans for and results of the audits. Both internal
and independent auditors have free access to the Audit Committee,
without members of management present, to discuss the adequacy of
the internal control structure and any other matters which they
believe should be brought to the attention of the Audit Committee.
s/James R. Pouliot s/Michael L. Pautler
James R. Pouliot Michael L. Pautler
President and Chief Executive Officer Senior Vice President -
Finance and Treasurer
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<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Guaranty National Corporation
We have audited the accompanying consolidated balance sheets of
Guaranty National Corporation and subsidiaries ("the Company") as
of December 31, 1996 and 1995, and the related consolidated
statements of earnings, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Guaranty National Corporation and subsidiaries at December 31, 1996
and 1995 and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles.
s/Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
February 14, 1997
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<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
December 31,
-----------------------
1996 1995
---- ----
Investments:
Fixed maturities held to maturity, at cost $ 80,271 $ 75,017
Fixed maturities available for sale, at market 390,290 395,198
------- -------
470,561 470,215
Equity securities, at market 88,102 85,085
Other long-term investments 13,585 11,521
Short-term investments available for sale,
at market 94,993 52,257
------- -------
Total investments 667,241 619,078
Cash 3,988 6,794
Accrued investment income 7,971 7,603
Accounts receivable, (less allowance of
$171 - 1996; $374 - 1995) 45,557 51,638
Reinsurance recoverables and prepaids,
(less allowance of $200 - 1996; $200 - 1995 ) 90,781 81,825
Property and equipment, (less accumulated
depreciation of $13,508 - 1996; $9,326 - 1995) 29,833 31,573
Deferred policy acquisition costs 44,456 37,637
Goodwill, (less accumulated amortization
of $6,423 -1996; $5,263 - 1995) 34,639 33,133
Other assets 4,626 5,892
-------- --------
Total assets $929,092 $875,173
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses $303,266 $290,156
Unpaid loss adjustment expenses 65,142 64,478
Unearned premiums 154,242 146,205
Notes payable 101,688 103,000
Reinsurance payables and deposits 7,268 8,290
Other liabilities 59,447 47,493
-------- --------
Total liabilities 691,053 659,622
-------- --------
Commitments and contingencies
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;
14,961,354 shares - 1995 14,975 14,961
Capital in excess of par 121,272 121,050
Retained earnings 84,685 64,664
Deferred compensation on restricted stock (644)
Net unrealized investment gains 17,107 15,520
-------- --------
Total shareholders' equity 238,039 215,551
-------- --------
Total liabilities and shareholders' equity $929,092 $875,173
======== =========
See notes to consolidated financial statements
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<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
Year Ended December 31,
-----------------------------------
1996 1995 1994
---- ---- ----
Revenue:
Premiums earned $481,648 $390,017 $321,638
Net investment income 39,439 30,976 23,576
Realized investment gains 8,455 3,291 3,007
Other income 2
-------- -------- --------
529,542 424,284 348,223
Expenses:
Losses incurred 279,108 248,771 180,865
Loss adjustment expenses 58,676 44,742 32,640
Policy acquisition costs 133,931 110,341 93,103
General and administrative 10,422 6,458 7,206
Interest 6,851 5,708 3,218
Nonrecurring charges 2,163 838
Other 1,510 932 766
-------- ------- --------
492,661 416,952 318,636
-------- ------- --------
Earnings before income taxes (benefit) 36,881 7,332 29,587
Income taxes (benefit) 9,375 (1,597) 7,036
-------- -------- --------
Net earnings $27,506 $ 8,929 $22,551
======== ======== ========
Earnings per common share $ 1.84 $ 0.67 $ 1.86
======== ========= ========
See notes to consolidated financial statements
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GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Deferred Unrealized
Capital Compensation Investment
Common in Excess Retained on Restricted Gains Treasury
Stock of Par Earnings Stock (Losses) Stock
------ --------- -------- ------------- ---------- -------
Balance,
January
1, 1994 $12,480 $83,991 $45,888 $ (663) $10,793 $
Net earnings 22,551
Change in
unrealized
investment
(losses),
less
applicable
deferred taxes (17,854)
Purchase of
treasury
stock (6,636)
Exercise of
stock options
and issuance
of restricted
stock, net of
cancellation 74 (368) 294
Amortization of
deferred
compensation on
restricted
stock 8 250
Cash dividends
declared and
paid (6,049)
------ --------- -------- ------------- ---------- -------
Balance
Decenber
31, 1994 12,480 84,073 62,390 (781) (7,061) (6,342)
Net earnings 8,929
Change in
unrealized
investment
gains, less
applicable
deferred taxes 22,581
deferred taxes
Exercise of
stock options
and issuance
of restricted
stock, net of
cancellations 20 329 (126) 327
Amortization of
deferred
compensation on
restricted
stock 8 263
Sale of common
stock 1,550 22,670
Conversion of
affiliate debt 911 13,970 6,015
Cash dividends
declared and
paid (6,655)
------- --------- -------- ------------- ---------- -------
Balance,
December
31, 1995 14,961 121,050 64,664 (644) 15,520
1995
Net earnings 27,506
Change in
unrealized
investment
gains, less
applicable
deferred taxes 1,587
Exercise of
stock options,
net of
cancellation 14 222
Amortization of
deferred
compensation on
restricted
stock 644
Cash dividends
declared and
paid (7,485)
------- --------- -------- ------------- ---------- -------
Balance,
December
31, 1996 $14,975 $121,272 $84,685 $ $17,107 $
======= ======== ======= ============ ========= ========
See notes to consolidated financial statements.
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GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December 31,
----------------------------------
1996 1995 1994
----- ---- ----
Operating Activities:
Premiums collected $496,686 $396,621 $321,000
Net investment income collected 35,102 29,938 22,969
Losses and loss adjustment
expenses paid (339,442) (267,641) (199,530)
Policy acquisition costs
and general and
administrative expenses paid (145,711) (119,821) (93,495)
Interest paid (6,817) (6,005) (3,043)
Nonrecurring charges paid (1,302) (978)
Federal income taxes paid (2,470) (5,359) (6,108)
Other receipts (payments) 8,390 1,368 (1,337)
--------- ---------- --------
Net cash provided by
operating activities 44,436 29,101 39,478
--------- ---------- --------
Investing Activities:
Maturities of fixed maturities
held to maturity 9,795 12,096 10,231
Maturities of fixed maturities
available for sale 56,553 20,219 8,281
Sales of fixed maturities
available for sale 49,931 40,158 37,147
Sales of equity securities 40,373 28,367 19,185
Net change in short-term investments (42,584) (20,039) 7,535
Sales of property and equipment 303 590 274
Purchases of fixed maturities held
to maturity (20,780) (10,138) (16,570)
Purchases of fixed maturities
available for sale (100,536) (74,652) (57,989)
Purchases of equity securities (29,512) (21,480) (21,883)
Net change in other long-term
investments 1,433 1,825 (1,376)
Purchases of property and equipment (3,482) (2,950) (13,643)
Acquisition of subsidiaries, net of
cash acquired (94,681) (6,363)
---------- --------- ---------
Net cash used in investing
activities (38,506) (120,685) (35,171)
---------- --------- ---------
Financing Activities:
Proceeds from issuance of
notes payable 130,654 14,000
Repayment of notes payable (1,313) (60,000)
Dividends paid to shareholders (7,485) (6,655) (6,049)
Purchase of treasury stock (6,636)
Proceeds from issuance of common stock 24,220
Proceeds from exercise of stock
options 62 550
--------- -------- --------
Net cash (used in) provided by
financing activities (8,736) 88,769 1,315
--------- -------- --------
Net (Decrease) Increase in Cash (2,806) (2,815) 5,622
Cash, Beginning of
Year 6,794 9,609 3,987
--------- ------- --------
Cash, End Of Year $3,988 $6,794 $9,609
========= ======= ========
Non-Cash Financing Transactions:
Conversion of affiliate debt $ $ (20,896) $
Issuance of common stock in
conversion of affiliate debt 14,881
Conversion of affiliate debt
from treasury stock 6,015
Restricted stock forfeitures (126)
(Continued)
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<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December 31,
---------------------------------------
1996 1995 1994
----- ---- ----
Reconciliation of Net Earnings
to Net Cash Provided By
Operating Activities:
Net earnings $27,506 $ 8,929 $22,551
Adjustments:
Depreciation 4,392 3,490 2,692
Non-cash investment income (3,969) (275) (401)
Realized investment gains (8,455) (3,291) (3,007)
Amortization of goodwill 1,160 883 766
Deferred tax provision (benefit) 4,164 (3,543) 24
Other 1,061 979 774
Changes in assets and liabilities:
Accrued investment income (368) (763) (206)
Accounts receivable 6,081 (2,782) (2,248)
Reinsurance recoverables and
prepaids (8,956) (6,679) (8,070)
Deferred policy acquisition costs (6,819) (3,775) 187
Other assets (44) 250 (25)
Unpaid losses 13,110 26,620 15,778
Unpaid loss adjustment expenses 664 5,829 4,478
Unearned premiums 8,037 12,375 3,506
Reinsurance payables and deposits (1,022) (821) (4,261)
Other liabilities 7,894 (8,325) 6,940
--------- ---------- ---------
Total adjustments and changes 16,930 20,172 16,927
--------- ---------- ---------
Net Cash Provided by Operating
Activities $44,436 $29,101 $39,478
========= ========== =========
See notes to consolidated financial statements.
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<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations - Guaranty National Corporation and
its subsidiaries (the "Company") is a corporation based in
Englewood, Colorado which principally underwrites and sells
specialty property and casualty insurance coverages that are
generally not available in traditional insurance markets. The
Company manages its business under three operational areas based on
function: commercial lines, personal lines and collateral
protection.
The Company's insurance subsidiaries are authorized as multiple-
line insurance carriers and may insure all types of property and
liability risks. The insurance coverages provided by these
insurance carriers are generally known as nonstandard risks due to
the potential for poor claims experience because of increased risk
exposure. The insurance subsidiaries market insurance coverage
throughout the United States, and one or more of these subsidiaries
are admitted in all states.
Basis of presentation - The consolidated financial
statements and notes thereto are presented in accordance with
generally accepted accounting principles ("GAAP") for property and
casualty insurance companies. The preparation of the Company's
consolidated financial statements in conformity with generally
accepted accounting principles requires Company management to make
estimates and assumptions that affect the amounts reported in these
consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
From November 1, 1988, through November 19, 1991, Orion Capital
Corporation and its affiliates ("Orion") owned 100% of Guaranty
National Corporation and subsidiaries outstanding common stock.
The assets and liabilities of the Company were revalued at the time
of the 1988 Orion purchase. The accompanying consolidated
financial statements reflect the recording of these acquisition
adjustments by Orion. Orion's current ownership is approximately
81%.
In 1995, the Company acquired control of, but not ownership of,
Viking County Mutual Company ("VCM"). VCM is a Texas mutual
organization which performs 100% reinsurance services in the state
of Texas for its affiliated companies. VCM is not included in the
consolidated financial statements.
As discussed in Notes 9 and 14, there are various transactions
with Orion and VCM which include certain expenses paid to Orion and
VCM and other transactions with Orion affiliates and VCM. In the
opinion of management, the transaction amounts with Orion are
reasonable and representative of expenses that would have been
incurred in transactions with unrelated parties.
Certain reclassifications have been made to the 1995 and 1994
consolidated financial statements to conform with the presentation
used in 1996.
Principles of consolidation - The consolidated financial
statements include the accounts of Guaranty National Corporation
("Guaranty") and its wholly-owned subsidiaries, Intercon General
Agency, Inc. ("Intercon"), Auto Insurance Centers, Inc. ("AIC"),
Guaranty National Warranty Services ("GNWS"), Guaranty National
Insurance Company ("GNIC") and Viking. GNIC includes its wholly-
owned subsidiaries, Landmark American Insurance Company ("LAIC"),
Colorado Casualty Insurance Company ("CCIC"), Peak Property and
Casualty Insurance Corporation ("PEAK"), and Guaranty National
Insurance Company of California ("GNICOC"). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Significant accounting policies - This summary of significant
accounting policies is presented to assist in understanding the
Company's consolidated financial statements:
a. Investments - Investments in bonds and redeemable
preferred stocks are carried in the accompanying consolidated
balance sheets as fixed maturities. Fixed maturities for which the
Company has the positive intent and ability to hold until maturity
are carried at amortized cost. Fixed maturities classified as
available for sale are carried at estimated fair value with any
unrealized gains or losses reflected in shareholders' equity, net
of applicable deferred taxes. Losses considered other than
temporary are recorded in earnings as a realized loss. The
Company's criteria used to identify fixed maturities held to
maturity as of December 31, 1996 and 1995, generally includes
investment grade bonds
-40-
<PAGE>
with stated maturities less than 10 years. All other fixed
securities are classified as available for sale and may be sold in
response to changes in interest rates, anticipated prepayments,
liquidity needs or other economic factors. Select issues with
maturities beyond 10 years may be classified as held to maturity
due to certain factors, including expected early call provisions.
Investments in common stocks and nonredeemable preferred stocks
are classified as available for sale and are carried at estimated
fair value, with any unrealized gains or losses of securities
reflected in shareholders' equity, net of applicable deferred
taxes. Losses considered other than temporary are recorded in
earnings as a realized loss.
Estimated fair value for securities is generally based on last
sales prices, listed bid prices, bid quotations received from
security dealers or, when estimated fair values are not readily
available through market sources, fair value estimates are based on
quoted market prices of similar instruments. Mortgage loans are
carried at their unpaid balance and are classified as other long-
term investments. Estimated fair value for mortgage loans is
calculated by discounting scheduled cash flows through maturity
using estimated market discount rates. Other long-term
investments, which are principally comprised of interests in
several investment limited partnerships, are generally carried at
equity value which approximates estimated fair value. Short-term
investments, which include certificates of deposit, money market
accounts, and commercial paper maturing within one year of the
balance sheet date, are carried at cost which approximates
estimated fair value.
Realized investment gains and losses are recognized on the
specific identification method, and amortization of premiums and
discounts is determined using the interest method.
b. Losses and loss adjustment expenses - Losses and loss
adjustment expenses ("LAE") are charged to operations as incurred.
Losses and LAE liabilities are determined on the basis of claims
adjusters' evaluations and estimates based on historical experience
including estimates of incurred but not reported losses and salvage
and subrogation recoveries. Such liabilities are recorded gross of
applicable reinsurance. The Company does not discount the
liability for unpaid losses and LAE. Management believes that the
recorded liabilities are a reasonable provision for all losses and
loss adjustment expenses incurred. Notwithstanding the foregoing,
no assurances can be given that further reserve development may not
occur in the future as the process of establishing loss and LAE
reserves is, by nature, imprecise. The estimates are continually
reviewed and as adjustments to these estimates become necessary,
such adjustments are reflected in current operations.
c. Revenue recognition - Unearned premiums are generally
computed on a daily pro-rata method over the term of the policies
in-force and are carried gross of related reinsurance.
Historically, the Company has not experienced significant losses
related to receivables because of short payment terms and the lack
of concentrations of credit risk. Thus, the carrying amount
approximates estimated fair value.
d. Deferred policy acquisition costs - Policy acquisition
costs are deferred and charged to operations over the periods in
which the related premiums are earned. The determination of
recoverability of such deferred costs includes anticipated
investment income.
e. Property, equipment and depreciation - Property and
equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives.
f. Income taxes - Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled.
g. Goodwill - The excess of Viking's cost over fair value of
net assets acquired is being amortized by the straight-line method
over 40 years. The excess of Orion's cost over fair value of net
assets acquired and other goodwill recorded in the consolidated
balance sheet is being amortized by the straight-line method over
31 to 36 years. Reflected in other expenses is amortization of
goodwill of $1,160,000, $883,000, and $766,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
h. Statement of cash flows - For purposes of the
consolidated statements of cash flows, the Company considers only
demand deposit accounts to be cash.
-41-
<PAGE>
i. Earnings per share - Earnings per share for 1996, 1995
and 1994 has been computed by dividing net earnings by the number
of weighted average shares and equivalent shares outstanding of
14,973,332, 13,324,200 and 12,135,505, respectively. The common
stock equivalents are stock options which result in a dilutive
effect from assumed exercise of the options.
j. Employee stock compensation plans - The Company follows
Accounting Principles Board Opinion (APB) No. 25, "Accounting for
Stock Issued to Employees." The exercise price of stock options
issued to employees equals the market price of the stock on the
measurement date, and therefore, the Company does not record
compensation expense on stock options granted to employees.
Restricted stock issued to employees is considered issued and
outstanding when awarded, and is recorded as deferred compensation.
2. Statutory Accounting Practices
The accompanying consolidated financial statements are prepared
under GAAP which differs materially from practices prescribed by
statutory accounting rules and regulations. Under such practices,
GNIC consolidated policyholders' surplus reported to the state
regulatory authorities as of December 31, 1996 and 1995 was
$164,473,000 and $133,749,000, respectively, and Viking Insurance
Company of Wisconsin ("VICW") consolidated policyholders' surplus
as of December 31, 1996 and 1995 was $89,342,000 and $86,872,000,
respectively. SStatutory net income, as reported to state
insurance departments, is as follows (in thousands):
GNIC VICW
Year ended December 31, 1996 $20,450 $ 9,366
Year ended December 31, 1995 7,875 15,866
Year ended December 31, 1994 26,324
3. Acquisitions
On July 18, 1995, the Company acquired Viking in a business
combination accounted for as a purchase. Viking is a property
and casualty insurance company writing nonstandard personal
automobile insurance, primarily in the state of California.
The results of operations of Viking are included in the
accompanying consolidated financial statements since the date
of acquisition.
The total cost of the acquisition was $97,225,000, with
total cash paid of approximately $94,681,000, including
acquisition expenses and net of $878,000 cash acquired. The
total consideration exceeded the fair value of the net assets
of Viking by approximately $10,612,000. The total acquisition
cost differs from the announced total consideration paid of
$103,000,000 due to transaction expenses, the contingent
purchase price adjustments, discussed below, and a $12,000,000
extraordinary dividend taken by Talegen Holdings, Inc.
("Seller") from Viking just prior to the sale.
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 LAE reserves. The Company has agreed to
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. 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 this estimated amount of approximately
$4,333,000, as well as the corresponding
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<PAGE>
interest payable, in the accompanying consolidated financial
statements. Loss and LAE reserves of Viking were recorded at
the date of acquisition at amounts consistent with the
Company's estimates of additional purchase price that will be
paid.
The following summarized pro forma information (unaudited)
assumes the Viking acquisition had occurred on January 1, 1995
and 1994 (in thousands, except per share amounts):
Twelve Months Ended
December 31,
1995 1994
Total Revenue $512,718 $509,657
======= =======
Net Income 7,765 30,014
======= =======
Earnings Per Share $ 0.53 $ 2.05
======= =======
The above amounts reflect adjustments used in recording the
purchase, such as adjustments for interest on notes payable
issued as part of the purchase price, amortization of goodwill,
and fees eliminated as a result of the acquisition.
4. Investments
The amortized cost and estimated fair values of investments in
fixed maturity and equity securities are as follows (in thousands):
December 31,
----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
1996
- ----
Fixed maturity securities
held to maturity:
U.S. Treasury and
U.S. Government agencies $30,674 $ 170 $ 106 $30,738
State and municipal 47,605 1,202 146 48,661
Corporate 1,992 39 2,031
------ ------ ------ ------
80,271 1,411 252 81,430
Fixed maturity securities
available for sale:
U.S. Treasury and
U.S. Government agencies 112,115 1,222 548 112,789
State and municipal 156,439 6,150 165 162,424
Corporate 113,861 3,290 2,074 115,077
------- ------ ------ -------
382,415 10,662 2,787 390,290
------- ------ ------ -------
Total fixed maturity securities $462,686 $ 12,073 $ 3,039 $471,720
======= ======= ====== =======
Equity securities:
Common stocks $ 42,689 $ 17,966 $ 1,240 $ 59,415
Nonredeemable preferred stocks 26,969 3,096 1,378 28,687
------- ------- ------ -------
Total equity securities $ 69,658 $ 21,062 $ 2,618 $ 88,102
======= ======= ====== =======
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<PAGE>
December 31,
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ----------- --------
1995
- ----
Fixed maturity securities
held to maturity:
U.S. Treasury and
U.S. Government agencies $ 17,943 $ 896 $ $ 18,839
State and municipal 53,907 1,564 400 55,071
Corporate 3,167 66 3,233
------- ------ ------- -------
75,017 2,526 400 77,143
Fixed maturity securities
available for sale:
U.S. Treasury and
U.S. Government agencies 123,209 3,000 126,209
State and municipal 176,461 8,298 161 184,598
Corporate 83,465 2,884 1,958 84,391
------- ------ ------ -------
383,135 14,182 2,119 395,198
======= ====== ====== =======
Total fixed maturity securities $458,152 $16,708 $ 2,519 $472,341
======= ====== ====== =======
Equity securities:
Common stocks $ 41,994 $12,767 $ 2,622 $ 52,139
Nonredeemable preferred
stocks 31,277 3,654 1,985 32,946
------- ------ ------ -------
Total equity securities $ 73,271 $16,421 $ 4,607 $ 85,085
======= ====== ====== =======
For a summary of the amortized costs and estimated fair
value of fixed investment maturities at December 31, 1996 and 1995,
by contractual maturity, see Note 7.
Net investment income is summarized as follows (in thousands):
Year Ended December 31,
------------------------------------
1996 1995 1994
---- ---- ----
Type of investment:
Fixed maturities held to maturity $ 4,090 $ 7,531 $ 7,653
Fixed maturities available
for sale 24,369 15,886 10,999
Common stocks 1,686 1,420 1,147
Nonredeemable preferred stocks 2,393 2,432 2,557
Short-term investments 4,570 2,439 1,145
Other 3,702 2,397 1,166
------ ------ ------
Total investment income 40,810 32,105 24,667
Less investment expenses 1,371 1,129 1,091
------ ------ ------
Net investment income $39,439 $30,976 $23,576
====== ====== ======
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<PAGE>
Realized investment gains and losses, which include a write-
downs for other-than-temporary investment impairments of $2,135,000
as of December 31, 1995, are as follows (in thousands):
Year Ended December 31,
-----------------------------------
1996 1995 1994
---- ---- ----
Fixed maturities held to maturity:
Gains $ $ 360 $ 174
Losses (269) (21)
------ ------ ------
91 153
Fixed maturities available for sale:
Gains 1,815 1,566 2,374
Losses (1,322) (2,869) (2,657)
----- ----- -----
493 (1,303) (283)
Equity securities:
Gains 9,950 6,227 3,192
Losses (1,988) (1,724) (55)
----- ----- -----
7,962 4,503 3,137
----- ----- -----
Total $ 8,455 $ 3,291 $ 3,007
===== ===== =====
Net change in unrealized gains (losses) in the estimated fair
value of investments is as follows (in thousands):
Year Ended December 31,
--------------------------------------
1996 1995 1994
---- ---- ----
Fixed maturities held to maturity $ (967) $ 4,999 $ (7,819)
Fixed maturities available for sale (4,188) 24,044 (20,675)
Equity securities 6,630 10,697 (6,672)
------ ------ -------
Total $ 1,475 $39,740 $(35,166)
====== ====== =======
To augment the average yield on its investment portfolio, the
Company invests a portion of its fixed maturity assets in "high
yield" bonds and preferred stocks, which are investments of a
quality considered to be noninvestment grade (rated "BB" or below).
Such securities are generally considered to have a higher potential
of loss due to default because they are unsecured, subordinated to
other debt and/or issued by highly leveraged companies. At
December 31, 1996 and 1995, the Company had investments in "high
yield" securities of $55,205,000 and $36,641,000 with estimated
fair values of $56,477,000 and $36,356,000, respectively.
The Company closely monitors the financial condition of issuers
of securities that it owns, and if conditions are deemed
appropriate, the Company ceases to accrete, discount, accrue
interest or record "pay in-kind" interest or dividends. The
Company had $315,000 and $230,000 of fixed maturities at estimated
fair value at December 31, 1996 and 1995, respectively, which had
been non-income producing for a portion of the previous twelve
months. All fixed maturities at December 31, 1994 had been income
producing during the year. At December 31, 1996 and 1995, total
other-than-temporary investment impairments amounted to $1,700,000
and $2,135,000, respectively. There were no other-than-temporary
investment impairments at December 31, 1994. In 1995, and as a
result of the Statement of Financial Accounting Standards (SFAS)
No. 115 "Implementation Guide" the Company transferred certain
fixed maturities from the held to maturity portfolio to the
available for sale portfolio. The amortized cost of this transfer
was $41,643,000 and the unrealized gain was $916,000. During 1994,
the Company transferred fixed maturity securities from the held to
maturity portfolio to the available for sale portfolio due to the
decrease in credit ratings of three issuers. The amortized cost of
this transfer was $4,219,000 and the unrealized loss was $450,000.
Concentrations of credit risk exist for groups of issuers
when they have similar economic characteristics that would cause
their ability to meet their obligations to be similarly affected by
changes in economic or other conditions. At December 31, 1996, the
Company holds $35,543,000 of fixed maturity and equity securities
of public utilities and $210,029,000 of fixed maturities of state
and local governments; these holdings are not collateralized. The
Company does not have a concentration of credit risk with any one
issuer of fixed income or equity securities.
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<PAGE>
5. Property and Equipment
In May 1996, Viking moved its Freeport, Illinois operations from
a leased facility to an office building which was acquired by
Viking. Viking purchased the building in February 1996, for
approximately $1,300,000.
In conjunction with the Viking acquisition, in July 1995,
the Company acquired two Viking owned properties, as well as
various Viking owned equipment. The Viking owned properties
consist of Viking's corporate office building located in Madison,
Wisconsin, and a regional claims office located in Salem, Oregon.
The estimated fair value of these two facilities, as well as the
equipment, totaled approximately $7,028,000 at July 18, 1995, the
acquisition closing date.
During 1994, the Company relocated its Colorado operations
to a new home office facility. See Note 17 for further discussion
of this relocation.
6. Notes Payable
On June 2, 1995, the Company entered into a $110,000,000 credit
agreement ("Credit Agreement") with several participating banks.
The Agreement provides for an unsecured reducing revolving credit
facility, used in part to fund the Viking acquisition (See Note 3),
to retire the outstanding balance of $29,000,000 under the
Company's previous revolving line of credit, and for working
capital and general corporate purposes.
The Credit Agreement was amended and restated as of December 16,
1996, in order to obtain a more favorable commitment fee and London
Interbank Offered Rate (LIBOR) margin, to adjust the repayment
schedule and terms, and to modify certain of the debt covenants.
Under the amended and restated Credit Agreement, principal payments
are required beginning April 15, 1998, until the loan is retired in
2002. The Company made an early principal payment during 1995 in
the amount of $2,000,000, and therefore, the next principal payment
is due on April 15, 1999. Interest is payable quarterly, and
interest rates are based on the floating LIBOR rate. As of
December 31, 1996, the outstanding loan amount under this Agreement
was $100,000,000, with an interest rate of 6.24% (see Note 11).
Loan fees are being amortized over the seven year life of the loan.
The Credit Agreement contains covenants with respect to
minimum net worth and statutory surplus, the maximum ratio of net
written premiums to surplus, the minimum fixed charge coverage
ratio, the minimum level of total adjusted capital (within the
meaning of the Risk-Based Capital for Insurers Model Act as
promulgated by the National Association of Insurance
Commissioners), and limitations on other items, such as permitted
investments and disposition of material assets. The Company is
currently in compliance with the affirmative, negative and
financial covenants of the Agreement.
On June 14, 1995, the Company amended the $20,896,000
subordinated notes ("Orion Notes") held by Orion, to include a
common stock conversion feature. On June 22, 1995, the Company
converted $8,667,000 of the Orion Notes into 550,000 shares of
common stock. On October 30, 1995, the Shareholders of the Company
approved the conversion of the remaining balance of the Orion Notes
into 776,128 shares of common stock.
As of December 31, 1996, the Company had a remaining principal
balance of $1,688,000 under its 6.5% term loan, which was entered
into during 1994 in order to purchase furniture and fixtures for
the new home office facility. This term loan is secured by the
furniture and fixtures purchased. Quarterly principal and interest
payments are due on this loan until April 1, 1999.
Maturities of notes payable are as follows: 1997-$562,500; 1998-
$750,000; 1999- $22,375,000; 2000-$24,000,000; 2001-$26,000,000;
2002 and thereafter-$28,000,000.
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<PAGE>
7. Fair Value of Financial Instruments
The amortized cost and estimated fair value of fixed investment
maturities at December 31, 1996 and 1995, by contractual maturity,
are shown below (in thousands). Expected maturities will differ
from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
December 31,
--------------------------------------------------
Available for Sale Held to Maturity
------------------ ----------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
1996
- ----
Due in one year or less $ 46,601 $ 46,700 $ 2,000 $ 2,000
Due after one year
through five years 95,761 96,236 39,321 40,333
Due after five years
through ten years 63,395 66,057 33,330 33,615
After ten years 128,284 132,981 5,620 5,482
Federal agency and
other mortgage pools 48,374 48,316
------- ------- ------- ------
$382,415 $390,290 $ 80,271 $81,430
======= ======= ======== ======
1995
Due in one year or less $ 33,100 $ 33,342 $ 9,816 $ 9,861
Due after one year
through five years 98,425 99,124 26,346 27,411
Due after five years
through ten years 66,832 68,829 28,489 29,905
After ten years 132,220 139,818 10,366 9,966
Federal agency and
other mortgage pools 52,558 54,085
------- ------- ------ ------
$383,135 $395,198 $ 75,017 $ 77,143
======= ======= ======= =======
The carrying value and estimated fair value of other financial
instruments at December 31, 1996 and 1995 are as follows (in
thousands):
December 31, 1996 December 31, 1995
------------------------- -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
Assets:
Equities $ 88,102 $ 88,102 $ 85,085 $ 85,085
Other long-term
investments 13,585 13,600 11,521 11,572
Short-term investments 94,993 94,993 52,257 52,257
Liabilities:
Notes payable 101,688 101,696 103,000 103,009
Estimated fair value of the term loan, included in notes
payable above, was calculated by discounting contractual cash flows
through maturity using quoted market rates for similar issues with
similar maturities. Estimated fair value of the Credit Agreement,
also included in notes payable above, approximates face value due
to the credit terms during the revolving period. See Note 6 for
further discussion of both the term loan and Credit Agreement.
The estimated fair value of financial hedge instruments,
both of which are held for other than trading purposes, is the
estimated amount the Company would pay to terminate the interest
rate swap agreements, taking into consideration current interest
rates and other relevant factors. The estimated amount at December
31, 1996 and 1995 was $214,000 and $678,000, respectively.
8. Income Taxes
Effective July 2, 1996, the Company will be included in Orion's
consolidated federal income tax return and is covered by income tax
sharing agreements under which the Company computes its current
federal income tax liability on a separate return basis and pays
Orion any taxes due on this basis.
Deferred income taxes result from temporary differences in the
basis of various assets and liabilities for financial statement
purposes and for tax purposes, and alternative minimum tax ("AMT")
credit carryforwards. The tax effects of
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<PAGE>
the temporary differences and AMT carryforwards comprising the net
deferred tax liability at December 31, 1996 and the net deferred
tax asset at December 31 1995, which are included in other
liabilities and other assets in the consolidated balance sheet, are
as follows (in thousands):
Year Ended December 31,
-------------------------
1996 1995
---- ----
Discounted loss reserves $10,406 $11,325
Unearned premiums 9,642 8,971
Deferred compensation arrangements 1,658 1,030
Realized investment losses 595 747
AMT credit carryforward 1,141 1,819
Accrued post retirement benefits
other than pensions 643 504
Accrued exit activity costs 574 1,464
Other 891 1,039
------ ------
Gross deferred tax assets 25,550 26,899
------ ------
Deferred policy acquisition costs 15,560 13,173
Net unrealized investment gain 9,212 8,357
Amortization of fixed maturities 461 489
Other 1,120 664
------ ------
Gross deferred tax liabilities 26,353 22,683
------ ------
Net deferred tax (liability) asset $ (803) $ 4,216
====== ======
Included in gross deferred tax assets at December 31, 1996 and 1995, is
$1,141,000 and $1,819,000 of AMT credit carryforward, respectively. The
credit is allowed for the amount of adjusted net minimum tax for all years
reduced by the minimum tax credit for all prior tax years. This
credit has no expiration date as a credit against the Company's
future regular tax liability. Included in other deferred tax
assets at December 31, 1996 and 1995, is the tax effect of a
$573,000 and $639,000, respectively, net operating loss
carryforward arising from the acquisition of CCIC, available to
offset future taxable income of CCIC. This carryforward
substantially expires in 1997, with final expiration in 2003. Also
included in other deferred tax assets at December 31, 1995, is the
tax effect of a $609,000 net operating loss carryforward, which was
utilized to reduce the Company's 1996 regular tax liability. This
carryforward expires in 2010. As of December 31, 1996, no
valuation allowance on deferred tax assets was necessary.
Total income taxes (benefits) are allocated as follows (in
thousands):
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Income from continuing operations $ 9,375 $ (1,597) $ 7,036
Shareholders' equity, for unrealized
investment gains (losses) 855 12,160 (9,493)
Shareholders' equity, other 8 8
------ ------- ------
$10,230 $10,571 $(2,449)
====== ====== ======
The components of the provision (benefit) for income taxes on
continuing operations are as follows (in thousands):
Year Ended December 31,
--------------------------------------
1996 1995 1994
---- ---- ----
Current $5,211 $ 1,946 $7,012
Deferred 4,164 (3,543) 24
----- ------ -----
$9,375 $(1,597) $7,036
===== ====== =====
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The following table reconciles the effective tax rate to the
federal statutory rate of 35 percent for pretax earnings from
continuing operations (in thousands):
Year Ended December 31,
------------------------------------
1996 1995 1994
---- ---- ----
Earnings before taxes $36,881 $ 7,332 $29,587
====== ====== ======
Expected income tax expense $12,908 $ 2,566 $10,355
Adjustments resulting from:
Dividends received deduction (1,234) (1,875) (1,528)
Nontaxable interest income (3,848) (3,451) (2,754)
Proration 762 799 642
Nonrecurring tender offer
charge (Note 17) 409
Other, net 378 364 321
------ ------- -------
$ 9,375 $ (1,597) $ 7,036
====== ======= =======
9. Reinsurance
In the ordinary course of business, the Company reinsures
certain risks, generally on an excess of loss basis with other
insurance companies. Effective July 1, 1996, such reinsurance
arrangements limit the Company's maximum loss per occurrence on
casualty losses to $400,000, on property losses to $300,000 and for
catastrophe losses to $600,000. For the first half of 1996, such
reinsurance arrangements limited the Company's maximum loss per
occurrence on individual risks to $400,000 and for catastrophes to
$500,000. Amounts recoverable from reinsurers are recognized and
estimated in a manner consistent with the claim liabilities arising
from the reinsured policies and incurred but not reported losses.
Reinsurance contracts do not relieve the Company from its
obligations to policyholders. To the extent that any reinsuring
company is unable to meet its obligations, the Company would be
liable for such defaulted amounts; consequently, allowances are
established for amounts deemed uncollectible. The allowances
established for uncollectible amounts were $200,000 at both
December 31, 1996 and 1995. The Company generally does not require
collateral to support reinsurance recoverables, but continually
evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk to minimize exposure to significant
losses from reinsurer insolvencies. At December 31, 1996 and 1995,
reinsurance recoverables of $80,249,000 and $68,938,000,
respectively, were associated with two reinsurers (both companies
are rated A+ or above by A.M. Best) under the Company's excess of
loss property and casualty treaties and certain facultative
reinsurance contracts. The Company's reinsurance treaties
generally provide that premiums are ceded on a written basis but
are paid to the reinsurers on an earned basis; consequently,
prepaid reinsurance premiums are primarily deposits required by
contract terms and amounts paid related to facultative reinsurance
contracts. Prepaid reinsurance premiums are amortized over the
contract period in proportion to the amount of reinsurance
protection provided.
The approximate prepaid and recoverable amounts of reinsurance
ceded to other companies, including subsidiaries of Orion under
100% reinsurance arrangements, are as follows (in thousands):
December 31, 1996 December 31, 1995
-------------------------- --------------------------
Non-Affiliates Affiliates Non-Affiliates Affiliates
-------------- ---------- -------------- ----------
Premiums prepaid $ 2,244 $ 30 $ 4,435 $ 79
Paid losses recoverable 4,780 9,016
Unpaid losses recoverable 66,633 2,197 51,491 3,438
Unpaid LAE recoverable 12,238 2,659 10,048 3,318
------ ------ ------ ------
$85,895 $ 4,886 $74,990 $ 6,835
====== ====== ====== ======
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<PAGE>
Premiums, losses and LAE, including the effect of reinsurance,
are comprised of (in thousands):
Year Ended December 31,
-------------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
Written Earned Written Earned Written Earned
------- ------ ------- ------ ------- ------
Premiums:
Direct $493,660 $492,077 $414,694 $393,886 $295,714 $284,918
Assumed 44,376 37,921 36,819 47,916 69,277 76,720
Ceded (46,804) (48,350) (53,614) (51,785) (42,066) (40,000)
------- ------- ------- ------- ------- -------
Net $491,232 $481,648 $397,899 $390,017 $322,925 $321,638
======= ======= ======= ======= ======= =======
% Assumed to Net 9.03% 9.25% 21.45%
==== ==== =====
Incurred Incurred Incurred
-------- -------- --------
Losses and LAE:
Direct $361,837 $309,298 $192,183
Assumed 20,268 32,281 54,892
Ceded (44,321) (48,066) (33,570)
------- ------- -------
Net $337,784 $293,513 $213,505
======= ======= =======
Included in direct premiums earned above, for the years ended
December 31, 1996, 1995 and 1994, were $97,000, $309,000 and
$1,152,000, respectively, of premiums earned under 100% reinsurance
agreements with subsidiaries of Orion. Also, included in direct
losses incurred above, for the years ended December 31, 1996, 1995
and 1994, were $67,000, $218,000 and $854,000, respectively, of
losses incurred under these same 100% reinsurance agreements with
subsidiaries of Orion.
The Company has entered into reinsurance agreements with
subsidiaries of Orion, whereby it assumes business written by the
affiliates. Included in premiums assumed above, for the years
ended December 31, 1996, 1995 and 1994, were $15,673,000,
$9,495,000 and $30,921,000 of premiums written, respectively, which
were assumed under these agreements. Assumed premiums and incurred
losses have changed, compared to the prior years, as a result of
the changes in the Company's business written in different states.
The Company paid fees and expenses to affiliates for assumed
business written as follows: 1996-$607,000; 1995-$338,000; 1994-
$1,440,000.
Since the acquisition of Viking, the Company is party to 100%
reinsurance agreements with VCM, whereby the Company assumes
business written, in the state of Texas, by this affiliate.
Included in 1996 and 1995 premiums assumed above were $29,623,000
and $5,525,000, respectively, of premiums written under these
agreements. The policy issue fee charged by VCM is offset by the
management fee charged by the Company to VCM. Therefore, the net
amount of policy issue fees and management fees is immaterial.
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<PAGE>
10. Reserves for Loss and Loss Adjustment Expenses
The Company's loss and LAE reserves are summarized below (in
thousands):
Year Ended December 31,
----------------------------------------
1996 1995 1994
---- ---- ----
Balance at beginning of year $354,634 $241,221 $220,965
Reserves acquired as a result of
a business combination 80,692
Less reinsurance recoverables 68,295 61,446 55,165
------- ------- -------
Net adjusted beginning balance 286,339 260,467 165,800
Provision for incurred losses
and LAE:
Current year 338,779 280,726 212,458
Prior years (995) 12,787 1,047
------- ------- -------
337,784 293,513 213,505
------- ------- -------
Payments for incurred losses
and LAE:
Current year 194,667 159,208 111,418
Prior years 144,775 108,433 88,112
------- ------- -------
339,442 267,641 199,530
------- ------- -------
Net balance at end of year 284,681 286,339 179,775
Plus reinsurance recoverables 83,727 68,295 61,446
------- ------- -------
Balance at end of year $368,408 $354,634 $241,221
======= ======= =======
As a result of changes in estimates of insured events in prior
years, the provision for prior year losses and LAE decreased by
$995,000 in 1996, a significant improvement compared to 1995.
The favorable development in 1996 was the result of $4,038,000
redundant development in the personal lines business unit. The
redundancy in this unit was due to estimated incurred but not
reported losses at the beginning of the year developing lower
than expected, as well as the successful implementation of claims
operational changes, which resulted in better than expected
development on 1995 personal lines acquired reserves. The
favorable development within the personal lines business unit
during 1996 was partially offset by adverse development within
the commercial and collateral protection units. The total
commercial lines adverse development in 1996 was $1,675,000,
which represented a significant improvement over 1995, and
resulted primarily from general liability losses and loss
adjustment expenses on reported claims costing more to settle
than expected. During 1996, the collateral protection unit
experienced $1,368,000 adverse development primarily due to an
under-estimation of unreported claims, as of December 31, 1995,
for the Blanket Vendor Single Interest and Puerto Rico business.
The 1995 adverse development in personal lines of $2,504,000
was a result of adverse trends in claim frequency which caused
higher than expected development of outstanding claims and
incurred but not reported losses. Development on personal lines
during 1994 was favorable. Total adverse development in
commercial lines during 1995 was $10,056,000, of which $7,266,000
was caused by commercial automobile liability higher claim
severity primarily in 1994 through 1992. The remaining
commercial lines 1995 adverse development was from general
liability and other lines. The adverse development in commercial
lines in 1994 was primarily due to loss development on
professional, general and commercial automobile liability claims
occurring prior to 1985. These accident years accounted for
$920,000 of commercial lines' adverse development in 1995 and
$1,300,000 in 1994. The remaining adverse development in 1995 of
$227,000 was attributable to the collateral protection business
unit.
The Company primarily writes automobile coverage, and
therefore has limited exposure for environmental claims. In
establishing the liability for unpaid losses and LAE related to
environmental claims, the Company considers facts currently
known, current state of the law, and coverage litigation.
Liabilities are recognized for known claims when sufficient
information has been developed to indicate the involvement of a
specific insurance policy, and its liability can be reasonably
estimated. In addition, liabilities have been established to
cover additional exposures on both known and unasserted claims.
Estimates of the liabilities are reviewed and updated
continually. Developed case law and adequate claim history do
not exist for such claims,
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<PAGE>
especially because significant uncertainty exists about the
outcome of coverage litigation and whether past claim
experience will be representative of future claim experience.
Environmental claims reported to the Company to date, such
as asbestos and pollution contamination, have primarily related
to policies written during the period 1984 to 1978. In 1985,
the Company added an absolute pollution exclusion clause to
general liability policies to significantly reduce exposure to
such claims. The Company's known exposure to environmental
losses is not considered to be material as they have amounted
to approximately three percent of cumulative payments on
general liability claims for the accident years 1984 to 1978,
and there are less than $600,000 in net outstanding claim
reserves, and approximately $2,000,000 in total loss and loss
adjustment expense reserves, at December 31, 1996. Based on
the claim activity to date and the nature of the business
written during this period and subsequent periods, the Company
does not believe that a material exposure to such risks exists
in the future.
11. Interest Rate Swap Agreements
At December 31, 1996, the Company had two interest rate swap
agreements outstanding, with participating commercial banks,
having a total notional principal amount of $80,000,000, or
$40,000,000 for each bank. These agreements effectively change
the Company's interest rate exposure on $80,000,000 of the
$100,000,000 million principal balance outstanding under the
Credit Agreement, which is discussed in Note 6, to a fixed
rate. The fixed rate interest percentage paid by the Company
on the total notional amounts is approximately 6.3%. Net cash
payments made or received under the swap agreements have been
included within interest expense.
The interest rate swap agreements terminate on March 16,
1998. The interest rate swap floating rate, which is paid by
the banks to the Company, resets every three months, beginning
December 20, 1995, which coincides with the LIBOR determination
dates available on the outstanding principal balance under the
Company's Credit Agreement. The floating interest rate under
the swap agreements is based upon the LIBOR rate at each
determination date.
The Company is exposed to credit loss in the event of
nonperformance by the other parties to the interest rate swap
agreements. However, the Company does not anticipate
nonperformance by the counterparties.
12. Commitments and Contingencies
The Company rents various buildings for its branch office
locations. Rent expense for operating leases was as follows: 1996-
$1,697,000; 1995-$1,262,000; 1994-$1,450,000. Future minimum lease
payments on building and equipment operating lease commitments are
as follows: 1997-$1,520,000; 1998-$1,221,000; 1999-$451,000; 2000-
$102,000; 2001-$16,000; 2002 and thereafter-$0.
In conjunction with the Viking acquisition there is additional
purchase price which may ultimately be paid to the seller depending
on Viking's future loss development. See Note 3 for further
discussion of this contingency payment.
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 consolidated financial statements as of December 31,
1996, as part of the nonrecurring charge discussed in Note 17.
In addition to the three complaints described above, the Company
is subject to litigation in the normal course of operating its
insurance business. The Company is not engaged in any such
litigation which it believes would have a material adverse impact
on its financial condition or results of operations, taking into
account the reserves established therefore and giving effect to
insurance.
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<PAGE>
13. Restrictions On Shareholders' Equity
The amended and restated Credit Agreement, which is
discussed in Note 6, imposes no dividend restrictions on the
Company, but requires the Company to maintain consolidated net
worth of $190,000,000, plus 30% of the aggregate positive
consolidated net income for each fiscal quarter ending after
December 31, 1996, plus 100% of the aggregate amount of
increases in the stated capital and additional paid-in capital
accounts resulting from the issuance of equity securities or
other capital investments after December 31, 1996. According
to the definition outlined in the Credit Agreement,
consolidated net worth means the net worth of Guaranty and its
subsidiaries determined in accordance with GAAP, and without
regard to the requirements of Statement of Financial Accounting
Standards No. 115. As of December 31, 1996, the required net
worth under the bank loan agreement was $190,000,000 while the
Company's actual net worth, as defined in the Credit Agreement,
was $232,920,000.
Shareholders' equity of the Company is primarily represented by
the surplus, including undistributed earnings, of GNIC and VICW.
The Colorado dividend restriction law limits the annual dividend a
Colorado domiciled insurance company may pay to its parent holding
company during a twelve-month period to the greater of 10% of
GNIC's statutory surplus as reported at the end of the preceding
calendar year ($164,474,000 and $133,749,000 at December 31, 1996
and 1995, respectively), or GNIC's statutory net income, excluding
realized capital gains ($9,332,000 and ($442,490) for 1996 and
1995, respectively) as reported at the end of the preceding
calendar year. When a dividend is declared by GNIC to Guaranty,
the Colorado Insurance Department must be notified of such
declaration within five days thereafter, and at least ten business
days before the payment of the dividend. The Wisconsin dividend
restriction law limits the annual dividend that VICW may pay to
Guaranty to the lesser of 10% of VICW's statutory surplus as of the
end of the preceding calendar year ($88,597,000 and $86,872,000 at
December 31, 1996 and 1995, respectively) or the greater of either
the statutory net income of VICW for the preceding calendar year,
less realized capital gains, ($7,524,000 and $14,591,000 at
December 31, 1996 and 1995, respectively) or the aggregate of the
net income of VICW for the three calendar years preceding the date
of the dividend, less realized capital gains for those calendar
years minus dividends paid or credited and distributions made
within the first two of the preceding three calendar years
($10,642,000 and $17,521,000 at December 31, 1996 and 1995,
respectively). When a dividend is paid by VICW to Guaranty, the
Wisconsin Insurance Department must have been notified in writing
at least 30 days prior to the payment of the dividend. During
1996, GNIC paid no dividends to Guaranty, while VICW paid dividends
in the amount of $8,687,000 to Guaranty. In 1995, GNIC paid
dividends of $16,500,000 to Guaranty, while VICW paid no dividends
to Guaranty. The Company believes that GNIC and VICW will be in a
position to pay dividends to Guaranty in the future.
14. Related Party Transactions
During 1996, Orion increased its ownership in the Company by
approximately 31.5%, to 81%. See Notes 12 and 17 for further
discussion of this transaction
Orion manages a majority of the Company's investment portfolio.
The Company paid investment management fees to Orion as follows:
1996-$650,000; 1995-$595,000; 1994-$550,000.
The Company paid commissions to an Orion agency affiliate of
$85,000, $72,000 and $90,000 in 1996, 1995 and 1994, respectively,
for premiums written by the affiliate for the Company of $436,000,
$411,000 and $516,000 in 1996, 1995 and 1994, respectively.
In 1990, GNIC entered into a loan participation agreement with a
subsidiary of Orion, whereby they loaned money to another
affiliate. The loan was secured by a leasehold deed of trust and
matured in November 1995. GNIC's proportionate share of this loan
was $3,700,000, or 41.1%. GNIC received quarterly interest
payments at a rate of 11% of its proportionate share. Interest
earned was $355,000 in 1995 and $407,000 in 1994. In 1995, during
the assembly of the Viking acquisition financing, the Company
received a commitment for a $21,000,000 Bridge Loan from Orion, for
which the Company paid a $210,000 commitment fee. During 1995, the
Company converted the $20,896,000 Orion Notes into 1,326,128 shares
of common stock. See Note 6 for further discussion related to this
conversion. In 1995 and 1994, the interest expense paid to Orion
was $1,122,000 and $1,640,000, respectively.
Also, the Company has entered into certain reinsurance
agreements with subsidiaries of Orion (see Note 9).
In the opinion of management, the terms of the Company's
transactions with Orion are reasonable and representative of the
terms that would have been applicable in transactions with
unrelated parties.
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<PAGE>
The son of the Company's Chairman of the Board is a managing
director of Insurance Partners Advisors L.P., which manages
Insurance Partners L.P., a partnership formed to make equity
investments in the insurance industry. The Company has committed
initial capital in an aggregate amount not to exceed $1,500,000 of
the total $550,000,000 committed by all partners.
A member of the Board of Directors of the Company is the owner
of a general agency. Gross commissions paid by the Company to the
agency, under a standard agency contract, for business produced
were $731,000, $813,000 and $789,000 in 1996, 1995 and 1994,
respectively.
As a result of the Viking acquisition and the subsequent change
in control of VCM, VCM was required to increase its surplus to a
minimum of $2,000,000 as required by the Texas Insurance Code. The
increase was accomplished by the issuance of a surplus debenture to
Viking in the amount of $1,300,000 in exchange for cash. The
debenture pays interest annually at a rate of 8.5%. Interest
earned in 1996 and 1995 was $129,000 and $33,000, respectively.
Also, the Company provides management services to VCM. The fees
paid by VCM are offset by policy issue fees paid to VCM by the
Company under 100% reinsurance agreements (see Note 9).
15. Employee Benefit Plans
The Company provides incentive plans for key employees. These
plans include the Company's 1987 Performance Unit Plan (the "Unit
Plan") and the Equity Incentive Plan, which replaced the 1991 Long-
Term Performance Incentive Plan (the "Incentive Plan").
Under the Unit Plan, units granted increase in value in
relationship to the book value per share of the Company's common
stock with certain adjustments. As of December 31, 1996, 225,707
units are outstanding. No units were issued during 1996.
Under the Incentive Plan, shares of restricted stock as
well as stock options may be granted by the Company. The Incentive
Plan, as adopted September 12, 1991, reserved 800,000 common shares
for grant to key employees. During 1996, no restricted stock was
issued. In 1995, 12,000 shares of restricted stock was issued, a
portion of which was from treasury stock. Restricted stock is
considered issued and outstanding when awarded, and is recorded as
deferred compensation. As a result of the Orion tender offer,
which was completed in July 1996 and is discussed in Note 17, all
restrictions on the restricted stock lapsed in 1996. Therefore,
the Company included $587,000 of compensation expense, which
related to the restricted stock that became fully vested as a
result of the Orion tender offer, in the nonrecurring tender offer
charge, which is also discussed in Note 17. Prior to the Orion
tender offer, the Company had recorded $57,000 as compensation
expense on restricted stock during 1996. The compensation expense
recognized on restricted stock during 1995 and 1994 was $263,000
and $250,000, respectively.
All stock options under the Incentive Plan are granted at fair
market value at date of grant, become exercisable proportionately
from the first through the fourth anniversaries of the grant dates,
and expire ten years after the date of grant. In October 1996, the
Company's Board of Directors amended the Incentive Plan to be
consistent with the terms of the Equity Incentive Plan.
As a result of the Orion tender offer, all stock options granted
prior to the completion of the tender offer became fully vested and
became exercisable. At December 31, 1996, there were 400,500
options exercisable under the Incentive Plan and 39,986 common
shares available for grant under the Incentive Plan.
The Equity Incentive Plan was approved by the Board of
Directors on October 29, 1996, and reserved 700,000 shares to
grant to key employees. All stock options under this plan must be
granted at no less than fair market value at the date of grant.
The options granted under the Equity Incentive Plan are
exercisable proportionately from the first through fourth
anniversaries of the grant dates and expire ten years after the
date of the grant. At December 31, 1996, there were no options
exercisable under the Equity Incentive Plan. The 162,747 stock
options granted under this plan in 1996 are pending shareholder
approval at the May 13, 1997 Annual Meeting of Shareholders. If
approved, there would be 537,253 common shares available for grant
under the Equity Incentive Plan at December 31, 1996.
Additionally, the Equity Incentive Plan provides for performance
unit awards, which allow for cash and common stock payments to be
made, contingent on the future cumulative increases in book value
of the Company's common stock. The awards allow for annual
payments to be earned up to four years from the date of grant.
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As discussed in Note 1, the Company follows APB. No. 25 for
stock options issued to employees, rather than following Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation." SFAS No. 123, among other things,
requires estimating the fair value of stock options using an
option pricing model that considers factors specified by this
SFAS, and recording compensation cost based on the estimated fair
value of the stock options. Had compensation cost for the stock
options granted under the Company's Equity Incentive Plan and
Incentive Plan been determined consistent with SFAS No. 123, the
Company's net earnings and earnings per common share would have
been reduced to the pro forma amounts indicated below:
1996 1995
---- ----
Net Income (In thousands)
As Reported $27,506 $8,929
Pro Forma 27,093 (a) 8,727
Earnings Per Common Share:
As Reported $ 1.84 $ 0.67
Pro Forma 1.81 (a) 0.65
(a) As a result of the Orion tender offer, approximately
$361,000 of the compensation cost estimated under SFAS No. 123
would have been included in the 1996 nonrecurring charge.
The following is a summary of stock option transactions:
1996 1995
------------------------- --------------------------
Weighted Weighted
Average Exercise Average Exercise
Shares Price Shares Price
------ ---------------- ------ ----------------
Balance-January 1 471,500 $16.70 458,000 $16.44
Granted 302,749 16.50 90,000 17.25
Exercised (98,500) 14.28 (36,750) 14.98
Terminated (2,500) 17.50 (39,750) 16.64
------- ----- ------- -----
Balance - December 31 673,249 $16.96 471,500 $16.70
======= ===== ======= =====
Options exercisable at
year end with the
corresponding
weighted-average
exercise price 400,500 $17.05 237,625 $15.97
======= ===== ======= =====
Weighted-average
fair value
of options granted
during the year $ 4.16 $ 5.18
======= =======
Range of Exercise
Prices for Options
Outstanding at
December 31 $13.50-23.25 $14.50-23.25
============ ============
The Company utilized the Black-Scholes option pricing model to
estimate the fair value, on the date of grant, of stock options
granted. The following weighted-average assumptions were used for
1996 stock options issued: 3.0% dividend yield, expected
volatility of 24%, risk free interest rate of 6.1% and expected
term of 6.0 years. The following weighted-average assumptions
were used for 1995 stock options issued: 2.9% dividend yield,
expected volatility of 24%, risk free interest rate of 6.4% and
expected term of 8.7 years.
The Company had 272,749 and 233,875 nonexercisable options,
including those granted under the Equity Incentive Plan and the
Incentive Plan, at December 31, 1996 and 1995, respectively. All
of the December 31, 1996 and 1995 nonexercisable options were time-
based-exercisable options, based on the four year vesting period
discussed above.
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<PAGE>
The weighted-average remaining contractual lives for options
outstanding at December 31, 1996 and 1995 were 7.5 and 7.4 years,
respectively.
The Company has a defined contribution profit sharing plan,
which qualifies under Section 401(k) of the Internal Revenue Code,
for which substantially all employees are eligible after a specific
waiting period. The plan is contributory and the Company matches
employee contributions unless changed by the withBoard of
Directors. Prior to 1996, Viking had its own separate Individual
Retirement Plan which was pending qualification under Section
401(k) of the Internal Revenue Code. On April 1, 1996, the Company
received a favorable determination letter from the Internal Revenue
Service and rolled the Viking plan into its plan.
The Company has a non-qualified Supplemental Executive
Retirement Plan ("SERP") for employees whose compensation meets a
minimum requirement. This plan provides deferred benefits for
those employees who received less than the full employer
contribution of the Company's defined contribution profit sharing
plan as a result of federal tax limitations on participation in the
plan. Eligible employees are entitled to receive payment of funds
upon retirement or termination unless terminated for good cause as
defined in the SERP. Prior to 1996, Viking employees were not
eligible to participate in this plan.
The Company, excluding Viking, has a defined benefit health care
plan ("the Plan") that provides postretirement medical benefits to
full-time employees who have worked for ten years and attained age
55 while in service with the Company. Benefits generally are
provided under the Plan for retirees and their dependents until the
retirees attain age 65. The Plan is contributory and contains
other cost sharing features which may be adjusted annually for the
expected general inflation rate. The Company's policy is to fund
the cost of the Plan benefits in amounts determined at the
discretion of management. To date, no funding of the Plan has been
made.
As of December 31, 1995, Viking terminated its defined benefit
health care plan that provided for post-retirement medical benefits
to individuals who retired or became permanently disabled while in
service with Viking. Employees who were retired or disabled as of
December 31, 1995 continue to be eligible for post-retirement
medical benefits. Benefits generally are provided under this plan
for retirees and their dependents until the death of the retiree.
This plan is contributory and contains other cost sharing features
which may be adjusted annually. Viking's policy is to fund the
cost of plan benefits in amounts determined at the discretion of
management.
Total expense for the Company's employee benefit plans, discussed
above, is as follows: 1996-$2,692,000; 1995-$2,132,000; 1994-
$1,602,000.
16. Shareholder Rights Agreement
On November 20, 1991, the Board of Directors approved the
adoption of a Shareholder Rights Agreement and in connection
therewith declared a dividend distribution of one Right for each
outstanding share of Common Stock until such time that separate
Right certificates are distributed, or the Rights are redeemed or
expire. When exercisable, each Right will entitle a holder to
purchase from the Company a unit consisting of one one-hundredth of
a share of a new series of the Company's Preferred Stock at a
purchase price of $60 per share.
The Rights become exercisable ten days following a
public announcement that a person or group of acquires has acquired
or obtained the rights to acquire beneficial ownership of 20% or
more of the Company's Common Stock or ten business days following
announcement of a tender offer or exchange offer that could result
in beneficial ownership of 20% or more of the Company's Common
Stock. Prior to consummation of such a transaction, each holder of
a Right is entitled to purchase shares of the Company's Common
Stock having a value equal to two times the exercise price of the
Right. The Company has the right to redeem the Rights at $.01 per
Right prior to the time they become exercisable. The Rights will
expire on December 30, 2001.
17. Nonrecurring Charges
On May 8, 1996, Orion 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.
-56-
<PAGE>
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.
On July 2, 1996, Orion successfully completed the Offer and
purchased the 4,600,000 shares of the Company's common stock at an
amended price of $18.50 per share. According to the Depository for
the Offer, 6,774,515 shares of the Company's shares were tendered
and not withdrawn pursuant to the Offer. The proration factor used
by Orion to purchase the tendered shares was .67901168. For
further information related to the Orion Offer refer to the
Company's report on Schedule 14D-9, filed with the Securities and
Exchange Commission on May 22, 1996, and amendments thereto, filed
on June 1, 1996, June 7, 1996 and June 19, 1996.
On July 17, 1996, Orion purchased an additional 120,000
shares of the Company's common stock in the open market. The
purchase of these additional shares brought Orion's ownership level
in the Company to 12,129,942 shares, or 81.0%.
The Company relocated its Colorado operations to a new home
office facility during the second quarter of 1994. New facility
expenditures totaled $16,208,000, which were primarily funded from
operating cash flow. Total nonrecurring relocation charges of
$838,000 were incurred in 1994.
18. Quarterly Financial Data (Unaudited)
Three Months Ended
----------------------------------------
March 31 June 30 Sept 30 Dec 31
-------- ------- ------- ------
(In thousands, except per share data)
1996:
Total revenue $126,704 $129,823 $134,125 $138,890
Earnings before income taxes 7,241 6,945 10,402 12,293
Net earnings 5,787 5,225 7,521 8,973
Earnings per share $ 0.39 $ 0.35 $ 0.50 $ 0.60
1995:
Total revenue $ 86,502 $ 88,306 $121,479 $127,997
Earnings (loss) before income taxes 7,535 6,575 (8,349) 1,571
Net earnings (loss) 5,768 4,851 (4,113) 2,423
Earnings (loss) per share $ 0.48 $ 0.40 $ (0.29) $ 0.16
During the third quarter of 1995, the Company completed the
Viking acquisition (see Note 3), which significantly increased
revenues in the third and fourth quarters of 1995. Also in the
third quarter of 1995, the Company strengthened its loss reserves
(losses and loss adjustment expenses) by $13,971,000, as a result
of adverse development within the personal and commercial lines
units (see Note 10).
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<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Pursuant to General Instruction G(3) to this form, the
information required by Part III (Items 10, 11, 12 and 13) hereof
is incorporated by reference from the Company's definitive proxy
statement for its Annual Meeting to be held on May 13, 1997. The
Company intends to file the proxy material, which involves the
election of directors, not later than 120 days after the close of
the Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Consolidated Financial Statements:
The following financial statements filed as part of this Form
10-K appear on the pages indicated:
Page
----
Report of Management 33
Independent Auditors' Report 34
Guaranty National Corporation and subsidiaries:
December 31, 1996 and 1995
Consolidated Balance Sheets 35
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Earnings 36
Consolidated Statements of Changes in
Shareholders' Equity 37
Consolidated Statements of Cash Flows 38
Notes to the Consolidated Financial Statements 40
(a) 2. Financial Statement Schedules:
Page
----
Independent Auditors' Report on Schedules S-1
Schedule I Summary of Investments - Other than
Investments in Related Parties-December
31, 1996 S-2
II Condensed Financial Information of
Registrant - December 31, 1996, 1995
and 1994 S-3
III Supplemental Information For Property and
Casualty Insurance Operations - December
31, 1996, 1995 and 1994 S-5
Schedules other than those listed above are omitted for the
reason that they are not required or are not applicable, or
the required information is shown in the Consolidated
Financial Statements or notes thereto.
-58-
<PAGE>
(a) 3. EXHIBITS:
Exhibit
Number Exhibit
*3.1 Amended and Restated Articles of Incorporation of the
Registrant--filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (No. 33-42781)
*3.2 By-laws of the Registrant--filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (No. 33-42781)
*4.1 Form of Certificate for Common Stock--filed as Exhibit
4.1 to the Company's Registration Statement on Form S-1
(No. 33-42781)
*4.2 Form of Rights Agreement--filed as Exhibit 1 to the
Company's Registration Statement on Form 8-A, filed December
19, 1991
*10.1 Form of Indemnification Agreement--filed as Exhibit 10.1
to the Company's Registration Statement on Form S-1 (No.
33-42781)
*10.2 Guaranty National Insurance Company Retirement Savings
Plan and Trust Agreement, as amended and restated as of
January 1, 1989 (formerly Guaranty National Insurance
Company Profit Sharing Plan)--filed as Exhibit 28.7 to
the Company's Form 10-Q for September 30, 1993
*10.3 Guaranty National Corporation Performance Unit Plan,
adopted November 17, 1987, as amended July 29, 1993 by
form of Amendment No. 1--filed as Exhibit 10.5 to the
Company's Form 10-K for 1993 (#)
*10.4 Employment Agreement between Guaranty National
Corporation and Roger B. Ware, dated September 1, 1986--
filed as Exhibit 10.7 to the Company's Registration
Statement on Form S-1 (No. 33-42781) (#)
*10.5 Casualty Excess of Loss Reinsurance Agreement between
Guaranty National Insurance Company and Landmark American
Insurance Company and National Reinsurance Corporation,
dated March 27, 1985--filed as Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (No. 33-
42781)
*10.6 Umbrella and Following Form Excess of Loss Reinsurance
Agreement between Guaranty National Insurance Company and
Landmark American Insurance Company and National
Reinsurance Corporation, dated April 20, 1990--filed as
Exhibit 10.14 to the Company's Registration Statement on
Form S-1 (No. 33-42781)
*10.7 First Property Per Risk Excess of Loss Reinsurance
Agreement between Guaranty National Insurance Company and
Landmark American Insurance Company and National
Reinsurance Corporation, dated March 4, 1985--filed as
Exhibit 10.16 to the Company's Registration Statement on
Form S-1 (No. 33-42781)
*10.8 American Re-Insurance Company Reinsurance Agreement with
Guaranty National Insurance Company, dated November 15,
1982--filed as Exhibit 10.17 to the Company's
Registration Statement on Form S-1 (No. 33-42781)
*10.9 Casualty Quota Share Reinsurance Contract between
Landmark American Insurance Company/Guaranty National
Insurance Company and Design Professionals Insurance
Company/The Connecticut Indemnity Company/Security
Insurance Company of Hartford, dated September 1, 1989--
filed as Exhibit 10.18 to the Company's Registration
Statement on Form S-1 (No. 33-42781)
10.10 Guaranty National Corporation 1991 Long-Term Performance
Incentive Plan, adopted September 12, 1991, as amended
October 29, 1996 (#)
*10.11 Form of Officer's Severance Pay Agreement--filed as
Exhibit 10.21 to the Company's Registration Statement on
Form S-1 (No. 33-42781) (#)
- -------------------------------------------
*Incorporated by reference
(#)Management compensation agreement
-59-
<PAGE>
*10.12 Participation Agreement Regarding Design Professionals
Insurance Company Loan between Security Reinsurance
Company and Guaranty National Insurance Company, dated
December 20, 1990--filed as Exhibit 10.22 to the
Company's Registration Statement on Form S-1 (No. 33-
42781)
*10.13 Commercial Automobile Physical Damage and Liability Quota
Share Reinsurance Agreement between Williamsburg National
Insurance Company and Guaranty National Insurance
Company, dated January 1, 1991--filed as Exhibit 10.25 to
the Company's Registration Statement on Form S-1 (No. 33-
42781)
*10.14 Special Risk Division Casualty Reinsurance Contract
issued to Guaranty National Insurance Company and
Landmark American Insurance Company by E. W. Blanche Co.,
dated January 1, 1990--filed as Exhibit 10.26 to the
Company's Registration Statement on Form S-1 (No. 33-
42781)
*10.15 Note Issuance Agreement, as amended, effective August 1,
1993 by and among Guaranty National Corporation, Orion
Capital Corporation and certain subsidiaries of Orion
Capital Corporation--filed as Exhibit 10.22 to the
Company's Form 10-K for 1993
*10.16 Specimen of 7.85% Subordinated Promissory note due
July 1, 2003 of Guaranty National Corporation--included
as Exhibit "A" to Exhibit 10.15 above
*10.17 Investment Management Agreement by and among Orion
Capital Corporation, Guaranty National Corporation and
Certain Subsidiaries of Guaranty National Corporation--
filed as Exhibit 10.29 to the Company's Form 10-K for 1991
*10.18 Shareholder Agreement by and among Orion Capital
Corporation, Guaranty National Corporation and certain
wholly owned subsidiaries of Orion Capital Corporation--
filed as Exhibit 10.30 to the Company's Form 10-K for 1991
*10.19 Trade Name Agreement by and among Guaranty National
Corporation on behalf of itself and all subsidiaries and
affiliates and Orion Capital Corporation on behalf of
itself and all subsidiaries and affiliates--filed as
Exhibit 10.31 to the Company's Form 10-K for 1991
*10.20 Amendment to Guaranty National Corporation 1991 Long-Term
Performance Incentive Plan dated December 19, 1991--filed
as Exhibit 28.2 to the Company's Form S-8 filed December
19, 1991 (#)
*10.21 Property and Casualty Excess of Loss Agreement
Reinsurance Agreement (First, Second, Third and Fourth)
issued to Guaranty National Insurance Company and
Landmark American Insurance Company by E. W. Blanch Co.,
dated as of January 1, 1992--filed as Exhibit 28.2 to the
Company's Form 10-Q for June 30, 1992
*10.22 Stock Purchase Agreement for Colorado Casualty Insurance
Company by and between Guaranty National Insurance
Company and Providence Washington Insurance Company dated
September 30, 1992 (Exhibit 10.1), and related Services
Agreement (Exhibit 10.2), Reinsurance Agreement (Exhibit
10.3), Trust Agreement (Exhibit 10.4), Second Reinsurance
Agreement (Exhibit 10.5) and Asset Purchase Agreement
(Exhibit 10.6)--filed on Form 8-K on October 31, 1992
*10.23 Amended and Restated Credit Agreement by and between
Guaranty National Corporation and Norwest Bank Denver,
N.A. and Shawmut Bank Connecticut, N.A. dated
November 23, 1993--filed as Exhibit 10.30 to the
Company's Form 10-K for 1993
*10.24 Quota Share Reinsurance Agreement by and between Landmark
American Insurance Company and State and County Mutual
Fire Insurance Company, dated as of July 15, 1989 and
amended as of March 1, 1992--filed as Exhibit 10.36 to
the Company's Form 10-K for 1992
*10.25 Termination Addendum to the Special Risk Division
Casualty Reinsurance Contract issued to Guaranty National
Insurance Company and Landmark American Insurance Company
by E. W. Blanch Co., dated as of January 1, 1990--filed
as Exhibit 10.37 to the Company's Form 10-K for 1992
- ----------------------------------------
*Incorporated by reference
(#)Management compensation agreement
-60-
<PAGE>
*10.26 Amendment to Investment Management Agreement by and Among
Orion Capital Corporation, Guaranty National Corporation
and Certain Subsidiaries of Guaranty National
Corporation, dated January 13, 1993--filed as Exhibit
10.40 to the Company's Form 10-K for 1992
*10.27 Investment Management Contract by and between Guaranty
National Insurance Company and Cambiar Investors, Inc.,
dated October 8, 1992--filed as Exhibit 10.41 to the
Company's Form 10-K for 1992
*10.28 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 January 1, 1993 and was
subsequently amended by Endorsements numbered 1 through
14--filed as Exhibit 10.2 to the Company's Form 10-Q for
June 30, 1996
*10.29 Stock Purchase Agreement for Peak Property and Casualty
Insurance Corporation between GE Capital Mortgage
Corporation and Guaranty National Insurance Company,
dated as of September 15, 1993--filed as Exhibit 10.42 to
the Company's 10-K for 1993
*10.30 Amendment to Guaranty National Corporation 1991 Long-Term
Performance Incentive Plan, effective May 11, 1993--filed
by the Company on Form S-8 dated July 22, 1993 (#)
*10.31 Non-revolving line of credit agreement by and between
Norwest Bank Denver, N. A. and Guaranty National
Corporation, dated December 30, 1993--filed as Exhibit
28.1 to the Company's Form 10-Q for March 31, 1994
*10.32 First Amendment of Credit Agreement by and between
Guaranty National Corporation and Norwest Bank Colorado,
N.A. and Shawmut Bank Connecticut, N.A., dated June 1,
1994--filed as Exhibit 28.2 to the Company's Form 10-Q
for June 30, 1994
*10.33 Stock Purchase Agreement for General Electric Mortgage
Insurance Corporation of California between GE Capital
Mortgage Corporation and Guaranty National Insurance
Company, effective August 26, 1994--filed as Exhibit 28.3
to the Company's Form 10-Q for September 30, 1994
*10.34 Guaranty National Insurance Company Supplemental
Executive Retirement Plan, dated December 30, 1994--filed
as Exhibit 10.48 to the Company's Form 10-K for 1994 (#)
*10.35 Amendment to Shareholder Agreement by and among Orion
Capital Corporation, Guaranty National Corporation and
certain wholly owned subsidiaries of Orion Capital
Corporation, dated February 2, 1994--filed as Exhibit
10.49 to the Company's Form 10-K for 1994
*10.36 Amendment to Shareholder Agreement by and among Orion
Capital Corporation, Guaranty National Corporation and certain
wholly owned subsidiaries of Orion Capital Corporation, dated March
2, 1995--filed as Exhibit 10.50 to the Company's Form 10-K for 1994
10.37 Credit Agreement among Guaranty National Corporation, as
Borrower, and First Union National Bank of North
Carolina, as Agent, dated as of June 2, 1995, amended and
restated as of December 16, 1996
*10.38 Stock Purchase Agreement for Viking Insurance Holding,
Inc., between Talegen Holdings, Inc. and Guaranty
National Corporation, signed April 26, 1995--filed as
Exhibit 10.1 to the Company's Form 10-Q for March 31,
1995
*10.39 Note Issuance Agreement, as amended and restated
effective June 14, 1995, by and among Guaranty National
Corporation, Orion Capital Corporation and Certain
Subsidiaries of Orion Capital Corporation--filed as
Exhibit 10.3 to the Company's Form 10-Q for June 30, 1995
*10.40 International Swap Dealers Association, Inc., (ISDA)
Master Agreement dated as of September 19, 1995, between
Norwest Bank Minnesota, N.A. and Guaranty National
Corporation--filed as Exhibit 10.6 to the Company's Form
10-Q for September 30, 1995
- ---------------------------------------------
*Incorporated by reference
(#)Management compensation agreement
-61-
<PAGE>
*10.41 ISDA Master Agreement dated as of September 19, 1995,
between Guaranty National Corporation and Mellon Bank,
N.A.--filed as Exhibit 10.7 to the Company's Form 10-Q
for September 30, 1995
*10.42 Employment Agreement between Guaranty National
Corporation and James R. Pouliot, dated April 27, 1995--
filed as Exhibit 10.48 to the Company's Form 10-K for
1995 (#)
*10.43 Private Passenger Non-Standard Auto Quota Share
Reinsurance Agreement issued to Guaranty National
Insurance Company of California by Zurich Reinsurance
Centre, Inc., dated as of May 1, 1995--filed as Exhibit
10.49 to the Company's Form 10-K for 1995
*10.44 Property First Surplus, First Property Per Risk Excess of
Loss and Second Property Per Risk Excess of Loss
Reinsurance Contract issued to Colorado Casualty
Insurance Company, Guaranty National Insurance Company,
Peak Property and Casualty Insurance Corporation and
Landmark American Insurance Company by Towers Perrin
Reinsurance, dated as of January 1, 1995--filed as
Exhibit 10.50 to the Company's Form 10-K for 1995
10.45 Tax Allocation Agreement by and among Guaranty National
Corporation and each of its subsidiaries, dated as of
December 23, 1996
*10.46 Quota Share Reinsurance Agreement No. LIC-00I, by and
between Viking County Mutual Insurance Company and
Landmark American Insurance Company, dated November 15,
1995--filed as Exhibit 10.52 to the Company's Form 10-K
for 1995
*10.47 Managing General Agency Agreement No. 001-IGA by and
between Viking County Mutual Insurance Company and
Intercon General Agency, Inc., dated November 15, 1995--
filed as Exhibit 10.53 to the Company's Form 10-K for
1995
*10.48 Amendment to Employment Agreement of Roger B. Ware, dated
as of February 29, 1996--filed as Exhibit 10.54 to the
Company's Form 10-K for 1995 (#)
*10.49 100% Quota Share Reinsurance Treaty between Viking County
Mutual Insurance Company, Texas, and Landmark American
Insurance Company, Oklahoma--filed as Exhibit 10.1 to the
Company's Form 10-Q for June 30, 1996
*10.50 Endorsement No. 1, dated April 1, 1996, to the Multiple
Line Excess of Loss Agreement No. 3973-05--filed as
Exhibit 10.3 to the Company's Form 10-Q for June 30, 1996
*10.51 Commercial Umbrella Excess of Loss Facultative Automatic
Reinsurance Agreement No. 06AC960032, effective February
1, 1996 to February 1, 1997, between Guaranty National
Insurance Company, Landmark American Insurance Company,
Peak Property and Casualty Insurance Corporation,
Guaranty National Insurance Company of California and
National Reinsurance Corporation--filed as Exhibit 10.4
to the Company's Form 10-Q for September 30, 1996
*10.52 Endorsement No. 2, dated July 1, 1996, to the Multiple
Line Excess of Loss Agreement No. 3973-05--filed as
Exhibit 10.5 to the Company's Form 10-Q for September 30,
1996
10.53 Property First Catastrophe Excess of Loss Contract,
effective January 1, 1996, issued to Guaranty National
Insurance Company, Colorado Casualty Insurance Company,
Peak Property and Casualty Insurance Corporation,
Guaranty National Insurance Company of California,
Landmark American Insurance Company, Viking Insurance
Company of Wisconsin, Viking County Mutual Insurance
Company by Towers Perrin Reinsurance
10.54 Property Second Catastrophe Excess of Loss Contract,
effective January 1, 1996, issued to Guaranty National
Insurance Company, Colorado Casualty Insurance Company,
Peak Property and Casualty Insurance Corporation,
Guaranty National Insurance Company of California,
Landmark American Insurance Company, Viking Insurance
Company of Wisconsin, Viking County Mutual Insurance
Company by Towers Perrin Reinsurance
- -----------------------------------------------
*Incorporated by reference
(#)Management compensation agreement
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<PAGE>
10.55 Tax Sharing Agreement, dated as of December 20, 1996, by
and between Orion Capital Corporation and Guaranty
National Corporation
10.56 Guaranty National Corporation Equity Incentive Plan,
approved by the Company's Board of Directors on October
29, 1996, and subject to Shareholder approval on May 13,
1997 (#)
21.1 Subsidiaries of Registrant
23.1 Consent of Deloitte & Touche LLP
- -----------------------------------------------
*Incorporated by reference
(#)Management compensation agreement
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K have been filed by
the Registrant during the fourth quarter of
1996.
-63-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Guaranty National Corporation
By: s/James R. Pouliot
------------------
James R. Pouliot, 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: February 28, 1997
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<PAGE>
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
(including a majority of the members of the Board of Directors of
the Registrant) in the capacities and on the date indicated:
SIGNATURE & TITLE DATE
s/Alan R. Gruber February 28, 1997
- ----------------
Alan R. Gruber
Chairman of the Board
of Directors
s/James R. Pouliot February 28, 1997
- ------------------
James R. Pouliot
President and Chief Executive
Officer and Director
s/Tucker H. Adams February 28, 1997
- -----------------
Tucker H. Adams
Director
s/W. Marston Becker February 28, 1997
- -------------------
W. Marston Becker
Director
s/Dennis J. Lacey February 28, 1997
- -----------------
Dennis J. Lacey
Director
s/M. Ann Padilla February 28, 1997
- ----------------
M. Ann Padilla
Director
s/Vincent T. Papa February 28, 1997
- ------------------
Vincent T. Papa
Director
s/Robert B. Sanborn February 28, 1997
- -------------------
Robert B. Sanborn
Director
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<PAGE>
s/William J. Shepherd February 28, 1997
- ---------------------
William J. Shepherd
Director
s/Richard R. Thomas February 28, 1997
- -------------------
Richard R. Thomas
Director
s/Roger B. Ware February 28, 1997
- ---------------
Roger B. Ware
Director
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<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Guaranty National Corporation
We have audited the consolidated financial statements of
Guaranty National Corporation and subsidiaries as of December 31,
1996 and 1995, and for each of the three years in the period ended
December 31, 1996, and have issued our report thereon dated
February 14, 1997, (included elsewhere in this Form 10-K). Our
audits also included the financial statement schedules listed in
Item 14(a)2 of this Form 10-K. These financial statement schedules
are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement
schedules based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
s/Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
February 14, 1997
S-1
<PAGE>
SCHEDULE I
GUARANTY NATIONAL CORPORATION
SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
(In thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
- ------------------------------------------------------------------------------
AMOUNT
SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- -----------------------------------------------------------------------------
Fixed Maturities Held to Maturity:
Bonds:
United States Government and
agencies and authorities $ 30,674 $ 30,738 $ 30,674
States, municipalities and
political subdivisions 47,605 48,661 47,605
All other corporate 1,992 2,031 1,992
------- ------- ------
80,271 81,430 80,271
------- ------- ------
Fixed Maturities Available For Sale:
Bonds:
United States Government and
agencies and authorities 112,115 112,789 112,789
States, municipalities and
political subdivisions 156,439 162,424 162,424
Public utilities 5,810 5,559 5,559
All other corporate 78,220 79,868 79,868
Redeemable preferred stocks 29,831 29,650 29,650
------- ------- -------
382,415 390,290 390,290
------- ------- -------
Total fixed maturities 462,686 471,720 470,561
Equity Securities:
Common Stock:
Public utilities 1,471 1,994 1,994
Banks, trusts, insurance companies 3,306 6,833 6,833
Industrial, miscellaneous and
all other 37,912 50,588 50,588
Nonredeemable preferred stocks 26,969 28,687 28,687
------ ------ ------
Total equity securities 69,658 88,102 88,102
------ ------ ------
Other long-term investments 13,585 13,600 13,585
Short-term investments 94,993 94,993 94,993
------ ------ ------
Total investments $640,922 $668,415 $667,241
======= ======= =======
S-2
<PAGE>
SCHEDULE II
GUARANTY NATIONAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In thousands)
BALANCE SHEET
December 31,
--------------------
1996 1995
---- ----
Cash $ 9 $ 4
Investment in subsidiaries 341,158 310,539
Due from subsidiaries 3,108 4,601
Other assets 3,855 5,231
------- -------
Total assets $348,130 $320,375
======= =======
Other liabilities $ 8,403 $ 1,824
Notes payable 101,688 103,000
Shareholders' equity 238,039 215,551
------- -------
Total liabilities and
shareholders' equity $348,130 $320,375
======= =======
STATEMENT OF EARNINGS
Year Ended December 31,
-------------------------
1996 1995 1994
---- ---- ----
Miscellaneous income $ 2,639 $ 1,336 $ 947
Equity in earnings of subsidiaries 46,253 14,171 34,176
------ ------ ------
Total income 48,892 15,507 35,123
------ ------ ------
Interest expense 6,851 5,708 3,218
Nonrecurring charge 2,163
Other expenses 2,997 2,467 2,318
------ ------ -----
Total expenses 12,011 8,175 5,536
------ ----- -----
Earnings before income taxes 36,881 7,332 29,587
Income taxes 9,375 (1,597) 7,036
------ ------ ------
Net earnings $27,506 $8,929 $22,551
====== ===== ======
Note: The Parent only condensed financial information should be
read in conjunction with the consolidated financial
statements and accompanying notes of Guaranty National
Corporation and subsidiaries.
S-3
<PAGE>
SCHEDULE II
GUARANTY NATIONAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In thousands)
STATEMENT OF CASH FLOWS
Year Ended December 31,
------------------------------------
1996 1995 1994
---- ---- ----
OPERATING ACTIVITIES:
Dividends received from subsidiaries $ 8,687 $ 16,500 $ 4,000
Interest expense paid (6,817) (6,005) (3,043)
Miscellaneous income 2,639 1,337 947
Operating expenses (760) (834) (820)
Nonrecurring charge (1,302)
Advances from (to) subsidiaries,
net of income taxes paid 7,214 (3,189) 1,023
------ ------ ------
Net cash provided by
operating activities 9,661 7,809 2,107
------ ------ ------
INVESTING ACTIVITIES:
Sales of property and equipment 30 92 265
Purchases of property and equipment (1,145) (3,732)
Investment in subsidiary (950) (95,558)
----- ------ -----
Net cash used in
investing activities (920) (96,611) (3,467)
----- ------ -----
FINANCING ACTIVITIES:
Proceeds from issuance of
notes payable 130,654 14,000
Repayment of notes payable (1,313) (60,000)
Dividends paid (7,485) (6,655) (6,049)
Proceeds from issuance of common stock 24,220
Proceeds from exercise of stock options 62 550
Purchase of treasury stock (6,636)
------- ------- -----
Net cash provided by (used in)
financing activities (8,736) 88,769 1,315
------ ------- -----
NET INCREASE (DECREASE) IN CASH 5 (33) (45)
------ ------- -----
CASH, BEGINNING OF YEAR 4 37 82
------ ------ -----
CASH, END OF YEAR $ 9 $ 4 $ 37
====== ====== =====
Non-Cash Financing Transactions:
Conversion of affiliate debt $ $(20,896) $
Issuance of common stock in
conversion of affiliate debt 14,881
Conversion of affiliate debt
from treasury stock 6,015
Restricted stock forfeitures (126)
Note: The Parent only condensed financial information should be
read in conjunction with the consolidated financial
statements and accompanying notes of Guaranty National
Corporation and subsidiaries.
S-4
<PAGE>
SCHEDULE III
GUARANTY NATIONAL CORPORATION
SUPPLEMENTAL INFORMATION FOR PROPERTY AND CASUALTY INSURANCE OPERATIONS
(In Thousands)
Column A Column B Column C Column E Column F Column G
- -------- -------- -------- -------- -------- --------
Deferred Unpaid
Policy Losses & Loss Net
Acquisition Adjustment Unearned Premiums Investment
Costs Expenses Premiums Earned Income
----------- ------------- -------- -------- ----------
Property/Liability
Insurance
Year ended
December 31, 1996 $ 44,456 $368,408 $154,242 $481,648 $ 39,439
======= ======= ======= ======= =======
Year ended
December 31, 1995 $ 37,637 $354,634 $146,205 $390,017 $ 30,976
======= ======= ======= ======= =======
Year ended
December 31, 1994 $ 31,623 $241,221 $123,092 $321,638 $ 23,576
======= ======= ======= ======= =======
SCHEDULE III (CONTINUED)
GUARANTY NATIONAL CORPORATION
SUPPLEMENTAL INFORMATION FOR PROPERTY AND CASUALTY INSURANCE OPERATIONS
(In Thousands)
Column A Column H Column I Column J Column K
- -------- -------- -------- -------- --------
Losses & Loss
Adjustment Expenses Amortization Paid
Incurred Related to of Deferred Losses
(1) (2) Policy & Loss Net
Current Prior Acquisition Adjustment Premiums
Year Year Costs Expenses Written
------- ----- ------------ ---------- --------
Property/Liability
Insurance
Year ended
December 31, 1996 $338,779 $ (995) $133,931 $339,442 $491,232
======= ===== ======= ======= =======
Year ended
December 31, 1995 $280,726 $12,787 $110,341 $267,641 $397,899
======= ====== ======= ======= =======
Year ended
December 31,1994 $212,458 $ 1,047 $ 93,103 $199,530 $322,925
======= ====== ======= ======= =======
S-5
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM GUARANTY NATIONAL CORPORATION'S FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 390,290
<DEBT-CARRYING-VALUE> 80,271
<DEBT-MARKET-VALUE> 81,430
<EQUITIES> 88,102
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 667,241
<CASH> 3,988
<RECOVER-REINSURE> 88,507
<DEFERRED-ACQUISITION> 44,456
<TOTAL-ASSETS> 929,092
<POLICY-LOSSES> 368,408
<UNEARNED-PREMIUMS> 154,242
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 101,688
0
0
<COMMON> 136,247
<OTHER-SE> 101,792
<TOTAL-LIABILITY-AND-EQUITY> 929,092
481,648
<INVESTMENT-INCOME> 39,439
<INVESTMENT-GAINS> 8,455
<OTHER-INCOME> 0
<BENEFITS> 337,784
<UNDERWRITING-AMORTIZATION> 133,931
<UNDERWRITING-OTHER> 10,422
<INCOME-PRETAX> 36,881
<INCOME-TAX> 9,375
<INCOME-CONTINUING> 27,506
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,506
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 1.84
<RESERVE-OPEN> 286,339
<PROVISION-CURRENT> 338,779
<PROVISION-PRIOR> (995)
<PAYMENTS-CURRENT> 194,667
<PAYMENTS-PRIOR> 144,775
<RESERVE-CLOSE> 284,681
<CUMULATIVE-DEFICIENCY> (995)
</TABLE>
GUARANTY NATIONAL CORPORATION
1991 LONG-TERM PERFORMANCE INCENTIVE PLAN
AS AMENDED OCTOBER 29,1996
<PAGE>
1. PURPOSE OF THE PLAN
The purpose of the Guaranty National Corporation 1991
Long-Term Performance Incentive Plan (the "Plan"), as amended
October 29, 1996 is to further the interests of Guaranty National
Corporation (the "Company") and its shareholders by providing
long-term performance incentives to those key employees of the
Company and its subsidiaries who are largely responsible for the
management, growth and protection of the business of the Company
and its subsidiaries. To that end, the Company may, from time to
time during the effective period of the Plan, award to such
employees as may be selected in the manner provided below one or
more of Incentive Stock Options, Non-Qualified Stock Options,
Restricted Stock and Performance Units (each as hereinafter
described), subject to the conditions hereinafter set forth.
2. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Compensation
Committee of the Board of Directors of the Company as may from
time to time be designated by the Board of Directors (the
"Committee"). No member of the Committee while serving as such
shall be eligible for participation in the Plan. A majority of
the Committee shall constitute a quorum, and the acts of a
majority of the members present at any meeting at which a quorum
is present, in person or by means of conference telephone or
similar communications equipment by means of which all persons
participating in the meeting can hear each other, or acts
approved in writing by all of the members, shall be the acts of
the Committee.
Subject to the provisions of the Plan, the Committee
shall have full and final authority in its discretion (a) to
select the employees who will participate in the Plan, (b) to
determine the amount and type of the awards to be made to each
employee so selected, (c) to determine the time or times at which
awards will be made, (d) to construe and interpret the Plan and
to adopt, amend and rescind such rules and regulations as, in its
opinion, may be advisable in the administration of the Plan and
(e) to make all other determinations as it may deem necessary or
advisable for the administration of the Plan.
<PAGE>
3. PARTICIPATION IN THE PLAN
Participants in the Plan shall be selected by the
Committee from among the key employees of the Company and its
subsidiaries. The term "employees," as used herein, shall include
officers of the Company or of a subsidiary of the Company, and
shall include directors who are also employees of the Company or
of a subsidiary of the Company. The term "subsidiary," as used
herein, shall mean any corporation of which 50% or more of the
outstanding voting securities are beneficially owned, directly or
indirectly, now or hereafter, by the Company.
No employee shall have any right to participate in the
Plan unless selected by the Committee and then only to the extent
determined by the Committee. In selecting the employees who may
become participants in the Plan, as well as in determining the
amount, type and terms and conditions of each award made under
the Plan, the Committee shall weigh such factors as it shall deem
relevant to accomplish the purposes of the Plan, and all actions
taken and determinations made by the Committee, in its sole
discretion, shall be final and binding and not subject to review.
An employee to whom an award has been made under the
Plan may receive one or more additional awards if the Committee
shall so determine. No employee shall be eligible to receive any
stock option or Restricted Stock if, at the time such award is
made, such employee owns stock possessing more than ten percent
of the total combined voting power of all classes of stock either
of the Company or of any subsidiary.
4. PLAN LIMITATIONS; SHARES SUBJECT TO THE PLAN
Subject to the provisions of Section 9 hereof, the
aggregate number of shares of Common Stock, $1.00 par value, of
the Company (the "Common Stock") for which options may be
awarded, or which may be issued as Restricted Stock, shall not
exceed 800,000 shares. Such shares shall be made available, at
the discretion of the Board of Directors, either from the
authorized but unissued shares of Common Stock of the Company or
from shares of Common Stock held by the Company as treasury
shares, including shares purchased in the open market. If an
option award under this Plan shall expire or terminate or be
surrendered to the Company (other than pursuant to Section 5(g)
unexercised as to any shares covered thereby, or if any shares of
Restricted Stock awarded under the Plan shall be forfeited or
surrendered to the Company, the shares represented thereby shall
thereafter again be available for other awards under the Plan.
However, if an option award under this Plan shall be accepted for
surrender pursuant to terms and conditions determined by the
Committee under Section 5(g) hereof, and shares covered thereby
shall not thereafter be available for other awards under the
Plan.
Subject to the provisions of Section 9 hereof, the aggregate
number of Performance Units which may be awarded under the Plan
shall not exceed 350,000. If any Performance Units
<PAGE>
awarded under the Plan shall be forfeited or canceled, such
Performance Units shall thereafter be available for making of
awards under the Plan.
<PAGE>
5. STOCK OPTIONS
(a) Award of Options. Subject to the provisions of the
Plan, the Committee may from time to time, in its sole
discretion, award to employees who have been selected to
participate in the Plan options to purchase shares of Common
Stock of the Company. In connection therewith, the Committee
shall have full and final authority in its discretion, subject to
the provision of the Plan, (i) to determine the employees to whom
options are to be awarded, (ii) in the case of each option
awarded, to determine whether the same shall be an incentive
stock option pursuant to section 422 of the Internal Revenue Code
of 1986 (the "Code"), as the same may from time to time be
amended (an "Incentive Stock Option"), or an option which does
not qualify under such section 422 (a "Non-Qualified Option"),
(iii) to determine the number of shares subject to each option,
(iv) to determine the time or times at which options will be
awarded, (v) to determine the option price of the shares subject
to each option, which price shall not be less than the minimum
specified in Section 5 (c) hereof, (vi) to determine the time or
times when each option becomes exercisable and the duration of
the exercise period, and (vii) to prescribe the form or forms of
the instruments evidencing any options awarded under the Plan
(which forms shall be consistent with the Plan but need not be
identical).
(b) Term of Options. The full term of each option awarded
hereunder shall be for such period as the Committee shall determine, but
not for more than ten years and on day from the date of awarding of a Non-
Qualified Option and not more than ten years from the date of
awarding of and Incentive Stock Option. Each option shall be
subject to earlier termination as provided in paragraphs (f) and
(g) of this Section 5.
(c) Option Price. The option price shall be determined
by the Committee at the time any option is awarded, and shall be
not less than 100 percent of the fair market value (but in no
event less than par value) of the shares covered thereby at the
time the option is awarded. The option price shall be paid in
cash or by the surrender, at the fair market value thereof, of
share of Common Stock of the Company, or by any combination of
cash and such shares. For purposes of this Plan, the "fair
market value" of a share of Common Stock of the Company shall be
deemed to be, a any time, the mean of the high and low selling
prices of such Common Stock as reported on the New York Stock
Exchange, Inc.
(d) Non-Transferability of Options - Designation of
Beneficiary. (I) Except as provided in paragraph (ii) of this Section, no
option awarded under this Plan shall be transferred by the holder
thereof otherwise than to his designated beneficiary or estate
pursuant to Section 8 hereof, and such option may be exercised
during his or her lifetime only by him or her.
(iii) Notwithstanding the foregoing, the Committee may,
in its discretion, provide that options, restricted stock,
performance units or other rights or interests of an employee
granted pursuant to this Plan (other than an Incentive Stock
Option) be transferable, without consideration, to immediate
family members (i.e., children, grandchildren or spouse), to
trusts for
<PAGE>
the benefit of such immediate family members and to
partnerships in which such family members are the only partners.
The Committee may attach to such family members are the only
partners. The Committee may attach to such transferability
feature such terms and conditions as its deems advisable. In
addition, an employee may, in the manner established by the
Committee, designate a beneficiary (which may be a person or a
trust) to exercise the rights of the employee, and to receive any
distribution with respect to any award made under this Plan upon
the death of the employee. A beneficiary, guardian, legal
representative, or other person claiming any rights under the
Plan from or through any employee shall be subject to all terms
and conditions of the Plan and any Agreement applicable to such
participant, except as otherwise determined by the Committee, and
to any additional restrictions deemed necessary or appropriate by
the Committee.
(e) Limitation on Incentive Stock Options. In the case of
any Option which is intended to be an Incentive Stock Option, the
aggregate fair market value (determined at the time the option is
granted) of the Common Stock with respect to which Incentive
Stock Options are exercisable for the first time by an optionee
during any calendar year (under all stock option plans of the
Company) shall not exceed one hundred thousand dollars ($100,000)
(f) Exercise of Options. (i) Subject to the provisions of
Section 5(e) hereof, each option awarded under this Plan shall be
exercisable on such date or dates and during such period and for
such number of shares as shall be determined pursuant to the
provisions of the instrument evidencing such options.
(ii) A person electing to exercise an option shall give
written notice to the Company of such election and of the number
of shares such person has elected to purchase, and shall at the
time of exercise tender the full purchase price of the shares he
has elected to purchase. Until receipt by the Company of such
full purchase price, he shall possess no rights of a record
holder with respect to any of such shares. Upon the exercise of
an option at a time when there is not in effect a registration
statement under the Securities Act of 1933 relating to the shares
issuable upon exercise of the option, the optionee shall provide
the Company with such representations and warranties as may be
required by the Company to the effect that the shares to be
purchased pursuant to the option are being acquired for
investment and not with a view to the distribution thereof.
Without limiting the Company's obligations with respect to
outstanding options, no shares shall be purchased upon the
exercise of any option unless all applicable requirements of the
Securities and Exchange Commission, and any other regulatory
agencies having jurisdiction and of any stock exchanges upon
which the shares may be listed have been fully complied with.
The Company shall use its best efforts to comply with all such
regulations and appropriate provisions may be made in the
instruments evidencing options to provide for suitable
adjustments in the event that the Company is unable to comply
with such regulations.
(iii) No option shall be affected by any change of duties
or position of the optionee (including transfer to or from a
subsidiary), so long as he continues to be an employee of the
Company or any of its subsidiaries. If an optionee shall cease
to be such an employee for any
<PAGE>
reason other than death, such option shall thereafter be
exercisable only to the extent of the purchase rights, if any,
which had accrued as of the date of such cessation, and such
remaining right to purchase shall in any event terminate upon the
earlier of (a) the expiration of the full term of the option or
the expiration of three months from the date of such cessation of
employment. Nothing in this Plan or in any option awarded
hereunder shall confer upon any optionee any right to continue in
the employ of the Company or any of its subsidiaries or to
interfere in any way with the right of the Company or its
subsidiaries to terminate his employment at any time.
(iv) Should an optionee die while in the employ of the
Company or any of its subsidiaries, such optionee's designated
beneficiaries or such other persons as shall have acquired, by
will or by the laws of descent and distribution, the right to
exercise any option theretofore awarded such optionee may, in
either case, exercise such option at any time prior to expiration
of its full term or the expiration of one year from the date of
death of the optionee, whichever is earlier.
(v) Any exercise pursuant to subparagraphs (iii) or (iv)
above shall be limited to the purchase rights which shall have
accrued as of the date when the optionee ceased to be such an
employee, whether by death or otherwise, provided, however, that
the Committee may provide in the instrument evidencing any
option, or any amendment thereto, that all shares covered by such
option shall become subject to purchase immediately upon the
death or cessation of employment of the optionee.
(g) Surrender of Options. The Committee may, under
such terms and conditions as it deems appropriate, accept the
surrender by an optionee of a right to exercise an option to
purchase shares of Common Stock and authorize a payment in
consideration therefor of an amount equal to the difference
obtained by subtracting the option price form the fair market
value on the date of such surrender, such payment (net of any
amount withheld pursuant to Section 11 hereof) to be, in the sole
discretion of the Committee, in shares of the Common Stock of the
Company, valued at fair market value on the date of such
surrender, or in cash, or partly in such shares and partly in
cash, provided that the Committee shall have determined that such
settlement is consistent with the purposes set forth in Section 1
hereof.
(h) Stock Option Agreements. Each option awarded under
the Plan shall be evidenced by a stock option agreement (which
need not be identical with other stock option agreements)
executed on behalf of the Company by a member of the Committee or
by an officer designated by the Committee and by the optionee
which shall set forth the terms and conditions of the option
(including, in the case of Incentive Stock Options, such terms
as shall be requisite in the judgment of the Committee to provide
that those options will be "incentive stock options" within the
meaning of Section 422 of the Code) either expressly to by
reference to the Plan an which may contain other provisions
provided they are neither inconsistent with nor prohibited by the
Plan.
6. RESTRICTED STOCK
<PAGE>
(a) Restricted Stock Awards. Subject to the provisions
of the Plan, the Committee may from time to time, in its sole
discretion, contingently award to employees who have been
selected to participate in the Plan shares of Common Stock of the
Company upon the terms and conditions, and subject to the
restrictions set forth in this Section 6 ("Restricted Stock").
In connection therewith, the Committee shall have full and final
authority in its discretion, subject to the provision of the
Plan, (i) to determine the employees to be awarded Restricted
Stock, (ii) to determine the number of shares of Restricted Stock
to be awarded to each such employee, (iii) to determine the time
or times at which awards of Restricted Stock shall be made, (iv)
to determine the Restricted Period (as hereinafter defined)
applicable to each award of Restricted Stock, and (v) to
prescribe the form or forms of the agreements to be entered into
between the Company and each employee to whom Restricted Stock is
awards (which agreements shall be consistent with the Plan but
need not be identical).
(b) Restricted Period. (i) Except as hereinafter expressly
provided, no shares of Restricted Stock awarded to an employee may be sold,
assigned, transferred, pledged, hypothecated or otherwise encumbered by the
employee for such period, not to be less than two years from the
date of award, as shall be established by the Committee in its
sole discretion at the time of such award (the "Restricted
Period"). If at any time an employee to whom Restricted Stock
has been awarded is no longer employed by the Company or any of
its subsidiaries for any reason (other than death, permanent and
total disability, or retirement), all shares of Restricted Stock
theretofore awarded to him and as to which the applicable
Restricted Period has not expired shall immediately be forfeited
and returned to the Company, and all rights of such employee with
respect to such Restricted Stock shall terminate, without payment
of any consideration by the Company.
(ii) In the event that an employee to whom Restricted Stock
has been awarded is no longer employed by the Company or any of
its subsidiaries by reason of such employee's death, permanent
and total disability or retirement, the restrictions set forth in
Section 6(b)(i) shall be deemed to have been satisfied as to the
number of full shares of such employee's Restricted Stock
determined by multiplying the total number of shares of
Restricted Stock subject to each Restricted Stock award by a
fraction, the numerator of which shall be the number of days
between the date of such award and the date of termination of
employment, and the denominator of which shall be the total
number of days in the applicable Restricted Period. Shares of
Restricted Stock as to which restrictions have not so lapsed
shall be forfeited and returned to the Company as provided in
Section 6(b)(i).
(iii) Notwithstanding the terms of the foregoing
sections, the Committee shall have the authority, in its
sole discretion, to accelerate the time at which
restrictions will lapse or to remove any such restrictions
whenever it may determine that, by reason of changes in
applicable tax or other laws or any other changes in
circumstances arising after the date of award, such action
is in the best interests of the Company and equitable to the
employee or his or her heirs or designated beneficiaries.
<PAGE>
(c) Legend: Deposit of Certificates. Each certificate
issued in respect of shares of Restricted Stock awarded under the
Plan shall be registered in the name of the employee and
deposited by the employee, together with a stock power endorsed
in blank, with the Company, and shall bear the following (or a
similar) legend, and any other legend required by law:
The transferability of this certificate and the shares of
stock represented hereby are subject to the terms and
conditions (including forfeiture) contained in the Guaranty
National Corporation 1991 Long-Term Performance Incentive
Plan, as amended, and an agreement between the registered
owner and Guaranty National Corporation. Copies of such
plan and agreement are on file in the offices of the
Secretary of Guaranty National Corporation, 9800 South
Meridian Boulevard, Englewood, Colorado 80155.
Upon the expiration of the Restricted Period, or the earlier
lapse of restrictions pursuant to Section 6(b)(ii) or (iii)
hereof, the Company shall deliver to the employee (or to his or
her heir, designated beneficiary or legal representative) a
certificate or certificates not bearing the legend required by
this paragraph.
(d) Rights as a Shareholder. Except for the restrictions
set forth herein and subject to the terms and conditions of the
agreement between the Company and the employee to whom Restricted
Stock has been awarded, the employee shall have all the rights of
a stockholder with respect to shares of Restricted Stock awarded
to him or her, including, without limitation, the right to vote
such shares and the right to receive all dividends or other
distributions made with respect to such shares.
7. PERFORMANCE UNITS
(a) Award of Performance Units. Subject to the provisions
of the Plan, the Committee may from time to time, in its sole
discretion, award "Performance Units" to employees who have been
selected to participate in the Plan. In connection therewith,
the Committee shall have full and final authority in its
discretion, subject to the provisions of the Plan, (i) to
determine, from time to time, the employees to whom Performance
Units are to be awarded, (ii) to determine the number of
Performance Units to be awarded to each such employee, (iii) to
determine the time or times at which awards of Performance Units
shall be made, (iv) to determine the Performance Period,
Performance Target and Applicable Percentages (each as
hereinafter defined) applicable to each award of Performance
Units, and (v) to prescribe the form or forms of the agreements
to be entered into between the Company and each employee to whom
Performance Units may be awarded (which agreements shall be
consistent with the Plan but need not be identical).
(b) Performance Period. (i) At the time it makes an award
of Performance Units, the Committee shall determine the
Performance Period applicable to the Performance Units so
awarded. If at any time an employee to whom Performance Units
have been awarded is no longer employed by the Company or any of
its subsidiaries for any reason (other than death,
<PAGE>
permanent and total disability or retirement), all Performance
Units theretofore awarded to him and as to which the applicable
Performance Period has not expired shall immediately be
forfeited, and all rights of such employee with respect to such
Performance Units shall terminate, without payment of any
consideration by the Company.
(ii) In the event that an employee to whom Performance
Units have been awarded is no longer employed by the Company or
any of its subsidiaries prior to the expiration of the
Performance Period by reason of such employee's death, permanent
and total disability or retirement, such employee (or his or her
heirs, designated beneficiaries or legal representative) shall be
entitled, following the expiration of such Performance Period, to
a payment in an amount equal to the payment, if any, which would
have been made pursuant to Section 7(f) hereof if such
termination of employment had not occurred times a fraction, the
numerator of which shall be the number of days between the date
of termination of employment, and the denominator of which shall
be the total number of days in the applicable Performance Period.
(iii) Notwithstanding the terms of the foregoing sections,
the Committee shall have the authority, in its sole discretion,
to accelerate the time at which any Performance Period will
expire or declare the Performance Units of any employee or
employees immediately payable in such amounts as the Committee
may determine as being in the best interest of the Company and
equitable to the employee or his or her heirs or designated
beneficiaries.
(c) Performance Target. At the time of each award of
Performance Units, the Committee shall determine the Performance
Target which shall be applicable to the Performance Units so
awarded. The Performance Target shall be a goal, expressed in
terms of growth in book value, earnings per share, return on
equity or any other financial or other measurement deemed
appropriate by the Committee, to be attained by the conclusion of
the Performance Period, failing which attainment the Performance
Units subject to the Performance Target shall lapse or be subject
to adjustment by an Applicable Percentage as and to the extent
determined by the Committee. At the discretion of the Committee,
the Performance Target for any such award may relate to the
results of operations or other measurable progress of either the
Company as a whole or the employee's subsidiary, division or
department. The Performance Target need not be identical for all
Performance Units awarded at any time or form time to time.
(d) Applicable Percentages. At the time of each award of
Performance Units, the Committee shall determine the Applicable
Percentages which shall be applicable to the Performance Units so
awarded. The Applicable Percentages shall consist of such range
of percentages as the Committee shall determine at the time of
each award, as shall be applicable to the total number of
Performance Units awarded to an employee at any one time and
which shall be applied to the total number of Performance Units
so awarded to reflect, in such manner as the Committee may
determine to be appropriate, the degree to which the Performance
Target shall have been met or exceeded. The Applicable
Percentages need not be identical for all Performance Units
granted at any time or from time to time.
<PAGE>
(e) Value of Performance Units. The value of each
Performance Unit at any time shall equal the book value per share
of the Company's Common Stock as such value appears on the
consolidated balance sheet of the Company and its subsidiaries as
of the end of the fiscal quarter immediately preceding the date
of valuation, provided, however, that Performance Units shall not
be deemed to be shares of capital stock of the Company and the
award of Performance Units under the Plan shall not entitle the
employee to whom Performance Units have been awarded to any
dividend, voting or other rights of a stockholder. Prior to the
availability of a definitive balance sheet for a particular
quarter the Committee shall make a good faith estimate of such
book value and any payment during such period shall be subject to
adjustment when a definitive balance sheet shall be available.
(f) Payment of Performance Units. Subject to the
provisions of the Plan and the terms of each employee's award,
each employee awarded Performance Units shall be entitled to
payment in respect thereof as soon as practicable after the close
of the Performance Period applicable to such award. Such payment
shall be made in cash and/or in stock (valued at its fair market
value) in an amount equal to the value of all such vested
Performance Units then held by the employee (determined in
accordance with Section 7(e) hereof), times the Applicable
Percentage. The Committee may also make adjustments, to the
extent it deems appropriate at the conclusion of the Performance
Period, in the Performance Target or Applicable Percentages for
any Performance Units awarded to compensate for, or to reflect,
any material changes which may have occurred in accounting
practices, tax laws or other laws or regulations which alter or
affect the computation of such Performance Target, or any unusual
circumstances outside of management's control which materially
affect the performance of the Company or any relevant subsidiary,
division or department. Notwithstanding the foregoing, no
adjustments shall be made in any outstanding Performance Units to
the extent that such adjustment would adversely affect the status
of that Performance Units as "performance based compensation"
under Section 162(m) of the Code.
<PAGE>
8. DESIGNATION OF BENEFICIARY
An employee who has received an award under this Plan may,
with the consent of the Committee, designate a person or persons
to be his or her designated beneficiaries under this Plan. Such
designation shall be made upon forms supplied by and delivered to
the Company and may be revoked in writing. If an employee fails
effectively to designate a beneficiary, then his or her estate
will be deemed to be the beneficiary.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION;
ACCELERATION IN CERTAIN EVENTS.
(a) Any instruments evidencing options awarded hereunder,
and any agreements entered into between the Company and an
employee in connection with any award hereunder, may contain such
provisions as the Committee may determine for adjustment of the
number and classes of shares covered thereby, the purchase price
of options, the lapsing of the restrictions on exercise of
options or on Restricted Stock, the number and method of
valuation of Performance Units covered thereby or the like, in
the event of changes in the outstanding Common Stock of the
Company by reason of any stock dividend, stock split-up,
recapitalization, reorganization, merger, consolidation,
combination or exchange of shares or the like, of or by the
Company. In the absence of any such provision, the Board of
Directors of the Company, in the event of any such change, may
make such adjustments as it may, in its sole discretion, deem
equitable; provided, however, in each case, no adjustment shall
be made which would cause the Plan to violate Section 422 (b) (1)
of the Code with respect to Incentive Stock Option or would
adversely affect the status of options or Restricted Stock
intended to be "performance based compensation as such under
Section 162 (m) of the Code. In addition, in the event of any
such change the Board of Directors may make such change as it may
deem appropriate in the aggregate number, or awarded, or which
may thereafter be issued as Restricted Stock, or in the aggregate
number and classes of shares for which options may thereafter be
awarded, or which may thereafter be issued as Restricted Stock,
or in the aggregate number and method of valuation of Performance
Units which may thereafter be awarded.
(b) Notwithstanding the foregoing, in the event of any of
the following occurs: (i) the acquisition, in one or more
transactions, of beneficial ownership (within the meaning of Rule
13d-3 under the Exchange Act) by any person or entity or any
group of persons or entities who constitute a group (within the
meaning of Section 13 (d)3 of the Exchange Act) other than (x)
Orion Capital Corporation or a direct or indirect subsidiary
thereof (or a group including such a corporation) or (y) a
trustee or other fiduciary holding securities under an employee
benefit plan of the Company or a Subsidiary, of any securities of
the Company such that, as a result of such acquisition, such
person, entity or group either (A), beneficially owns (within the
meaning of Rule 13 (d)-3 under the Exchange Act), directly or
indirectly, more than 20% of the Company's outstanding voting
securities entitled to vote on a regular basis for a majority of
the members of the Board of (B) otherwise has the ability to
elect, directly or indirectly, a majority of the
<PAGE>
members of the Board; (ii) a change in the composition of the
Board such that a majority of the members of the Board are not
directors who were nominated for election or elected to the Board
by stockholders of the Company during the preceding twelve months
and who were not members of the Board twelve months prior to that
time ("Continuing Directors"); or (iii) the stockholders of the
Company approve a merger or consolidation of the Company with any
other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding
immediately prior there to continuing to represent (either by
remaining outstanding or by being converted into voting
securities of the surviving entity) at least 80% of the total
voting power represented by the voting securities of the Company
or such surviving entity outstanding immediately after such
merger or consolidation, or the stockholders of the Company
approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of (in one
or more transactions) all or substantially all the Company's
assets, (collectively (i) to (iii), "Change of Control"), then
(x) all stock options theretofore awarded under the Plan shall
become immediately exercisable as to all shares of Common Stock
covered thereby, and all restrictions on all shares of Common
Stock covered thereby, and all restrictions on all shares of
Restricted Stock theretofore awarded under the Plan shall
immediately lapse, in each case from such date, and for such
period, as may be necessary to enable the holders thereof to
obtain the benefits of such offer merger or consolidation, and
(y) the Performance Periods applicable to all Performance Units
therefore awarded under the Plan will immediately expire and the
Committee may, in its sole discretion, declare the Performance
Units of any employee or employees immediately payable in such
amounts as the Committee may determine.
Notwithstanding the foregoing, the preceding events shall
not be deemed to be a Change of Control if prior to any
transaction or transactions causing such change a majority of the
Continuing Directors shall have voted not to treat such
transaction or transactions as resulting in a Change of Control.
10. NO ASSIGNMENT
Except as provided in Section 5 hereof, an employee's rights
and interest under the Plan may not be assigned or transferred
except, in the event of an employee' death, to his or her
designated beneficiary or to his estate pursuant to Section 8
hereof.
11. NO RIGHT TO AWARD OR EMPLOYMENT
No employee or other person shall have any claim or right to
receive an award under the Plan. Neither the Plan nor any action
taken hereunder shall be construed as giving any employee any
right to be retained in the employ of the Company or any
subsidiary.
12. WITHHOLDING
<PAGE>
The Company or any subsidiary shall have the right to deduct
from all payments made under the Plan any taxes required to be
withheld in connection therewith under the applicable laws or
regulations of any governmental authority, whether Federal, state
or local and whether domestic or foreign, and, in the case of any
shares of stock transferred pursuant to the Plan, the person
receiving such shares shall be required to pay to the Company or
such subsidiary, in cash or by surrender, at the fair market
value thereof, of shares of Common Stock of the Company, or by
any combination of cash or such shares, the amount of any such
taxes which the Company or such subsidiary is required to
withhold with respect to such stock.
13. AMENDMENT, SUSPENSION OR TERMINATION
The Board of Directors of the Company may at any time
terminate or from time to time amend or suspend (and if
suspended, may reinstate) the Plan; provided, however, that
except as provided in Section 8 hereof, no such amendment shall,
without the approval of the shareholders of the Company, (a)
increase the aggregate number of shares as to which options may
be awarded or which may be awarded as Restricted Stock under the
Plan, either to all employees or any one employee, (b) change the
minimum exercise price of options awarded hereunder, (c) extend
the maximum period during which options may exercised, or (d)
materially modify the requirements as to eligibility for
participation in the Plan or permit the making of awards to
members of the Committee. No amendment, suspension or
termination shall adversely affects any right or obligation with
respect to any award theretofore made without the consent of the
employee so affected.
The right to make awards under the Plan shall terminate
automatically at the close of business on the tenth anniversary
of the date the Plan is adopted by the Board of Directors of the
Company, thereafter the function of the Committee will be limited
to supervising the administration of awards previously made
14. EFFECTIVE DATE
The effective date of the Plan is October 1, 1991. The
Plan was approved by the Company's shareholders in 1991 and 1994,
and, as hereby amended, was approved by the Company's
Board of Directors and became effective on October 29, 1996.
CREDIT AGREEMENT
among
GUARANTY NATIONAL CORPORATION
as Borrower,
THE LENDERS NAMED HEREIN,
and
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA,
as Agent
$110,000,000 Reducing Revolving Credit Facility
Dated as of June 2, 1995,
As Amended and Restated as of December 16, 1996
<PAGE>
TABLE OF CONTENTS
Page
RECITALS 1
ARTICLE I
DEFINITIONS
1.1. Defined Terms 1
1.2. Accounting Terms 18
1.3. Other Terms; Construction. 19
ARTICLE II
AMOUNT AND TERMS OF THE LOANS
2.1. The Loans 19
2.2. Borrowings 19
2.3. Notes 21
2.4. Termination, Reduction of Commitments 21
2.5. Payments; Voluntary, Mandatory 22
2.6. Interest 23
2.7. Fees. 24
2.8. Interest Periods. 24
2.9. Conversions and Continuations 25
2.10. Method of Payments; Computations 26
2.11. Recovery of Payments 27
2.12. Use of Proceeds 28
2.13. Pro Rata Borrowings 28
2.14. Increased Costs; Change in Circumstances; Illegality; etc 28
2.15. Taxes 30
2.16. Compensation 31
2.17. Replacement of Lenders 32
2.18. Sale and Assignment of Existing Loans 32
ARTICLE III
CONDITIONS OF EFFECTIVENESS AND BORROWING
3.1. Conditions of Loans under Original Credit Agreement 33
3.2. Conditions to Effectiveness of this Agreement 33
3.3. Conditions to All Loans 35
3.4. No Waiver of Conditions Precedent 35
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1. Corporate Organization and Power 36
4.2. Authorization; Enforceability. 36
4.3. No Violation. 36
4.4. Governmental Authorization; Permits. 36
4.5. Litigation. 37
4.6. Taxes. 37
4.7. Subsidiaries. 37
4.8. Full Disclosure. 37
4.9. Margin Regulations. 38
4.10. Financial Matters. 38
4.11. Ownership of Properties. 39
4.12. Plans. 40
4.13. Solvency. 41
4.14. Environmental Matters. 41
4.15. Compliance With Laws. 42
4.16. Regulated Industries. 42
4.17. Reinsurance Agreements 42
4.18. Carried Insurance 42
4.19. Indebtedness 42
ARTICLE V
AFFIRMATIVE COVENANTS
5.1. Financial Statements. 43
5.2. Statutory Financial Statements. 43
5.3. Other Business and Financial Information. 44
5.4. Notice of Certain Events 45
5.5. Corporate Existence; Franchises; Maintenance of Properties. 46
5.6. Compliance with Laws 47
5.7. Payment of Obligations 47
5.8. Insurance. 47
5.9. Maintenance of Books and Records; Inspection. 47
5.10. Dividends 47
5.11. Ownership of Insurance Subsidiaries 48
5.12. Further Assurances 48
ARTICLE VI
FINANCIAL COVENANTS
6.1. Consolidated Statutory Surplus 48
6.2. Operating Leverage Ratio 48
6.3. Fixed Charge Coverage Ratio 48
<PAGE>
6.4. Risk-Based Capital 48
6.5. Consolidated Net Worth 49
ARTICLE VII
NEGATIVE COVENANTS
7.1. Merger, Consolidation 49
7.2. Indebtedness 49
7.3. Liens 50
7.4. Disposition of Assets. 50
7.5. Investments 50
7.6. Restricted Payments 51
7.7. Transactions with Affiliates 52
7.8. Certain Amendments 52
7.9. Lines of Business 52
7.10. Limitation on Certain Restrictions 52
7.11. Compliance of Plans. 52
7.12. Fiscal Year 53
7.13. Accounting Changes. 53
7.14. Reinsurance Agreements. 53
ARTICLE VIII
EVENTS OF DEFAULT
8.1. Events of Default 53
8.2. Remedies: Termination of Commitments, Acceleration, etc. 56
8.3. Remedies: Set-Off 56
ARTICLE IX
THE AGENT
9.1. Appointment 57
9.2. Nature of Duties 57
9.3. Absence of Reliance on the Agent 57
9.4. Certain Rights of the Agent 58
9.5. Notice of Default 58
9.6. Reliance by Agent 58
9.7. Indemnification 59
9.8. The Agent in its Individual Capacity 59
9.9. Holders 59
9.10. Successor Agent 59
<PAGE>
ARTICLE X
MISCELLANEOUS
10.1. Survival 60
10.2. Governing Law; Consent to Jurisdiction. 60
10.3. Waiver of Jury Trial 61
10.4. Notices 61
10.5. Fees and Expenses. 62
10.7. Amendments, Waivers, etc 63
10.8. Assignments, Participations. 64
10.9. No Waiver 66
10.10. Successors and Assigns 66
10.11. Severability 67
10.12. Construction 67
10.13. Entire Agreement 67
10.14. Counterparts; Effectiveness 67
10.15. Confidentiality 67
10.16. Effect of Amendment and Restatement 68
<PAGE>
ANNEXES
Annex 1 Provisions for Alternative Dispute Resolution
Annex 2 Sale and Assignment of Existing Loans
EXHIBITS
Exhibit A Form of Note
Exhibit B-1 Form of Notice of Borrowing
Exhibit B-2 Form of Notice of Conversion/Continuation
Exhibit C Form of Compliance Certificate
Exhibit D Form of Assignment and Acceptance
Exhibit E Form of Opinion of Ireland, Stapleton, Pryor & Pascoe, P.C.
SCHEDULES
Schedule 1.1(a) Liens
Schedule 4.4(a) Consents, Approvals
Schedule 4.4(b) Licenses
Schedule 4.7 Subsidiaries
Schedule 4.12(a) Plans
Schedule 4.12(c) Certain Welfare Plans
Schedule 4.17 Reinsurance Agreements
Schedule 4.18 Insurance Policies
Schedule 4.19 Indebtedness
Schedule 7.7 Agreements with Affiliates
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT, dated as of the
16th day of December, 1996 (this "Agreement"), is made among
GUARANTY NATIONAL CORPORATION, a Colorado corporation with its
principal offices in Englewood, Colorado (the "Borrower"), the
banks and financial institutions listed on the signature pages
hereof or that become parties hereto after the date hereof
(collectively, the "Lenders"), and FIRST UNION NATIONAL BANK OF
NORTH CAROLINA, a national banking association with its principal
offices in Charlotte, North Carolina ("First Union"), as agent
for the Lenders (in such capacity, the "Agent").
RECITALS
A. The Borrower, certain banks and other financial
institutions, Norwest Bank Colorado, National Association, as
Funding Agent, and First Union, as Administrative Agent, are
parties to a Credit Agreement, dated as of June 2, 1995 (as
amended, the "Original Credit Agreement"), providing for the
availability to the Borrower of a reducing revolving credit
facility in the aggregate principal amount of $110,000,000 on the
terms and subject to the conditions set forth therein. The
proceeds of borrowings under the Original Credit Agreement were
used to finance the acquisition of Viking Insurance Holdings,
Inc. and to pay certain costs and expenses in connection
therewith, to refinance certain existing indebtedness and for
working capital and general corporate purposes.
B. The Borrower has requested certain amendments to the
Original Credit Agreement, and the Lenders and the Agent have
agreed to make such amendments by amending and restating the
Original Credit Agreement in its entirety on the terms and
subject to the conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual provisions,
covenants and agreements herein contained, the parties hereto
hereby agree that, as of the Amendment Effective Date, the
Original Credit Agreement shall be amended and restated in its
entirety as follows:
ARTICLE I
DEFINITIONS
1.1. Defined Terms. For purposes of this Agreement, in
addition to the terms defined elsewhere herein, the following
terms shall have the meanings set forth below (such meanings to
be equally applicable to the singular and plural forms thereof):
"Account Designation Letter" shall mean a letter from the
Borrower to the Agent, duly completed and signed by an Authorized
Officer of the Borrower and in form and substance satisfactory to
the Agent, listing any one or more accounts to which the Borrower
may from time to time request the Agent to forward the proceeds
of any Loans made hereunder.
<PAGE>
"Acquisition Agreement" shall mean the Stock Purchase
Agreement, dated as of April 26, 1995, between the Borrower and
Talegen.
"Actuarial Report" shall mean, with respect to any Insurance
Subsidiary for any period, an actuarial review and valuation
statement of, and opinion as to the adequacy of, such Insurance
Subsidiary's loss and loss adjustment expense reserve positions
as of the end of such period with respect to the insurance
business then in force, and covering such other subjects as are
customary in actuarial reviews and as may be requested by the
Required Lenders, prepared by an independent actuarial firm
acceptable to the Required Lenders in accordance with reasonable
actuarial assumptions and procedures not inconsistent with the
assumptions and procedures previously employed.
"Adjusted LIBOR Rate" shall mean, at any time with respect
to any Loan, a rate per annum equal to the LIBOR Rate plus the
Applicable LIBOR Margin, each as in effect at such time.
"Affiliate" shall mean, as to any Person, each other Person
that directly, or indirectly through one or more intermediaries,
owns or controls, is controlled by or under common control with,
such Person or is a director or officer of such Person. For
purposes of this definition, with respect to any Person "control"
shall mean (i) the possession, direct or indirect, of the power
to direct or cause the direction of the management and policies
of such Person, whether through the ownership of voting
securities, by contract or otherwise, or (ii) the beneficial
ownership of 10% or more of the outstanding voting securities of
such Person.
"Agreement" shall mean this Credit Agreement, as amended,
modified or supplemented from time to time.
"Amendment Effective Date" shall mean the date on which all
conditions precedent set forth in Section 3.2 have been satisfied
or waived in accordance with the terms of this Agreement;
provided that, unless the Borrower shall agree otherwise, the
Amendment Effective Date shall not occur prior to December 16,
1996.
"Applicable Commitment Fee Rate" shall mean, except as
provided in the last sentence of the paragraph after the
following matrix, a rate per annum as determined under the
following matrix with reference to the Capitalization Ratio
calculated as provided below:
Capitalization Ratio Applicable Commitment Fee Rate
Greater than or equal to 0.45 to 1.0 0.25%
Greater than or equal to 0.35 to 1.0
but less than 0.45 to 1.0 0.25%
Greater than or equal to 0.25 to 1.0
but less than 0.35 to 1.0 0.20%
Less than 0.25 to 1.0 0.175%
The Applicable Commitment Fee Rate shall be reset from time to
time in accordance with the above matrix on the fifth (5th)
Business Day after delivery by the Borrower in accordance with
<PAGE>
Sections 5.1(a) and (b) of financial statements together with a
Compliance Certificate attaching a Rate Calculation Worksheet
(reflecting the computation of the Capitalization Ratio as of the
last day of the preceding fiscal quarter, beginning with the
fiscal quarter ending December 31, 1996) that provides for a
different Applicable Commitment Fee Rate than that then in
effect. The Applicable Commitment Fee Rate shall be 0.20% at all
times hereunder until the first effective date of any change in
the Applicable Commitment Fee Rate under the matrix as provided
above.
"Applicable LIBOR Margin" shall mean, at any time with
respect to any LIBOR Loan, except as provided in the last
sentence of the paragraph after the following matrix, the
applicable percentage as determined under the following matrix
with reference to the Capitalization Ratio calculated as provided
below:
Pricing Level I Pricing Level II
Applicable Applicable
Capitalization Ratio LIBOR Margin LIBOR Margin
Greater than or equal to 0.45 to 1.0 0.875% 0.75%
Greater than or equal to 0.35 to 1.0
but less than 0.45 to 1.0 0.65% 0.55%
Greater than or equal to 0.25 to 1.0
but less than 0.35 to 1.0 0.55% 0.45%
Less than 0.25 to 1.0 0.45% 0.375%
Pricing Level II shall apply at all times during which (i) Orion
and its Subsidiaries collectively beneficially own securities of
the Borrower representing 80% or more of the combined voting
power of the then outstanding securities of the Borrower
ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of
directors and, in addition, (ii) Orion has senior unsecured long-
term publicly traded Indebtedness without third-party credit
enhancement that is rated not lower than "BBB-" (or the then
equivalent grade) by Standard & Poor's or not lower than "Baa3"
(or the then equivalent grade) by Moody's; at all other times,
Pricing Level I shall apply. The Applicable LIBOR Margin shall
be reset from time to time in accordance with the above matrix on
the fifth (5th) Business Day after delivery by the Borrower in
accordance with Sections 5.1(a) and (b) of financial statements
together with a Compliance Certificate attaching a Rate
Calculation Worksheet (reflecting the computation of the
Capitalization Ratio as of the last day of the preceding fiscal
quarter, beginning with the fiscal quarter ending December 31,
1996) that provides for a different Applicable LIBOR Margin than
that then in effect. The Applicable LIBOR Margin shall be 0.45%
at all times hereunder until the first effective date of any
change in the Applicable LIBOR Margin under the matrix as
provided above.
"Annual Statement" shall mean, with respect to any Insurance
Subsidiary for any fiscal year, the annual financial statements
of such Insurance Subsidiary as required to be filed with the
Insurance Regulatory Authority of its jurisdiction of domicile
and in accordance with the laws of such jurisdiction, together
with all exhibits, schedules, certificates and actuarial opinions
required to be filed or delivered therewith.
<PAGE>
"Assignee" shall have the meaning given to such term in
Section 10.8(a).
"Assignment and Acceptance" shall mean an Assignment and
Acceptance entered into between a Lender and an Assignee and
accepted by the Agent and the Borrower, in substantially the form
of Exhibit D.
"Authorized Officer" shall mean any officer of the Borrower
authorized by resolution of the board of directors of the
Borrower to take the action specified herein with respect to such
officer and whose signature and incumbency shall have been
certified to the Agent by the secretary or an assistant secretary
of the Borrower.
"Available Dividend Amount" shall mean, with respect to any
Insurance Subsidiary for any period of four consecutive fiscal
quarters, the aggregate maximum amount of dividends that is or
would be permitted by the Insurance Regulatory Authority of its
jurisdiction of domicile, under applicable Requirements of Law
(without the necessity of any consent, approval or other action
of such Insurance Regulatory Authority), to be paid by such
Insurance Subsidiary in respect of such four-quarter period as if
such period were a fiscal year (whether or not any such dividends
have actually been paid).
"Bankruptcy Code" shall mean 11 U.S.C. section 101 et seq., as
amended from time to time, and any successor statute.
"Base Rate" shall mean the higher of (i) the per annum
interest rate publicly announced from time to time by First Union
in Charlotte, North Carolina, to be its prime or base rate (which
may not necessarily be its best lending rate), as adjusted to
conform to changes as of the opening of business on the date of
any such change in such prime or base rate, or (ii) 0.5% per
annum in excess of the Federal Funds Rate, as adjusted to conform
to changes as of the opening of business on the date of any such
change in the Federal Funds Rate.
"Base Rate Loan" shall mean, at any time, any Loan that
bears interest at such time at the Base Rate.
"Borrowing" shall mean the incurrence by the Borrower on a
given date (including as a result of conversions or continuations
of outstanding Loans pursuant to Section 2.9) of Loans under the
Facility.
"Borrowing Date" shall have the meaning given to such term
in Section 2.2(a).
"Business Day" shall mean (i) any day other than a Saturday
or Sunday, a legal holiday or a day on which commercial banks in
Charlotte, North Carolina are required by law to be closed and
(ii) in respect of any determination relevant to a LIBOR Loan,
any such day that is also a day on which tradings are conducted
in the London interbank Eurodollar market.
"Capitalization Ratio" shall mean, as of the last day of any
fiscal quarter, the ratio of (i) Consolidated Indebtedness
(excluding Indebtedness incurred pursuant to Investment
Borrowings of the Borrower and its Subsidiaries, but only to the
extent such Indebtedness is permitted under Section 7.2) as of
such date to (ii) the sum of Consolidated Indebtedness (excluding
Indebtedness incurred pursuant to Investment Borrowings of the
Borrower and its Subsidiaries, but only to the
<PAGE>
extent such Indebtedness is permitted under Section 7.2) and
Consolidated Net Worth, each as of such date.
"Cash Equivalents" shall mean (i) securities issued or
unconditionally guaranteed by the United States of America or any
agency or instrumentality thereof, backed by the full faith and
credit of the United States of America and maturing within 180
days from the date of acquisition, (ii) securities issued by any
state of the United States of America or any political
subdivision or public instrumentality thereof, maturing within
180 days from the date of acquisition and, at the time of
acquisition, having a rating of at least A or the equivalent
thereof by Standard & Poor's or at least A2 or the equivalent
thereof by Moody's, (iii) commercial paper issued by any Person
organized under the laws of the United States of America,
maturing no more than 180 days from the date of acquisition and,
at the time of acquisition, having a rating of at least A-1 or
the equivalent thereof by Standard & Poor's or at least P-1 or
the equivalent thereof by Moody's, (iv) time deposits and
certificates of deposit that are insured by the Federal Deposit
Insurance Corporation (the "FDIC") or any successor
instrumentality of the government of the United States of America
up to the applicable limit on insurance granted by the FDIC or
such other instrumentality with respect to such instruments (it
being understood that the amount invested in such instrument may
not exceed the limit on such insurance), maturing within 180 days
from the date of issuance and issued by a bank or trust company
organized under the laws of the United States of America or any
state thereof and having combined capital and surplus of at least
$250,000,000 and (v) money market funds substantially all of
whose assets are comprised of securities of the types described
in clauses (i) through (iv) above.
"Change of Control" shall mean the occurrence of any of the
following: (i) any Person or group of Persons acting in concert
as a partnership or other group (other than Orion or any of its
Subsidiaries or a group including Orion or any of its
Subsidiaries) shall, as a result of a tender or exchange offer,
open market purchases, privately negotiated purchases or
otherwise, have become, after the date hereof, the "beneficial
owner" (within the meaning of such term under Rule 13d-3 under
the Exchange Act) of securities of the Borrower representing 20%
or more of the combined voting power of the then outstanding
securities of the Borrower ordinarily (and apart from rights
accruing under special circumstances) having the right to vote in
the election of directors; (ii) the Borrower shall at any time no
longer be subject to the reporting requirements of Section 13(a)
or Section 15(d) of the Exchange Act and, also at such time,
Orion and its Subsidiaries shall collectively beneficially own
securities of the Borrower representing less than 80% of the
combined voting power of the then outstanding securities of the
Borrower ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of
directors; or (iii) the board of directors of the Borrower shall
cease to consist of a majority of the individuals who constituted
the board of directors as of the date hereof or who shall have
become a member thereof subsequent to the date hereof after
having been nominated, or otherwise approved in writing, by at
least a majority of individuals who constituted the board of
directors of the Borrower as of the date hereof (or their
replacements approved as herein required), and, also at such
time, either (A) Orion and its Subsidiaries shall collectively
beneficially own securities of the Borrower representing 50% or
less of the combined voting power of the then outstanding
securities of the Borrower ordinarily (and apart from rights
accruing under special circumstances) having the right to vote in
the election of directors, or (B) any Person or group of Persons
acting in concert as a partnership or other group shall, as a
result of a tender or exchange offer, open market purchases,
privately negotiated purchases or otherwise, have become, after
the date hereof, the "beneficial owner" (within the meaning of
such term under Rule 13d-3 under the Exchange Act) of securities
of Orion representing 20% or more of
<PAGE>
the combined voting power of the then outstanding securities of
Orion ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of
directors.
"Combined Net Written Premiums" shall mean, at any time, the
aggregate (without duplication) of Net Written Premiums of each
Insurance Subsidiary at such time, after eliminating the effect
thereupon of any transactions among the Insurance Subsidiaries.
"Commitment" shall mean, with respect to any Lender at any
time, the amount set forth under such Lender's name on its
signature page hereto under the caption "Commitment" or, if such
Lender has entered into one or more Assignment and Acceptances,
the amount set forth for such Lender at such time in the Register
maintained by the Agent pursuant to Section 10.8(b) as such
Lender's "Commitment," as such amount may be reduced at or prior
to such time pursuant to the terms hereof.
"Compliance Certificate" shall mean a fully completed
certificate in the form of Exhibit C.
"Consolidated Indebtedness" shall mean, as of the last day
of any fiscal quarter, the aggregate (without duplication) of all
Indebtedness of the Borrower and its Subsidiaries as of such
date, determined on a consolidated basis in accordance with
Generally Accepted Accounting Principles.
"Consolidated Investment Assets" shall mean, at any time,
the aggregate of (i) cash and Cash Equivalents at such time and
(ii) the equity and non-equity securities owned by the Borrower
or any of its Subsidiaries at such time and required to be
classified as investment assets on the consolidated balance sheet
of the Borrower and its Subsidiaries, determined on a
consolidated basis in accordance with Generally Accepted
Accounting Principles.
"Consolidated Net Income" shall mean, for any fiscal
quarter, net income (or loss) for the Borrower and its
Subsidiaries for such fiscal quarter, determined on a
consolidated basis in accordance with Generally Accepted
Accounting Principles.
"Consolidated Net Worth" shall mean, at any time, the net
worth of the Borrower and its Subsidiaries at such time,
determined on a consolidated basis in accordance with Generally
Accepted Accounting Principles but (i) excluding any preferred
stock or other class of equity securities that, by its stated
terms (or by the terms of any class of equity securities issuable
upon conversion thereof or in exchange therefor), or upon the
occurrence of any event, matures or is mandatorily redeemable, or
is redeemable at the option of the holders thereof, in whole or
in part, and (ii) without regard to the requirements of Statement
of Financial Accounting Standards No. 115 issued by the Financial
Accounting Standards Board of the American Institute of Certified
Public Accountants.
"Consolidated Statutory Surplus" shall mean, with respect to
GNIC and VICW at any time, the aggregate (without duplication) of
the amounts shown on line 25, page 3, column 1 of the Annual
Statement of each of GNIC and VICW, or the aggregate (without
duplication) of the amounts determined in a consistent manner for
any date other than a date as of which an Annual Statement of
GNIC and VICW is prepared.
"Consolidated Total Assets" shall mean, at any time, the
aggregate (without duplication) of all assets of the Borrower and
its Subsidiaries that are required to be included on the asset
side of the
<PAGE>
consolidated balance sheet of the Borrower and its Subsidiaries
at such time, determined on a consolidated basis in accordance
with Generally Accepted Accounting Principles.
"Contingent Obligation" shall mean, with respect to any
Person, any direct or indirect liability of such Person with
respect to any Indebtedness, lease, dividend, guaranty, letter of
credit or other obligation (the "primary obligation") of another
Person (the "primary obligor"), whether or not contingent, (a) to
purchase, repurchase or otherwise acquire such primary obligation
or any property constituting direct or indirect security
therefor, (b) to advance or provide funds (i) for the payment or
discharge of any such primary obligation or (ii) to maintain
working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency or any balance
sheet item, level of income or financial condition of the primary
obligor, (c) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such
primary obligation of the ability of the primary obligor in
respect thereof to make payment of such primary obligation or
(d) otherwise to assure or hold harmless the owner of any such
primary obligation against loss or failure or inability to
perform in respect thereof; provided, however, that obligations
entered into in the ordinary course of an Insurance Subsidiary's
business under insurance policies or contracts issued by it or to
which it is a party, including Reinsurance Agreements (and
security posted by any such Insurance Subsidiary in the ordinary
course of its business to secure obligations thereunder), shall
not be deemed to be Contingent Obligations of the Borrower or any
of its Subsidiaries for purposes of this Agreement. The amount
of any Contingent Obligation shall be deemed to be an amount
equal to the stated or determinable amount of the primary
obligation in respect of which such Contingent Obligation is made
or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof.
"Covenant Compliance Worksheet" shall mean a fully completed
worksheet in the form of Attachment A to Exhibit C.
"Default" shall mean any event or condition that, with the
passage of time or giving of notice, or both, would constitute an
Event of Default.
"Dollars" or "$" shall mean dollars of the United States of
America.
"ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended from time to time, and any successor
statute, and all rules and regulations from time to time
promulgated thereunder.
"ERISA Affiliate" shall mean any Person (including any trade
or business, whether or not incorporated) that would be deemed to
be under "common control" with, or a member of the same
"controlled group" as, the Borrower or any of its Subsidiaries,
within the meaning of Sections 414(b), (c), (m) or (o) of the
Internal Revenue Code or Section 4001 of ERISA.
"ERISA Event" shall mean (i) a Reportable Event with respect
to a Qualified Plan or a Multiemployer Plan, (ii) a complete or
partial withdrawal by the Borrower or any ERISA Affiliate from a
Multiemployer Plan, (iii) the filing by the Borrower or any ERISA
Affiliate of a notice of intent to terminate, the treatment of a
plan amendment as a termination under Section 4041 or 4041A of
ERISA, or the commencement of proceedings by the PBGC to
terminate, a Qualified Plan or Multiemployer Plan subject to
Title IV of ERISA, (iv) a failure to make required contributions
to a Qualified Plan or Multiemployer Plan by the applicable due
date thereof, (v) the imposition upon the
<PAGE>
Borrower or any ERISA Affiliate of any liability under Title IV
of ERISA, other than for PBGC premiums due but not delinquent
under Section 4007 of ERISA, (vi) an application for a funding
waiver or an extension of any amortization period pursuant to
Section 412 of the Internal Revenue Code with respect to any
Qualified Plan, (vii) the engaging in or otherwise becoming
liable for a nonexempt Prohibited Transaction by the Borrower or
any ERISA Affiliate or (viii) a violation of the applicable
requirements of Section 404 or 405 of ERISA or the exclusive
benefit rule under Section 401(a) of the Internal Revenue Code by
any fiduciary of any Qualified Plan for which the Borrower or any
of its Subsidiaries may be directly or indirectly liable
(provided that each of the events described in clauses (v), (vii)
and (viii) above shall be an "ERISA Event" only if the same would
be reasonably likely to have a Material Adverse Effect).
"Eligible Assignee" shall mean (i) a commercial bank
organized under the laws of the United States or any state
thereof and having total assets in excess of $5,000,000,000,
(ii) a commercial bank organized under the laws of any other
country that is a member of the OECD or a political subdivision
of any such country and having total assets in excess of
$5,000,000,000, provided that such bank or other financial
institution is acting through a branch or agency located in the
United States, in the country under the laws of which it is
organized or in another country that is also a member of the
OECD, (iii) the central bank of any country that is a member of
the OECD, (iv) a finance company, insurance company or other
financial institution or fund that is engaged in making,
purchasing or otherwise investing in loans in the ordinary course
of its business and having total assets in excess of
$3,000,000,000 or (v) any Affiliate of an existing Lender.
"Environmental Claims" shall mean any and all
administrative, regulatory or judicial actions, suits, demands,
demand letters, claims, liens, notices of noncompliance or
violation, investigations (other than internal reports prepared
by the Borrower or any Subsidiary solely in the ordinary course
of its business and not in response to any third party action or
request of any kind) or proceedings relating in any way to any
Environmental Law or any permit issued, or any approval given,
under any such Environmental Law (collectively, "Claims"),
including, without limitation, (i) any and all Claims by
Governmental Authorities for enforcement, cleanup, removal,
response, remedial or other actions or damages pursuant to any
applicable Environmental Law and (ii) any and all Claims by any
third party seeking damages, contribution, indemnification, cost
recovery, compensation or injunctive relief resulting from
Hazardous Substances or arising from alleged injury or threat of
injury to human health or the environment.
"Environmental Laws" shall mean, collectively, any and all
federal, state and local laws, statutes, ordinances, rules,
regulations, permits, licenses, approvals, interpretations, rules
of common law and orders of courts or Governmental Authorities,
relating to the protection of human health or the environment,
now or hereafter in effect and in each case as amended from time
to time, including, without limitation, requirements pertaining
to the manufacture, processing, distribution, use, treatment,
storage, disposal, transportation, handling, reporting,
licensing, permitting, investigation or remediation of Hazardous
Substances.
"Event of Default" shall have the meaning given to such term
in Section 8.1.
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time, and any successor statute,
and all rules and regulations from time to time promulgated
thereunder.
<PAGE>
"Existing Loans" shall have the meaning given to such term
in Section 2.1(c).
"Facility" shall mean the revolving line of credit
established by the Lenders under Section 2.1(a).
"Facility Expiry Date" shall mean April 15, 2002.
"Facility Termination Date" shall mean the Facility Expiry
Date or such earlier date of termination of the Commitments in
accordance with Section 2.4 or 8.2.
"Federal Funds Rate" shall mean, for any period, a
fluctuating per annum interest rate equal for each day during
such period to the weighted average of the rates on overnight
federal funds transactions with members of the Federal Reserve
System arranged by federal funds brokers, as published for such
day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York,
or if such rate is not so published for any day that is a
Business Day, the average of the quotations for such day on such
transactions received by the Agent from three federal funds
brokers of recognized standing selected by the Agent.
"Federal Reserve Board" shall mean the Board of Governors of
the Federal Reserve System or any successor thereto.
"Fee Letter" shall mean the letter from First Union to the
Borrower, dated October 15, 1996, relating to the facility and
administrative fees payable in respect of the transactions
contemplated by this Agreement, as amended, modified or
supplemented from time to time.
"Fixed Charge Coverage Ratio" shall mean, as of the last day
of any period of four consecutive fiscal quarters (the
"Measurement Period"), the ratio of (i) the sum of (A) the
aggregate (without duplication) of the Available Dividend Amount
of each Insurance Subsidiary directly owned by the Borrower or by
Viking Holdings for the Measurement Period, plus (B) the
aggregate of all management fees and lease payments paid to the
Borrower by its Subsidiaries during the Measurement Period, plus
(C) the difference (whether positive or negative) between (1) the
aggregate of all payments made to the Borrower by its
Subsidiaries during the Measurement Period pursuant to tax
sharing or tax allocation agreements or arrangements minus
(2) the aggregate of all tax payments (including payments to
Orion pursuant to tax sharing or tax allocation agreements) made
by the Borrower during the Measurement Period to (ii) the
aggregate (without duplication) of all lease payments and
scheduled payments of principal (to the extent such principal
remains outstanding) and interest (based on interest rates in
effect as of the date of determination) in respect of
Indebtedness reasonably determined by the Borrower (and as set
forth in the relevant Covenant Compliance Worksheet) to be
required to be made by the Borrower and its Subsidiaries during
the period of four consecutive fiscal quarters immediately
following the Measurement Period. For the sake of clarity, it is
understood that prepayments of Indebtedness made during any
Measurement Period shall not be taken into account in the
calculation under clause (i) above for such Measurement Period.
"GNIC" shall mean Guaranty National Insurance Company, a
Colorado corporation.
"Generally Accepted Accounting Principles" shall mean
generally accepted accounting principles, as set forth in the
opinions and pronouncements of the Accounting Pronouncements
Board and the American Institute of Certified Public Accountants
and the statements and pronouncements of
<PAGE>
the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the
accounting profession) or in such other statements by such
entities as may be in general use by significant segments of the
accounting profession, consistently applied and maintained and in
conformity with those used in the preparation of the most recent
Historical Financial Statements and containing disclosure of the
effect on the financial position or results of operations of any
material change in the application of accounting principles and
practices during the relevant reporting period.
"Governmental Authority" shall mean any nation or
government, any state or other political subdivision thereof and
any central bank thereof, any municipal, local, city or county
government, and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining
to government, and any corporation or other entity owned or
controlled, through stock or capital ownership or otherwise, by
any of the foregoing.
"Hazardous Substances" shall mean any substances or
materials (i) that are or become defined as hazardous wastes,
hazardous substances, pollutants, contaminants or toxic
substances under any Environmental Law, (ii) that are defined by
any Environmental Law as toxic, explosive, corrosive, ignitable,
infectious, radioactive, mutagenic or otherwise hazardous,
(iii) the presence of which require investigation or response
under any Environmental Law, (iv) that constitute a nuisance,
trespass or health or safety hazard to Persons or neighboring
properties, (v) that consist of underground or aboveground
storage tanks, whether empty, filled or partially filled with any
substance or (vi) that contain, without limitation, asbestos,
polychlorinated biphenyls, urea formaldehyde foam insulation,
petroleum hydrocarbons, petroleum derived substances or wastes,
crude oil, nuclear fuel, natural gas or synthetic gas.
"Hedge Agreement" shall mean any interest or foreign
currency rate swap, cap, collar, option, hedge, forward rate or
other similar agreement or arrangement designed to protect
against fluctuations in interest rates or currency exchange
rates.
"Historical Financial Statements" shall have the meaning
given to such term in Section 4.10(a).
"Historical Statutory Statements" shall have the meaning
given to such term in Section 4.10(c).
"IRIS Tests" shall mean the ratios and other financial
measurements developed by the NAIC under its Insurance Regulatory
Information System or, in lieu thereof, any successor or other
substantially similar guidelines intended to measure the
financial performance of companies in the property and casualty
insurance industry, as the same shall be in effect from time to
time.
"Indebtedness" shall mean, with respect to any Person,
(i) all indebtedness of such Person for borrowed money, (ii) all
reimbursement obligations of such Person with respect to surety
bonds, letters of credit and bankers' acceptances (in each case,
whether or not matured and in the stated amount thereof),
(iii) all obligations of such Person evidenced by notes, bonds,
debentures or similar instruments, (iv) all obligations of such
Person to pay the deferred purchase price of property or services
(other than trade or other accounts payable arising in the
ordinary course of business, payable on terms customary in the
trade, and not more than 60 days past due except to the extent
being contested in good faith and by appropriate proceedings),
(v) all indebtedness created or arising under
<PAGE>
any conditional sale or other title retention agreement with
respect to property acquired by such Person (even though the
rights and remedies of the seller or lender under such agreement
in the event of a default are limited to repossession or sale of
such property), (vi) all obligations of such Person as lessee
under leases that are or should be, in accordance with Generally
Accepted Accounting Principles, recorded as capital leases, to
the extent such obligations are required to be so recorded,
(vii) all obligations of such Person to purchase, redeem, retire,
defease or otherwise make any payment in respect of any capital
stock or other equity securities that, by their stated terms (or
by the terms of any equity securities issuable upon conversion
thereof or in exchange therefor), or upon the occurrence of any
event, mature or are mandatorily redeemable, or are redeemable at
the option of the holder thereof, in whole or in part, (viii) all
Investment Borrowings of such Person, (ix) the net termination
obligations of such Person under any Hedge Agreements (other than
any Hedge Agreements in respect of the Indebtedness incurred
pursuant to this Agreement), calculated as of any date as if such
agreement or arrangement were terminated as of such date, (x) all
Contingent Obligations of such Person and (xi) all indebtedness
referred to in clauses (i) through (x) above secured by any Lien
on any property or asset owned or held by such Person regardless
of whether the indebtedness secured thereby shall have been
assumed by such Person or is nonrecourse to the credit of such
Person.
"Insurance Code" shall mean, with respect to any Insurance
Subsidiary, the insurance code of any state where such Insurance
Subsidiary is domiciled or conducting business, as amended from
time to time, and any successor statute, together with all rules
and regulations from time to time promulgated thereunder.
"Insurance Regulatory Authority" shall mean, with respect to
any Insurance Subsidiary, the insurance department or similar
Governmental Authority charged with regulating insurance
companies or insurance holding companies, in its state of
domicile and, to the extent that it has regulatory authority over
such Insurance Subsidiary, in each other jurisdiction in which
such Insurance Subsidiary conducts business or is licensed to
conduct business.
"Insurance Subsidiary" shall mean any Subsidiary of the
Borrower the ability of which to pay dividends is regulated by an
Insurance Regulatory Authority or that is otherwise required to
be regulated thereby in accordance with the applicable
Requirements of Law of its state of domicile.
"Investment Borrowings" shall mean, with respect to any
Person, Indebtedness of such Person incurred in connection with
(i) mortgage-backed security transactions in which such Person
sells mortgage collateral, such as (without limitation)
securities issued by the Government National Mortgage Association
and the Federal Home Loan Mortgage Corporation, for delivery in
the current month while simultaneously contracting to repurchase
"substantially the same" (as determined by the Public Securities
Association and under Generally Accepted Accounting Principles)
collateral for a later settlement, (ii) transactions in which
such Person lends cash to a primary dealer and the primary dealer
collateralizes the borrowing of the cash with certain securities,
and (iii) transactions in which such Person makes loans of
securities to a broker-dealer under an agreement requiring such
loans to be continuously secured by cash collateral or by United
States government securities.
"Investment Grade Securities" shall mean non-equity
securities (i) that are rated either "BBB-" (or the then
equivalent grade) or higher by Standard & Poor's or "Baa3" (or
the then equivalent grade) or higher by Moody's or (ii) that are
rated "2" or better by the NAIC in the event no rating therefor
is published by either Standard & Poor's or Moody's.
<PAGE>
"Interest Period" shall have the meaning given to such term
in Section 2.9.
"Internal Revenue Code" shall mean the Internal Revenue Code
of 1986, as amended from time to time, and any successor statute,
and all rules and regulations from time to time promulgated
thereunder.
"LIBOR Loan" shall mean, at any time, any Loan that bears
interest at such time at the Adjusted LIBOR Rate.
"LIBOR Rate" shall mean, with respect to each LIBOR Loan
comprising part of the same Borrowing for any Interest Period, an
interest rate per annum obtained by dividing (i) (y) the rate of
interest appearing on Telerate Page 3750 (or any successor page)
or (z) if no such rate is available, or at the option of the
Agent in any event, the rate of interest determined by the Agent
to be the rate or the arithmetic mean of rates (rounded upward,
if necessary, to the nearest 1/16 of one percentage point) at
which Dollar deposits in immediately available funds are offered
by First Union to first-tier banks in the London interbank
Eurodollar market, in each case under (y) and (z) above at
approximately 11:00 a.m., London time, two (2) Business Days
prior to the first day of such Interest Period for a period
substantially equal to such Interest Period and in an amount
substantially equal to the amount of First Union's LIBOR Loan
comprising part of such Borrowing, by (ii) the amount equal to
1.00 minus the Reserve Requirement (expressed as a decimal) for
such Interest Period.
"Lender" shall mean each financial institution signatory
hereto and each other financial institution that becomes a
"Lender" hereunder pursuant to Section 10.8, and their respective
successors and assigns.
"Licenses" shall have the meaning given to such term in
Section 4.4(b).
"Lien" shall mean any mortgage, pledge, hypothecation,
assignment, security interest, lien (statutory or otherwise),
preference, priority, charge or other encumbrance of any nature,
whether voluntary or involuntary, including, without limitation,
the interest of any vendor or lessor under any conditional sale
agreement, title retention agreement, capital lease or any other
lease or arrangement having substantially the same effect as any
of the foregoing, and the filing of any financing statement or
similar statement or notice under the applicable Uniform
Commercial Code or comparable recording statute of any
jurisdiction.
"Loan Documents" shall mean and collectively refer to this
Agreement, the Notes and all other instruments, documents and
certificates now or hereafter executed and delivered to the Agent
or any Lender by or on behalf of the Borrower or any Subsidiary
with respect to this Agreement and the transactions contemplated
hereby, in each case as amended, modified, supplemented or
restated from time to time.
"Loans" shall have the meaning given to such term in
Section 2.1.
"Margin Stock" shall have the meaning given to such term in
Regulation U.
"Material Adverse Effect" or "Material Adverse Change" shall
mean a material adverse effect upon, or a material adverse change
in, any of (i) the condition (financial or otherwise),
operations, business or properties of the Borrower and its
Subsidiaries, taken as a whole, (ii) the ability of the
<PAGE>
Borrower to perform its obligations under the Loan Documents or
(iii) the rights and remedies of the Agent or the Lenders under
the Loan Documents.
"Material Assets" shall mean (i) as to the Borrower or any
of its Subsidiaries at any time, (y) any one or more assets,
properties or businesses of the Borrower or such Subsidiary
comprising, individually or in the aggregate, greater than three
percent (3%) of Consolidated Total Assets at such time and
(z) any issued and outstanding shares of capital stock or other
equity securities of any Significant Subsidiary, and (ii) as to
any Insurance Subsidiary at any time, any one or more insurance
product lines to which greater than three percent (3%) of
Combined Net Written Premiums for the prior fiscal year are
attributable.
"Moody's" shall mean Moody's Investors Service, Inc., and
its successors and assigns.
"Multiemployer Plan" shall mean any "multiemployer plan"
within the meaning of Section 4001(a)(3) of ERISA to which the
Borrower or any ERISA Affiliate makes, is making or is obligated
to make contributions or has made or been obligated to make
contributions.
"NAIC" shall mean the National Association of Insurance
Commissioners and any successor thereto.
"Net Written Premiums" shall mean, with respect to any
Insurance Subsidiary at any time, the amount of premiums written
(after deducting or adding premiums on business ceded to or
assumed from others) as shown on line 32, page 8, Part 2B, column
4 of the Annual Statement of such Insurance Subsidiary, or the
amount determined in a consistent manner for any date other than
a date as of which an Annual Statement of such Insurance
Subsidiary is prepared.
"Notes" shall mean the promissory notes of the Borrower in
substantially the form of Exhibit A, executed and delivered to
the Lenders pursuant to Section 2.3 or, in connection with an
Assignment and Acceptance, pursuant to Section 10.8(c), in each
case as amended, modified, supplemented or restated from time to
time.
"Notice of Borrowing" shall have the meaning given to such
term in Section 2.2(a).
"Notice of Conversion/Continuation" shall have the meaning
given to such term in Section 2.9(b).
"OECD" shall mean the Organization for Economic Cooperation
and Development and any successor thereto.
"Obligations" shall mean all principal of and interest
(including, to the greatest extent permitted by law,
post-petition interest) on the Loans and all fees, expenses,
indemnities and other obligations owing, due or payable at any
time by the Borrower to the Agent, any Lender or any other Person
entitled thereto, under this Agreement or any of the other Loan
Documents.
"Original Closing Date" shall mean the date upon which the
initial extensions of credit were made pursuant to the Original
Credit Agreement.
"Original Credit Agreement" shall have the meaning given to
such term in the recitals hereof.
<PAGE>
"Original Credit Agreement Date" shall mean June 2, 1995.
"Original Lenders" shall mean the banks and other financial
institutions that are "Lenders" (within the meaning of the
Original Credit Agreement) under the Original Credit Agreement as
of the Amendment Effective Date.
"Orion" shall mean Orion Capital Corporation, a Delaware
corporation, and its successors and assigns.
"PBGC" shall mean the Pension Benefit Guaranty Corporation
and any successor thereto.
"Participant" shall have the meaning given to such term in
Section 10.8(d).
"Pension Plan" shall mean any "employee pension benefit
plan" within the meaning of Section 3(2) of ERISA that is subject
to the provisions of Title IV of ERISA (other than a
Multiemployer Plan) and to which the Borrower or any ERISA
Affiliate may have any liability.
"Percentage" shall mean, with respect to any Lender at any
time, a fraction (expressed as a percentage) the numerator of
which is the Commitment of such Lender at such time and the
denominator of which is the Total Commitment at such time;
provided that if the Percentage of any Lender is to be determined
after the Commitments have been terminated, then such Percentage
shall be determined immediately prior (and without giving effect)
to such termination.
"Permitted Liens" shall mean any of the following types of
Liens:
(i) Liens created by the Loan Documents;
(ii) Liens in existence on the Amendment Effective Date
and set forth on Schedule 1.1(a);
(iii) Liens imposed by law, such as Liens of carriers,
warehousemen, mechanics, materialmen and landlords, and
other similar Liens incurred in the ordinary course of
business for sums not constituting borrowed money that are
not overdue for a period of more than thirty (30) days or
that are being contested in good faith by appropriate
proceedings and for which adequate reserves have been
established in accordance with Generally Accepted Accounting
Principles or other appropriate provision made therefor;
(iv) Liens (other than any Lien imposed by ERISA)
incurred in the ordinary course of business in connection
with worker's compensation, unemployment insurance or other
forms of governmental insurance or benefits, or to secure
the performance of letters of credit, bids, tenders,
statutory obligations, surety and appeal bonds, leases,
government contracts and other similar obligations (other
than obligations for borrowed money) entered into in the
ordinary course of business;
(v) Liens for taxes, assessments or other governmental
charges or statutory obligations that are not delinquent or
remain payable without any penalty or that are being
contested in good faith by appropriate proceedings and for
which adequate reserves have been
<PAGE>
established in accordance with Generally Accepted Accounting
Principles or other appropriate provision made therefor;
(vi) Liens in connection with pledges and deposits made
pursuant to statutory and regulatory requirements of
Insurance Regulatory Authorities by an Insurance Subsidiary
in the ordinary course of its business;
(vii) Purchase money Liens upon property used by the
Borrower or any Subsidiary of the Borrower in the ordinary
course of its business, securing Indebtedness incurred
solely to pay all or a portion of the purchase price thereof
to the extent such Indebtedness is permitted under
Section 7.2(vii), provided that any such Lien (i) shall
attach to such property concurrently or within ten (10) days
after the acquisition thereof by the Borrower or such
Subsidiary, (ii) shall not exceed the lesser of (y) the fair
market value of such property or (z) the cost thereof to the
Borrower or such Subsidiary and (iii) shall not encumber any
other property of the Borrower or any Subsidiary of the
Borrower;
(viii) Any attachment or judgment Lien not constituting
an Event of Default under Section 8.1(l) that is being
contested in good faith by appropriate proceedings and for
which adequate reserves have been established in accordance
with Generally Accepted Accounting Principles or other
appropriate provision made therefor;
(ix) With respect to any real property, all easements,
rights of way, licenses and similar encumbrances on title
that do not materially impair the use of such property for
its intended purposes;
(x) Liens securing obligations of the Borrower not
exceeding $200,000, created pursuant to the settlement of
the actions styled (a) Vogel v. Guaranty National
Corporation, et al., filed in the District Court for the
City and County of Denver, Colorado, (b) Vogel v. Guaranty
National Corporation, et al., filed in the Supreme Court of
the State of New York, New York County, and (c) Miller v.
Ware, et al., filed in the District Court for the County of
Arapahoe, Colorado;
(xi) Liens arising under insurance holding company
statutes or regulations; and
(xii) Liens arising from the filing, for notice purposes
only, of financing statements regarding operating leases.
"Person" shall mean any corporation, association, joint
venture, partnership, limited liability company, organization,
business, individual, trust, government or agency or political
subdivision thereof or any other legal entity.
"Plan" shall mean any "employee benefit plan" within the
meaning of Section 3(3) of ERISA that the Borrower or any ERISA
Affiliate maintains, administers, contributes to or is required
to contribute to and that covers any employee or former employee
of the Borrower or any ERISA Affiliate with respect to such
employee's relationship with any of the foregoing, in each case
including, without limitation, all profit-sharing plans, bonus
plans, incentive compensation plans, deferred compensation plans,
retirement plans, stock option plans, stock purchase plans and
health, life and disability benefit plans, and all Pension Plans.
<PAGE>
"Pro Rata Share" of any amount shall mean, with respect to
any Lender at any time, the product of (i) such amount,
multiplied by (ii) such Lender's Percentage at such time; except
that, as used in connection with any amount to be paid or
distributed to the Lenders hereunder or under any other Loan
Document, the term "Pro Rata Share" shall mean, with respect to
any Lender at any time, the product of (y) such amount,
multiplied by (z) a fraction (expressed as a percentage) the
numerator of which is the ratable portion of such amount owing to
such Lender and the denominator of which is the aggregate of such
amount.
"Prohibited Transaction" shall mean any transaction
described in (i) Section 406 of ERISA that is not exempt by
reason of Section 408 of ERISA or by reason of a Department of
Labor prohibited transaction individual or class exemption or
(ii) Section 4975(c) of the Internal Revenue Code that is not
similarly exempt or exempt by reason of Section 4975(c)(2) or
4975(d) of the Internal Revenue Code.
"Projections" shall have the meaning given to such term in
Section 4.10(b).
"Qualified Plan" shall mean any Pension Plan that is
intended to be tax-qualified under Section 401(a) of the Internal
Revenue Code, and the trust created thereunder that is intended
to be tax-exempt under Section 501(a) of the Internal Revenue
Code, and that the Borrower or any ERISA Affiliate sponsors or
maintains or to which it makes or is obligated to make
contributions, or, in the case of a "multiple employer plan"
within the meaning of Section 4064(a) of ERISA, has made
contributions at any time during the immediately preceding five-
plan year period, but excluding any Multiemployer Plan.
"Quarterly Statement" shall mean, with respect to any
Insurance Subsidiary for any fiscal quarter, the quarterly
financial statements of such Insurance Subsidiary as required to
be filed with the Insurance Regulatory Authority of its
jurisdiction of domicile, together with all exhibits, schedules,
certificates and actuarial opinions required to be filed or
delivered therewith.
"Rate Calculation Worksheet" shall mean a fully completed
worksheet in the form of Attachment B to Exhibit C.
"Register" shall have the meaning given to such term in
Section 10.8(b).
"Regulations D, G, T, U and X" shall mean Regulations D, G,
T, U and X, respectively, of the Federal Reserve Board, as in
effect from time to time, and any successor regulations.
"Reinsurance Agreement" shall mean any agreement, contract,
treaty, certificate or other arrangement whereby any Insurance
Subsidiary agrees to transfer, cede or retrocede to another
insurer or reinsurer all or part of the liability assumed by such
Insurance Subsidiary under a policy or policies of insurance
issued by such Insurance Subsidiary.
"Reportable Event" shall mean (i) a "reportable event"
within the meaning of Section 4043(b) of ERISA for which the 30-
day notice has not been waived by the PBGC, (ii) a withdrawal
from a plan described in Section 4063 of ERISA or (iii) a
cessation of operations described in Section 4062(e) of ERISA.
<PAGE>
"Required Lenders" shall mean, at any time, the Lenders
providing sixty-six and two-thirds percent (66 2/3%) or more of
the aggregate principal amount of the Loans outstanding at such
time or, in the event no Loans are outstanding at such time, the
Lenders having sixty-six and two-thirds percent (66 2/3%) or more
of the Total Commitment at such time.
"Requirement of Law" shall mean, with respect to any Person,
the charter, articles or certificate of organization or
incorporation and bylaws or other organizational or governing
documents of such Person, and any statute, law, treaty, rule,
regulation, order, decree, writ, injunction or determination of
any arbitrator or court or other Governmental Authority, in each
case applicable to or binding upon such Person or any of its
property or to which such Person or any of its property is
subject or otherwise pertaining to any or all of the transactions
contemplated by this Agreement and the other Loan Documents.
"Reserve Requirement" shall mean, with respect to any
Interest Period, the reserve percentage (expressed as a decimal)
applicable two (2) Business Days before the first day of such
Interest Period determined by the Agent to be in effect on such
day, as provided by the Federal Reserve Board, applied for
determining the maximum reserve requirements (including, without
limitation, basic, supplemental, marginal and emergency reserves)
applicable to First Union under Regulation D of the Board of
Governors of the Federal Reserve System with respect to
"Eurocurrency liabilities" within the meaning of Regulation D, or
under any similar or successor regulation with respect to
Eurocurrency liabilities or Eurocurrency funding.
"Senior Financial Officer" shall mean, with respect to the
Borrower, the chief financial officer, vice president-finance,
treasurer or other officer of the Borrower who has primary
overall responsibility for the management of the financial
affairs of the Borrower and its Subsidiaries.
"Significant Subsidiary" shall mean, at the relevant time of
determination, any Subsidiary of the Borrower the assets of which
comprise greater than five percent (5%) of Consolidated Total
Assets at such time or (if an Insurance Subsidiary) the Net
Written Premiums of which at such time comprise greater than
three percent (3%) of Combined Net Written Premiums for the prior
fiscal year.
"Standard & Poor's" shall mean Standard & Poor's Ratings
Services, a division of McGraw-Hill, Inc., and its successors and
assigns.
"Statutory Accounting Principles" shall mean, with respect
to any Insurance Subsidiary, the statutory accounting practices
prescribed or permitted by the relevant Insurance Regulatory
Authority of its state of domicile, consistently applied and
maintained and in conformity with those used in the preparation
of the most recent Historical Financial Statements and containing
disclosure of the effect on the financial position or results of
operations of any material change in the application of
accounting principles and practices during the relevant reporting
period.
"Statutory Surplus" shall mean, with respect to any
Insurance Subsidiary at any time, the amount shown on line 25,
page 3, column 1 of the Annual Statement of such Insurance
Subsidiary, or the amount determined in a consistent manner for
any date other than a date as of which an Annual Statement of
such Insurance Subsidiary is prepared.
<PAGE>
"Subsidiary" shall mean, with respect to any Person, any
corporation or other Person of which more than fifty percent
(50%) of the outstanding capital stock having ordinary voting
power to elect a majority of the board of directors, in the case
of a corporation, or of the ownership or beneficial interests, in
the case of a Person not a corporation, is at the time, directly
or indirectly, owned or controlled by such Person and one or more
of its other Subsidiaries or a combination thereof (irrespective
of whether, at the time, securities of any other class or classes
of any such corporation or other Person shall or might have
voting power by reason of the happening of any contingency);
provided, however, that, notwithstanding the foregoing, Viking
County Mutual Insurance Company shall not be considered a
Subsidiary of the Borrower for any purpose hereunder. When used
without reference to a parent entity, the term "Subsidiary" shall
be deemed to refer to a Subsidiary of the Borrower.
"Talegen" shall mean Talegen Holdings, Inc., a Delaware
corporation.
"Total Commitment" shall mean, at any time, the sum of the
Commitments of each Lender at such time.
"Total Unutilized Commitment" shall mean, at any time, the
sum of the Unutilized Commitments of each Lender at such time.
"Unfunded Pension Liabilities" shall mean the excess of a
Pension Plan's accrued benefits, within the meaning of
Section 3(23) of ERISA, over the current value of its assets,
within the meaning of Section 3(26) of ERISA.
"Unutilized Commitment" shall mean, with respect to any
Lender at any time, such Lender's Commitment at such time less
the aggregate principal amount of all Loans made by such Lender
that are outstanding at such time.
"VICW" shall mean Viking Insurance Company of Wisconsin, a
Wisconsin corporation that is a Wholly Owned Subsidiary of the
Borrower.
"Viking Holdings" shall mean Viking Insurance Holdings,
Inc., a Delaware corporation that is a Wholly Owned Subsidiary of
the Borrower and the parent corporation of VICW.
"Wholly Owned" shall mean, with respect to any Subsidiary of
the Borrower, that 100% of the outstanding capital stock or other
ownership interests of such Subsidiary is owned, directly or
indirectly, by the Borrower.
1.2 Accounting Terms. Except as specifically provided
otherwise in this Agreement, all accounting terms used herein
that are not specifically defined shall have the meanings
customarily given them, and all financial computations hereunder
shall be made, in accordance with Generally Accepted Accounting
Principles (or, to the extent that such terms apply solely to any
Insurance Subsidiary or if otherwise expressly required,
Statutory Accounting Principles). Notwithstanding the foregoing,
in the event that any changes in Generally Accepted Accounting
Principles or Statutory Accounting Principles after the date
hereof are required to be applied to the transactions described
herein and would affect the computation of the financial
covenants contained in Sections 6.1 through 6.5, as applicable,
such changes shall be followed only from and after the date this
Agreement shall have been amended to take into account any such
changes. References to amounts on particular
<PAGE>
exhibits, schedules, lines, pages and columns of any Annual
Statement or Quarterly Statement are based on the format
promulgated by the NAIC for the 1995 Annual Statements and
Quarterly Statements. In the event such format is changed in
future years so that different information is contained in such
items or they no longer exist, or if the Annual Statement or
Quarterly Statement is replaced by the NAIC or by any Insurance
Regulatory Authority after the date hereof such that different
forms of financial statements are required to be furnished by the
Insurance Subsidiaries in lieu thereof, such references shall be
to information consistent with that reported in the referenced
item in the 1995 Annual Statements or Quarterly Statements, as
the case may be.
1.3 Other Terms; Construction. Unless otherwise specified
or unless the context otherwise requires, all references herein
to sections, annexes, schedules and exhibits are references to
sections, annexes, schedules and exhibits in and to this
Agreement, and all terms defined in this Agreement shall have the
defined meanings when used in any other Loan Document or any
certificate or other document made or delivered pursuant hereto.
ARTICLE II
AMOUNT AND TERMS OF THE LOANS
2.8. The Loans. (a) Each Lender severally agrees, subject
to and on the terms and conditions of this Agreement, to make
revolving credit loans (each, a "Loan," and collectively, the
"Loans") to the Borrower, from time to time on any Business Day
during the period from and including the Amendment Effective Date
to but not including the Facility Termination Date, in an
aggregate principal amount at any time outstanding not exceeding
its Commitment at such time, provided that no Borrowing of Loans
shall be made if, immediately after giving effect thereto, the
aggregate principal amount of Loans outstanding at such time
would exceed the Total Commitment at such time. Subject to and
on the terms and conditions of this Agreement, the Borrower may
borrow, repay and reborrow Loans.
(b) The Loans shall, at the option of the Borrower and
subject to the terms and conditions of this Agreement, be either
Base Rate Loans or LIBOR Loans (each such type of Loan, a
"Type"), provided that all Loans comprising the same Borrowing
shall, unless otherwise specifically provided herein, be of the
same Type.
(c) The aggregate principal amount of all Loans (as defined
in the Original Credit Agreement) made pursuant to the Original
Credit Agreement and outstanding on the Amendment Effective Date
(collectively, the "Existing Loans") is $100,000,000. On the
Amendment Effective Date, and after giving effect to the
concurrent assignment and purchase of a portion of the Existing
Loans among the Lenders in accordance with Section 2.18, the
aggregate outstanding principal amount of all Existing Loans
shall automatically be converted to an equivalent principal
amount of Loans hereunder, made by the Lenders ratably in
accordance with their respective Commitments, and for all
purposes of this Agreement shall be deemed to be Loans hereunder
and entitled to the benefits of this Agreement and the other Loan
Documents.
2.2. Borrowings. (a) Whenever the Borrower desires to make
a Borrowing (other than continuations or conversions of
outstanding Loans, which shall be made pursuant to Section 2.9)
under the Facility, the Borrower will give the Agent oral or
written notice (by telecopier or
<PAGE>
otherwise), prior to 11:00 a.m., Charlotte time, at least three
(3) Business Days prior to each Borrowing to be comprised of
LIBOR Loans and at least one (1) Business Day prior to each
Borrowing to be comprised of Base Rate Loans. Each such notice
(each, a "Notice of Borrowing") shall be irrevocable, shall be
given in the form of Exhibit B-1 (or, if oral notice is given,
shall be promptly followed, by telecopier or otherwise, with a
writing in the form of Exhibit B-1) and shall be appropriately
completed to specify (i) the aggregate principal amount and Type
of the Loans to be made pursuant to such Borrowing (and, in the
case of a Borrowing of LIBOR Loans, the initial Interest Period
to be applicable thereto) and (ii) the requested date of the
Borrowing (the "Borrowing Date"), which shall be a Business Day.
Notwithstanding anything to the contrary contained herein:
(i) the aggregate principal amount of each Borrowing
hereunder (y) in the case of Borrowings comprised of Base
Rate Loans, shall not be less than $1,000,000 and, if
greater, shall be in an integral multiple of $100,000 in
excess thereof (or, if less, in the amount of the Total
Unutilized Commitment), and (z) in the case of Borrowings
comprised of LIBOR Loans, shall not be less than $5,000,000
and, if greater, shall be in an integral multiple of
$1,000,000 in excess thereof;
(ii) if the Borrower shall have failed to designate the
Type of Loans comprising a Borrowing, the Borrower shall be
deemed to have requested a Borrowing comprised of Base Rate
Loans; and
(iii) if the Borrower shall have failed to select
the duration of the Interest Period to be applicable to any
Borrowing of LIBOR Loans, then the Borrower shall be deemed
to have selected an Interest Period with a duration of one
month.
(b) Upon the receipt of a Notice of Borrowing, the Agent
will promptly notify each Lender of the proposed Borrowing, of
such Lender's Pro Rata Share thereof and of the other matters
specified in the Notice of Borrowing. Each Lender will make the
amount of its Pro Rata Share of such Borrowing available to the
Agent at its office referred to in Section 10.4, for the account
of the Borrower, in Dollars and in immediately available funds,
prior to 1:00 p.m, Charlotte time, on the Borrowing Date. To the
extent the Lenders have made such amounts available to the Agent
as provided hereinabove, the Agent will make the aggregate of
such amounts available to the Borrower in accordance with
subsection (e) below and in like funds as received by the Agent.
(c) Unless the Agent has received, prior to 1:00 p.m.,
Charlotte time, on any Borrowing Date, written notice from a
Lender that such Lender will not make available to the Agent its
Pro Rata Share of the relevant Borrowing (which notice shall, if
so received, be forwarded promptly upon receipt to the Borrower),
the Agent may assume that such Lender has made its Pro Rata Share
of such Borrowing available to the Agent on such Borrowing Date
in accordance with subsection (b) above, and the Agent may, in
reliance upon such assumption, but shall not be obligated to,
make a corresponding amount available to the Borrower on such
Borrowing Date. If and to the extent that such Lender shall not
have made such Pro Rata Share available to the Agent, and the
Agent shall have made such corresponding amount available to the
Borrower, such Lender, on the one hand, and the Borrower, on the
other (but without prejudice to the Borrower's rights under
Section 2.17), severally agree to pay to the Agent forthwith on
demand such corresponding amount, together with interest thereon
for each day from the date such amount is made available to the
Borrower until the date such amount is repaid to the Agent,
(i) if recovered from such Lender, at the Federal Funds Rate for
the first three (3) Business Days and thereafter at the Base
Rate, and (ii) if recovered from the
<PAGE>
Borrower, at the rate of interest payable by the Borrower
hereunder in respect of the Loans comprising such Borrowing. If
such Lender shall repay to the Agent such corresponding amount,
such amount so repaid shall constitute such Lender's Loan as part
of such Borrowing for purposes of this Agreement. Nothing in
this subsection (c), however, shall relieve any Lender of its
obligation to make available to the Agent its Pro Rata Share of
any Borrowing, subject to and in accordance with the terms
hereof.
(d) The failure of any Lender to make any Loan required to
be made by it as part of any Borrowing shall not relieve any
other Lender of its obligation, if any, hereunder to make its
Loan on the respective Borrowing Date, but no Lender shall be
responsible for the failure of any other Lender to make the Loan
to be made by such other Lender as part of any Borrowing.
(e) The Borrower hereby authorizes the Agent to disburse
the proceeds of each Borrowing in accordance with the terms of
any written instructions from any of the Authorized Officers,
provided that the Agent shall not be obligated under any
circumstances to forward amounts to any account not listed in an
Account Designation Letter. Without limiting the obligation of
the Borrower to confirm in writing any telephonic Notice of
Borrowing, the Agent may act without liability upon the basis of
any telephonic Notice of Borrowing believed by the Agent in good
faith to be from any such officer prior to receipt of written
confirmation. The Borrower may at any time deliver to the Agent
an Account Designation Letter listing any additional accounts or
deleting any accounts listed in a previous Account Designation
Letter.
2.3. Notes. (a) The Loans made by each Lender shall be
evidenced by a Note appropriately completed in substantially the
form of Exhibit A.
(b) The Note issued to each Lender shall (i) be executed by
the Borrower, (ii) be payable to the order of such Lender,
(iii) be dated as of the Amendment Effective Date (or, in the
case of Notes issued pursuant to an Assignment and Acceptance, as
of the date thereof), (iv) be in a stated principal amount equal
to such Lender's Commitment, (v) bear interest in accordance with
the provisions of Section 2.6, as the same may be applicable to
the Loans made by such Lender from time to time, and (vi) be
entitled to all of the benefits of this Agreement and the other
Loan Documents and subject to the provisions hereof and thereof.
(c) Each Lender will record on its internal records the
amount of each Loan made by it and each payment received by it in
respect thereof and will, in the event of any transfer of any of
its Notes, either endorse on the reverse side thereof the
outstanding principal amount of the Loans evidenced thereby as of
the date of transfer or provide such information on Schedule I to
the Assignment and Acceptance relating to such transfer;
provided, however, that the failure of any Lender to make any
such recordation or provide any such information, or any error in
such recordation or information, shall not affect the Borrower's
obligations in respect of such Loans.
2.4. Termination, Reduction of Commitments. (a) At any
time and from time to time, the Borrower may terminate in whole
or reduce in part the Total Unutilized Commitment by giving the
Agent written notice (by telecopier or otherwise), prior to 11:00
a.m., Charlotte time, at least five (5) Business Days prior to
the proposed effective date of such termination or reduction,
which notice shall specify the proposed effective date thereof
(which shall be a Business Day) and the amount of any reduction;
provided that any such reduction shall be in an aggregate amount
of not less than $5,000,000 or, if greater, shall be in an
integral multiple of $1,000,000 in excess thereof. Upon its
<PAGE>
receipt of any such notice of termination or reduction, the Agent
will promptly notify each Lender thereof. Any such termination
or reduction shall be effective on the date specified in such
notice. The amount of any termination or partial reduction made
under this subsection (a) may not thereafter be reinstated.
(b) On each date set forth below, the Total Commitment
shall automatically be permanently reduced by the amount set
forth below opposite such date (such amounts being subject to
reduction as set forth in subsection (c) below):
Amount of Reduction in
Date Total Commitment
April 15, 1998 $10,000,000
April 15, 1999 22,000,000
April 15, 2000 24,000,000
April 15, 2001 26,000,000
April 15, 2002 28,000,000
(c) Each reduction of the Total Commitment under
subsections (a) or (b) above shall be applied ratably among the
Commitments of the Lenders according to their respective
Percentages and, in the case of voluntary reductions under
subsection (a) above, shall be applied to reduce the scheduled
reduction amounts set forth in the table in subsection (b) above
ratably in accordance with their respective dollar amounts.
After any such reduction, the fees provided for in Section 2.7(b)
shall be calculated with respect to the reduced Commitments.
(d) The Total Commitment, and the Commitment of each
Lender, shall terminate in its entirety on the Facility
Termination Date.
2.5. Payments; Voluntary, Mandatory. (a) The Borrower
shall have the right from time to time to prepay the Loans, in
whole or in part, without premium or penalty (except as provided
in clause (iii) below), upon written notice to the Agent prior to
11:00 a.m., Charlotte time, at least three (3) Business Days
prior to each intended prepayment of LIBOR Loans and at least one
(1) Business Day prior to each intended prepayment of Base Rate
Loans, provided that (i) each partial prepayment of Base Rate
Loans shall be in an aggregate principal amount of no less than
$1,000,000 or, if greater, shall be in an integral multiple of
$100,000 in excess thereof (or, if the aggregate principal amount
of Base Rate Loans then outstanding is less than $1,000,000, such
outstanding amount), and each partial prepayment of LIBOR Loans
shall be in an aggregate principal amount of no less than
$5,000,000 or, if greater, shall be in an integral multiple of
$1,000,000 in excess thereof, (ii) no partial prepayment of LIBOR
Loans made pursuant to any single Borrowing shall reduce the
outstanding principal amount of the remaining LIBOR Loans under
such Borrowing to less than $5,000,000 and (iii) unless made
together with all amounts required under Section 2.16 to be paid
as a consequence of such prepayment, a prepayment of a LIBOR Loan
may be made only on the last day of the Interest Period
applicable thereto. Each such notice shall specify the proposed
date of such prepayment and the aggregate principal amount and
the Types of the Loans to be prepaid (and, in the case of LIBOR
Loans, the specific Borrowing or Borrowings pursuant to which
made) and shall be irrevocable and shall bind the Borrower to
make such prepayment on the terms specified therein. Amounts
prepaid pursuant to this subsection (a) may be reborrowed,
subject to the terms and conditions of this Agreement.
<PAGE>
(b) In the event that the aggregate principal amount of the
Loans outstanding on any date (including any date set forth in
the table in Section 2.4(b)) exceeds the Total Commitment as of
such date (after giving effect to any termination or reduction
thereof as of such date, including any reduction provided for in
such table), the Borrower will repay the principal amount of the
Loans on such date in the amount of such excess.
(c) The Borrower will repay the outstanding principal
amount of the Loans in full on the Facility Expiry Date, unless
due or made sooner pursuant to the terms and conditions of this
Agreement.
(d) Each payment of a LIBOR Loan made pursuant to the
provisions of this Section 2.5 on a day other than the last day
of the Interest Period applicable thereto shall be made together
with all amounts required under Section 2.16 to be paid as a
consequence thereof.
2.6. Interest. (a) The Borrower will pay interest in
respect of the unpaid principal amount of each Loan, from the
date of Borrowing thereof until such principal amount shall be
paid in full, (i) at the Base Rate, as in effect from time to
time during such periods as such Loan is a Base Rate Loan, and
(ii) at the Adjusted LIBOR Rate, as in effect from time to time
during such periods as such Loan is a LIBOR Loan.
(b) Any principal amounts of the Loans not paid when due
and, to the greatest extent permitted by law, all interest
accrued on the Loans and all other fees and amounts hereunder not
paid when due (whether at maturity, pursuant to acceleration or
otherwise), shall bear interest at a rate equal to the interest
rate applicable from time to time thereafter to such Loans
(whether the Base Rate or the Adjusted LIBOR Rate) plus 2% per
annum (or, in the case of fees and other amounts, at the Base
Rate plus 2% per annum), and, in each case, such default interest
shall be payable on demand. To the greatest extent permitted by
law, interest shall continue to accrue after the filing by or
against the Borrower of any petition seeking any relief in
bankruptcy or under any law pertaining to insolvency or debtor
relief.
(c) Accrued (and theretofore unpaid) interest shall be
payable as follows:
(i) in respect of each Base Rate Loan (including any
Base Rate Loan or portion thereof paid or prepaid pursuant
to the provisions of Section 2.5, except as provided
hereinbelow), in arrears on the last Business Day of each
calendar quarter; provided, that in the event the Loans are
repaid or prepaid in full and the Commitments have been
terminated, then accrued interest in respect of all Base
Rate Loans shall be payable together with such repayment or
prepayment on the date thereof;
(ii) in respect of each LIBOR Loan (including any LIBOR
Loan or portion thereof paid or prepaid pursuant to the
provisions of Section 2.5, except as provided hereinbelow),
in arrears (y) on the last Business Day of the Interest
Period applicable thereto (subject to the provisions of
clause (iv) in Section 2.8) and (z) in the case of a LIBOR
Loan having an Interest Period of six months, on the date
three months after the first day of such Interest Period;
provided, that in the event all LIBOR Loans made pursuant to
a single Borrowing are repaid or prepaid in full, then
accrued interest in respect of such LIBOR Loans shall be
payable together with such repayment or prepayment on the
date thereof; and
<PAGE>
(iii) in respect of any Loan, at maturity (whether
pursuant to acceleration or otherwise) and, after maturity,
on demand.
(d) Nothing contained in this Agreement or in any other
Loan Document shall be deemed to establish or require the payment
of interest to any Lender at a rate in excess of the maximum rate
permitted by applicable law. If the amount of interest payable
for the account of any Lender on any interest payment date would
exceed the maximum amount permitted by applicable law to be
charged by such Lender, the amount of interest payable for its
account on such interest payment date shall be automatically
reduced to such maximum permissible amount. In the event of any
such reduction affecting any Lender, if from time to time
thereafter the amount of interest payable for the account of such
Lender on any interest payment date would be less than the
maximum amount permitted by applicable law to be charged by such
Lender, then the amount of interest payable for its account on
such subsequent interest payment date shall be automatically
increased to such maximum permissible amount, provided that at no
time shall the aggregate amount by which interest paid for the
account of any Lender has been increased pursuant to this
sentence exceed the aggregate amount by which interest paid for
its account has theretofore been reduced pursuant to the previous
sentence.
(e) The Agent shall promptly notify the Borrower and the
Lenders upon determining the interest rate for each Borrowing
after its receipt of the relevant Notice of Borrowing or Notice
of Conversion/Continuation; provided, however, that the failure
of the Agent to provide the Borrower or the Lenders with any such
notice shall neither affect any obligations of the Borrower or
the Lenders hereunder nor result in any liability on the part of
the Agent to the Borrower or any Lender. Each such determination
(including each determination of the Reserve Requirement in
connection with a Borrowing of LIBOR Loans) shall, absent
manifest error, be final and conclusive and binding on all
parties hereto.
2.7. Fees. The Borrower agrees to pay:
(a) To First Union, for its own account, on the Amendment
Effective Date, the fee described in paragraph (1) of the Fee
Letter, in the amount set forth therein and to the extent not
theretofore paid to First Union;
(b) To the Agent, for the account of each Lender that is a
party to this Agreement as of the Amendment Effective Date, on
the Amendment Effective Date, the fee described in paragraph (2)
of the Fee Letter, in the amount set forth therein and to the
extent not theretofore paid to the Agent;
(c) To the Agent, for the account of each Lender, a
commitment fee for the period from the Original Credit Agreement
Date to the Facility Termination Date, at the Applicable
Commitment Fee Rate on the average daily Unutilized Commitment of
such Lender, payable in arrears (i) on the last Business Day of
each calendar quarter and (ii) on the Facility Termination Date;
and
(d) To the Agent, for its own account, the annual
administrative fee described in paragraph (3) of the Fee Letter,
on the terms, in the amount and at the times set forth therein.
2.8. Interest Periods. Concurrently with the giving of any
Notice of Borrowing or Notice of Conversion/Continuation in
respect of any Borrowing comprised of LIBOR Loans, the Borrower
shall have the right to elect, pursuant to such notice, the
interest period (each, an "Interest Period") to
<PAGE>
be applicable to such LIBOR Loans, which Interest Period shall,
at the option of the Borrower, be a one, two, three or six-month
period; provided, however, that:
(i) all LIBOR Loans comprising a single Borrowing
shall at all times have the same Interest Period;
(ii) the initial Interest Period for any LIBOR Loan
shall commence on the date of the Borrowing of such Loan
(including the date of any continuation of, or conversion
into, such LIBOR Loan), and each successive Interest Period
applicable to such LIBOR Loan shall commence on the day on
which the next preceding Interest Period applicable thereto
expires;
(iii) LIBOR Loans may not be outstanding under more than
three (3) separate Interest Periods at any one time;
(iv) if any Interest Period otherwise would expire on a
day that is not a Business Day, such Interest Period shall
expire on the next succeeding Business Day unless such next
succeeding Business Day falls in another calendar month, in
which case such Interest Period shall expire on the next
preceding Business Day;
(v) the Borrower may not select any Interest Period
that expires after the Facility Expiry Date;
(vi) no Interest Period may be selected that would end
after a scheduled date for repayment of principal of the
Loans (including any date of a scheduled mandatory reduction
of the Total Commitment) occurring on or after the first day
of such Interest Period unless, immediately after giving
effect to such selection, the sum of (y) the aggregate
principal amount of Loans that are Base Rate Loans or that
have Interest Periods expiring on or before such principal
repayment date plus (z) the Total Unutilized Commitment as
of such date, equals or exceeds the principal amount
required to be paid on such principal repayment date;
(vii) if any Interest Period begins on a day for which
there is no numerically corresponding day in the calendar
month during which such Interest Period would otherwise
expire, such Interest Period shall expire on the last
Business Day of such calendar month; and
(viii) if, upon the expiration of any Interest
Period applicable to a Borrowing of LIBOR Loans, the
Borrower shall have failed to elect a new Interest Period to
be applicable to such LIBOR Loans, then the Borrower shall
be deemed to have elected to convert such LIBOR Loans into
Base Rate Loans as of the expiration of the then current
Interest Period applicable thereto.
2.9. Conversions and Continuations. (a) The Borrower shall
have the right, on any Business Day, to elect (i) to convert all
or a portion of the outstanding principal amount of any Base Rate
Loans into LIBOR Loans, or to convert any LIBOR Loans having the
same Interest Period into Base Rate Loans, or (ii) to continue
all or a portion of the outstanding principal amount of any LIBOR
Loans having the same Interest Period for an additional Interest
Period, provided that (x) any such conversion or continuation
shall involve an aggregate principal amount of Loans of not less
than $5,000,000 or, if greater, an integral multiple of
$1,000,000 in excess thereof, and no partial conversion of LIBOR
Loans made pursuant to a single Borrowing shall reduce the outstanding
<PAGE>
principal amount of such LIBOR Loans to less than $5,000,000 or
to any greater amount not an integral multiple of $1,000,000 in
excess thereof, (y) except as otherwise provided in
Section 2.14(d), LIBOR Loans may be converted into Base Rate
Loans only on the last day of the Interest Period applicable
thereto (and, in any event, if a LIBOR Loan is converted into a
Base Rate Loan on any day other than the last day of the Interest
Period applicable thereto, the Borrower will pay, upon such
conversion, all amounts required under Section 2.16 to be paid as
a consequence thereof) and (z) no conversion of Base Rate Loans
into LIBOR Loans or continuation of LIBOR Loans shall be
permitted during the continuance of a Default or Event of
Default.
(b) The Borrower shall make each such election by
delivering oral or written notice (by telecopier or otherwise) to
the Agent prior to 11:00 a.m., Charlotte time, at least three (3)
Business Days prior to the effective date of any conversion of
Base Rate Loans into, or continuation of, LIBOR Loans and at
least one (1) Business Day prior to the effective date of any
conversion of LIBOR Loans into Base Rate Loans. Each such notice
(each, a "Notice of Conversion/Continuation") shall be
irrevocable, shall be given in the form of Exhibit B-2 (or, if
oral notice is given, shall be promptly followed, by telecopier
or otherwise, with a writing in the form of Exhibit B-2) and
shall be appropriately completed to specify (x) the date of such
conversion or continuation (which shall be a Business Day),
(y) in the case of a conversion into, or a continuation of, LIBOR
Loans, the Interest Period to be applicable thereto and (z) the
aggregate amount and Type of the Loans being converted or
continued. Upon the receipt of a Notice of
Conversion/Continuation, the Agent will promptly notify the Agent
and each Lender of the proposed conversion or continuation, of
such Lender's Pro Rata Share thereof and of the other matters
specified in such notice. In the event that the Borrower shall
fail to deliver a Notice of Conversion/Continuation as provided
herein with respect to any outstanding LIBOR Loans, such LIBOR
Loans shall automatically be converted to Base Rate Loans upon
the expiration of the then current Interest Period applicable
thereto.
2.10. Method of Payments; Computations. (a) All payments
by the Borrower hereunder and under the Notes shall be made
without setoff, counterclaim or other defense, in Dollars and in
immediately available funds to the Agent, for the account of the
Lenders (except as otherwise provided in Sections 2.7(a), 2.7(c),
2.14, 2.15, 2.16, 2.17, 9.7, 10.5 and 10.6 as to payments
required to be made directly to the Agent and the Lenders) at its
office referred to in Section 10.4, prior to 2:00 p.m., Charlotte
time, on the date payment is due. Any payment made as required
hereinabove, but after 2:00 p.m., Charlotte time, shall be deemed
to have been made on the next succeeding Business Day. If any
payment falls due on a day that is not a Business Day, then such
due date shall be extended to the next succeeding Business Day
(except that in the case of LIBOR Loans to which the provisions
of clause (iv) in Section 2.8 are applicable, such due date shall
be the next preceding Business Day), and such extension of time
shall then be included in the computation of payment of interest,
fees or other applicable amounts.
(b) The Agent will distribute to the Lenders like amounts
relating to payments made to the Agent for the account of the
Lenders as follows: (i) if the payment is received by 2:00 p.m.,
Charlotte time, in immediately available funds, the Agent will
make available to each such Lender on the same date, by wire
transfer of immediately available funds, such Lender's ratable
share of such payment (based on the percentage that the amount of
the relevant payment owing to such Lender bears to the total
amount of such payment owing to all the Lenders), and (ii) if
such payment is received after 2:00 p.m., Charlotte time, or in
other than immediately available funds, the Agent will make
available to each such Lender its ratable share of such payment
by wire transfer of immediately available funds on the next
succeeding Business Day (or in the case of uncollected funds, as
soon as
<PAGE>
practicable after collected). If the Agent shall not have made a
required distribution to the Lenders as required hereinabove
after receiving a payment for the account of the Lenders, the
Agent will pay to each Lender, on demand, its ratable share of
such payment with interest thereon at the Federal Funds Rate for
each day from the date such amount was required to have been
disbursed by the Agent until the date repaid to such Lender.
(c) Unless the Agent shall have received written notice
from the Borrower prior to the date on which any payment is due
to any Lender hereunder that such payment will not be made in
full (which notice shall, if so received, be forwarded promptly
upon receipt to the Borrower), the Agent may assume that the
Borrower has made such payment in full to the Agent on such date,
and the Agent may, in reliance on such assumption, but shall not
be obligated to, cause to be distributed to each such Lender on
such due date an amount equal to the amount then due to such
Lender. If and to the extent the Borrower shall not have so made
such payment in full to the Agent, each such Lender shall repay
to the Agent forthwith on demand such amount so distributed to
such Lender, together with interest thereon for each day from the
date such amount is so distributed to such Lender until the date
repaid to the Agent, at the Federal Funds Rate for the first
three (3) Business Days and thereafter at the Base Rate.
(d) With respect to each payment on the Loans hereunder,
except as specifically provided otherwise herein or in any of the
other Loan Documents, the Borrower may designate by written
notice to the Agent prior to or concurrently with such payment
the Types of Loans that are to be repaid or prepaid and, in the
case of LIBOR Loans, the specific Borrowing or Borrowings
pursuant to which made, provided that (i) unless made together
with all amounts required under Section 2.16 to be paid as a
consequence thereof, a prepayment of a LIBOR Loan may be made
only on the last day of the Interest Period applicable thereto
and (ii) each prepayment of Loans comprising a single Borrowing
shall be applied pro rata among such Loans. In the absence of
any such designation by the Borrower, the Agent shall, subject to
the foregoing, make such designation in its sole discretion.
(e) All computations of interest and fees hereunder
(including computations of the Reserve Requirement) shall be made
on the basis of a year consisting of 360 days and the actual
number of days (including the first day, but excluding the last
day) elapsed.
2.11. Recovery of Payments. (a) The Borrower agrees that
to the extent the Borrower makes a payment or payments to or for
the account of the Agent or any Lender, which payment or payments
or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside or required to be repaid to
a trustee, receiver or any other party under any bankruptcy,
insolvency or similar state or federal law, common law or
equitable cause, then, to the extent of such payment or
repayment, the Obligation intended to be satisfied shall be
revived and continued in full force and effect as if such payment
had not been received.
(b) If any amounts distributed by the Agent to a Lender
are subsequently returned or repaid by the Agent to the Borrower
or its representative or successor in interest, whether by court
order or by settlement approved by the Lender in question, such
Lender will, promptly upon receipt of notice thereof from the
Agent, pay the Agent such amount. If any such amounts are
recovered by the Agent from the Borrower or its representative or
successor in interest, the Agent will redistribute such amounts
to the Lenders on the same basis as such amounts were originally
distributed.
<PAGE>
2.12. Use of Proceeds._. The proceeds of the Loans (as
defined in the Original Credit Agreement) made pursuant to the
Original Credit Agreement were used to finance the Acquisition
(as defined in the Original Credit Agreement), to repay the
Terminating Senior Indebtedness (as defined in the Original
Credit Agreement) in full, to pay or reimburse transaction fees
and expenses in connection with the consummation of the
Acquisition and the transactions contemplated by the Original
Credit Agreement, and thereafter for working capital and general
corporate purposes. The proceeds of the Loans made on or after
the Amendment Effective Date will be used for working capital and
general corporate purposes.
2.13. Pro Rata Borrowings. (a) All funding of Borrowings,
continuations and conversions of Loans shall be made by the
Lenders pro rata on the basis of their respective Percentages (in
the case of the initial funding of any Loans pursuant to
Section 2.2) or Loans (in the case of continuations and
conversions of outstanding Loans pursuant to Section 2.9), as
applicable from time to time, rounded to the nearest penny.
(b) Each Lender agrees that if it shall at any time
receive any amount hereunder (whether by voluntary payment,
realization upon security, exercise of the right of setoff or
banker's lien, counterclaim or cross action, enforcement of any
right under the Loan Documents, or otherwise) applicable to the
payment of any Obligations that exceeds its ratable share
(according to the proportion of (i) the amount of such
Obligations due and payable to such Lender at such time to
(ii) the aggregate amount of such Obligations due and payable to
all Lenders at such time) of payments on account of such
Obligations then or therewith obtained by all the Lenders, such
Lender shall forthwith purchase from the other Lenders such
participations in such Obligations as shall be necessary to cause
such purchasing Lender to share the excess payment or other
recovery ratably with each of them; provided, however, that if
all or any portion of such excess payment is thereafter recovered
from such purchasing Lender, such purchase from each such other
Lender shall be rescinded and each such other Lender shall repay
to the purchasing Lender the purchase price to the extent of such
recovery together with an amount equal to such other Lender's
ratable share (according to the proportion of (i) the amount of
such other Lender's required repayment to (ii) the total amount
so recovered from the purchasing Lender) of any interest or other
amount paid or payable by the purchasing Lender in respect of the
total amount so recovered. The Borrower agrees that any Lender
so purchasing a participation from another Lender pursuant to the
provisions of this subsection may, to the fullest extent
permitted by law, exercise any and all rights of payment
(including, without limitation, setoff, banker's lien or
counterclaim) with respect to such participation as fully as if
such participant were a direct creditor of the Borrower in the
amount of such participation.
2.14. Increased Costs; Change in Circumstances; Illegality;
etc. (a) If, at any time after the date hereof and from time to
time, by reason of (i) the introduction of or any change in any
applicable law, rule or regulation or in the interpretation or
administration thereof by any Governmental Authority charged with
the interpretation or administration thereof or (ii) compliance
with any guideline or request from any such Governmental
Authority (whether or not having the force of law), there shall
be any increase in the costs to any Lender of agreeing to make,
making, funding or maintaining any LIBOR Loans or other reduction
in any amount received or receivable by such Lender hereunder in
respect of its LIBOR Loans (other than by reason of any change in
the Reserve Requirement or any change in the rate or basis of tax
on the overall net income of such Lender or its applicable
lending office imposed by the jurisdiction in which such Lender's
principal office or applicable lending office is located), the
Borrower will, within fifteen (15) days after delivery to the
Borrower by such Lender of written demand therefor (with a copy
thereof to the Agent), pay to such
<PAGE>
Lender such additional amounts as shall compensate such Lender
for such increase in costs or reduction in return.
(b) If, at any time after the date hereof and from time to
time, any Lender shall have reasonably determined that (i) the
introduction of or any change in any applicable law, rule or
regulation regarding capital adequacy or in the interpretation or
administration thereof by any Governmental Authority charged with
the interpretation or administration thereof or (ii) compliance
with any guideline or request from any such Governmental
Authority (whether or not having the force of law), has or would
have the effect of reducing the rate of return on such Lender's
capital as a consequence of its Commitment or Loans to a level
below that which such Lender could have achieved but for such
introduction, change or compliance (taking into account such
Lender's policies with respect to capital adequacy), the Borrower
will, within fifteen (15) days after delivery to the Borrower by
such Lender of written demand therefor (with a copy thereof to
the Agent), pay to such Lender such additional amounts as will
compensate such Lender for such reduction in return.
(c) If, on or prior to the first day of any Interest
Period, (i) the Agent shall have determined that adequate and
reasonable means do not exist for ascertaining the applicable
LIBOR Rate for such Interest Period or (ii) the Agent shall have
received written notice from the Required Lenders of their
determination that the rate of interest referred to in the
definition of "LIBOR Rate" upon the basis of which the Adjusted
LIBOR Rate for LIBOR Loans for such Interest Period is to be
determined will not adequately and fairly reflect the cost to
such Lenders of making or maintaining LIBOR Loans during such
Interest Period, the Agent will forthwith so notify the Borrower
and the Lenders, whereupon the obligation of all Lenders to make,
to convert Base Rate Loans into, or to continue, LIBOR Loans
shall be suspended (including pursuant to the Borrowing to which
such Interest Period applies), and any Notice of Borrowing or
Notice of Conversion/Continuation given at any time thereafter
with respect to LIBOR Loans shall be deemed to be a request for
Base Rate Loans, until the Agent or the Required Lenders, as the
case may be, shall have determined that the circumstances giving
rise to such suspension no longer exist (and the Required
Lenders, if making such determination, shall have so notified the
Agent), and the Agent shall have so notified the Borrower and the
Lenders.
(d) Notwithstanding any other provision in this Agreement,
if, at any time after the date hereof and from time to time, any
Lender shall have determined in good faith that (i) the
introduction of or any change in any applicable law, rule or
regulation or in the interpretation or administration thereof by
any Governmental Authority charged with the interpretation or
administration thereof or (ii) compliance with any guideline or
request from any such Governmental Authority (whether or not
having the force of law), has or would have the effect of making
it unlawful for such Lender to make or to continue to make or
maintain LIBOR Loans, such Lender will forthwith so notify the
Agent and the Borrower, whereupon (y) each of such Lender's
outstanding LIBOR Loans shall automatically, on the expiration
date of the respective Interest Period applicable thereto (or, to
the extent any such LIBOR Loan may not lawfully be maintained as
a LIBOR Loan until such expiration date, upon such notice), be
converted into a Base Rate Loan, and (z) the obligation of such
Lender to make, to convert Base Rate Loans into, or to continue,
LIBOR Loans shall be suspended (including pursuant to the
Borrowing to which such Interest Period applies), and any Notice
of Borrowing or Notice of Conversion/Continuation given at any
time thereafter with respect to LIBOR Loans shall, as to such
Lender, be deemed to be a request for Base Rate Loans, until such
Lender shall have determined that the circumstances giving rise
to such suspension no longer exist and shall have so notified the
Agent, and the Agent shall have so notified the Borrower.
<PAGE>
(e) Determinations by the Agent or any Lender for purposes
of this Section 2.14 of any increased costs, reduction in return,
market contingencies, illegality or any other matter shall,
absent manifest error, be conclusive, provided that such
determinations are made in good faith. No failure by the Agent
or any Lender at any time to demand payment of any amounts
payable under this Section 2.14 shall constitute a waiver of its
right to demand payment of any additional amounts arising at any
subsequent time. Nothing in this Section 2.14 shall require or
be construed to require the Borrower to pay any interest, fees,
costs or other amounts in excess of that permitted by applicable
law.
2.15. Taxes. (a) Any and all payments by the Borrower
hereunder or under any Note shall be made, in accordance with the
terms hereof and thereof, free and clear of and without deduction
for any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with
respect thereto, other than net income and franchise taxes
imposed on the Agent or any Lender by the United States or by the
jurisdiction under the laws of which the Agent or Lender, as the
case may be, is organized or in which its principal office or (in
the case of a Lender) its applicable lending office is located or
any political subdivision or taxing authority thereof (all such
nonexcluded taxes, levies, imposts, deductions, charges,
withholdings and liabilities being hereinafter referred to as
"Taxes"). If the Borrower shall be required by law to deduct any
Taxes from or in respect of any sum payable hereunder or under
any Note to the Agent or any Lender, (i) the sum payable shall be
increased as may be necessary so that after making all required
deductions (including deductions applicable to additional sums
payable under this Section 2.15), the Agent or Lender, as the
case may be, receives an amount equal to the sum it would have
received had no such deductions been made, (ii) the Borrower will
make such deductions, (iii) the Borrower will pay the full amount
deducted to the relevant taxation authority or other authority in
accordance with applicable law and (iv) the Borrower will deliver
to the Agent or Lender, as the case may be, evidence of such
payment.
(b) The Borrower will indemnify the Agent and each Lender
for the full amount of Taxes (including, without limitation, any
Taxes imposed by any jurisdiction on amounts payable under this
Section 2.15) paid by the Agent or Lender, as the case may be,
and any liability (including penalties, interest and expenses)
arising therefrom or with respect thereto, whether or not such
Taxes were correctly or legally asserted. This indemnification
shall be made within 30 days from the date the Agent or any
Lender, as the case may be, makes written demand therefor.
(c) If any Lender is a "foreign corporation, partnership
or trust" within the meaning of the Internal Revenue Code, and
such Lender claims exemption from United States withholding tax
under Section 1441 or 1442 of the Internal Revenue Code, such
Lender will deliver to each of the Agent and the Borrower, on or
prior to the Amendment Effective Date (if not previously
delivered pursuant to the Original Credit Agreement) or, if such
Lender becomes a party hereto after the Amendment Effective Date,
concurrently with the delivery of the relevant Assignment and
Acceptance, a properly completed Internal Revenue Service Form
4224 or 1001, as applicable (or successor forms), certifying that
such Lender is entitled to an exemption from or a reduction of
withholding or deduction for or on account of United States
federal income taxes in connection with payments under this
Agreement or any of the Notes, together with a properly completed
Internal Revenue Service Form W-8 or W-9, as applicable (or
successor forms). Each such Lender further agrees to deliver to
each of the Agent and the Borrower an additional copy of each
such relevant form on or before the date that such form expires
(currently, three successive calendar years for Form 1001 and one
calendar year for Form 4224) or becomes obsolete or after the
occurrence of any event
<PAGE>
requiring a change in the most recent forms so delivered by it,
in each case certifying that such Lender is entitled to an
exemption from or a reduction of withholding or deduction for or
on account of United States federal income taxes in connection
with payments under this Agreement or any of the Notes, unless an
event (including, without limitation, any change in treaty, law
or regulation) has occurred prior to the date on which any such
delivery would otherwise be required, which event renders all
such forms inapplicable or the exemption to which such forms
relate unavailable and such Lender notifies the Agent and the
Borrower that it is not entitled to receive payments without
deduction or withholding of United States federal income taxes.
Each such Lender will promptly notify the Agent and the Borrower
of any changes in circumstances that would modify or render
invalid any claimed exemption or reduction.
(d) If any Lender is entitled to a reduction in (and not a
complete exemption from) the applicable withholding tax, the
Agent may withhold from any interest payment to such Lender an
amount equivalent to the applicable withholding tax after taking
into account such reduction. If the forms or other documentation
required under subsection (c) above are not delivered to the
Agent as therein required, then the Agent may withhold from any
interest payment to such Lender not providing such forms or other
documentation an amount equivalent to the applicable withholding
tax. For purposes of this Section 2.15, a distribution hereunder
by the Agent to or for the account of any Lender shall be deemed
a payment by the Borrower.
(e) If the Internal Revenue Service or any other
Governmental Authority, domestic or foreign, asserts a claim that
the Agent did not properly withhold tax from amounts paid to or
for the account of any Lender (whether because the appropriate
form was not delivered or was not properly executed, because such
Lender failed to notify the Agent of a change in circumstances
that rendered the exemption from, or reduction of, withholding
tax ineffective, or for any other reason), such Lender shall
indemnify the Agent fully for all amounts paid, directly or
indirectly, by the Agent as tax or otherwise, including penalties
and interest, and including any taxes imposed by any jurisdiction
on the amounts payable to the Agent under this subsection (e),
together with all costs, expenses and reasonable attorneys' fees
incurred or paid in connection therewith, except to the extent
arising out of or resulting from the gross negligence or willful
misconduct of the Agent.
2.16. Compensation. The Borrower will compensate each
Lender, upon its written request (which request shall set forth
the basis for requesting such compensation in reasonable detail
and shall be copied to the Agent), for all losses, expenses and
liabilities (including, without limitation, any loss, expense or
liability incurred by reason of the liquidation or reemployment
of deposits or other funds required by such Lender to fund its
LIBOR Loans) that such Lender may sustain (i) if for any reason
(other than a default by such Lender or the Agent) a Borrowing
of, or conversion of or into, LIBOR Loans does not occur on a
date specified therefor in a Notice of Borrowing or Notice of
Conversion/Continuation, (ii) if any repayment, prepayment or
conversion of any of its LIBOR Loans occurs on a date other than
the last day of an Interest Period applicable thereto, (iii) if
any prepayment of any of its LIBOR Loans is not made on any date
specified in a notice of prepayment given by the Borrower or
(iv) as a consequence of any other failure by the Borrower to
make any payments with respect to LIBOR Loans when due hereunder,
including as a consequence of acceleration of the maturity of
such Loans pursuant to Section 8.2. Calculation of all amounts
payable to a Lender under this Section 2.16 shall be made as
though such Lender had actually funded its relevant LIBOR Loan
through the purchase of a Eurodollar deposit bearing interest at
the LIBOR Rate in an amount equal to the amount of such LIBOR
Loan, having a maturity comparable to the relevant Interest
Period; provided, however, that each Lender may fund each of its
LIBOR Loans in
<PAGE>
any manner it sees fit and the foregoing assumption shall be
utilized only for the calculation of amounts payable under this
Section 2.16.
2.17. Replacement of Lenders. The Borrower may, at any time
and so long as no Default or Event of Default has then occurred
and is continuing, replace any Lender (i) that has requested
compensation from the Borrower under Section 2.14(a) or 2.14(b)
or that is entitled to payment of additional amounts under
Section 2.15, (ii) the obligation of which to make or maintain
LIBOR Loans has been suspended under Section 2.14(d) or
(iii) that shall refuse to fund or otherwise default in the
funding of its Pro Rata Share of any Borrowing requested and
permitted to be made by the Borrower hereunder and such refusal
has not been withdrawn or such default has not been cured within
three (3) Business Days after the Borrower has given such Lender
written notice thereof, in any case by written notice to such
Lender and the Agent given no more than thirty (30) days after
any such event and identifying one or more Persons each of which
must be an Eligible Assignee reasonably acceptable to the Agent
(each, a "Replacement Lender," and collectively, the "Replacement
Lenders") to replace such Lender (the "Replaced Lender"),
provided that (i) the notice from the Borrower to the Replaced
Lender and the Agent provided for hereinabove shall specify an
effective date for such replacement (the "Replacement Effective
Date"), which shall be at least ten (10) Business Days after such
notice is given, (ii) as of the relevant Replacement Effective
Date, each Replacement Lender shall enter into an Assignment and
Acceptance with the Replaced Lender pursuant to Section 10.8(a)
(but shall not be required to pay the processing fee otherwise
payable to the Agent pursuant to Section 10.8(a)), pursuant to
which such Replacement Lenders collectively shall acquire, in
such proportion among them as they may agree with the Borrower
and the Agent, all (but not less than all) of the Commitment and
outstanding Loans of the Replaced Lender, and, in connection
therewith, shall pay to (y) the Replaced Lender in respect
thereof an amount equal to the sum as of the Replacement
Effective Date (without duplication) of (1) the unpaid principal
amount of, and all accrued but unpaid interest on, all
outstanding Loans of the Replaced Lender and (2) the Replaced
Lender's Pro Rata Share of all accrued but unpaid fees and
expenses owing by the Borrower hereunder, and (z) the Agent, for
its own account, any amounts owing to the Agent by the Replaced
Lender under Section 2.2(c), and (iii) all obligations of the
Borrower due and owing to the Replaced Lender (other than those
specifically described in clause (ii) above in respect of which
the assignment purchase price has been, or is concurrently being,
paid) shall be paid in full by the Borrower to the Replaced
Lender on or prior to the Replacement Effective Date.
2.18. Sale and Assignment of Existing Loans. (a) Each of
the Original Lenders party hereto that is selling Existing Loans
pursuant to this Section 2.18 (each, a "Selling Lender," and
collectively, the "Selling Lenders") hereby represents and
warrants to (i) each of the Lenders party hereto that is not an
Original Lender, and (ii) each other Original Lender party hereto
that is purchasing Existing Loans pursuant to this Section 2.18
(the Lenders described under (i) and (ii), each, a "Purchasing
Lender," and collectively, the "Purchasing Lenders"), that it is
the legal and beneficial owner of the interest in the Existing
Loans being assigned by it hereunder and that such interest is
free and clear of any adverse claim. In order to give effect to
the assignment to the Purchasing Lenders of their respective Pro
Rata Shares of the Existing Loans to be concurrently converted to
Loans hereunder as of the Amendment Effective Date, all as
contemplated hereunder, each Selling Lender shall and does hereby
sell and assign to each Purchasing Lender, without recourse,
representation or warranty (except as set forth in the first
sentence of this subsection (a)), and each Purchasing Lender
shall and does hereby purchase and assume from each Selling
Lender, a portion of all of the rights and obligations of each
Selling Lender with respect to such Existing Loans converted to
Loans hereunder as of the Amendment Effective Date and each of
the Loan Documents,
<PAGE>
in each case in the amounts set forth in Annex 2 hereto (the
"Assigned Rights"), such that after giving effect to such sale
and assignment, the Lenders shall own the Existing Loans
converted to Loans hereunder in proportion to their respective
Commitments. Upon payment by the Purchasing Lenders to the
Selling Lenders of the amounts calculated by the Agent pursuant
to subsection (b) below, each Lender shall be entitled to its
respective Pro Rata Share of (y) all interest on and any fees in
respect of the Loans and Commitments payable on and after the
Amendment Effective Date and (z) all payments of principal made
on the Loans attributable to such Lender that occur after the
Amendment Effective Date.
(b) Pursuant to the sale and assignment of the Assigned
Rights to the Purchasing Lenders under this Section 2.18, each
Selling Lender is entitled to receive a payment from each
Purchasing Lender in an amount equal to the portion of such
Selling Lender's Existing Loans representing the Assigned Rights
ratably purchased by each Purchasing Lender. In order to
facilitate and give effect to the sale and assignment of the
Assigned Rights, each of the Selling Lenders and Purchasing
Lenders agrees that (i) the Agent shall calculate the amount
owing to the Selling Lenders and to be paid or funded by the
Purchasing Lenders, (ii) each of the Purchasing Lenders shall pay
or fund, as the case may be, to the Agent the amount specified by
the Agent in writing to such Purchasing Lender, and (iii) the
Agent shall, to the extent such payments or fundings are actually
made, apply such amounts ratably to pay the amount owned to the
Selling Lenders.
ARTICLE III
CONDITIONS OF EFFECTIVENESS AND BORROWING
3.1. Conditions of Loans under Original Credit Agreement.
The obligation of each Lender to make Loans in connection with
the initial Borrowing under the Original Credit Agreement was
subject to the satisfaction of the conditions precedent set forth
in Sections 3.2 and 3.4 of the Original Credit Agreement, and the
obligation of each Lender to make the Acquisition Loans under the
Original Credit Agreement was subject to the satisfaction of the
conditions precedent set forth in Sections 3.3 and 3.4 of the
Original Credit Agreement, which conditions in each case have
heretofore been satisfied (other than the term Original Credit
Agreement, which shall have the meaning given to it in this
Agreement, capitalized terms used in this Section 3.1 without
definition shall, solely for purposes of this Section 3.1, have
the meanings given to them in the Original Credit Agreement).
3.2. Conditions to Effectiveness of this Agreement. The
effectiveness of this Agreement and the amendment and restatement
of the Original Credit Agreement effected hereby is subject to
the satisfaction of the condition set forth in the last sentence
of Section 10.14 and the following conditions precedent:
(a) The Agent shall have received the following, each dated
the Amendment Effective Date (unless otherwise specified) and,
except for the Notes, in sufficient copies for each Lender:
(i) a Note for each Lender that is a party hereto as
of the Amendment Effective Date, in the amount of such
Lender's Commitment and duly completed and executed by the
Borrower;
<PAGE>
(ii) a certificate, signed by the chief executive
officer or Senior Financial Officer of the Borrower, in form
and substance satisfactory to the Lenders, certifying that
(i) all representations and warranties of the Borrower
contained in this Agreement and the other Loan Documents are
true and correct as of the Amendment Effective Date (except
to the extent any such representation or warranty is
expressly stated to have been made as of a specific date, in
which case such representation or warranty shall be true and
correct as of such date), (ii) no Default or Event of
Default has occurred and is continuing, (iii) there are no
insurance regulatory proceedings pending or, to such
individual's knowledge, threatened against any of the
Insurance Subsidiaries in any jurisdiction that, if
adversely determined, would be reasonably likely to have a
Material Adverse Effect, and (iv) the Borrower has satisfied
each of the conditions precedent set forth in this
Section 3.2 and Section 3.3;
(iii) a copy, certified by the secretary or an assistant
secretary of the Borrower, of the resolutions adopted by the
board of directors of the Borrower (or the executive
committee thereof) authorizing the execution, delivery and
performance of this Agreement and the other Loan Documents
to which it is a party; and
(iv) a favorable opinion of Ireland, Stapleton, Pryor &
Pascoe, P.C., counsel to the Borrower, addressed to the
Agent and the Lenders, in substantially the form of
Exhibit E and addressing such other matters as the Agent or
any Lender may reasonably request.
(b) The Agent shall have received a certificate as of a
recent date of the good standing of the Borrower under the laws
of the State of Colorado, from the Secretary of State of
Colorado.
(c) All approvals, permits and consents of any Governmental
Authorities (including, without limitation, all relevant
Insurance Regulatory Authorities) or other Persons required in
connection with the execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby shall
have been obtained (without the imposition of conditions that are
not reasonably acceptable to each Lender), and all related
filings, if any, shall have been made, and all such approvals,
permits, consents and filings shall be in full force and effect
and the Agent shall have received such copies thereof as it shall
have requested; all applicable waiting periods shall have expired
without any adverse action being taken by any Governmental
Authority having jurisdiction; and no action, proceeding,
investigation, regulation or legislation shall have been
instituted, threatened or proposed before, and no order,
injunction or decree shall have been entered by, any court or
other Governmental Authority, in each case to enjoin, restrain or
prohibit, to obtain substantial damages in respect of, or that is
otherwise related to or arises out of, this Agreement or the
consummation of the transactions contemplated hereby, or that, in
the opinion of the Required Lenders, would otherwise be
reasonably likely to have a Material Adverse Effect.
(d) Each of the representations and warranties contained in
Article IV and in the other Loan Documents shall be true and
correct on and as of the Amendment Effective Date with the same
effect as if made on and as of such date (except to the extent
any such representation or warranty is expressly stated to have
been made as of a specific date, in which case such
representation or warranty shall be true and correct as of such
date).
(e) No Default or Event of Default shall have occurred and
be continuing.
<PAGE>
(f) Since December 31, 1995, there shall not have occurred
any Material Adverse Change or any event, condition or state of
facts that could reasonably be expected to have a Material
Adverse Effect.
(g) The Borrower shall have paid (i) to First Union, for
its own account, the unpaid balance of the fee described in
paragraph (1) of the Fee Letter, (ii) to the Agent, for the
account of each Lender that is a party to this Agreement as of
the Amendment Effective Date, the fee described in paragraph (2)
of the Fee Letter, and (iii) all other fees and expenses of the
Agent and the Lenders required hereunder to be paid on or prior
to the Amendment Effective Date (including fees and expenses of
counsel to the Agent) in connection with this Agreement and the
transactions contemplated hereby.
(h) The Agent shall have received an Account Designation
Letter, duly completed and executed by the Borrower.
(i) The Agent and each Lender shall have received such
other documents, certificates, opinions and instruments as it
shall have reasonably requested.
3.3. Conditions to All Loans. The obligation of the Lenders
to make any Loans hereunder is subject to the satisfaction of the
following conditions precedent on the relevant Borrowing Date:
(a) The Agent shall have received a Notice of Borrowing in
accordance with Section 2.2(a).
(b) Each of the representations and warranties contained in
Article IV and in the other Loan Documents shall be true and
correct on and as of the relevant Borrowing Date with the same
effect as if made on and as of such date, both immediately before
and after giving effect to the Loans to be made on such date
(except to the extent any such representation or warranty is
expressly stated to have been made as of a specific date, in
which case such representation or warranty shall be true and
correct as of such date).
(c) No Default or Event of Default shall have occurred and
be continuing on such date, both immediately before and after
giving effect to the Loans to be made on such date.
Each giving of a Notice of Borrowing or a Notice of
Conversion/Continuation, and the consummation of each Borrowing,
shall be deemed to constitute a representation by the Borrower
that the statements contained in subsections (b) and (c) above
are true, both as of the date of such notice or request and as of
the relevant Borrowing Date.
3.4. No Waiver of Conditions Precedent. If any Lender makes
any Loan prior to the satisfaction of any of the conditions
precedent set forth in this Article III, the making of such Loan
shall constitute only an extension of time for the satisfaction
of such condition and not a waiver thereof, and unless the
Required Lenders indicate otherwise in writing, the Borrower
shall thereafter use its best efforts to cause each such
condition to be satisfied promptly.
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
In order to induce the Agent and the Lenders to enter into
this Agreement and to extend the credit contemplated hereby, the
Borrower represents and warrants to the Agent and each Lender as
follows:
4.1. Corporate Organization and Power. Each of the Borrower
and its Subsidiaries (i) is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction
of its incorporation, (ii) has the full corporate power and
authority to execute, deliver and perform the Loan Documents to
which it is or will be a party, to own and hold its property and
to engage in its business as presently conducted and (iii) is
duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction where the nature of its
business or the ownership of its properties requires it to be so
qualified, except where the failure to be so qualified would not,
individually or in the aggregate, be reasonably likely to have a
Material Adverse Effect.
4.2. Authorization; Enforceability. The Borrower has taken
all necessary corporate action to execute, deliver and perform
each of the Loan Documents to which it is or will be a party, and
has, or on any later date of execution and delivery will have,
validly executed and delivered each of the Loan Documents to
which it is or will be a party. This Agreement constitutes, and
each of the other Loan Documents upon execution and delivery will
constitute, the legal, valid and binding obligation of the
Borrower, enforceable against it in accordance with its terms,
except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally or by general equitable
principles.
4.3. No Violation. The execution, delivery and performance
by the Borrower of the Loan Documents, and compliance by it
therewith, do not and will not (i) violate any provision of its
articles or certificate of incorporation or bylaws,
(ii) contravene any applicable Requirement of Law, where such
contravention would be reasonably likely to have a Material
Adverse Effect, (iii) conflict with, result in a breach of or
constitute (with notice, lapse of time or both) a default under
any indenture, loan agreement, mortgage or other material
instrument relating to Indebtedness or any other material lease,
agreement or instrument to which it is a party, by which it or
any of its properties is bound or to which it may be subject, or
(iv) result in or require the creation or imposition of any Lien
upon any of its properties, other than Liens created pursuant to
the Loan Documents.
4.4. Governmental Authorization; Permits. (a) No consent,
approval, authorization, exemption or other action by, notice to,
or filing with, any Governmental Authority or other Person is
required as a condition to or otherwise in connection with the
due execution, delivery and performance by the Borrower of the
Loan Documents or the legality, validity or enforceability hereof
or thereof.
(b) Each of the Borrower and its Subsidiaries has, and is
in good standing with respect to, all governmental approvals,
licenses, permits and authorizations necessary to conduct its
business as presently conducted and to own or lease and operate
its properties, except for those the failure to obtain which
would not be reasonably likely, individually or in the aggregate,
to have a Material Adverse Effect. To the knowledge of the
Borrower, none of such approvals, licenses, permits or
authorizations contains any term, condition or limitation more
burdensome than such as are generally
<PAGE>
applicable to Persons engaged in the same or similar business.
Without limitation of the foregoing, Schedule 4.4(b) lists with
respect to each Insurance Subsidiary that is a Significant
Subsidiary, as of the Amendment Effective Date, all of the
jurisdictions in which such Insurance Subsidiary holds licenses
(including, without limitation, licenses or certificates of
authority from relevant Insurance Regulatory Authorities),
permits or authorizations to transact insurance and reinsurance
business (collectively, the "Licenses"), and indicates the line
or lines of insurance in which each such Insurance Subsidiary is
permitted to be engaged with respect to each License therein
listed. To the knowledge of the Borrower, except as set forth on
Schedule 4.4(b), (i) no such License is the subject of a
proceeding for suspension, revocation or limitation or any
similar proceedings, (ii) there is no sustainable basis for such
a suspension, revocation or limitation, and (iii) no such
suspension, revocation or limitation is threatened by any
relevant Insurance Regulatory Authority. No such Insurance
Subsidiary transacts any insurance business, directly or
indirectly, in any jurisdiction other than those listed on
Schedule 4.4(b), where such business requires any license, permit
or other authorization of a Insurance Regulatory Authority of
such jurisdiction, except where the same would not be reasonably
likely, individually or in the aggregate, to have a Material
Adverse Effect.
4.5. Litigation. There are no actions, investigations,
suits or proceedings pending or, to the knowledge of the
Borrower, threatened, at law, in equity or in arbitration, before
any court, other Governmental Authority or other Person,
(i) against or affecting the Borrower, any of its Subsidiaries or
any of their respective properties that would, if adversely
determined, be reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect, or (ii) with
respect to this Agreement or any of the other Loan Documents.
4.6. Taxes. Each of the Borrower and its Subsidiaries has
timely filed all tax returns and reports required to be filed by
it and has paid all taxes, assessments, fees and other charges
levied upon it or upon its properties that are shown thereon as
due and payable, other than those that are being contested in
good faith and by proper proceedings and for which adequate
reserves have been established in accordance with Generally
Accepted Accounting Principles. Such returns accurately reflect
in all material respects all liability for taxes of the Borrower
and its Subsidiaries for the periods covered thereby. There is
no action, suit, audit, investigation, assessment, claim or
proceeding pending or, to the knowledge of the Borrower,
threatened, regarding any taxes relating to the Borrower or any
of its Subsidiaries, that would, if adversely determined, be
reasonably likely, individually or in the aggregate, to have a
Material Adverse Effect.
4.7. Subsidiaries. Schedule 4.7 sets forth a list, as of
the Amendment Effective Date, of all of the Subsidiaries of the
Borrower and, as to each such Subsidiary, the jurisdiction of its
incorporation, the percentage ownership (direct and indirect) of
the Borrower in each class of its capital stock, and each direct
owner thereof, and indicates those Subsidiaries that are
Significant Subsidiaries. Except for the shares of capital stock
expressly indicated on Schedule 4.7, there are no shares of
capital stock or warrants, rights, options or other equity
securities of any Subsidiary of the Borrower outstanding or
reserved for any purpose. All outstanding shares of capital
stock of each Subsidiary of the Borrower are duly and validly
issued, fully paid and nonassessable. Each Person indicated on
Schedule 4.7 as the direct owner of the outstanding shares of
capital stock of any Subsidiary of the Borrower is the sole
legal, record and beneficial owner of, and has good and valid
title to, all such capital stock, free and clear of all Liens
other than Permitted Liens.
4.8. Full Disclosure. All factual information heretofore or
contemporaneously furnished to the Agent and the Lenders in
writing by or on behalf of the Borrower or any of its Subsidiaries
<PAGE>
(including, without limitation, all information contained in the
Loan Documents) for purposes of or in connection with this
Agreement and the other Loan Documents and the transactions
contemplated hereby and thereby is, and all other such factual
information hereafter furnished to the Agent and the Lenders in
writing by or on behalf of the Borrower or any of its
Subsidiaries will be, taken as a whole, true and accurate in all
material respects on the date as of which such information is
dated or certified (or, if such information has been amended or
supplemented, on the date as of which any such amendment or
supplement is dated or certified) and not made incomplete by
omitting to state a material fact necessary to make the
statements contained therein, taken as a whole together with all
other such information in light of the circumstances under which
such information was provided, not misleading.
4.9. Margin Regulations. Neither the Borrower nor any of
its Subsidiaries is engaged in the business of extending credit
for the purpose of purchasing or carrying Margin Stock. No
proceeds of the Loans will be used, directly or indirectly, to
purchase or carry any Margin Stock, to extend credit for such
purpose or for any other purpose that would violate Regulations
G, T, U or X of the Federal Reserve Board, or any purpose that
would violate any provision of the Exchange Act.
4.10. Financial Matters. (a) The Borrower has heretofore
furnished to the Agent copies of (i) the audited consolidated
balance sheets of the Borrower and its Subsidiaries as of
December 31, 1995, 1994, 1993, and 1992, and the related
statements of income and cash flows for the fiscal years then
ended, and (ii) the unaudited consolidated balance sheet of the
Borrower and its Subsidiaries as of September 30, 1996, and the
related statements of income and cash flows for the nine-month
period then ended (collectively, the "Historical Financial
Statements"). The Historical Financial Statements have been
prepared in accordance with Generally Accepted Accounting
Principles (subject, with respect to the unaudited Historical
Financial Statements, to the absence of notes required by
Generally Accepted Accounting Principles and to normal year-end
audit adjustments) and present fairly the financial position of
the Borrower and its Subsidiaries on a consolidated basis as of
the respective dates thereof and the consolidated results of
operations of the Borrower and its Subsidiaries for the
respective periods then ended. Except as fully reflected in the
most recent Historical Financial Statements and the notes
thereto, there are no material liabilities or obligations with
respect to the Borrower or any of its Subsidiaries of any nature
whatsoever (whether absolute, contingent or otherwise and whether
or not due). Since December 31, 1995, there has been no Material
Adverse Change, and, to the knowledge of the Borrower, no
Material Adverse Change is threatened or reasonably likely to
occur.
(b) In connection with the closing of the transactions
contemplated by the Original Credit Agreement, the Borrower
prepared, and furnished to the Agent copies of, annual projected
balance sheets and statements of income and cash flows of the
Borrower and its Subsidiaries for the eight-year period beginning
January 1, 1995, giving effect to the transactions contemplated
by the Original Credit Agreement (the "Projections"). In the
opinion of the Borrower's management, the assumptions used in
preparation of the Projections were reasonable when made. The
Projections were prepared in good faith by the executive and
financial personnel of the Borrower in light of the historical
financial performance of the Borrower and the financial and
operating condition of the Borrower at the time prepared and, at
such time, represented a reasonable estimate of the future
performance and financial condition of the Borrower and its
Subsidiaries, subject to the uncertainties and approximations
inherent in any projections.
<PAGE>
(c) The Borrower has heretofore furnished to the Agent
copies of (i) the Annual Statement of each of the Insurance
Subsidiaries as of December 31, 1995, and for the fiscal year
then ended, each as filed with the relevant Insurance Regulatory
Authority, and (ii) the Quarterly Statement of each of the
Insurance Subsidiaries as of September 30, 1996, and for the nine-
month period then ended, each as filed with the relevant
Insurance Regulatory Authority (collectively, the "Historical
Statutory Statements"). The Historical Statutory Statements
(including, without limitation, the provisions made therein for
investments and the valuation thereof, reserves, policy and
contract claims and Statutory Liabilities) have been prepared in
accordance with Statutory Accounting Principles (except as may be
reflected in the notes thereto and subject, with respect to the
Quarterly Statements, to the absence of notes required by
Statutory Accounting Principles and to normal year-end audit
adjustments), were in compliance with applicable Requirements of
Law when filed and present fairly the financial position of the
respective Insurance Subsidiaries covered thereby as of the
respective dates thereof and the results of operations, changes
in capital and surplus and cash flow of the respective Insurance
Subsidiaries covered thereby for the respective periods then
ended. Except for liabilities and obligations disclosed or
provided for in the Historical Statutory Statements (including,
without limitation, reserves, policy and contract claims and
Statutory Liabilities), no Insurance Subsidiary had, as of the
date of its respective Historical Statutory Statements, any
material liabilities or obligations of any nature whatsoever
(whether absolute, contingent or otherwise and whether or not
due) that, in accordance with Statutory Accounting Principles,
would have been required to have been disclosed or provided for
in such Historical Statutory Statements. All books of account of
each Insurance Subsidiary fully and fairly disclose all of its
material transactions, properties, assets, investments,
liabilities and obligations, are in its possession and are true,
correct and complete in all material respects.
(d) The investments of each of the Insurance Subsidiaries
reflected in its most recently filed Annual Statement and
Quarterly Statement comply in all material respects with all
applicable requirements of the relevant Insurance Regulatory
Authority and of any other Governmental Authority having
jurisdiction over the investment of its funds. The amounts shown
in the most recently filed Annual Statement and Quarterly
Statement for each of the Insurance Subsidiaries for reserves,
policy and contract claims, agents' balances and uncollected
premiums and Statutory Liabilities were computed in accordance
with commonly accepted actuarial standards consistently applied,
were fairly stated in accordance with sound actuarial principles,
were based on actuarial assumptions that were in accordance with
or more stringent than those called for in the insurance policies
and contracts and in the related reinsurance, co-insurance or
similar contracts of such Insurance Subsidiaries, were computed
on the basis of assumptions consistent with those of the
preceding fiscal year, and meet the requirements of each relevant
Insurance Regulatory Authority and of any other Governmental
Authority having jurisdiction. Such reserves as established by
each Insurance Subsidiary were, in the judgment of the Borrower,
adequate as of such date for the payment by such Insurance
Subsidiary of all of its insurance benefits, losses, claims and
investigative expenses. Marketable securities and short-term
investments reflected in each Insurance Subsidiary's most
recently filed Annual Statement and Quarterly Statement are
valued at cost, amortized cost or market value, as required by
applicable Requirements of Law.
4.11. Ownership of Properties. Each of the Borrower and its
Subsidiaries has good and marketable title to all real property
owned by it, holds interests as lessee under valid leases in full
force and effect with respect to all leased real and personal
property used in connection with its business, and has good title
to all of its other properties and assets reflected in the most
recent Historical Financial Statements (except as sold or
otherwise disposed of since the date thereof in the
<PAGE>
ordinary course of business), in each case free and clear of all
Liens other than Permitted Liens and in each case except to the
extent the failure to own or hold such property would not be
reasonably likely, individually or in the aggregate, to have a
Material Adverse Effect.
4.12. Plans. (a) Schedule 4.12(a) lists all Plans of the
Borrower and its Subsidiaries in effect as of the Amendment
Effective Date and separately identifies which of such Plans are
intended to be Qualified Plans and Multiemployer Plans. Each
Plan is in compliance in all material respects with all
applicable Requirements of Law, including, without limitation,
the applicable provisions of ERISA and the Internal Revenue Code
(including provisions therein relating to the filing of reports
in respect of such Plan, which reports are true and correct in
all material respects as of the date filed).
(b) Each Qualified Plan has an Internal Revenue Service
favorable determination letter indicating that such Plan is
qualified and that the trust created thereunder is exempt from
tax under the provisions of Section 501 of the Internal Revenue
Code, or the remedial amendment period under Section 401(b) of
the Internal Revenue Code within which such a determination may
be applied for has not yet expired (or an application for such
determination is pending before the Internal Revenue Service),
and, to the knowledge of the Borrower, nothing has occurred that
would cause the loss of such qualified or tax-exempt status or
would cause the Internal Revenue Service not to issue any such
determination.
(c) Except as disclosed on Schedule 4.12(c), no Plan
provides medical or other welfare benefits or extends coverage
relating to such benefits beyond the date of a participant's
termination of employment, except to the extent required by
Section 4980B of the Internal Revenue Code and at the sole
expense of the participant or the beneficiary of the participant
to the fullest extent permissible under Section 4980B of the
Internal Revenue Code. The Borrower and each ERISA Affiliate
have complied in all material respects with the notice and
continuation coverage requirements of Section 4980B of the
Internal Revenue Code.
(d) No ERISA Event has occurred (except with respect to
Reportable Events that have occurred by reason of a change in a
controlled group) or, to the knowledge of the Borrower, is
reasonably expected to occur with respect to any Pension Plan.
(e) Except for such as would not, individually or in the
aggregate, be reasonably likely to have a Material Adverse
Effect, there are no pending or, to the knowledge of the
Borrower, threatened claims, actions or proceedings against or
with respect to any Plan by the Internal Revenue Service,
Department of Labor, Equal Employment Opportunity Commission or
any participant, beneficiary or other Person involving any aspect
of any Plan or its assets or any fiduciary with respect to any
Plan (other than routine benefit claims), nor are there any facts
or circumstances that could reasonably be expected to form the
basis for any such claim, action or proceeding.
(f) To the knowledge of the Borrower, neither the Borrower
nor any ERISA Affiliate reasonably expects to incur (i) any
liability (and no event has occurred that, with the giving of
notice under Section 4219 of ERISA, would result in such
liability) under Section 4201 or 4243 of ERISA with respect to a
Multiemployer Plan or (ii) any liability under Title IV of ERISA
that would be reasonably likely to have a Material Adverse Effect
(other than premiums due and not delinquent under Section 4007 of
ERISA) with respect to a Pension Plan.
<PAGE>
(g) There is no outstanding penalty, interest or excise
tax under the Internal Revenue Code or ERISA with respect to any
Plan, which penalty, interest or excise tax would be reasonably
likely to have a Material Adverse Effect.
(h) With respect to each Pension Plan, (i) all required
contributions and payments have been made (including any employee
election contributions described in Section 401(k) of the
Internal Revenue Code) by their applicable due date and (ii) all
benefits due thereunder have been paid.
4.13. Solvency. The Borrower and its Subsidiaries, taken as
a whole, have capital sufficient to carry on their businesses as
conducted and as proposed to be conducted, and have assets with a
fair saleable value (i) not less than the amount required to pay
the probable liability on their existing debts as they become
absolute and matured and (ii) greater than the total amount of
their liabilities (including identified contingent liabilities);
and neither the Borrower nor any of its Significant Subsidiaries
intends to, or believes that it will, incur debts or liabilities
beyond its ability to pay such debts and liabilities as they
mature.
4.14. Environmental Matters. (a) (i) No Hazardous
Substances are or have been generated, used, released, treated,
disposed of or stored by the Borrower or its Subsidiaries or are,
to the knowledge of the Borrower, otherwise located, in, on or
under any portion of any real property, leased or owned, of the
Borrower or any of its Subsidiaries, except in material
compliance with all applicable Environmental Laws, and no portion
of any such real property or any other real property at any time
leased, owned or operated by the Borrower or any of its
Subsidiaries, including, without limitation, the soil and
groundwater located thereon and thereunder, has been contaminated
by any Hazardous Substance, and (ii) no portion of any real
property, leased or owned, of the Borrower or any of its
Subsidiaries has been or, to the knowledge of the Borrower, is
presently the subject of an environmental audit, assessment or
remedial action.
(b) To the knowledge of the Borrower, (i) no portion of
any real property, leased or owned, of the Borrower or any of its
Subsidiaries has been used as or for a mine, a landfill, a dump
or other disposal facility, a gasoline service station, or (other
than for petroleum substances stored in the ordinary course of
business) a petroleum products storage facility, (ii) no portion
of such real property or any other real property at any time
leased, owned or operated by the Borrower or any of its
Subsidiaries has, pursuant to any Environmental Law, been placed
on the "National Priorities List" or "CERCLIS List" (or any
similar federal, state or local list) of sites subject to
possible environmental problems, and (iii) there are not and have
never been any underground storage tanks situated on any real
property, leased or owned, of the Borrower or any of its
Subsidiaries.
(c) All activities and operations of the Borrower and its
Subsidiaries are in material compliance with the requirements of
all applicable Environmental Laws, and each of the Borrower and
its Subsidiaries has timely filed all reports required to be
filed, has acquired all necessary certificates, approvals and
permits, and has generated and maintained in all material
respects all required data, documentation and records required
under all Environmental Laws.
(d) Other than pursuant to claims made under policies
written by the Insurance Subsidiaries in the ordinary course of
business, neither the Borrower nor any of its Subsidiaries is
involved in any suit, action or proceeding, or has received any
notice, complaint or other request for information from any
Governmental Authority or other Person with respect to, any
actual or alleged
<PAGE>
Environmental Claims; and, to the knowledge of the Borrower,
there are no threatened actions, suits, proceedings or
investigations with respect to Environmental Claims, nor any
basis therefor.
4.15. Compliance With Laws. Each of the Borrower and its
Subsidiaries has timely filed all reports, documents and other
materials required to be filed by it with any Governmental
Authority, has retained all records and documents required to be
retained by it and is otherwise in compliance with all applicable
Requirements of Law in respect of the conduct of its business and
the ownership and operation of its properties, except to the
extent the failure to do so, individually or in the aggregate,
would not be reasonably likely to have a Material Adverse Effect.
4.16. Regulated Industries. Neither the Borrower nor any of
its Subsidiaries is (i) an "investment company," a company
"controlled" by an "investment company," or an "investment
advisor," within the meaning of the Investment Company Act of
1940, as amended, or (ii) a "holding company," a "subsidiary
company" of a "holding company," or an "affiliate" of a "holding
company" or of a "subsidiary company" of a "holding company,"
within the meaning of the Public Utility Holding Company Act of
1935, as amended.
4.17. Reinsurance Agreements. Schedule 4.17 lists, as of
the Amendment Effective Date, each Reinsurance Agreement to which
any of the Insurance Subsidiaries is a party, indicates the other
parties thereto and the term thereof, and lists separately each
Reinsurance Agreement no longer in force to which any of the
Insurance Subsidiaries was a party and under which, to the
knowledge of the Borrower, any material benefits or liabilities
remain outstanding. Each such Reinsurance Agreement is in full
force and effect; neither the Borrower nor any of its Insurance
Subsidiaries or, to the knowledge of the Borrower, any other
party thereto, is in default under any such contract; and the
Borrower has no reason to believe that the financial condition of
any other party to any such contract is impaired such that a
default thereunder by such party could reasonably be anticipated.
Each such Reinsurance Agreement is qualified under all applicable
Requirements of Law to receive the statutory credit assigned to
such Reinsurance Agreement in the relevant Annual Statement or
Quarterly Statement at the time prepared. Each Person to whom
the Borrower or any of its Subsidiaries has ceded any material
liability pursuant to any Reinsurance Agreement has a rating of
"A-" or better by A.M. Best & Company.
4.18. Carried Insurance. Schedule 4.18 sets forth a true
and complete summary of all material insurance policies or
arrangements carried by the Borrower and its Significant
Subsidiaries, and indicates the insurer's name, policy number,
expiration date, amount of coverage, type of coverage, annual
premiums, exclusions and deductibles, and also indicates any self-
insurance programs that are in effect. The assets, properties
and business of the Borrower and its Significant Subsidiaries are
adequately insured against such hazards and liabilities, under
such coverages and in such amounts, as are customarily maintained
by prudent companies similarly situated and under policies issued
by insurers of recognized responsibility.
4.19. Indebtedness. Schedule 4.19 sets forth, as of the
Amendment Effective Date, a complete and accurate list of all
Indebtedness of the Borrower or any of its Subsidiaries having an
aggregate principal amount in excess of $500,000 (other than the
Indebtedness incurred pursuant to this Agreement and the other
Loan Documents), designates the parties thereto, and indicates
the principal amount outstanding thereunder, the scheduled
maturity thereof and the existence of any Liens in respect
thereof.
<PAGE>
ARTICLE V
AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that, until the
termination of the Commitments and the payment in full of all
principal and interest with respect to the Loans together with
all other amounts then due and owing hereunder:
5.1. Financial Statements. The Borrower will deliver to
each Lender:
(a) As soon as practicable and in any event within sixty
(60) days after the end of each of the first three fiscal
quarters of each fiscal year, beginning with the fiscal quarter
ending March 31, 1997, an unaudited consolidated balance sheet of
the Borrower and its Subsidiaries and an unaudited balance sheet
of each Significant Subsidiary that is directly owned by the
Borrower and that is not an Insurance Subsidiary, in each case as
of the end of such fiscal quarter, and unaudited consolidated
statements of income, retained earnings and cash flows for the
Borrower and its Subsidiaries and unaudited statements of income,
retained earnings and cash flows for each Significant Subsidiary
that is directly owned by the Borrower and that is not an
Insurance Subsidiary, in each case for the fiscal quarter then
ended and for that portion of the fiscal year then ended, and in
each case for all of the foregoing statements setting forth
comparative figures for the corresponding period in the preceding
fiscal year, all prepared in accordance with Generally Accepted
Accounting Principles (subject to the absence of notes required
by Generally Accepted Accounting Principles and subject to normal
year-end audit adjustments); and
(b) As soon as practicable and in any event within 105 days
after the end of each fiscal year, beginning with the current
fiscal year, an audited consolidated balance sheet of the
Borrower and its Subsidiaries as of the end of such fiscal year
and audited consolidated statements of income, retained earnings
and cash flows for the Borrower and its Subsidiaries for the
fiscal year then ended, including the notes to each, in each case
setting forth comparative figures for the preceding fiscal year,
certified by the independent certified public accounting firm
regularly retained by the Borrower or another independent
certified public accounting firm reasonably acceptable to the
Required Lenders, together with (i) a report thereon by such
accountants that is not qualified as to going concern or scope of
audit and to the effect that such financial statements present
fairly the consolidated financial position and results of
operations of the Borrower and its Subsidiaries as of the dates
and for the periods indicated in accordance with Generally
Accepted Accounting Principles and (ii) a report by such
accountants to the effect that, based on and in connection with
their examination of the financial statements of the Borrower and
its Subsidiaries, they obtained no knowledge of the occurrence or
existence of any Event of Default relating to accounting or
financial reporting matters, or a statement specifying the nature
and period of existence of any such Event of Default disclosed by
their audit; provided, however, that such accountants shall not
be liable by reason of the failure to obtain knowledge of any
Event of Default that would not be disclosed or revealed in the
course of their audit examination.
5.2. Statutory Financial Statements. The Borrower will
deliver to each Lender:
(a) As soon as practicable and in any event within sixty
(60) days after the end of each of the first three fiscal
quarters of each fiscal year, beginning with the fiscal quarter
ending March 31, 1997, a Quarterly Statement of each Insurance
Subsidiary as of the end of such fiscal quarter and for
<PAGE>
that portion of the fiscal year then ended, in the form filed
with the relevant Insurance Regulatory Authority, prepared in
accordance with Statutory Accounting Principles; and
(b) As soon as practicable and in any event within seventy-
five (75) days after the end of each fiscal year, beginning with
the current fiscal year, an Annual Statement of each Insurance
Subsidiary as of the end of such fiscal year and for the fiscal
year then ended, in the form filed with the relevant Insurance
Regulatory Authority, prepared in accordance with Statutory
Accounting Principles.
5.3. Other Business and Financial Information. The Borrower
will deliver to each Lender:
(a) Concurrently with each delivery of the financial
statements described in Sections 5.1 and 5.2, a Compliance
Certificate with respect to the period covered by the financial
statements then being delivered, executed by the Senior Financial
Officer of the Borrower (together, in the case of the financial
statements described in Section 5.1, with a Rate Calculation
Worksheet and a Covenant Compliance Worksheet reflecting the
computation of the financial covenant set forth in Section 6.5 as
of the last day of the period covered by such financial
statements, and in the case of the financial statements described
in Section 5.2, with a Covenant Compliance Worksheet reflecting
the computation of the financial covenants set forth in Sections
6.1 through 6.4 as of the last day of the period covered by such
financial statements);
(b) Promptly upon filing with the relevant Insurance
Regulatory Authority and in any event within ninety-five (95)
days after the end of each fiscal year, beginning with the
current fiscal year, a copy of each Insurance Subsidiary's
"Statement of Actuarial Opinion" (or equivalent information
should the relevant Insurance Regulatory Authority not require
such a statement) as to the adequacy of such Insurance
Subsidiary's loss reserves for such fiscal year, together with a
copy of its management discussion and analysis in connection
therewith, each in the format prescribed by the applicable
Insurance Code;
(c) As soon as practicable and in any event within thirty
(30) days after the beginning of each fiscal year, beginning with
the fiscal year ending December 31, 1996, new business plans and
a consolidated operating budget for the Borrower for such fiscal
year and projected financial statements for the Borrower for the
remaining stated term of the Facility, consisting of a
consolidated balance sheet, statement of income and cash flow,
together with a certificate of the chief executive officer or
Senior Financial Officer of the Borrower to the effect that such
budgets and financial projections have been prepared in good
faith and are reasonable estimates of the financial position and
results of operations of the Borrower for the period covered
thereby;
(d) Promptly upon (and in any event within twenty (20)
Business Days after) receipt thereof, a copy of each final report
to each Insurance Subsidiary from the NAIC as to such Insurance
Subsidiary's status under the relevant IRIS Tests;
(e) Promptly upon (and in any event within twenty (20)
Business Days after) receipt or completion thereof, copies of any
"management letter," or other significant report or significant
communication, submitted to the Borrower or any of its
Subsidiaries by its certified public accountants, and any
response reports from the Borrower or any such Subsidiary in
respect thereof, in connection with each annual, interim or
special audit;
<PAGE>
(f) Promptly upon (and in any event within twenty (20)
Business Days after) the sending, filing or receipt thereof,
copies of (i) all financial statements, reports, notices and
proxy statements that the Borrower or any of its Subsidiaries
shall send or make available generally to its shareholders,
(ii) all regular, periodic and special reports, registration
statements and prospectuses that the Borrower or any of its
Subsidiaries shall render to or file with the Securities and
Exchange Commission, the National Association of Securities
Dealers or any national securities exchange, (iii) all
significant reports on examination or similar significant
reports, financial examination reports or market conduct
examination reports by the NAIC or any Insurance Regulatory
Authority or other Governmental Authority with respect to any
Insurance Subsidiary's insurance business, (iv) all significant
filings made under applicable state insurance holding company
acts by the Borrower or any of its Subsidiaries, including,
without limitation, filings seeking approval of transactions with
Affiliates, and (v) all press releases and other statements that
the Borrower or any of its Subsidiaries shall make available
generally to the public concerning developments in the business
of the Borrower or any of its Subsidiaries, other than press
releases or statements issued in the ordinary course of business;
and
(g) As promptly as reasonably possible, such other
information about the business, condition (financial or
otherwise), operations or properties of the Borrower or any of
its Subsidiaries as any Lender may from time to time reasonably
request.
5.4. Notice of Certain Events. The Borrower will promptly,
but in no event later than five (5) Business Days after obtaining
knowledge thereof, give written notice to each Lender of:
(a) The occurrence of any Default or Event of Default,
together with a written statement of the chief executive officer
or Senior Financial Officer of the Borrower specifying the nature
of such Default or Event of Default, the period of existence
thereof and the action that each of the Borrower and its
Subsidiaries has taken and proposes to take with respect thereto;
(b) The institution or threatened institution of any
action, suit, investigation or proceeding against or affecting
the Borrower or any of its Subsidiaries, including any such
investigation or proceeding by any Insurance Regulatory Authority
or other Governmental Authority (other than routine periodic
inquiries, investigations or reviews), together with copies of
any filings, communications, reports or other information
relating thereto made available to the Borrower or any of its
Subsidiaries, except such as would not, individually or in the
aggregate, be reasonably likely to have a Material Adverse
Effect;
(c) The receipt by the Borrower or any of its Subsidiaries
from any Governmental Authority of a notice of violation or
noncompliance by the Borrower or any of its Subsidiaries that, if
established, would be reasonably likely to have a Material
Adverse Effect, or a notice of any actual or threatened
suspension, termination, limitation or revocation of any license,
permit or authorization (including, without limitation, any
License) of the Borrower or any of its Subsidiaries where such
action would be reasonably likely to have a Material Adverse
Effect, together with a copy of such notice and any other
information relating thereto made available to the Borrower or
any of its Subsidiaries;
(d) The occurrence of any changes in any Insurance Code
governing the investment or dividend practices of any of the
Insurance Subsidiaries that would be reasonably likely to have a
Material Adverse Effect;
<PAGE>
(e) Any change in the rating of any Insurance Subsidiary by
A.M. Best & Co., Inc.;
(f) The occurrence of any amendment or modification to any
Reinsurance Agreement (whether entered into before or after the
Amendment Effective Date), including any Reinsurance Agreements
that are in a runoff mode on the Amendment Effective Date, which
amendment or modification would be reasonably likely to have a
Material Adverse Effect; or the receipt by the Borrower or any of
its Subsidiaries of any written notice of denial of coverage,
litigation, claim or arbitration arising out of any Reinsurance
Agreement to which it is a party or any cancellation or change in
any material insurance policy carried by it, which would be
reasonably likely to have a Material Adverse Effect;
(g) The occurrence of any ERISA Event with respect to the
Borrower or any of its ERISA Affiliates, together with (i) a
written statement of the chief executive officer or Senior
Financial Officer of the Borrower specifying the details of such
ERISA Event and the action that the Borrower or such ERISA
Affiliate has taken or proposes to take with respect thereto,
(ii) a copy of any notice with respect to such ERISA Event that
may be required to be filed with the PBGC and (iii) any notice
delivered by the PBGC to the Borrower or such ERISA Affiliate
with respect to such ERISA Event;
(h) The occurrence of any of the following, together with a
reasonably detailed description thereof and copies of any
filings, communications, reports or other information relating
thereto made available to the Borrower or any of its
Subsidiaries: (i) the taking of any remedial action by the
Borrower, any of its Subsidiaries or any other Person in response
to the actual or alleged generation, storage, release, disposal
or discharge of any Hazardous Substances on, to, upon or from any
of the real property, leased or owned, of the Borrower or any of
its Subsidiaries; (ii) any pending or threatened Environmental
Claim against or affecting the Borrower, any of its Subsidiaries
or any of their respective real property, leased or owned (other
than pursuant to claims made under policies written by the
Insurance Subsidiaries in the ordinary course of business); or
(iii) any other condition or occurrence on or arising from or
with respect to any real property, leased or owned, of the
Borrower or any of its Subsidiaries, that (x) results in
noncompliance by the Borrower or any of its Subsidiaries with any
applicable Environmental Law, (y) could reasonably be anticipated
to form the basis of an Environmental Claim against the Borrower,
any of its Subsidiaries or any of their respective real property,
leased or owned, or (z) could reasonably be anticipated to cause
any of such real property, or any interest therein (including
leaseholds), to be subject to any restrictions on ownership,
occupancy, use or transfer under any Environmental Law; but in
each case under clauses (i), (ii) and (iii) above, only to the
extent the same would be reasonably likely to have a Material
Adverse Effect; and
(i) Any other matter or event that has, or would be
reasonably likely to have, a Material Adverse Effect, together
with a written statement of the chief executive officer or Senior
Financial Officer of the Borrower setting forth the nature and
period of existence thereof and the action that each of the
Borrower and its Subsidiaries has taken and proposes to take with
respect thereto.
5.5. Corporate Existence; Franchises; Maintenance of
Properties. The Borrower will, and will cause each of its
Significant Subsidiaries to, (i) except as permitted by
Section 7.1, maintain and preserve in full force and effect its
corporate existence, (ii) obtain, maintain and preserve in full
force and effect all other rights, franchises, licenses, permits,
certifications, approvals and authorizations (including, without
limitation, Licenses) required by Governmental Authorities and
necessary to the
<PAGE>
ownership, occupation or use of its properties or the conduct of
its business, except to the extent failure to do so would not be
reasonably likely to have a Material Adverse Effect, and
(iii) keep all properties materially useful to its business in
good working order and condition (normal wear and tear excepted)
and from time to time make all necessary repairs to and renewals
and replacements of such properties, except to the extent that
any of such properties are obsolete or are being replaced.
5.6. Compliance with Laws. The Borrower will, and will
cause each of its Subsidiaries to, comply in all respects with
all Requirements of Law applicable in respect of the conduct of
its business and the ownership and operation of its properties,
including, without limitation, applicable Insurance Codes, except
to the extent the failure so to comply would not be reasonably
likely to have a Material Adverse Effect.
5.7. Payment of Obligations. The Borrower will, and will
cause each of its Subsidiaries to, (i) pay all Indebtedness as
and when due (subject to any applicable subordination provisions)
and otherwise comply with and perform all contracts, agreements
and instruments creating or evidencing Indebtedness to which it
is a party, except to the extent failure to do so would not be
reasonably likely to have a Material Adverse Effect, and (ii) pay
and discharge all taxes, assessments and governmental charges or
levies imposed upon it, upon its income or profits or upon any of
its properties, prior to the date on which penalties would attach
thereto, and all lawful claims that, if unpaid, might become a
Lien upon any of the properties of the Borrower or any of its
Subsidiaries; provided, however, that neither the Borrower nor
any of its Subsidiaries shall be required to pay any such tax,
assessment, charge, levy or claim that is being contested in good
faith and by proper proceedings and as to which the Borrower or
such Subsidiary is maintaining adequate reserves with respect
thereto in accordance with Generally Accepted Accounting
Principles.
5.8. Insurance. The Borrower will, and will cause each of
its Significant Subsidiaries to, maintain with responsible
insurance companies insurance with respect to its assets,
properties and business, against such hazards and liabilities, of
such types and in such amounts, as is customarily maintained by
prudent companies similarly situated.
5.9. Maintenance of Books and Records; Inspection. The
Borrower will, and will cause each of its Subsidiaries to,
(i) maintain adequate books, accounts and records, in which full,
true and correct entries shall be made of all financial
transactions in relation to its business and properties, and
prepare all financial statements required under this Agreement,
in each case in accordance with Generally Accepted Accounting
Principles or Statutory Accounting Principles, as applicable, and
in compliance with the requirements of any Governmental Authority
having jurisdiction over it, and (ii) permit employees or agents
of the Agent or any Lender to inspect its properties and examine
or audit its books, records, working papers and accounts and make
copies and memoranda of them, and to discuss its affairs,
finances and accounts with its officers and employees and, upon
notice to the Borrower, the independent public accountants of the
Borrower and its Subsidiaries (and by this provision the Borrower
authorizes such accountants to discuss the finances and affairs
of the Borrower and its Subsidiaries), all at such times and from
time to time during business hours as may be reasonably
requested.
5.10. Dividends. The Borrower (i) will take all action
necessary to cause its Subsidiaries to make such dividends,
distributions or other payments to the Borrower as shall be
necessary for the Borrower to make payments of the principal of
and interest on the Loans in accordance with this Agreement,
including scheduled repayments required under Section 2.5(b), and
(ii) in furtherance of
<PAGE>
the foregoing, and without limitation thereof, will take all
action necessary to cause any dividends or other distributions
paid to Viking Holdings by its Subsidiaries to be paid over
immediately (and in any event by the next Business Day after
receipt thereof) to the Borrower. In the event the approval of
any Governmental Authority or other Person is required in order
for any such Subsidiary to make any such dividends, distributions
or other payments to the Borrower, or for the Borrower to make
any such principal or interest payments, the Borrower will
forthwith exercise its best efforts and take all actions
permitted by law and necessary to obtain such approval.
5.11. Ownership of Insurance Subsidiaries. The Borrower
will cause each of its Insurance Subsidiaries that is a
Significant Subsidiary to remain at all times a direct or
indirect Wholly Owned Subsidiary of the Borrower.
5.12. Further Assurances. The Borrower will, and will cause
each of its Subsidiaries to, make, execute, endorse, acknowledge
and deliver any amendments, restatements, modifications or
supplements hereto and any other agreements, instruments or
documents, and take any and all such other actions, as may from
time to time be reasonably requested by the Agent or the Required
Lenders to effect, confirm or further assure or protect and
preserve the interests, rights and remedies of the Lenders and
the Agent under this Agreement and the other Loan Documents.
ARTICLE VI
FINANCIAL COVENANTS
The Borrower covenants and agrees that, until the
termination of the Commitments and the payment in full of all
principal and interest with respect to the Loans together with
all other amounts then due and owing hereunder:
6.1. Consolidated Statutory Surplus. The Borrower will
cause Consolidated Statutory Surplus to be no less than
$200,000,000 at all times from and after the Amendment Effective
Date.
6.2. Operating Leverage Ratio. The Borrower will cause each
Insurance Subsidiary that is a Significant Subsidiary to maintain
a ratio of Net Written Premiums to Statutory Surplus of not
greater than 3.0 to 1.0 (or any lower ratio required under any
applicable Requirement of Law) at all times from and after the
Amendment Effective Date.
6.3. Fixed Charge Coverage Ratio. The Borrower will not
permit the Fixed Charge Coverage Ratio to be less than 1.5 to 1.0
as of the last day of any fiscal quarter, beginning with the
fiscal quarter ending December 31, 1996.
6.4. Risk-Based Capital. The Borrower will not permit
"total adjusted capital" (within the meaning of the Risk-Based
Capital for Insurers Model Act as promulgated by the NAIC as of
the Original Credit Agreement Date (the "Model Act")) of GNIC or
VICW as of the last day of any fiscal year, beginning with the
current fiscal year, to be less than 150% of the applicable
"Company Action Level RBC" (within the meaning of the Model Act)
for GNIC or VICW, as applicable, as of such date.
<PAGE>
6.5. Consolidated Net Worth. The Borrower will not permit
Consolidated Net Worth as of the last day of any fiscal quarter,
beginning with the fiscal quarter ending December 31, 1996, to be
less than the sum of (i) $190,000,000, plus (ii) 30% of the
aggregate of Consolidated Net Income for each fiscal quarter
ending after December 31, 1996 (provided that Consolidated Net
Income for any such fiscal quarter shall be taken into account
for purposes of this calculation only if positive), plus
(iii) 100% of the aggregate amount of all increases in the stated
capital and additional paid-in capital accounts of the Borrower
(as determined in accordance with Generally Accepted Accounting
Principles) resulting from the issuance of equity securities or
other capital investments after December 31, 1996 (including
pursuant to the conversion or exchange of Indebtedness, but
excluding options, rights, warrants and other equity securities
issued pursuant to employee benefit plans and any equity
securities issued upon the exercise, conversion or exchange
thereof).
ARTICLE VII
NEGATIVE COVENANTS
The Borrower covenants and agrees that, until the
termination of the Commitments and the payment in full of all
principal and interest with respect to the Loans together with
all other amounts then due and owing hereunder:
7.1. Merger, Consolidation. The Borrower will not, and will
not permit or cause any of its Significant Subsidiaries to,
liquidate, wind up or dissolve, or enter into any consolidation,
merger or other combination, or agree to do any of the foregoing;
provided, however, that any Significant Subsidiary may merge or
consolidate with another Subsidiary or with the Borrower so long
as (y) the surviving corporation is the Borrower or a Wholly
Owned Subsidiary and (z) immediately after giving effect thereto,
no Default or Event of Default would exist.
7.2. Indebtedness. The Borrower will not, and will not
permit or cause any of its Subsidiaries to, create, incur, assume
or suffer to exist any Indebtedness other than:
(i) Indebtedness incurred under this Agreement;
(ii) Indebtedness existing on the Amendment Effective
Date and described on Schedule 4.19;
(iii) Indebtedness under reimbursement obligations in
respect of letters of credit issued for the benefit of the
Insurance Subsidiaries in the ordinary course of their
business to support the payment of claims arising under
insurance contracts;
(iv) Indebtedness in favor of Talegen created under the
Acquisition Agreement; and consisting of contingent purchase
price obligations;
(v) Indebtedness incurred pursuant to Investment
Borrowings, in an aggregate principal amount at any time
outstanding not exceeding 25% of Consolidated Net Worth at
such time (except to the extent such Indebtedness described
in this clause (v) would then be permitted under
clause (vii) below);
<PAGE>
(vi) Indebtedness of the Borrower under any Hedge
Agreements entered into with any Lender in respect of the
Indebtedness incurred pursuant to this Agreement, provided
that the notional amount of all such agreements shall not
exceed the Total Commitment at any time; and
(vii) other Indebtedness (including purchase money
Indebtedness secured by Liens of the type described in
clause (vii) of the definition of Permitted Liens) in an
aggregate principal amount at any time outstanding not to
exceed $10,000,000 for the Borrower and its Subsidiaries.
7.3. Liens. The Borrower will not, and will not permit or
cause any of its Subsidiaries to, directly or indirectly, make,
create, incur, assume or suffer to exist, or enter into or suffer
to exist any agreement or restriction that prohibits or
conditions the creation, incurrence or assumption of, any Lien
upon or with respect to any part of its property or assets,
whether now owned or hereafter acquired, or agree to do any of
the foregoing, other than Permitted Liens.
7.4. Disposition of Assets. The Borrower will not, and will
not permit or cause any of its Subsidiaries to, directly or
indirectly, sell, assign, lease, convey, transfer or otherwise
dispose of (whether in one or a series of transactions) any
Material Assets, or enter into any arrangement with any Person
providing for the lease by the Borrower or any Subsidiary as
lessee of any Material Assets that have been sold or transferred
by the Borrower or such Subsidiary to such Person, or agree to do
any of the foregoing; provided, however, that any Subsidiary may,
to the extent permitted by applicable Requirements of Law and
each relevant Insurance Regulatory Authority, sell, assign or
otherwise dispose of any of its Material Assets to the Borrower
or another Wholly Owned Subsidiary so long as (y) such sale,
assignment or disposition will not adversely affect the ability
of any Insurance Subsidiary party thereto to pay dividends or
otherwise make distributions to its parent corporation and
(z) immediately after giving effect thereto, no Default or Event
of Default would exist.
7.5. Investments. The Borrower will not, and will not
permit or cause any of its Subsidiaries to, (a) directly or
indirectly, purchase, own, invest in or otherwise acquire any
capital stock, evidence of indebtedness or other obligation or
security or any interest whatsoever in any other Person, or make
or permit to exist any loans, advances or extensions of credit
to, or any investment in cash or by delivery of property in, any
other Person, or become a partner or joint venturer in any
partnership or joint venture, or (b) in any single transaction or
series of related transactions (y) acquire any going business or
all or substantially all of the assets of any Person, whether
through purchase of assets, merger or otherwise, or (z) acquire
securities of any Person having at least a majority of combined
voting power of the then outstanding securities of such Person
ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of
directors (any of the transactions described in clause (b) above,
a "Third Party Acquisition," and the transactions described in
clauses (a) and (b) above, collectively, "Investments"), or make
a commitment or otherwise agree to do any of the foregoing, other
than:
(i) Cash Equivalents;
(ii) Investments consisting of loans and advances to
employees for reasonable travel, relocation and business
expenses in the ordinary course of business or prepaid
expenses incurred in the ordinary course of business;
<PAGE>
(iii) Investments consisting of Indebtedness permitted
under Section 7.2;
(iv) existing Investments in corporations that are
Subsidiaries as of the date hereof;
(v) Investments comprised of direct ownership or
leasehold interests in real property that are reflected on
the December 31, 1995 Historical Financial Statements or
made in connection with real property occupied by the
Borrower and its Subsidiaries and required to be classified
as real property on the consolidated balance sheet of the
Borrower and its Subsidiaries; and
(vi) Other Investments by the Borrower or its Insurance
Subsidiaries to the extent permitted under applicable
Requirements of Law, provided that (A) any such Investments
in connection with a Third Party Acquisition may be made
only so long as, immediately after giving effect thereto, no
Default or Event of Default would exist, (B) the aggregate
of such Investments in preferred stock or non-equity
securities (in each case, excluding Investment Grade
Securities) shall not at any time exceed 11% of Consolidated
Investment Assets at such time, (C) the aggregate of such
Investments (excluding Investments in Subsidiaries) in
equity securities (including, without limitation, interests
in limited partnerships and real estate investment trusts,
but excluding preferred stock constituting Investment Grade
Securities) shall not at any time exceed the lesser of
(1) 17.5% of Consolidated Investment Assets at such time and
(2) 60% of Consolidated Net Worth at such time and (D) no
Investments comprised of direct ownership or leasehold
interests in real property may be made except as expressly
permitted under clause (v) above.
7.6. Restricted Payments. The Borrower will not, and will
not permit or cause any of its Significant Subsidiaries to,
directly or indirectly, declare or make any dividend payment, or
make any other distribution of cash, property or assets, in
respect of any of its capital stock or any warrants, rights or
options to acquire its capital stock, or purchase, redeem, retire
or otherwise acquire for value any shares of its capital stock or
any warrants, rights or options to acquire its capital stock, or
set aside funds for any of the foregoing, or enter into any
agreement (other than this Agreement) that restricts its ability
to declare or make any dividend payment or make any other
distribution of cash, property or assets in respect of its
capital stock or other ownership interests, except that:
(i) the Borrower may declare and make dividend
payments or other distributions payable solely in its
capital stock;
(ii) the Borrower may, pursuant to its shareholder
rights plan, declare and make dividend payments or other
distributions consisting of rights to purchase shares of its
capital stock;
(iii) each Significant Subsidiary may declare and make
dividend payments or other distributions to the Borrower or
another Subsidiary to the extent permitted under applicable
Requirements of Law and, as to the Insurance Subsidiaries,
by each relevant Insurance Regulatory Authority; and
(iv) the Borrower may declare and pay cash dividends in
respect of its capital stock and purchase, redeem, retire or
otherwise acquire shares of its capital stock, in each
<PAGE>
case so long as immediately after giving effect thereto, no
Default or Event of Default would exist.
7.7. Transactions with Affiliates. The Borrower will not,
and will not permit or cause any of its Subsidiaries to, enter
into any transaction with any officer, director, stockholder or
other Affiliate of the Borrower or any Subsidiary, except in the
ordinary course of and pursuant to the reasonable requirements of
its business and upon fair and reasonable terms that are no less
favorable to it than would obtain in a comparable arm's length
transaction with a Person other than an Affiliate of the Borrower
or such Subsidiary; provided, however, that nothing contained in
this Section shall prohibit:
(i) performance by the Borrower and its Subsidiaries
of the agreements described on Schedule 7.7;
(ii) transactions otherwise expressly permitted
hereunder; and
(iii) the payment by the Borrower of reasonable and
customary fees to members of its board of directors.
7.8. Certain Amendments. The Borrower will not, and will
not permit or cause any of its Subsidiaries to, amend, modify or
change its articles or certificate of incorporation or bylaws, or
any tax sharing or tax allocation agreement or management
agreement to which it is or becomes a party, in each case other
than any amendments, modifications or changes that could not,
individually or in the aggregate, reasonably be expected to
result in a Material Adverse Effect.
7.9. Lines of Business. The Borrower will not, and will not
permit or cause any of its Significant Subsidiaries to, engage in
any business other than the property and casualty insurance
business or a business reasonably incidental or related thereto;
and the Borrower will not permit or cause Viking Holdings to
create, incur or assume any liabilities or obligations of any
nature or engage in or transact any business whatsoever, except
that Viking Holdings may own and hold the capital stock of VICW
and may distribute such capital stock to the Borrower or to a
Wholly Owned Subsidiary of the Borrower pursuant to a liquidating
distribution or a merger with and into the Borrower or a Wholly
Owned Subsidiary of the Borrower.
7.10. Limitation on Certain Restrictions. The Borrower will
not, and will not permit or cause any of its Subsidiaries to,
directly or indirectly, create or otherwise cause or suffer to
exist or become effective any restriction or encumbrance on
(i) the ability of the Borrower and its Subsidiaries to perform
and comply with their respective obligations under the Loan
Documents or (ii) the ability of any Subsidiary of the Borrower
to make any dividend payments or other distributions in respect
of its capital stock, or to make loans or advances to the
Borrower, in each case other than such restrictions or
encumbrances existing under or by reason of applicable
Requirements of Law.
7.11. Compliance of Plans. The Borrower will not, and will
not permit or cause any ERISA Affiliate to, directly or
indirectly, (i) take or fail to take any action that could
reasonably be expected to result in a liability of the Borrower
or any ERISA Affiliate to the PBGC or to a Multiemployer Plan,
(ii) terminate any Pension Plan subject to Title IV of ERISA so
as to result in a liability of the Borrower or any ERISA
Affiliate, (iii) permit to exist any ERISA Event, or any other
event or condition, that presents the risk of a liability of the
Borrower or any ERISA Affiliate, or
<PAGE>
(iv) operate any Plan in a manner such that the Borrower or any
ERISA Affiliate will incur a tax liability under Section 4980B of
the Internal Revenue Code or a material liability to any
"qualified beneficiary" within the meaning of Section 4980B of
the Internal Revenue Code, in each case under clauses (i) through
(iv) above to the extent the same would be reasonably likely to
have a Material Adverse Effect.
7.12. Fiscal Year. The Borrower will not, and will not
permit or cause any of its Subsidiaries to, change the ending
date of its fiscal year to a date other than December 31 unless
(i) the Borrower shall have given the Lenders written notice of
its intention to change such fiscal year at least sixty (60) days
prior to the effective date thereof and (ii) prior to such
effective date this Agreement shall have been amended to make any
changes in the financial covenants and other terms and conditions
to the extent necessary, in the reasonable determination of the
Required Lenders, to reflect the new fiscal year ending date.
7.13. Accounting Changes. The Borrower will not, and will
not permit or cause any of its Subsidiaries to, make or permit
any material change in its accounting policies or reporting
practices, except as may be required to conform the policies and
practices employed with respect to Viking Holdings and VICW to
the Borrower's policies and practices and except as may be
required by Generally Accepted Accounting Principles or Statutory
Accounting Principles, as applicable.
7.14. Reinsurance Agreements. The Borrower will not, and
will not permit or cause any of its Insurance Subsidiaries
to, (i) be or become a party to any material Reinsurance
Agreement (whether in effect as of the date hereof or at any time
hereafter) with any reinsurer not rated "A-" or better by A.M.
Best & Company, or (ii) enter into any Reinsurance Agreements, or
make any change or modification to any Reinsurance Agreements,
that would, individually or in the aggregate, be reasonably
likely to have a Material Adverse Effect.
ARTICLE VIII
EVENTS OF DEFAULT
8.1. Events of Default. The occurrence of any one or more
of the following events shall constitute an "Event of Default":
(a) The Borrower shall fail to pay any principal of the
Loans when due;
(b) The Borrower shall fail to pay any interest on the
Loans, any fees or any other Obligations when due, and such
failure shall continue unremedied for one (1) Business Day;
(c) The Borrower shall fail to observe, perform or comply
with any term, condition or covenant contained in Sections 2.12,
5.4(a), 5.7(i), 5.10(ii), 5.11, 6.1 through 6.5, inclusive, 7.1
through 7.7, inclusive, or 7.11;
(d) The Borrower shall fail to observe, perform or comply
with any term, condition or covenant contained in this Agreement
other than those enumerated in subsections (a), (b) and (c)
above, and such failure shall continue unremedied for a period of
(i) three (3) Business Days after the Borrower acquires knowledge
thereof, in the case of any of the covenants set forth in Sections 5.1,
<PAGE>
5.2 and 5.3, (ii) five (5) Business Days after the Borrower
acquires knowledge thereof, in the case of any of the covenants
set forth in Sections 7.8, 7.9, 7.10, 7.12, 7.13 and 7.14, and
(iii) thirty (30) days after the Borrower acquires knowledge
thereof, in all other instances;
(e) The Borrower or any of its Subsidiaries shall fail to
observe, perform or comply with any term, condition or covenant
contained in any of the Loan Documents other than this Agreement,
and such failure shall continue unremedied for any grace period
specifically applicable thereto or, if no such grace period is
applicable, for a period of thirty (30) days after the Borrower
acquires knowledge thereof;
(f) Any representation or warranty made in writing by or on
behalf of any the Borrower or any of its Subsidiaries in this
Agreement, any of the other Loan Documents or in any certificate,
instrument or document delivered in connection herewith or
therewith, or in connection with the transactions contemplated
hereby or thereby, shall prove to have been false or incorrect in
any material respect at the time as of which such representation
or warranty was made;
(g) The Borrower or any of its Subsidiaries shall fail to
pay when due, whether by scheduled maturity, acceleration or
otherwise (taking into account any applicable grace period), any
principal of, interest on or other amount payable in respect of
any Indebtedness (other than the Indebtedness incurred pursuant
to this Agreement) having an aggregate principal amount of at
least $1,000,000; any other default or event of default shall
occur under the terms of any agreement or instrument pursuant to
which the Borrower or any of its Subsidiaries has incurred any
such Indebtedness, the effect of which default or event of
default is to accelerate, or permit acceleration of (after any
applicable grace period, notice or lapse of time), the maturity
of at least $1,000,000 in principal amount of such Indebtedness;
or any such Indebtedness of the Borrower or any of its
Subsidiaries shall be declared to be due and payable or required
to be prepaid or redeemed (other than pursuant to a regular
schedule therefor), purchased or defeased, or an offer to prepay,
redeem, purchase or defease shall be required to be made, in each
case prior to the stated maturity thereof;
(h) The Borrower or any of its Significant Subsidiaries
shall (i) file a voluntary petition or commence a voluntary case
seeking liquidation, reorganization, dissolution, arrangement,
readjustment of debts or any other relief under the Bankruptcy
Code or under any other applicable bankruptcy, insolvency or
similar law now or hereafter in effect, (ii) consent to the
appointment of or taking possession by a custodian, trustee,
receiver or similar official for or of all or a substantial part
of its properties, (iii) fail generally to pay its debts as they
become due or admit in writing its inability to pay its debts
generally as they become due, (iv) make a general assignment for
the benefit of creditors or (v) take any corporate action to
authorize or approve any of the actions described above;
(i) Any involuntary petition or case shall be filed or
commenced against the Borrower or any of its Significant
Subsidiaries seeking liquidation, reorganization, dissolution,
arrangement, readjustment of debts, the appointment of a
custodian, trustee, receiver or similar official for it or all or
a substantial part of its properties or any other relief under
the Bankruptcy Code or under any other applicable bankruptcy,
insolvency or similar law now or hereafter in effect, which
petition or case is not dismissed, bonded or discharged within
sixty (60) days of the date of filing; or an order for relief
(including, without limitation, the appointment of a custodian,
trustee, receiver or similar official) shall be entered in any
such proceeding, which order is not immediately stayed or made
subject to other similar relief;
<PAGE>
(j) Any Insurance Regulatory Authority or other
Governmental Authority having jurisdiction shall issue any order
of conservation, supervision, rehabilitation or liquidation or
any other order of similar effect in respect of any Insurance
Subsidiary that is a Significant Subsidiary;
(k) The Borrower or any of its Significant Subsidiaries
shall cease in any respect to conduct business as now conducted
or be enjoined, restrained or in any way prevented by order of
court or any other Governmental Authority from conducting all or
any part of its business affairs, and the same would be
reasonably likely to have a Material Adverse Effect;
(l) Any one or more judgments, writs or warrants of
attachment, executions or similar processes involving an
aggregate amount (not reimbursed or reimbursable by an insurer
that has acknowledged its liability in writing) in excess of
$1,000,000 shall be entered or filed against the Borrower or any
of its Subsidiaries or any of their respective properties, and
all such judgments and processes shall not be dismissed, vacated,
stayed, discharged or bonded for a period of thirty (30) days or
in any event later than five (5) days prior to the date of any
proposed sale thereunder, and, if bonded, such bond (or a
replacement bond) shall not continue in effect at all times until
such judgment is dismissed or discharged;
(m) Any Lien, levy or assessment, or notice thereof, shall
be filed of record with respect to all or any portion of the
assets of the Borrower or any of its Subsidiaries by the United
States, or any department, agency or instrumentality thereof, or
by any other Governmental Authority, including, without
limitation, the PBGC; such Lien, levy or assessment, taken
together with all other Liens, levies or assessments then of
record (other than Permitted Liens) with respect to the assets of
the Borrower and its Subsidiaries, taken as a whole, exceeds
$1,000,000; and such Lien, levy or assessment shall be executed
upon or shall not be paid, dismissed, vacated, stayed, released,
bonded or discharged within thirty (30) days after the same
becomes a Lien or, in the case of a Lien involving ad valorem
taxes, prior to the last day when payment may be made without
penalty;
(n) Any of the following shall occur with respect to any
Pension Plan maintained by the Borrower or any of its ERISA
Affiliates with Unfunded Pension Liabilities in excess of
$1,000,000 (as calculated on a termination basis in accordance
with the regulations issued by the PBGC): (i) a Reportable Event
(which is not waived by the PBGC) with respect to any such
Pension Plan that presents the risk of a material liability of
the Borrower or any ERISA Affiliate; (ii) the termination of any
such Pension Plan in a "distress termination" under the
provisions of section 4041 of ERISA; (iii) the appointment of a
trustee by an appropriate United States District Court to
administer any such Pension Plan; (iv) the institution of any
proceedings by the PBGC to terminate any such Pension Plan or to
appoint a trustee to administer any such Pension Plan; or (v) the
failure of the Borrower or such ERISA Affiliate to notify the
Agent promptly upon its receipt of any notice of the institution
of any proceeding or any other actions that may result in the
termination of any such Pension Plan;
(o) Any one or more licenses, permits or authorizations now
or hereafter held by the Borrower or any of its Subsidiaries
shall be terminated, suspended or revoked or shall not be
renewed, which terminations, suspensions, revocations or failures
to renew would, individually or in the aggregate, have a Material
Adverse Effect;
(p) The occurrence of any one or more changes in any
applicable Insurance Codes governing the dividend practices of
any of the Insurance Subsidiaries, which changes would,
individually or in the aggregate, have a Material Adverse Effect;
<PAGE>
(q) The occurrence of any one or more changes in the status
of any of the Reinsurance Agreements of any of the Insurance
Subsidiaries, which changes would, individually or in the
aggregate, have a Material Adverse Effect; or
(r) The occurrence of a Change of Control.
8.2. Remedies: Termination of Commitments, Acceleration,
etc. Upon and at any time after the occurrence and during the
continuance of any Event of Default, the Agent shall at the
direction, or may with the consent, of the Required Lenders, take
any or all of the following actions at the same or different
times:
(a) Declare the Commitment of each Lender to be terminated,
whereupon the same shall terminate (provided that, upon the
occurrence of an Event of Default pursuant to Sections 8.1(h),
(i) or (j), all of the Commitments shall automatically be
terminated);
(b) Declare all or any part of the outstanding principal
amount of the Loans, all unpaid interest accrued thereon, and all
other amounts payable under this Agreement, the Notes and the
other Loan Documents to be immediately due and payable, whereupon
such outstanding principal amounts, accrued interest and other
such amounts shall become immediately due and payable without
presentment, demand, protest, notice of intent to accelerate or
other notice or legal process of any kind, all of which are
hereby knowingly and expressly waived by the Borrower (provided
that, upon the occurrence of an Event of Default pursuant to
Sections 8.1(h), (i) or (j), all of such outstanding principal
amounts, accrued interest and other such amounts shall
automatically become immediately due and payable);
(c) Take any and all action necessary to obtain, at the
Borrower's expense and as soon as reasonably possible, a current
Actuarial Report with respect to each Insurance Subsidiary (the
Borrower hereby agreeing to cooperate in connection therewith);
and
(d) Exercise all rights and remedies available to it under
this Agreement, the other Loan Documents and applicable law.
8.3. Remedies: Set-Off. In addition to all other rights and
remedies available under the Loan Documents or applicable law or
otherwise, upon and at any time after the occurrence and during
the continuance of any Event of Default, each Lender and each of
its Affiliates may, and each is hereby authorized by the
Borrower, at any such time and from time to time, to the fullest
extent permitted by applicable law, without presentment, demand,
protest or other notice of any kind, all of which are hereby
knowingly and expressly waived by the Borrower, to set off and to
apply any and all deposits (general or special, time or demand,
provisional or final) and any other property at any time held,
and any other indebtedness at any time owing, by such Lender or
any of its Affiliates to or for the credit or the account of the
Borrower against any or all of the Obligations to such Lender now
or hereafter existing, whether or not such Obligations may be
contingent or unmatured, the Borrower hereby granting to each
Lender a continuing security interest in and Lien upon all such
deposits and other property as security for such Obligations.
Each Lender agrees promptly to notify the Borrower and the Agent
after any such set-off and application; provided, however, that
the failure to give such notice shall not affect the validity of
such set-off and application. Notwithstanding anything herein or
in any other Loan Document to the contrary, all rights of set-off
and application hereunder are specifically limited to the
deposits and assets of the Borrower, and under no circumstances
whatsoever
<PAGE>
shall any Lender or any Affiliate of any Lender be entitled to
set off or apply against the Obligations of the Borrower, or have
any Lien upon, any deposits or other property of any Subsidiary
(including, without limitation, any Insurance Subsidiary) held by
such Lender or Affiliate for the credit or account of such
Subsidiary or any other indebtedness owing by such Lender or
Affiliate to any Subsidiary.
ARTICLE IX
THE AGENT
9.1. Appointment. The Lenders hereby designate and appoint
First Union as Agent to act as specified herein and in the other
Loan Documents. Each Lender hereby irrevocably authorizes, and
each holder of any Note by the acceptance of such Note shall be
deemed irrevocably to authorize, the Agent to enter into and take
such action as agent on its behalf under the provisions of this
Agreement, the other Loan Documents and any other instruments and
agreements referred to herein or therein, and to exercise such
powers and to perform such duties hereunder and thereunder, as
are specifically delegated to or required of the Agent by the
terms hereof or thereof and such other powers as are reasonably
incidental thereto. Each Lender agrees that the rights and
remedies granted under this Agreement and the other Loan
Documents shall be exercised solely by the Agent, at the
direction or with the consent of the Required Lenders, and that
no Lender shall have any right individually to exercise any such
right or remedy except to the extent, if any, expressly provided
herein or therein. The Agent may execute any of its duties under
this Agreement or any other Loan Document by or through agents or
attorneys-in-fact and shall not be responsible for the negligence
or misconduct of any agents or attorneys-in-fact that it selects
with reasonable care.
9.2. Nature of Duties. The Agent shall not have any duties
or responsibilities other than those expressly set forth in this
Agreement and the other Loan Documents. Neither the Agent nor
any of its officers, directors, employees or agents shall be
liable for any action taken or omitted by it or them as such
hereunder or under any other Loan Document or in connection
herewith or therewith, unless caused by its or their gross
negligence or willful misconduct. The duties of the Agent shall
be mechanical and administrative in nature; the Agent shall not
have by reason of this Agreement or any other Loan Document a
fiduciary relationship in respect of any Lender or the holder of
any Note; and nothing in this Agreement or any other Loan
Document, express or implied, is intended to or shall be so
construed as to impose upon the Agent any obligations or
liabilities in respect of this Agreement or any other Loan
Document except as expressly set forth herein or therein.
9.3. Absence of Reliance on the Agent. (a) Each Lender
acknowledges that neither the Agent nor any of its officers,
directors, employees or agents has made any representation or
warranty to it and that no act by the Agent hereinafter taken,
including any review of the affairs of the Borrower and its
Subsidiaries, shall be deemed to constitute any representation or
warranty by the Agent to any Lender.
(b) Each Lender acknowledges that, independently and
without reliance upon the Agent or any other Lender and based on
such documents and information as it has deemed and may deem
appropriate, it has made and will continue to make its own
appraisal of and investigation into the business, prospects,
operations, properties, financial and other condition and
creditworthiness of the Borrower and its Subsidiaries in
connection with its decision to enter into this Agreement and extend
<PAGE>
credit to the Borrower hereunder, and will continue to make its
own credit analysis, appraisals and decisions in taking or not
taking action hereunder.
(c) Except as expressly provided in this Agreement, the
Agent shall not have any duty or responsibility, either initially
or on a continuing basis, to provide any Lender or the holder of
any Note with any credit or other information concerning the
business, prospects, operations, properties, financial or other
condition or creditworthiness of the Borrower, its Subsidiaries
or any other Person that may come into its possession, whether
before the making of the initial Loans or at any time or times
thereafter.
(d) The Agent shall not be responsible to any Lender or the
holder of any Note for any recitals, statements, information,
representations or warranties herein or in any other Loan
Document or in any document, instrument, certificate or other
writing delivered in connection herewith or therewith or for the
execution, effectiveness, genuineness, validity, enforceability,
perfection, priority or sufficiency of this Agreement or any
other Loan Document or the financial condition of the Borrower,
its Subsidiaries or any other Person, or be required to make any
inquiry concerning either the performance or observance of any of
the terms, provisions or conditions of this Agreement or any
other Loan Document, or the financial condition of the Borrower,
its Subsidiaries or any other Person or the existence or possible
existence of any Default or Event of Default.
9.4. Certain Rights of the Agent. If the Agent shall
request instructions from the Required Lenders with respect to
any act or action (including failure to act) in connection with
this Agreement or any other Loan Document, the Agent shall be
entitled to refrain from such act or taking such action unless
and until it shall have received such instructions, and the Agent
shall incur no liability to any Person by reason of so
refraining. The Agent shall not be obligated to take any action
hereunder or under any other Loan Document (i) if such action
would, in the reasonable opinion of the Agent, be contrary to
applicable law or this Agreement or any of the other Loan
Documents, (ii) if it shall not receive such advice or
concurrence of the Required Lenders as it reasonably deems
appropriate or (iii) if it shall not first be indemnified to its
satisfaction by the Lenders requesting such action against any
and all liability and expense that may be incurred by it by
reason of taking or continuing to take any such action. Without
limiting the foregoing, no Lender or holder of any Note shall
have any right of action whatsoever against the Agent as a result
of the Agent's acting or refraining from acting hereunder or
under any other Loan Document in accordance with the instructions
of the Required Lenders.
9.5. Notice of Default. The Agent shall not be deemed to
have knowledge or notice of the occurrence of any Default or
Event of Default (other than any Default or Event of Default
arising out of the failure to pay any principal, interest, fees
or other amounts payable to the Agent for the account of the
Lenders, as to which the Agent shall be deemed to have
knowledge), unless the Agent shall have received written notice
from the Borrower or a Lender referring to this Agreement,
describing such Default or Event of Default and stating that such
notice is a "notice of default." In the event that the Agent
receives such a notice, the Agent will give notice thereof to the
Lenders as soon as reasonably practicable; provided, however,
that if any such notice has also been furnished to the Lenders,
the Agent shall have no obligation to notify the Lenders with
respect thereto.
9.6. Reliance by Agent. The Agent shall be entitled to
rely, and shall be fully protected in relying, upon any note,
writing, resolution, notice, statement, consent, certificate,
telex, teletype or facsimile message, order or other documentary,
teletransmission or telephone message believed by it
<PAGE>
to be genuine and correct and to have been signed, sent or made
by the proper Person. The Agent may consult with legal counsel
(including counsel for the Borrower), independent public
accountants and other experts selected by it with respect to all
matters pertaining to this Agreement and the other Loan Documents
and its duties hereunder and thereunder and shall not be liable
for any action taken or omitted to be taken by it in good faith
in accordance with the advice of such counsel, accountants or
experts.
9.7. Indemnification. To the extent the Agent is not
reimbursed by or on behalf of the Borrower, and without limiting
the obligation of the Borrower to do so, the Lenders will
reimburse and indemnify the Agent, in proportion to their
respective percentages as used in determining the Required
Lenders as of the date of determination, from and against any and
all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses (including attorneys'
fees and expenses) or disbursements of any kind or nature
whatsoever that may at any time (including at any time following
the repayment in full of the Loans and the termination of the
Commitments) be imposed on, incurred by or asserted against the
Agent in any way relating to or arising out of this Agreement or
any other Loan Document or the transactions contemplated hereby
or thereby or any action taken or omitted by the Agent under or
in connection with any of the foregoing, and in particular will
reimburse the Agent for its out-of-pocket expenses promptly upon
demand by the Agent therefor; provided, however, that no Lender
shall be liable for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements to the extent resulting from the
Agent's gross negligence or willful misconduct.
9.8. The Agent in its Individual Capacity. With respect to
its Commitment, the Loans made by it and the Notes issued to it,
the Agent shall have the same rights and powers under the Loan
Documents as any other Lender or holder of a Note and may
exercise the same as though it were not performing the agency
duties specified herein; and the terms "Lenders," "Required
Lenders," "holders of Notes" and any similar terms shall, unless
the context clearly otherwise indicates, include the Agent in its
individual capacity. The Agent and its Affiliates may accept
deposits from, lend money to and generally engage in any kind of
banking, trust, financial advisory or other business with the
Borrower or any of its Subsidiaries or any of their respective
Affiliates as if it were not performing the agency duties
specified herein, and may accept fees and other consideration
from any of them for services in connection with this Agreement
and otherwise without having to account for the same to the
Lenders.
9.9. Holders. The Agent may deem and treat the payee of
any Note as the holder thereof for all purposes hereof unless and
until a written notice of the assignment, transfer or endorsement
thereof, as the case may be, shall have been filed with the
Agent. Any request, authority or consent of any Person that, at
the time of making such request or giving such authority or
consent, is the holder of any Note, shall be conclusive and
binding on any subsequent holder, transferee, assignee or
endorsee, as the case may be, of such Note or of any Note or
Notes issued in exchange therefor.
9.10. Successor Agent. The Agent may resign from its duties
as such at any time upon thirty (30) days' prior written notice
to the Borrower and the Lenders. Such resignation shall take
effect upon the appointment of a successor Agent as provided
hereinbelow. Upon any such notice of resignation by the Agent,
the Required Lenders will, with the prior written consent of the
Borrower, which consent shall not be unreasonably withheld,
appoint from among the Lenders a successor to the Agent (provided
that the Borrower's consent shall not be required in the event a
Default or Event of Default shall then have occurred and be
continuing). If no successor to the Agent shall have been
<PAGE>
appointed within such thirty-day period, the resigning Agent may,
after consulting with the Borrower and the Lenders, appoint its
successor from among the Lenders, which successor shall serve
until such time, if any, as the Required Lenders shall have
appointed a successor as provided hereinabove. Upon the written
acceptance of any appointment by a successor to the resigning
Agent, such successor shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the
resigning Agent, and the resigning Agent shall be discharged from
its duties and obligations hereunder and under the other Loan
Documents. After the Agent's resignation as such, the provisions
of this Article shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent.
ARTICLE X
MISCELLANEOUS
10.1. Survival. All representations, warranties, covenants
and agreements made by or on behalf of the Borrower or any of its
Subsidiaries in this Agreement and in each of the other Loan
Documents shall survive the execution and delivery hereof or
thereof and the making and repayment of the Loans. In addition,
notwithstanding anything herein or under applicable law to the
contrary, the provisions of Annex 1, Section 2.11 and the
provisions of this Agreement and the other Loan Documents
relating to indemnification or payment of fees, costs and
expenses, including, without limitation, the provisions of
Sections 2.14(a), 2.14(b), 2.15, 2.16, 9.7, 10.5 and 10.6, shall
survive the termination of the Commitments and any termination or
cancellation of this Agreement or any of the other Loan
Documents.
10.2. Governing Law; Consent to Jurisdiction. THIS
AGREEMENT HAS BEEN EXECUTED, DELIVERED AND ACCEPTED IN, AND SHALL
BE DEEMED TO HAVE BEEN MADE IN, NORTH CAROLINA AND SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NORTH CAROLINA (WITHOUT REGARD TO THE
CONFLICTS OF LAW PROVISIONS THEREOF). AS PART OF THE
CONSIDERATION FOR NEW VALUE THIS DAY RECEIVED, THE BORROWER
HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE COURT WITHIN
MECKLENBURG COUNTY, NORTH CAROLINA OR ANY FEDERAL COURT LOCATED
WITHIN THE WESTERN DISTRICT OF THE STATE OF NORTH CAROLINA FOR
ANY PROCEEDING INSTITUTED HEREUNDER OR UNDER ANY OF THE OTHER
LOAN DOCUMENTS, OR ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, OR ANY PROCEEDING
TO WHICH THE AGENT OR ANY LENDER OR THE BORROWER IS A PARTY,
INCLUDING ANY ACTIONS BASED UPON, ARISING OUT OF, OR IN
CONNECTION WITH ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENT (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENT OR
ANY LENDER OR THE BORROWER AND THAT ARISES UNDER OR IN CONNECTION
WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. THE
BORROWER IRREVOCABLY AGREES TO BE BOUND (SUBJECT TO ANY AVAILABLE
RIGHT OF APPEAL) BY ANY JUDGMENT RENDERED OR RELIEF GRANTED
THEREBY AND FURTHER WAIVES ANY OBJECTION THAT IT MAY HAVE BASED
ON LACK OF JURISDICTION OR IMPROPER VENUE OR FORUM NON CONVENIENS
TO THE CONDUCT OF ANY SUCH PROCEEDING. THE BORROWER CONSENTS THAT ALL
<PAGE>
SERVICE OF PROCESS BE MADE BY REGISTERED OR CERTIFIED MAIL
DIRECTED TO IT AT ITS ADDRESS SET FORTH HEREINBELOW, AND SERVICE
SO MADE SHALL BE DEEMED TO BE COMPLETED UPON THE EARLIER OF
ACTUAL RECEIPT THEREOF OR FIVE (5) DAYS AFTER DEPOSIT IN THE
UNITED STATES MAILS, PROPER POSTAGE PREPAID AND PROPERLY
ADDRESSED. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT TO
SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR
AFFECT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING ANY ACTION
OR PROCEEDING AGAINST THE BORROWER IN THE COURTS OF ANY OTHER
JURISDICTION.
10.3. Waiver of Jury Trial. THE BORROWER AND, BY ITS
ACCEPTANCE OF THE BENEFITS HEREOF, THE AGENT AND EACH LENDER,
HEREBY WAIVE, TO THE EXTENT PERMITTED BY APPLICABLE LAW, THEIR
RESPECTIVE RIGHTS TO TRIAL BY JURY OF ANY CLAIM OR CAUSE OF
ACTION ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY
OF THE OTHER LOAN DOCUMENTS, OR BASED UPON, ARISING OUT OF, OR IN
CONNECTION WITH ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENT (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENT OR
ANY LENDER OR THE BORROWER. The scope of this waiver is intended
to be all-encompassing of any and all disputes that may be filed
in any court and that relate to the subject matter of this
transaction, including, without limitation, contract claims, tort
claims, breach of duty claims and all other common law and
statutory claims. Each of the Borrower and, by its acceptance of
the benefits hereof, the Agent and each Lender, (i) acknowledges
that this waiver is a material inducement to enter into a
business relationship, that it has relied on this waiver in
entering into this Agreement or accepting the benefits hereof, as
the case may be, and that it will continue to rely on this waiver
in its related future dealings with the other parties hereto, and
(ii) further warrants and represents that it has reviewed this
waiver with its legal counsel and that, based upon such review,
it knowingly and voluntarily waives its jury trial rights to the
extent permitted by applicable law. THIS WAIVER IS IRREVOCABLE,
MEANING THAT IT MAY BE MODIFIED ONLY BY THE EXPRESS WRITTEN
AGREEMENT OF ALL OF THE PARTIES TO THIS AGREEMENT, AND THIS
WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, MODIFICATIONS OR
SUPPLEMENTS TO OR RESTATEMENTS OF THIS AGREEMENT OR ANY OF THE
OTHER LOAN DOCUMENTS. IN THE EVENT OF LITIGATION, THIS AGREEMENT
MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. IN
THE EVENT THAT THE WAIVER OF JURY TRIAL HEREIN SHALL BE
DETERMINED TO BE INVALID OR UNENFORCEABLE AS A MATTER OF LAW WITH
RESPECT TO ANY PARTY, THE PROVISIONS OF ANNEX 1 SHALL GOVERN AS
TO THE MATTERS SET FORTH THEREIN WITH RESPECT TO SUCH PARTY.
10.4. Notices. All notices and other communications
provided for hereunder shall be in writing (including
telegraphic, telex, facsimile transmission or cable
communication) and mailed, telegraphed, telexed, telecopied,
cabled or delivered to the party to be notified at the following
addresses:
<PAGE>
If to the Borrower: Guaranty National Corporation
9800 South Meridian Boulevard
Englewood, Colorado 80112
Attention: Michael L. Pautler
Telephone: (303) 754-8701
Telecopy: (303) 792-2360
With copies to: Orion Capital Corporation
600 Fifth Avenue
New York, New York 10020
Attention: Mike Maloney
Telephone: (212) 332-8080
Telecopy: (212) 247-4824
Ireland, Stapleton, Pryor & Pascoe, P.C.
1675 Broadway, Suite 2600
Denver, Colorado 80202
Attention: Hardin Holmes
Telephone: (303) 623-2700
Telecopy: (303) 623-2062
If to the Agent: First Union National Bank of
North Carolina
One First Union Center, TW-10
301 South College Street
Charlotte, North Carolina 28288-0608
Attention: Syndication Agency Services
Telephone: (704) 383-0281
Telecopy: (704) 383-0288
If to any Lender: At the address
set forth on its signature page
hereto (or, if to any Lender not a
party hereto as of the date hereof,
at the address set forth in its
Assignment and Acceptance)
or to such other address as any party may designate for itself by
like notice to all other parties hereto. All such notices and
communications shall be deemed to have been given (i) if mailed
as provided above by any method other than overnight delivery
service, on the third Business Day after deposit in the mails,
(ii) if mailed by overnight delivery service, telegraphed,
telexed, telecopied or cabled, when delivered for overnight
delivery, delivered to the telegraph company, confirmed by telex
answerback, transmitted by telecopier or delivered to the cable
company, respectively, or (iii) if delivered by hand, upon
delivery; provided that notices and communications to the Agent
shall not be effective until received by it.
10.5. Fees and Expenses. The Borrower hereby agrees
(i) whether or not the transactions contemplated by this
Agreement shall be consummated, to pay upon demand all reasonable
out-of-pocket costs and expenses of the Agent (including, without
limitation, the reasonable fees and
<PAGE>
expenses of counsel to the Agent, including any local counsel and
the allocated costs of in-house counsel) in connection with the
preparation, negotiation, execution, delivery and syndication of
this Agreement and the other Loan Documents, any amendment,
modification or waiver hereof or thereof or consent with respect
hereto or thereto, and the administration of the Loans, (ii) to
pay upon demand all reasonable out-of-pocket costs and expenses
of the Agent and each Lender (including, without limitation,
reasonable attorneys' fees and expenses, including the allocated
costs of in-house counsel) in connection with (y) any refinancing
or restructuring of the credit arrangement provided under this
Agreement, whether in the nature of a "work-out," in any
insolvency or bankruptcy proceeding or otherwise, and (z) the
enforcement, attempted enforcement or preservation of any rights
or remedies under this Agreement or any of the other Loan
Documents, whether in any action, suit or proceeding (including
any bankruptcy or insolvency proceeding) or otherwise, and
(iii) to pay and hold the Agent and each Lender harmless from and
against all liability for any intangibles, documentary, stamp or
other similar taxes, fees and excises, if any, including any
interest and penalties, and any finder's or brokerage fees,
commissions and expenses (other than any fees, commissions or
expenses of finders or brokers engaged by the Agent or any
Lender), that may be payable in connection with the transactions
contemplated by this Agreement and the other Loan Documents.
10.6. Indemnification. The Borrower hereby agrees, whether
or not the transactions contemplated by this Agreement shall be
consummated and in addition to the costs and expenses payable
under Section 10.5, from and at all times after the date of this
Agreement to indemnify and hold the Agent and each Lender and
each of their respective directors, officers, employees, agents
and Affiliates (each, an "Indemnified Person") harmless against
any and all claims, losses, damages, obligations, liabilities,
penalties, costs and expenses (including, without limitation,
reasonable attorneys' fees and expenses) of any kind or nature
whatsoever, whether direct, indirect or consequential
(collectively, "Indemnified Costs"), that may at any time be
imposed on, incurred by or asserted against any such Indemnified
Person as a result of, arising from or in any way relating to the
preparation, execution, performance or enforcement of this
Agreement or any of the other Loan Documents, any of the
transactions contemplated herein or therein or any transaction
financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of any Loans, including with
respect to any action, suit or proceeding (including any inquiry
or investigation) by any Person, whether threatened or initiated,
related to any of the foregoing, and including, without
limitation, in connection with the actual or alleged generation,
presence or release of any Hazardous Substances on or from, or
the transportation of Hazardous Substances to or from, any real
property owned or leased by the Borrower or any of its
Subsidiaries, and all other Environmental Claims, in any case
whether or not such Indemnified Person is a party to any such
action, proceeding or suit or a subject of any such inquiry or
investigation; provided, however, that no Indemnified Person
shall have the right to be indemnified hereunder for any
Indemnified Costs to the extent resulting from the gross
negligence or willful misconduct of such Indemnified Person. All
of the foregoing Indemnified Costs of any Indemnified Person
shall be paid or reimbursed by the Borrower, as and when incurred
and upon demand, and shall be additional Obligations hereunder.
10.7. Amendments, Waivers, etc. No amendment, modification,
waiver or (other than in accordance with its express terms)
discharge or termination of, or consent to any departure by the
Borrower from, any provision of this Agreement or any other Loan
Document, shall be effective unless in a writing signed by the
Required Lenders (or by the Agent at the request of the Required
Lenders), and then the same shall be effective only in the
specific instance and for the specific
<PAGE>
purpose for which given; provided, however, that no such
amendment, modification, waiver, discharge, termination or
consent shall:
(a) unless agreed to by all of the Lenders, (i) reduce the
principal amount of, or rate of interest on, any Loan, or reduce
any fees or other Obligations (other than fees payable to the
Agent for its own account) or any obligations of any other Person
at any time primarily or contingently liable with respect to the
Obligations, (ii) extend any date fixed for any payment of
principal (including any scheduled date for mandatory reduction
or termination of the Commitments (including the Facility Expiry
Date)), interest (other than additional interest payable under
Section 2.6(b) during the continuance of an Event of Default),
fees (other than fees payable to the Agent for its own account)
or any other Obligations, (iii) increase the Commitment of any
Lender (it being understood that a waiver of any Event of Default
shall not constitute such an increase), (iv) change the
percentage of the Commitments or of the aggregate unpaid
principal amount of the Loans, or the number or percentage of
Lenders, that shall be required for the Lenders or any of them to
take or approve, or direct the Agent to take, any action
hereunder (including as set forth in the definition of "Required
Lenders"), (v) amend or modify any provision of this Section 10.7
or (vi) consent to the sale, assignment or transfer by the
Borrower of any of its rights and obligations under this
Agreement or any of the other Loan Documents; and
(b) unless agreed to by the Agent in addition to the
Lenders required as provided hereinabove to take such action,
affect the rights or obligations of the Agent hereunder or under
any of the other Loan Documents;
and provided further that the Fee Letter may be amended or
modified, and any rights thereunder waived, in a writing signed
by the parties thereto.
10.8. Assignments, Participations. (a) With the prior
written consent of the Agent and the Borrower (to be evidenced by
their counterexecution of the relevant Assignment and
Acceptance), which consent shall not be unreasonably withheld
(provided that such consent shall not be required in the case of
any assignment by a Lender to any of its Affiliates), each Lender
may assign to one or more other Persons (each, an "Assignee") all
or a portion of its rights and obligations under this Agreement
(including, without limitation, all or a portion of its
Commitment, the outstanding Loans made by it and the Note or
Notes held by it); provided, however, that (i) except in the case
of an assignment to an Affiliate of such Lender, the amount of
the Commitment of such assigning Lender being assigned pursuant
to each such assignment (determined as of the date of the
Assignment and Acceptance with respect to each such assignment)
shall in no event be less than the lesser of (y) the entire
Commitment of such Lender immediately prior to such assignment or
(z) $5,000,000, (ii) each such assignment shall be to an Eligible
Assignee, and (iii) the parties to each such assignment will
execute and deliver to the Agent, for its acceptance and
recording in the Register, an Assignment and Acceptance, together
with any Note or Notes subject to such assignment, and will pay a
nonrefundable processing fee of $3,000 to the Agent for its own
account (provided that such fee shall not be payable in the case
of an assignment by a Lender to any of its Affiliates). Upon
such execution, delivery, acceptance and recording of the
Assignment and Acceptance, from and after the effective date
specified therein (a) the Assignee thereunder shall be deemed a
party hereto and, to the extent that rights and obligations
hereunder have been assigned to it pursuant to such Assignment
and Acceptance, shall have the rights and obligations of the
assigning Lender hereunder with respect thereto and (b) the
assigning Lender shall, to the extent that rights and obligations
hereunder have been assigned by it pursuant to such Assignment
and Acceptance, relinquish its rights (other than
<PAGE>
rights under the provisions of Annex 1 and the provisions of this
Agreement and the other Loan Documents relating to
indemnification or payment of fees, costs and expenses, to the
extent such rights relate to the time prior to the effective date
of such Assignment and Acceptance) and be released from its
obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all or the remaining portion
of such assigning Lender's rights and obligations under this
Agreement, such Lender shall cease to be a party hereto). The
terms and provisions of each Assignment and Acceptance shall,
upon the effectiveness thereof, be incorporated into and made a
part of this Agreement, and the covenants, agreements and
obligations of each Lender set forth therein shall be deemed made
to and for the benefit of the Agent and each other Lender party
to this Agreement as if set forth at length herein.
(b) The Agent will maintain a copy of each Assignment and
Acceptance delivered to and accepted by it and a register for the
recordation of the names and addresses of the Lenders and the
Commitment of, and principal amount of the Loans owing to, each
Lender from time to time (the "Register"). The entries in the
Register shall be conclusive and binding for all purposes, absent
manifest error, and the Borrower, the Agent and the Lenders may
treat each Person whose name is recorded in the Register as a
Lender hereunder for all purposes of this Agreement. The
Register shall be available for inspection by the Borrower or any
Lender at any reasonable time and from time to time upon
reasonable prior notice.
(c) Upon its receipt of an Assignment and Acceptance
executed by an assigning Lender and an Assignee and
counterexecuted by the Agent and the Borrower, together with any
Note or Notes subject to such assignment and (if required) the
processing and recording fee referred to in Section 10.8(a), the
Agent will, if such Assignment and Acceptance has been duly
completed and is in substantially the form of Exhibit D,
(i) accept such Assignment and Acceptance, (ii) record the
information contained therein in the Register and (iii) give
notice thereof to the Borrower. Within five (5) Business Days
after its receipt of such notice, the Borrower, at its own
expense, will execute and deliver to the Agent in exchange for
the surrendered Note or Notes a new Note or Notes to the order of
such Assignee in an aggregate amount equal to the Commitment
assumed by it pursuant to such Assignment and Acceptance and, to
the extent the assigning Lender has retained its Commitment
hereunder, a new Note or Notes to the order of the assigning
Lender in an aggregate amount equal to the Commitment retained by
it hereunder. Such new Note or Notes shall be in an aggregate
principal amount equal to the aggregate principal amount of such
surrendered Note or Notes, shall be dated the effective date of
such Assignment and Acceptance and shall otherwise be in
substantially the form of Exhibit A.
(d) Each Lender may sell to one or more other Persons
(each, a "Participant") participations in any portion comprising
less than all of its rights and obligations under this Agreement
(including, without limitation, a portion of its Commitment, the
outstanding Loans made by it and the Note or Notes held by it);
provided, however, that (i) such Lender's obligations under this
Agreement shall remain unchanged and such Lender shall remain
solely responsible for the performance of such obligations,
(ii) the Borrower, the Agent and the other Lenders shall continue
to deal solely and directly with such Lender in connection with
such Lender's rights and obligations under this Agreement,
(iii) no Lender shall sell any participation that, when taken
together with all other participations, if any, sold by such
Lender, covers all of such Lender's rights and obligations under
this Agreement (including, without limitation, all of its
Commitment, the outstanding Loans made by it and the Note or
Notes held by it), (iv) no Lender shall permit any Participant to
have any voting rights or any right to control the vote of such
Lender with respect to any amendment,
<PAGE>
modification, waiver, consent or other action hereunder or under
any other Loan Document except as to actions of the type
described in clauses (i) and (ii) of Section 10.7(a) and (v) no
Participant shall have any rights under this Agreement or any of
the other Loan Documents, each Participant's rights against the
granting Lender in respect of any participation to be those set
forth in the participation agreement, and all amounts payable by
the Borrower hereunder shall be determined as if such Lender had
not granted such participation. Notwithstanding the foregoing,
each Participant shall have the rights of a Lender for purposes
of Sections 2.14(a), 2.14(b), 2.15, 2.16 and 8.3, and shall be
entitled to the benefits thereto, to the extent that the Lender
granting such participation would be entitled to such benefits if
the participation had not been made, provided that, in the case
of Section 2.15, such Participant shall have complied with the
requirements of such Section as if it were a Lender subject
thereto, and provided further that no Participant shall be
entitled to receive any greater amount pursuant to any of such
Sections than the Lender granting such participation would have
been entitled to receive in respect of the amount of the
participation made by such Lender to such Participant had such
participation not been made.
(e) The Agent and each Lender may, in connection with any
assignment or participation or proposed assignment or
participation pursuant to this Section, disclose to the Assignee
or Participant or proposed Assignee or Participant any
information relating to the Borrower and its Subsidiaries
furnished to it by or on behalf of any other party hereto,
provided that such Assignee or Participant or proposed Assignee
or Participant agrees in writing to the Agent or such Lender, as
the case may be, to keep such information confidential to the
same extent required of the Lenders under Section 10.15.
(f) Nothing in this Agreement shall be construed to
prohibit any Lender from pledging or assigning all or any portion
of its rights and interest hereunder or under any Note to any
Federal Reserve Bank as security for borrowings therefrom.
10.9. No Waiver. The rights and remedies of the Agent and
the Lenders expressly set forth in this Agreement and the other
Loan Documents are cumulative and in addition to, and not
exclusive of, all other rights and remedies available at law, in
equity or otherwise. No failure or delay on the part of the
Agent or any Lender in exercising any right, power or privilege
shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power or privilege preclude
other or further exercise thereof or the exercise of any other
right, power or privilege or be construed to be a waiver of any
Default or Event of Default. No course of dealing between any of
the Borrower and the Agent or the Lenders or their agents or
employees shall be effective to amend, modify or discharge any
provision of this Agreement or any other Loan Document or to
constitute a waiver of any Default or Event of Default. No
notice to or demand upon the Borrower in any case shall entitle
the Borrower to any other or further notice or demand in similar
or other circumstances or constitute a waiver of the right of the
Agent or any Lender to exercise any right or remedy or take any
other or further action in any circumstances without notice or
demand.
10.10. Successors and Assigns. This Agreement shall be
binding upon, inure to the benefit of and be enforceable by the
respective successors and assigns of the parties hereto, and all
references herein to any party shall be deemed to include its
successors and assigns; provided, however, that (i) the Borrower
shall not sell, assign or transfer any of its rights, interests,
duties or obligations under this Agreement and (ii) any Assignees
and Participants shall have such rights and obligations with
respect to this Agreement and the other Loan Documents as are
provided for under and pursuant to the provisions of
Section 10.8.
<PAGE>
10.11. Severability. To the extent any provision of this
Agreement is prohibited by or invalid under the applicable law of
any jurisdiction, such provision shall be ineffective only to the
extent of such prohibition or invalidity and only in such
jurisdiction, without prohibiting or invalidating such provision
in any other jurisdiction or the remaining provisions of this
Agreement in any jurisdiction.
10.12. Construction. The headings of the various sections
and subsections of this Agreement have been inserted for
convenience only and shall not in any way affect the meaning or
construction of any of the provisions hereof. The provisions of
Annex 1, the exhibits and schedules hereto and the other Loan
Documents are incorporated in this Agreement by this reference.
Except as otherwise provided herein and in the other Loan
Documents, in the event of any inconsistency or conflict between
any provision of this Agreement and any provision of any of the
other Loan Documents, the provision of this Agreement shall
control.
10.13. Entire Agreement. THIS AGREEMENT AND THE OTHER
DOCUMENTS AND INSTRUMENTS EXECUTED AND DELIVERED IN CONNECTION
HEREWITH (A) EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING
BETWEEN THE PARTIES HERETO AND THERETO RELATING TO THE SUBJECT
MATTER HEREOF AND THEREOF, (B) SUPERSEDE ANY AND ALL PRIOR
AGREEMENTS AND UNDERSTANDINGS OF SUCH PERSONS, ORAL OR WRITTEN,
RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF, INCLUDING,
WITHOUT LIMITATION, THE COMMITMENT LETTER FROM FIRST UNION TO THE
BORROWER DATED OCTOBER 15, 1996, BUT SPECIFICALLY EXCLUDING THE
FEE LETTER, AND (C) MAY NOT BE AMENDED, SUPPLEMENTED,
CONTRADICTED OR OTHERWISE MODIFIED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
10.14. Counterparts; Effectiveness. This Agreement may be
executed in any number of counterparts and by different parties
hereto on separate counterparts, each of which when so executed
and delivered shall be an original, but all of which shall
together constitute one and the same instrument. This Agreement
shall become effective upon the execution and delivery of a
counterpart hereof by each of the parties hereto.
10.15. Confidentiality. Each Lender agrees to take normal
and reasonable precautions and exercise due care to maintain the
confidentiality of all nonpublic information provided to it by or
on behalf of the Borrower or any Subsidiary in connection with
this Agreement or any other Loan Document, and agrees not to use
any such information for any purpose or in any manner other than
pursuant to the terms contemplated by this Agreement; provided,
however, that any Lender may disclose such information (i) to its
directors, employees and agents and to its auditors, counsel and
other professional advisors (provided that such Persons have been
made aware of the nonpublic and confidential nature of such
information and of the restrictions herein against disclosure
thereof), (ii) at the demand or request of any bank regulatory
authority, court or other Governmental Authority having or
asserting jurisdiction over such Lender, as may be required
pursuant to subpoena or other legal process, or otherwise in
order to comply with any applicable Requirement of Law (provided
that notice of any such subpoena or other legal process shall be
furnished to the Borrower unless such notice is legally
prohibited or such Governmental Authority requests that such
notice not be furnished to the Borrower), (iii) in connection
with any proceeding to enforce its rights hereunder or other
litigation or proceeding related hereto, (iv) to the Agent or any
other Lender, (v) to the extent the
<PAGE>
same has become publicly available other than as a result of a
breach of this Agreement and (vi) pursuant to and in accordance
with the provisions of Section 10.8(e).
10.16. Effect of Amendment and Restatement. This Agreement
amends and restates the Original Credit Agreement in its
entirety; provided, however, that the provisions of the Original
Credit Agreement and the other Loan Documents relating to
indemnification or payment of fees, costs and expenses for the
benefit of the Agent and the Lenders (in each case, as defined in
the Original Credit Agreement), including, without limitation,
the provisions of Sections 2.14(a), 2.14(b), 2.15, 2.16, 9.7,
10.5 and 10.6 of the Original Credit Agreement, shall survive the
effectiveness of this Agreement and the amendment and restatement
of the Original Credit Agreement effected hereby. Upon the
effectiveness of this Agreement, (i) all Existing Loans shall be
deemed to be Loans hereunder, shall be evidenced by the Notes and
shall be entitled to all of the benefits of this Agreement and
the other Loan Documents, and (ii) all other Loan Documents,
instruments, certificates, financial statements and other
documents executed or delivered by or on behalf of the Borrower
or any of its Subsidiaries pursuant to the Original Credit
Agreement at any time prior to the effectiveness of this
Agreement shall be deemed to have been executed or delivered
pursuant to this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers as of
the date first above written.
GUARANTY NATIONAL CORPORATION
By: /s/ Michael L. Pautler
Title: Senior Vice President
<PAGE>
Commitment: FIRST UNION NATIONAL BANK OF
$26,000,000 NORTH CAROLINA, as Agent and
as Lender
By: /s/ Gail M. Golightly
Title: Senior Vice President
Instructions for wire transfers to the
Agent:
First Union National Bank of
North Carolina
ABA Routing No. 053000219
Charlotte, North Carolina
General Ledger No. 465906, RC No. 5007
Attention: Syndication Agency Services
Re: Guaranty National Corporation
Address for notices (as a Lender):
First Union NationalBank of
North Carolina
Financial Institutions Group
One First Union Center, 5th Floor
301 South College Street
Charlotte, North Carolina 28288-0735
Attention: Robert C. Mayer, Jr.
Telephone: (704) 374-6628
Telecopy: (704) 383-7611
<PAGE>
Commitment: BANK OF TOKYO-MITSUBISHI TRUST COMPANY
$10,000,000
By: /s/ John P. Judge
Title: Vice President
Address:
1251 Avenue of the Americas
12th Floor, National Banking Department
New York, New York 10116-3138
Attention: Dane E. Holmes
Telephone: (212) 782-4275
Telecopy: (212) 782-4935
<PAGE>
Commitment: THE FIRST NATIONAL BANK OF CHICAGO
$20,000,000
By: /s/ Cynthia Priest
Title: Vice President
Address:
One First National Plaza
Mail Suite 0085
Chicago, Illinois 60670-0085
Attention: Cindy Priest
Telephone: (312) 732-9565
Telecopy: (312) 732-4033
<PAGE>
Commitment: FLEET NATIONAL BANK
$24,000,000
By: /s/ Mark A. Wasilefsky
Title: Assistant Vice President
Address:
777 Main Street, MSN 250
Hartford, Connecticut 06115
Attention: Mark Wasilefsky
Telephone: (860) 986-7934
Telecopy: (860) 986-1264
<PAGE>
Commitment: MELLON BANK, N.A.
$20,000,000
By: /s/ Susan M. Whitewood
Title: Assistant Vice President
Address:
One Mellon Bank Center, Room 370
Pittsburgh, Pennsylvania 15258
Attention: Susan Whitewood
Telephone: (412) 234-7112
Telecopy: (412) 234-8087
<PAGE>
Commitment: NORWEST BANK COLORADO, NATIONAL
$10,000,000 ASSOCIATION
By: /s/ Georgianne Brummett
Title: Vice President
Address:
Norwest Bank Colorado, N.A.
1740 Broadway
Denver, Colorado 80274-8673
Attention: Georgianne S. Brummett
Telephone: (303) 863-5069
Telecopy: (303) 863-6670
<PAGE>
Annex 1 to Amended and Restated
Credit Agreement
First Union National Bank
of North Carolina, as Agent
Guaranty National Corporation
December 16, 1996 / $110,000,000
______________________________
Provisions for Alternative Dispute Resolution
1. Arbitration. Except as otherwise specifically set
forth in the Loan Documents or agreed to in writing by the
Borrower, the Agent and the Lenders, and except as expressly
provided otherwise in Section 3 below, in the event the
Borrower's waiver of trial by jury contained in Section 10.3 of
the Credit Agreement is determined to be invalid or unenforceable
as a matter of law, then any action, dispute, claim or
controversy between the parties, whether sounding in contract,
tort, or otherwise, arising under the Credit Agreement or any of
the other Loan Documents, arising out of or in connection with
any of the Loan Documents, or any proceeding to which the Agent
or any Lender is a party, including any actions based upon,
arising out of, or in connection with any course of conduct,
course of dealing, statement (whether oral or written), or
actions of the Agent, any Lender or the Borrower ("Dispute" or
"Disputes"), shall be resolved by arbitration as set forth in
this Annex. Such Disputes shall be resolved by binding
arbitration in accordance with Title 9 of the United States Code,
as amended, and the Commercial Arbitration Rules of the American
Arbitration Association ("AAA"), as in effect from time to time
(the "Rules"). In the event of any inconsistency between the
Rules and the provisions of this Annex, the provisions of this
Annex shall supersede the Rules. All statutes of limitations
that would otherwise be applicable shall apply to any arbitration
proceeding hereunder. In any arbitration proceeding subject to
the provisions of this Annex, the arbitrator is specifically
empowered to decide (by documents only, or with a hearing, at the
arbitrator's sole discretion) pre-hearing motions that are
substantially similar to pre-hearing motions to dismiss and
motions for summary adjudication. Judgment upon the award
rendered may be entered in any court having jurisdiction.
Whenever an arbitration is required, the parties shall select an
arbitrator in the manner provided in Section 4 below.
2. Judicial Reference. If a Dispute is not submitted to
arbitration as provided in Section 1 above for any reason, but
becomes the subject of a judicial action, at any point in the
proceeding, any party may elect to have any specific questions of
fact or law, or all questions of fact or law, determined by a
reference in accordance with Rule 53 of the North Carolina Rules
of Civil Procedure (or the equivalent rule of another State, as
applicable). A party shall not waive the right to request such
judicial reference for any remaining questions of fact or law to
be decided by virtue of the party's initiating or participating
in judicial or other proceedings or by failure to request such a
reference up to any point in a judicial proceeding. Whenever
such an election is made, the parties shall designate to the
court a single referee selected in the manner provided in Section
4 below. Judgment upon the award rendered shall be entered in the
court in which such proceeding was commenced.
3. Remedies. No provision of, nor the exercise of any
rights under, Sections 1 or 2 above shall limit or otherwise
affect the right of the Agent or any Lender (1) to exercise any
self help remedies available under the Loan Documents and
applicable law, including, without limitation, setoff, or to
exercise any other judicial or nonjudicial rights and remedies
available to it under any of the Loan Documents and applicable
law, or (2) to obtain provisional or ancillary remedies,
including, without limitation, injunctive relief and the
appointment of a receiver, from a court having jurisdiction
before, during or after the pendency of any arbitration or
referral. The Agent or any Lender's pursuit of provisional or
ancillary remedies, or its exercise of self help and other judicial or
<PAGE>
nonjudicial remedies, shall not constitute a waiver of its right
to submit the Dispute to arbitration or judicial reference.
4. Selection of Arbitrator or Referee. Whenever an
arbitration is required under Section 1 above or a referral is
required under Section 2 above, the arbitrator or referee shall
be selected in accordance with this Section 4. Except as
otherwise provided, the arbitrator or referee shall be an
attorney or retired judge selected in accordance with the Rules
of the AAA. The parties agree to request that the arbitrator
deliver a written opinion setting forth in reasonable detail the
basis for his conclusions relating to the Dispute. Qualified
retired judges shall be selected through panels maintained by
AAA, or any North Carolina Superior Court (or a court, of an
equivalent or higher level, of another State) or private
organization providing such services. A single arbitrator who is
an attorney but is not a retired judge shall have the power to
render a maximum aggregate award against any party of $100,000.
Where any party makes timely written request prior to appointment
of the arbitrator, or where the claim of any party exceeds
$100,000, the arbitrator shall be a retired judge formerly
sitting on the bench in a North Carolina Superior Court or any
higher State court (or a court, of an equivalent level, of
another State), or a retired Federal court judge formerly sitting
on the bench in a United States Court of Appeals or any Federal
District Court. A single arbitrator who is a retired judge shall
have the power to render a maximum aggregate award against any
party of $1,000,000. Where any party seeks an award in excess of
$1,000,000, the Dispute shall be decided by a majority vote of
three arbitrators, at least one of whom shall meet the
requirements for retired judges set forth herein. For purposes
of this Section 4, the computation of the maximum award an
arbitrator may make shall include any amounts awarded for
arbitration fees, attorneys fees and all other related costs
provided by Section 5 below.
5. Miscellaneous. The Credit Agreement shall be
interpreted, and the resolution of all Disputes and the rights
and liabilities of the parties shall be determined, in accordance
with the internal laws (as opposed to conflicts of law
provisions) of the State of North Carolina; provided that any
arbitration questions arising under this Annex on dispute
resolution shall be governed in accordance with Title 9 of the
United States Code, as amended. This Annex is incorporated into
and made a part of the Credit Agreement by this reference,
constitutes the entire agreement of the parties with respect to
its subject matter and supersedes all prior discussions,
arrangements, negotiations and other communications on dispute
resolution. To the extent any provision of this Annex is
prohibited by or invalid under applicable law, such provision
shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Annex. Capitalized terms
used herein without definition shall have the meanings assigned
to them in the Credit Agreement. The provisions of this Annex
shall survive any termination or expiration of the Credit
Agreement until payment in full of the Obligations and
termination of the Commitments, unless the parties otherwise
expressly agree in writing. The arbitrator shall have the power
to award to the prevailing party recovery of all costs, expenses
and fees incurred by it (including reasonable attorneys' fees,
administrative fees, arbitrators' fees, and court costs), and in
particular, but without limitation of the foregoing, shall have
the power to award to either party hereto, whether or not such
party shall be the prevailing party in an arbitration, recovery
of all costs, expenses and fees incurred by it (including
reasonable attorneys' fees, administrative fees, arbitrators'
fees, and court costs), but only to the extent payable or
reimbursable by the other party under the applicable provisions
of the Credit Agreement and the other Loan Documents, including,
without limitation, Section 10.5 of the Credit Agreement.
<PAGE>
Annex 2 to Amended and Restated
Credit Agreement
First Union National Bank
of North Carolina, as Agent
Guaranty National Corporation
December 16, 1996 / $110,000,000
______________________________
Existing Existing Amount Pro
Loans (Prior Loans (After Purchased Rata
Lender to Agreement) (Assignment) (Sold) Share Committment
- ------ ------------- ------------ --------- ----- -----------
First Union
National Bank
of
North
Carolina $21,818,182 $23,636,364 $1,818,182 23.6363% $26,000,000
Bank of Tokyo-
Mitsubishi
Trust
Company $9,090,909 $9,090,909 0 9.0909% $10,000,000
The First
National
Bank of
Chicago $9,090,909 $18,181,818 $9,090,909 18.1818% $20,000,000
Fleet
National
Bank $20,000,000 $21,818,182 $1,818,182 21.8181% $24,000,000
Mellon
Bank, N.A. $18,181,818 $18,181,818 0 18.1818% $20,000,000
Norwest
Bank
Colorado,
N.A. $21,818,182 $9,090,909 ($12,727,273) 9.0909% $10,000,000
----------- ---------- ------------- ------- -----------
$100,000,000 $100,000,000 0 100.000% $110,000,000
=========== =========== ============= ======== ============
<PAGE>
Exhibit A to Amended and Restated
Credit Agreement
First Union National Bank
of North Carolina, as Agent
Guaranty National Corporation
December 16, 1996 / $110,000,000
______________________________
FORM OF REVOLVING CREDIT NOTE
$______________ ______________, ____
Charlotte, North Carolina
FOR VALUE RECEIVED, GUARANTY NATIONAL CORPORATION, a
Colorado corporation (the "Borrower"), hereby promises to pay to
the order of
___________________________________________ (the "Lender"),
at the offices of First Union National Bank of North Carolina
(the "Agent") located at 301 South College Street, Charlotte,
North Carolina 28288-0608 (or at such other place or places as
the Agent may designate) the principal sum of up to
__________________________ DOLLARS AND ___/100
($___________), or such lesser amount as may constitute the
unpaid principal amount of the Loans payable to the Lender, under
the terms and conditions of this promissory note (this "Revolving
Credit Note") and the Amended and Restated Credit Agreement,
dated as of December 16, 1996, among the Borrower, the Lenders
from time to time parties thereto, and the Agent (as amended,
modified or supplemented from time to time, the "Credit
Agreement"). The defined terms in the Credit Agreement are used
herein with the same meaning. The Borrower also unconditionally
promises to pay interest on the aggregate unpaid principal amount
of this Revolving Credit Note at the rates provided in the Credit
Agreement.
This Revolving Credit Note is one of a series of Notes
issued to evidence the revolving credit Facility established
under the Credit Agreement. All of the terms, conditions and
covenants of the Credit Agreement are expressly made a part of
this Revolving Credit Note by reference in the same manner and
with the same effect as if set forth herein at length, and any
holder of this Revolving Credit Note is entitled to the benefits
of and remedies provided in the Credit Agreement and the other
Loan Documents. Reference is made to the Credit Agreement for
provisions relating to the interest rate, maturity, payment,
prepayment and acceleration of this Revolving Credit Note.
In the event of an acceleration of the maturity of this
Revolving Credit Note, this Revolving Credit Note, and all other
indebtedness of the Borrower to the Lender, shall become
immediately due and payable, without presentation, demand,
protest or notice of any kind, all of which are hereby waived by
the Borrower.
In the event this Revolving Credit Note is not paid when due
at any stated or accelerated maturity, the Borrower agrees to
pay, in addition to the principal and interest, all costs of
collection, including reasonable attorneys' fees.
This Revolving Credit Note shall be governed by and
construed in accordance with the internal laws and judicial
decisions of the State of North Carolina. The Borrower hereby
submits to
<PAGE>
the jurisdiction and venue of the federal and state courts
located in Mecklenburg County, North Carolina, although the
Lender shall not be limited to bringing an action in such courts.
IN WITNESS WHEREOF, the Borrower has caused this Revolving
Credit Note to be executed under seal by its duly authorized
corporate officer as of the day and year first above written.
GUARANTY
NATIONAL CORPORATION
By: _______________________________
Title: _____________________________
Borrower's Taxpayer Identification No. 84-0445021
<PAGE>
Exhibit B-1 to Amended and Restated
Credit Agreement
First Union National Bank
of North Carolina, as Agent
Guaranty National Corporation
December 16, 1996 / $110,000,000
______________________________
FORM OF
NOTICE OF BORROWING
[Date]
First Union National Bank of
North Carolina, as Agent
One First Union Center, TW-10
301 South College Street
Charlotte, North Carolina 28288-0608
Attention: Syndication Agency Services
Ladies and Gentlemen:
The undersigned, Guaranty National Corporation (the
"Company"), refers to the Amended and Restated Credit Agreement,
dated as of December 16, 1996, among the Company, certain banks
and other financial institutions from time to time parties
thereto (the "Lenders"), and you, as Agent for the Lenders (as
amended, modified or supplemented from time to time, the "Credit
Agreement," the terms defined therein being used herein as
therein defined), and, pursuant to Section 2.2(a) of the Credit
Agreement, hereby gives you irrevocable notice that the
undersigned hereby requests a Borrowing under the Credit
Agreement, and to that end sets forth below the information
relating to such Borrowing (the "Proposed Borrowing") as required
by Section 2.2(a) of the Credit Agreement:
(i) The Business Day of the Proposed Borrowing is
_______________ (the "Borrowing Date"). (1)
(ii) The aggregate principal amount of the
Proposed Borrowing is $_______________.
(iii) The Loans comprising the Proposed Borrowing
shall be initially maintained as [Base Rate Loans]
[LIBOR Loans].
[(iv) The initial Interest Period for each Loan
made as part of the Proposed Borrowing shall be
[one/two/three/six months].](2)
__________________________
(1) Shall be a Business Day at least one Business Day after
the date hereof (in the case of Base Rate Loans) or at
least three Business Days after the date hereof (in the
case of LIBOR loans).
(2) To be included for a Proposed Borrowing comprised of
LIBOR Loans.
<PAGE>
The undersigned hereby certifies that the following
statements are true on the date hereof and will be true on the
Borrowing Date:
(A) Each of the representations and warranties
contained in Article IV of the Credit Agreement and in
the other Loan Documents is and will be true and
correct before and after giving effect to the Proposed
Borrowing and to the application of the proceeds
therefrom, as though made on each such date (except to
the extent any such representation or warranty is
expressly stated to have been made as of a specific
date, in which case such representation or warranty
shall be true and correct as of such date); and
(B) No Default or Event of Default has occurred
and is continuing or would result from the Proposed
Borrowing or from the application of the proceeds
therefrom.
Very truly yours,
GUARANTY NATIONAL CORPORATION
By: ______________________________
Title:____________________________
<PAGE>
Exhibit B-2 to Amended and Restated
Credit Agreement
First Union National Bank
of North Carolina, as Agent
Guaranty National Corporation
December 16, 1996 / $110,000,000
______________________________
FORM OF
NOTICE OF CONVERSION/CONTINUATION
[Date]
First Union National Bank of
North Carolina, as Agent
One First Union Center, TW-10
301 South College Street
Charlotte, North Carolina 28288-0608
Attention: Syndication Agency Services
Ladies and Gentlemen:
The undersigned, Guaranty National Corporation (the
"Company"), refers to the Amended and Restated Credit Agreement,
dated as of December 16, 1996, among the Company, certain banks
and other financial institutions from time to time parties
thereto (the "Lenders"), and you, as Agent for the Lenders (as
amended, modified or supplemented from time to time, the "Credit
Agreement," the terms defined therein being used herein as
therein defined), and, pursuant to Section 2.9(b) of the Credit
Agreement, hereby gives you irrevocable notice that the
undersigned hereby requests a [conversion] [continuation] of
Loans under the Credit Agreement, and to that end sets forth
below the information relating to such [conversion]
[continuation] (the "Proposed [Conversion] [Continuation]") as
required by Section 2.9(b) of the Loan Agreement:
(i) The Business Day of the Proposed [Conversion]
[Continuation] is _______________.(1)
(ii) The Proposed [Conversion] [Continuation]
involves $____________ in aggregate principal amount of
Loans made pursuant to a Borrowing on _______________.
_____________________________
(1) Shall be a Business Day at least one Business Day after
the date hereof (in the case of any conversion of LIBOR
Loans into Base Rate Loans) or at least three Business
Days after the date hereof (in the case of any
conversion of Base Rate Loans into, or continuation of,
LIBOR Loans), and additionally, in the case of any
conversion of LIBOR Loans into Base Rate Loans, or
continuation of LIBOR Loans, shall be the last day of
the Interest Period applicable thereto.
<PAGE>
(iii) The Loans referred to in clause (ii) above
are presently maintained as [Base Rate] [LIBOR] Loans
and are proposed hereby to be [converted into Base
Rate/LIBOR Loans] [continued as LIBOR Loans].
[(iv) The initial Interest Period for each Loan
being [converted into] [continued as] a LIBOR Loan as
part of the Proposed [Conversion] [Continuation] shall
be [one/two/three/six months].](2)
The undersigned hereby certifies that the following
statements are true on the date hereof and will be true on the
effective date of the Proposed [Conversion] [Continuation]:
(A) Each of the representations and warranties
contained in Article IV of the Credit Agreement and in
the other Loan Documents is and will be true and
correct before and after giving effect to the Proposed
[Conversion] [Continuation], as though made on each
such date (except to the extent any such representation
or warranty is expressly stated to have been made as of
a specific date, in which case such representation or
warranty shall be true and correct as of such date);
and
(B) No Default or Event of Default has occurred
and is continuing or would result from the Proposed
[Conversion] [Continuation].
Very truly yours,
GUARANTY NATIONAL CORPORATION
By: ______________________________
Title: ____________________________
___________________
(2) To be included in the case of any conversion of Base Rate
Loans into, or continuation of, LIBOR Loans.
<PAGE>
Exhibit C to Amended and Restated
Credit Agreement
First Union National Bank
of North Carolina, as Agent
Guaranty National Corporation
December 16, 1996 / $110,000,000
__________________________
FORM OF
COMPLIANCE CERTIFICATE
(GAAP Financial Statements)
THIS CERTIFICATE is given pursuant to Section 5.3(a) of the
Amended and Restated Credit Agreement, dated as of December 16,
1996 (as amended, modified or supplemented from time to time, the
"Credit Agreement," the terms defined therein being used herein
as therein defined), among Guaranty National Corporation (the
"Borrower"), certain banks and other financial institutions from
time to time parties thereto (the "Lenders"), and First Union
National Bank of North Carolina, as Agent for the Lenders.
The undersigned hereby certifies that:
1. He is the duly elected [Chief Executive Officer/[insert
title of Senior Financial Officer]] of the Borrower.
2. Enclosed with this Certificate are copies of the
financial statements of the Borrower and its Subsidiaries as of
_____________, and for the [________-month period] [year] then
ended, required to be delivered under Section [5.1(a)] [5.1(b)]
of the Credit Agreement. Such financial statements have been
prepared in accordance with Generally Accepted Accounting
Principles [(subject to the absence of notes required by
Generally Accepted Accounting Principles and subject to normal
year-end audit adjustments)](1) and fairly present the financial
condition of the Borrower and its Subsidiaries on a consolidated
basis as of the date indicated and the results of operations of
the Borrower and its Subsidiaries on a consolidated basis for the
period covered thereby.
3. The undersigned has reviewed the terms of the Credit
Agreement and has made, or caused to be made under the
supervision of the undersigned, a review in reasonable detail of
the transactions and condition of the Borrower and its
Subsidiaries during the accounting period covered by such
financial statements.
4. The examination described in paragraph 3 above did not
disclose, and the undersigned has no knowledge of the existence
of, any Default or Event of Default during or at the end of the
accounting period covered by such financial statements or as of
the date of this Certificate. [, except as set forth below.
Describe here or in a separate attachment any exceptions to
paragraph 4 above by listing, in reasonable detail, the nature of
the Default or Event of Default, the period during which it
existed and the action that the Borrower has taken or proposes to
take with respect thereto.]
___________________________
(1) Insert the case of quarterly financial statements.
<PAGE>
5. Attached to this Certificate as Attachment A is a
Covenant Compliance Worksheet reflecting the computation of the
financial covenants set forth in Section 6.5 of the Credit
Agreement as of the last day of the period covered by the
financial statements enclosed herewith.
6. Attached to this Certificate as Attachment B is a Rate
Calculation Worksheet reflecting the computation of the
Capitalization Ratio as of the last day of the period covered by
the financial statements enclosed herewith.
IN WITNESS WHEREOF, the undersigned has executed and
delivered this Certificate as of the _______ day of
_____________, ____.
[signature]
Name: _______________________________
Title: ________________________________
<PAGE>
ATTACHMENT A
COVENANT COMPLIANCE WORKSHEET
Consolidated Net Worth
(Section 6.5 of the Credit Agreement) Not less than the following:
(1) Base Amount for calculating required
Consolidated Net Worth $190,000,000
(2) Aggregate amount of Consolidated Net
Income for each fiscal quarter ending
after December 31, 1996 (2) $_________
Multiplied by: 30%
Equals: Consolidated Net Income adjustment $
===========
(3) Aggregate amount of all increases
in the stated capital and additional
paid-in capital accounts of the Borrower
resulting from the issuance of equity
securities or other capital investments
after December 31, 1996 $
============
(4) Required Consolidated Net Worth:
Add Lines 1, 2 and 3 $
============
(5) Actual Consolidated Net Worth as of measurement date $
============
- ----------------------------------------------------------------------------
(2) Consolidated Net Income for any fiscal quarter shall be
included only if positive.
<PAGE>
ATTACHMENT B
RATE CALCULATION WORKSHEET
Capitalization Ratio
(1) Consolidated Indebtedness as of the
measurement date (excluding Investment
Borrowings to the extent permitted under
Section 7.2 of the Credit Agreement) $
============
(2) Total Capitalization:
(a) Consolidated Indebtedness as of
the measurement date (excluding
Investment Borrowings to the extent
permitted under Section 7.2 of the
Credit Agreement)
$__________
(b) Consolidated Net Worth as of
the measurement date (from the
Covenant Compliance Worksheet)
$__________
(c) Total Capitalization:
Add Lines 2(a) and 2(b) $
============
(3) Ratio of Consolidated Indebtedness to Total
Capitalization:
Divide Line 1 by Line 2(c) $
============
Applicable LIBOR Margin (pursuant to the Credit Agreement):
__________%
Applicable Commitment Fee Rate (pursuant to the Credit
Agreement):
__________%
<PAGE>
FORM OF
COMPLIANCE CERTIFICATE
(Statutory Financial Statements)
THIS CERTIFICATE is given pursuant to Section 5.3(a) of the
Amended and Restated Credit Agreement, dated as of December 16,
1996 (as amended, modified or supplemented from time to time, the
"Credit Agreement," the terms defined therein being used herein
as therein defined), among Guaranty National Corporation (the
"Borrower"), certain banks and other financial institutions from
time to time parties thereto (the "Lenders"), and First Union
National Bank of North Carolina, as Agent for the Lenders.
The undersigned hereby certifies that:
1. He is the duly elected [Chief Executive Officer/[insert
title of Senior Financial Officer]] of the Borrower.
2. Enclosed with this Certificate are copies of the
statutory financial statements of each Insurance Subsidiary as of
_____________, and for the [________-month period] [year] then
ended, required to be delivered under Section [5.2(a)] [5.2(b)]
of the Credit Agreement. Such statutory financial statements
have been prepared in accordance with Statutory Accounting
Principles [(subject to the absence of notes required by
Statutory Accounting Principles and to normal year-end audit
adjustments)](3) and fairly present the financial condition of
each Insurance Subsidiary as of the date indicated and the
results of operations, changes in capital and surplus and cash
flow of each Insurance Subsidiary for the period covered thereby.
3. The undersigned has reviewed the terms of the Credit
Agreement and has made, or caused to be made under the
supervision of the undersigned, a review in reasonable detail of
the transactions and condition of the Borrower and its
Subsidiaries during the accounting period covered by such
financial statements.
4. The examination described in paragraph 3 above did not
disclose, and the undersigned has no knowledge of the existence
of, any Default or Event of Default during or at the end of the
accounting period covered by such financial statements or as of
the date of this Certificate. [, except as set forth below.
Describe here or in a separate attachment any exceptions to
paragraph 4 above by listing, in reasonable detail, the nature of
the Default or Event of Default, the period during which it
existed and the action that the Borrower has taken or proposes to
take with respect thereto.]
5. Attached to this Certificate as Attachment A is a
Covenant Compliance Worksheet reflecting the computation of the
financial covenants set forth in Sections 6.1, 6.2, 6.3 and 6.4
of the Credit Agreement as of the last day of the period covered
by the financial statements enclosed herewith.
_____________________
(3) Insert in the case of quarterly statutory statements.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed and
delivered this Certificate as of the _______ day of
_____________, ____.
[signature]
Name: _______________________________
Title: ________________________________
<PAGE>
ATTACHMENT A
COVENANT COMPLIANCE WORKSHEET
Consolidated Statutory Surplus
(Section 6.1 of the Credit Agreement): Not less than $200,000,000
(1) Statutory Surplus of GNIC as of the
measurement date $
=================
(2) Statutory Surplus of VICW as of the
measurement date $
=================
(3) Consolidated Statutory Surplus:
Add Lines 1 and 2
$
=================
(Include other Significant Subsidiaries as required.)
<PAGE>
Operating Leverage Ratio
(Section 6.2 of the Credit Agreement): Not greater than 3.0 to 1.0
(1) GNIC
(a) Net Written Premiums as of
the measurement date: $
==================
(b) Statutory Surplus as of
the measurement date: $
==================
(c) Operating Leverage Ratio:
Divide Line 1(a) by Line 1(b)
==================
(2) VICW
(a) Net Written Premiums as of
the measurement date: $
==================
(b) Statutory Surplus as of
the measurement date: $
==================
(c) Operating Leverage Ratio:
Divide Line 1(a) by Line 1(b)
==================
(Include other Significant Subsidiaries as required.)
<PAGE>
Fixed Charge Coverage Ratio
(Section 6.3 of the Credit Agreement): Not less than 1.5 to 1.0
(1) Sources of Funds:
(a) Aggregate Available Dividend Amount
for the Measurement Period $________________
(b) Aggregate management fees and lease payments
received by the Borrower during the
Measurement Period $________________
(c) Aggregate tax receipts of the Borrower
during the Measurement Period $________________
(d) Aggregate tax payments (including tax
sharing payments) by the Borrower during
the Measurement Period ($_______________)
(e) Sources of Funds: Add Lines 1(a), 1(b)
and 1(c) and subtract Line 1(d) $
================
(2) Fixed Charges:
(a) Projected principal and interest payments on
all Indebtedness for the four-quarter period
following the Measurement Period $_________________
(b) Projected lease payments for the four-quarter
period following the Measurement Period $_________________
(c) Fixed charges: Add Lines 2(a) and 2(b) $
=================
(3) Fixed Charge Coverage Ratio:
Divide Line 1(e) by Line 2(c) =================
<PAGE>
Risk - Based Capital Ratio
(Section 6.4 of the Credit Agreement): Not less than 150% of
Company Action Level RBC
(1) GNIC
(a) Total adjusted capital as of
the measurement date $
==================
(b) Company Action Level RBC as of the
measurement date $
==================
(c) Required total adjusted capital as of the
measurement date:
Multiply Line 1(b) by 150% $
==================
(2) VICW
(a) Total adjusted capital as of
the measurement date $
==================
(b) Company Action Level RBC as of the
measurement date $
=================
(c) Required total adjusted capital as of the
measurement date:
Multiply Line 1(b) by 150% $
=================
TAX ALLOCATION AGREEMENT
AGREEMENT dated December 23, 1996 by and among Guaranty
National Corporation ("Parent") and each of its undersigned
subsidiaries
WITNESSETH
Whereas, the parties hereto are members of an affiliated
group ("Affiliated Group") as defined in Section 1504(a); and
Whereas, such Affiliated Group will be included in a U.S.
consolidated income tax return for its taxable year 1997; and
Whereas, it is the intent and desire of the parties hereto
that a method be established for allocating the consolidated tax
liability, including alternative minimum tax, of the Affiliated
Group among its members, for reimbursing the Parent for payment
of such tax liability, for compensating any party for use of its
losses or tax credits, and to provide for the allocation and
payment of any refund arising from a carryback of losses or tax
credits from subsequent taxable years,
NOW, THEREFORE, in consideration of the mutual covenants and
promises contained herein, the parties hereto agree as follows:
1. A U.S. consolidated income tax return shall be filed
for the taxable period ended December 31, 1997, and for
which the Affiliated Group is required or permitted to be
included in a consolidated tax return. Each subsidiary
shall execute and file such consent, elections, and other
documents that may be required or appropriate for the
proper filing of such returns.
2. a. For the taxable period, each member of the
Affiliated Group shall compute its separate tax liability
as if it had filed a separate tax return and shall pay
such amount to the Parent.
b. The separate return tax liability of each
member shall be computed in a manner consistent with the
provisions of Regulation 1.1552-1(a)(2)(ii), provided
that the carryover of any tax attribute from a prior
taxable year, which is not available in determining the
consolidated tax liability of the group for the taxable
period, shall be disregarded.
3. The Parent and Subsidiaries agree that in the taxable
year in which a consolidated alternative minimum tax
liability is imposed on the affiliated group by Section
55 of the Internal Revenue Code of 1986, the alternative
minimum tax liability shall be allocated among the
members in the following manner:
a. The consolidated regular federal income tax
liability of the affiliated group as defined in Section
55(c) of the Internal Revenue Code of 1986, shall be
allocated as provided in Paragraph (2) above, and
<PAGE>
b. The consolidated alternative minimum tax
liability shall be allocated to each member whose
alternative minimum taxable income exceeds its break-even
alternative minimum taxable income. The amount of such
liability allocated to any such member shall be equal to
the consolidated alternative minimum tax liability
multiplied by a fraction, the numerator of which is the
excess of such member's alternative minimum taxable
income over its break-even alternative minimum taxable
income, and the denominator of which is the excess of the
sum of all such members' alternative minimum taxable
incomes over the sum of their break-even alternative
minimum taxable incomes over the sum of their break-even
alternative minimum taxable incomes. For purposes of
this Agreement, "break-even alternative minimum taxable
income" is the amount of alternative minimum taxable
income at which a member's tentative alternative minimum
tax liability would equal its regular federal income tax
liability.
c. The amount of a member's minimum tax credit
under Section 53 of the Internal Revenue Code of 1986
shall equal its alternative minimum tax liability as
allocated under this paragraph for all taxable years to
which this Agreement applies, reduced by the minimum tax
credit used as provided in Paragraph (4) below.
4. The Parent and Subsidiaries agree that, in the taxable
year in which the Affiliated Group reduces its
consolidated regular federal income tax liability by the
minimum tax credit provided under Section 53 of the
Internal Revenue Code of 1986, the amount of such credit
used attributable to each member is equal to the
consolidated minimum tax credit multiplied by a fraction,
the numerator of which is the separate minimum tax credit
of such member, and the denominator of which is the sum
of the separate minimum tax credits of all members having
such credits.
5. Payment of the consolidated tax liability for the
taxable period shall include the payment of estimated tax
installments due for the taxable period, and each
subsidiary shall pay to the Parent its share of each
payment within ten days of receiving notice of such
payment from the Parent, but in no event later than the
due date for each such payment. Any amounts paid by a
subsidiary on account of a separate return or separate
estimated tax payments which are credited against the
consolidated tax liability of the Affiliated Group shall
be included in determining the payments due from such
subsidiary. Any overpayment of estimated tax should be
refunded to the subsidiary within 10 days after the date
of filing on the consolidated return.
6. If for the taxable period the separate return
liability of each member of the Affiliated Group,
including the Parent, exceeds the consolidated tax
liability for such period as a result of any excess
losses or tax credits of one or more members, then the
Parent shall pay to each such member its allocable
portion of such excess amount within ten days after the
date of filing on the consolidated return for such
period.
7. If part or all of an unused loss or tax credit is
allocated to a member of the Affiliated Group pursuant to
Regulation 1.1502-79, and is carried back or forward to a
year in which such member filed a separate return or a
consolidated return with another affiliated group, any
refund or reduction in tax liability arising from the
carryback or carryover shall be retained by such member.
Notwithstanding the above, the Parent shall determine
whether an election shall be made not to carry back part
or all of a consolidated net operating loss for the
taxable year in accordance with Section 172(b)(3)(C).
<PAGE>
8. If the consolidated tax liability is adjusted for the
taxable period, whether by means of an amended return,
claim for refund or after a tax audit by the Internal
Revenue Service, the liability of each member shall be
recomputed to give effect to such adjustments, and in the
case of a refund, the Parent shall make payment to each
member for its share of the refund, determined in the
same manner as in paragraph 2 above, within ten days
after the refund is received by the Parent, and in the
case of an increase in tax liability, each member shall
pay to the Parent its allocable share of such increased
tax liability within ten days after receiving notice of
such liability from the Parent.
9. If during the consolidated return period the Parent or
any subsidiary acquires or organizes another corporation
that is required to be included in the consolidated
return, then such corporation shall join in and be bound
by this agreement.
10. This agreement shall apply to the taxable period
ending December 31, 1997 unless the Parent and the
subsidiaries agree to terminate the agreement.
Notwithstanding such termination, this agreement shall
continue in effect with respect to any payment of refunds
due for the taxable period ending December 31, 1997.
11. This agreement shall be binding upon and inure to
the benefit of any successor, whether by statutory
merger, acquisition of assets or otherwise, to any of the
parties hereto, to the same extent as if the successor
had been an original party to the agreement.
In WITNESS WHEREOF, the parties hereto have caused this
agreement to be executed by their duly authorized representatives
on December 23, 1996.
Guaranty National Corporation
Guaranty National Insurance Company
Landmark American Insurance Company
Intercon General Agency, Inc.
Auto Insurance Centers, Inc.
Colorado Casualty Insurance Company
Peak Property and Casualty
Insurance Corporation
Guaranty National Insurance Company
of California
Viking Insurance Company of Wisconsin
Viking Insurance Holdings, Inc.
Viking General Agency, Inc.
Guaranty National Warranty Services Company
By s/Shelly J. Hengsteler
Assistant Treasurer
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY OF CALIFORNIA
LANDMARK AMERICAN INSURANCE COMPANY
VIKING INSURANCE COMPANY OF WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
PROPERTY FIRST CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
INDEX
ARTICLE SUBJECT PAGE
- ------- ------- ----
PREAMBLE 1
1 BUSINESS COVERED 1
2 TERM 1
3 DEFINITION OF POLICIES 1
4 TERRITORY 1
5 EXCLUSIONS 2
6 RETENTION AND LIMIT 3
7 REINSTATEMENT 3
8 DEFINITION OF LOSS OCCURRENCE 4
9 NET LOSS 5
10 NET RETAINED LINES 6
11 LIABILITY OF THE REINSURER 6
12 NOTICE OF LOSS AND LOSS SETTLEMENT 6
13 SALVAGE AND SUBROGATION 7
14 PREMIUM 7
15 CURRENCY 8
16 ERRORS AND OMISSIONS 8
17 TAXES 8
18 ACCESS TO RECORDS 8
19 INTERMEDIARY 8
20 INSOLVENCY 9
21 ARBITRATION 9
22 RESERVES 10
23 SERVICE OF SUIT 12
24 OFFSET 12
25 ENTIRE AGREEMENT 13
ATTACHMENTS
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
POOLS EXCLUSION CLAUSE
<PAGE>
-1-
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY OF CALIFORNIA
LANDMARK AMERICAN INSURANCE COMPANY
VIKING INSURANCE COMPANY OF WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
PROPERTY FIRST CATASTROPHE EXCESS OF LOSS CONTRACT
PREAMBLE
The Reinsurers hereby reinsure the net excess liability
of the Reassured resulting from any loss occurrence or loss
occurrences which may take place during the term of this Contract
under the Reassured's policies subject to the following
conditions:
ARTICLE 1., BUSINESS COVERED
This Contract shall cover policies in force at the
inception of this Contract or written or renewed subsequent to
its inception, issued by or on behalf the Reassured and
classified by the Reassured as property including Fire, Allied
Lines, Inland Marine, Section I of Farmers Multiple Peril,
Homeowners Multiple Peril and Commercial Multiple Peril and Auto
Physical Damage but excluding Collision.
ARTICLE 2., TERM
A. The term of this Contract shall be from 12:01 a.m.,
Local Standard Time, January 1, 1996 through 12:01 a.m., Local
Standard Time, January 1, 1997.
B. If this Contract should terminate while a loss
occurrence covered hereunder is in progress, the Reinsurers shall
be liable subject to all other conditions of this Contract, for
their share of all individual losses resulting from such loss
occurrence whether any such individual losses take place before
or after such termination.
ARTICLE 3., DEFINITION OF POLICIES
The term "policies", whenever used herein, shall mean
all binders, policies, contracts, certificates and other
obligations, whether oral or written, of insurance.
ARTICLE 4., TERRITORY
Subject to all other terms and conditions of this
Contract, this Contract shall apply to losses occurring anywhere
within the territorial limits of the Reassured's policy by which
it was insured.
<PAGE>
-2-
ARTICLE 5., EXCLUSIONS
A. This Contract does not apply to and specifically
excludes the following:
1. Business classified by the Reassured as Accident
and Health, Workers' Compensation, Employers' Liability, all
forms of third party Bodily Injury Liability, and Fidelity and
Surety;
2. Hail damage to growing or standing crops;
3. Nuclear incidents in accordance with the Nuclear
Incident Exclusion Clause - Physical Damage -
Reinsurance attached to and forming part of this
Contract;
4. Reinsurance treaty business, including pro rata
and excess of loss, assumed by the Reassured, but
not to exclude business from State and County
Mutual Fire, Security Insurance of Hartford and
affiliated companies;
5. Pools, Associations and Syndicate business as
excluded by the provisions of the "Pools
Exclusions Clause" attached to and forming part of
this Contract;
6. Loss or damage occasioned by war, invasion,
hostilities, act of foreign enemies, civil war,
rebellion, insurrection, military or usurped
power, or martial law or confiscation by order of
an 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;
7. Financial Guaranty and Insolvency;
8. All liability of the Reassured arising by
contract, operation OF law, or otherwise, from its
participation or membership, whether voluntary or
involuntary, in any insolvency fund shall be
excluded hereunder. "Insolvency Fund" includes
any guaranty fund, insolvency fund, plan, pool,
association, fund or other arrangement, howsoever
denominated, established or governed; which
provides for any assessment of or payment or
assumption by the Reassured of part or all of any
claim, debt, charge, fee, or other obligation of
an insurer, or its successors or assigns, which
has been declared by any competent authority to be
insolvent, or which is otherwise deemed unable to
meet any claim, debt, charge, fee or other
obligation in whole or in part;
9. Loss/or Damage/or Costs/or Expenses arising from
Seepage and/or Pollution and/or Contamination,
other than Contamination from Smoke Damage.
Nevertheless, this exclusion does not preclude any
payment of the cost of the removal of debris of
property damaged by a loss otherwise
<PAGE>
-3-
covered hereunder, but subject always to a limit
of 25.0% of the Reassured's Property loss under
the original policy. It is agreed that all
business the subject of the Contract contains the
full I.S.O. Seepage and Pollution Exclusion Clause
or so deemed.
B. Policies or coverages excluded under the provisions of
this ARTICLE 5., EXCLUSIONS, (other than items (3), (6), (7) and
(9) which are inadvertently issued or issued in error or issued
without the Reassured's knowledge and consent shall be covered
hereunder provided such policies are cancelled or reinsured
elsewhere as soon as possible upon the Reassured's Home Office
Underwriting Management becoming aware that they are excluded.
ARTICLE 6., RETENTION AND LIMIT
The Reinsurers shall be liable for each and every loss
occurrence, irrespective of the number and kinds of risks and
perils involved, for 95% of the net loss in excess of $6,000,000
each and every loss occurrence; but the Reinsurers' shall not be
liable for more than $3,800,000 (being 95% of $4,000,000) for
each an every loss occurrence. In the event the aggregate losses
recoverable under this Contract are expected to exceed
$7,200,000, the Reassured shall immediately notify the State of
Colorado Division of Insurance of the impending exhaustion of the
reinsurance coverage.
ARTICLE 7., REINSTATEMENT
A. Each claim hereunder shall reduce the amount of the
Reinsurers' liability from the time of the occurrence of the loss
by the sum paid, but the sum so exhausted immediately shall be
reinstated from the time of the occurrence of the loss.
B. For each amount so reinstated, the Reassured agrees to
pay an additional premium calculated by multiplying 100% of the
annual premium hereon by the product of the percentage that the
amount reinstated bears to the limit (i.e. $3,800,000) of this
Contract. Nevertheless, the liability of the Reinsurers shall
never be more than $3,800,000 in respect of any one loss
occurrence, nor more than $7,600,000 in all in respect of all
losses occurring during the term of this Contract.
C. A provisional reinstatement premium shall be paid by
the Reassured at the time the Reinsurers pay the loss giving rise
to the reinstatement premium through an offset of the provisional
reinstatement premium due the Reinsurers against the loss payment
due the Reassured, with only the net amount due to be remitted by
the Reinsurers to the Reassured. The amount of this provisional
reinstatement premium shall be based on 100% of the estimated
annual reinsurance premium as calculated in Paragraph A. of
ARTICLE 14., PREMIUM (or the annual deposit premium as stated in
Paragraph C. of ARTICLE 14., PREMIUM, if prior to the conclusion
of a full calendar year).
<PAGE>
-4-
D. As promptly as possible after the loss has been paid by
the Reinsurers and the annual reinsurance premium hereunder has
been finally determined, the Reassured shall prepare and submit
to the Reinsurers a final statement of reinstatement premium due.
Any reinstatement premium shown to be due the Reinsurers (less
prior payments, if any) shall be remitted by the Reassured with
its statement. Any return reinstatement premium shown to be due
the Reassured shall be remitted by the Reinsurers as promptly as
possible after receipt of the Reassured's final statement.
ARTICLE 8., DEFINITION OF LOSS OCCURRENCE
A. 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 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 Reassured occurring
during any period of 168 consecutive hours arising out of and
directly occasioned by the same event except that the term "Loss
Occurrence" shall be further defined as follows:
1. As regards windstorm, hail, tornado, hurricane,
cyclone, including ensuing collapse and water
damage, all individual losses sustained by the
Reassured 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 Reassured
occurring during any period of 72 consecutive
hours within the area of one municipality or
county and the municipalities or counties
contiguous thereto arising out of and directly
occasioned by the same event. The maximum
duration of 72 consecutive hours may be extended
in respect of individual losses which occur beyond
such 72 consecutive hours during the continued
occupation of an assured's premises by strikers,
provided such occupation commenced during the
aforesaid period.
3. As regards earthquake (the epicentre of which need
not necessarily be within the territorial confines
referred to in the opening paragraph of this
ARTICLE 8., DEFINITION OF LOSS OCCURRENCE) 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
Reassured's "Loss Occurrence".
<PAGE>
-5-
4. As regards "Freeze", only individual losses
directly occasioned by collapse, breakage of glass
and water damage (caused by bursting of frozen
pipes and tanks) may be included in the
Reassured's "Loss Occurrence".
B. For all "Loss Occurrences", other than those referred
to in sub-paragraph A. 2. of this ARTICLE 8., DEFINITION OF LOSS
OCCURRENCE, the Reassured 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 Reassured arising out
of that disaster, accident or loss and provided that only one
such period of 168 consecutive hours shall apply with respect to
one event except for any "Loss Occurrences" referred to in sub-
paragraph A. 1. of this ARTICLE 8., DEFINITION OF LOSS OCCURRENCE
where only one such period of 72 consecutive hours shall apply
with respect to one event.
C. As respects those "Loss Occurrences" referred to in sub-
paragraph A. 2. of this A.RTICLE 8., DEFINITION OF LOSS
OCCURRENCE, if the disaster, accident or loss occasioned by the
event is of greater duration than 72 consecutive hours, then the
Reassured 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 Reassured arising out of that disaster, accident or loss.
D. No individual losses occasioned by an event that would
be covered by 72 hours clauses may be included in any "Loss
Occurrence" claimed under the 168 hours provision.
ARTICLE 9., NET LOSS
A. The term "net loss" shall mean the actual loss incurred
by the Reassured under policies covered hereunder. Such loss
shall include sums paid in settlement of claims and suits and in
satisfaction of judgments, including prejudgment interest when
added to a judgment. Such loss also shall include all allocated
loss adjustment expenses paid by the Reassured including but not
limited to expenses sustained in connection with settlement and
litigation of claims and suits, satisfaction of judgments,
resistance to or negotiations concerning a loss (which shall
include the pro rata share of the Reassured's outside employees
according to the time occupied in adjusting such loss and the
expenses of the Reassured's employees while diverted from their
normal duties to the service of field adjustment but shall not
include any salaries of officers nor normal overhead expenses of
the Reassured) and any interest on judgments other than
prejudgment interest when added to a judgment.
B. All salvages, recoveries, payments and reversals or
reductions of verdicts or judgments (net of the cost of obtaining
such salvage, recovery, payment or reversal or reduction of a
verdict or judgment) whether recovered, received or obtained
prior or subsequent to loss settlement under this Contract,
including
<PAGE>
-6-
amounts recoverable under other reinsurance whether collected or
not, shall be applied as if recovered, received or obtained prior
to the aforesaid settlement and shall be deducted from the actual
losses sustained to arrive at the amount of the net loss.
Nothing in this ARTICLE 9., NET LOSS, shall be construed to mean
losses are not recoverable until the net loss to the Reassured
finally has been ascertained.
ARTICLE 10., NET RETAINED LINES
A. This Contract applies only to that portion of any
insurance or reinsurance which the Reassured retains net for its
own account and in calculating the amount of any loss hereunder
and also in computing the amount or amounts in excess of which
this Contract attaches, only loss or losses in respect of that
portion of any insurance or reinsurance which the Reassured
retains net for its own account shall be included.
B. It is agreed, however, that the amount of the
Reinsurers' liability hereunder in respect of any loss or losses
shall not be increased by reason of the inability of the
Reassured to collect from any other Reinsurers, whether specific
or general, any amounts which may have become due from them,
whether such inability arises from the insolvency of such other
Reinsurers or otherwise.
C. It is understood that the Reassured carries underlying
per risk excess reinsurance, recoveries under which shall inure
to the benefit of the Reinsurers hereunder and shall be deducted
in determining the net loss subject to this Contract.
ARTICLE 11., LIABILITY OF THE REINSURER
A. The liability of the Reinsurers shall follow that of
the Reassured in every case, and be subject in all respects to
all the general and special stipulations, clauses, waivers and
modifications of the Reassured's policies and any endorsements
thereon.
B. All terms of this Contract shall be subject to the laws
of the state of Colorado.
C. Nothing herein shall in any manner create any
obligations or establish any rights against the Reinsurers in
favor of any third party or any persons not parties to this
Contract.
ARTICLE 12., NOTICE OF LOSS AND LOSS SETTLEMENT
A. The Reassured shall advise the Reinsurers promptly of
all loss occurrences which, in the opinion of the Reassured, may
result in a claim hereunder and of all subsequent developments
thereto which, in the opinion of the Reassured, may materially
affect the position of the Reinsurers. Inadvertent omission or
oversight in giving such notice shall in no way affect the
liability of the Reinsurers. However, the Reinsurers shall be
informed of such omission or oversight promptly upon its
discovery.
<PAGE>
-7-
B. All loss settlements made by the Reassured, provided
they are within the terms of this Contract, shall be
unconditionally binding upon the Reinsurers, who agree to pay all
amounts for which they may be liable immediately upon being
furnished by the Reassured with reasonable evidence of the amount
due.
ARTICLE 13., SALVAGE AND SUBROGATION
The Reinsurers shall be credited with salvage (i.e.,
reimbursement obtained or recovery made by the Reassured, less
the actual cost, excluding salaries of officials and employees of
the Reassured and sums paid to attorneys as retainer, of
obtaining such reimbursement or making such recovery) on account
of claims and settlements involving reinsurance hereunder.
Salvage thereon shall always be used to reimburse the excess
carriers in the reverse order of their priority according to
their participation before being used in any way to reimburse the
Reassured for its primary loss. The Reassured hereby agrees to
enforce its rights to salvage or subrogation relating to any
loss, a part of which loss was sustained by the Reinsurer, and to
prosecute all claims arising out of such rights.
ARTICLE 14., PREMIUM
A. The premium due the Reinsurers shall be calculated by
applying a rate of .312% to the Reassured's gross net written
premium income during the term of this Contract.
The term "gross net written premium income" shall mean
gros premiums written on business covered hereunder less premiums
paid for reinsurance, recoveries under which would reduce the
loss under this Contract.
B. For purposes of this Contract, 100% of the Reassured's
written premium for property, including Fire, Allied Lines,
Inland Marine, Section I Farmowners Multiple Peril, Homeowners
Multiple Peril and Commercial Multiple Peril and Auto Physical
Damage excluding Collision shall be reported hereunder.
C. A deposit premium of $282,048, shall be payable to the
Reinsurers in four equal installments of $70,512, each, the first
payment being due at inception this Contract and the second and
subsequent payments being payable as of April 1, July 1 and
October 1, 1996. This Contract shall be subject to a minimum
premium of $225,638. As promptly as possible after the
termination of this Contract, the Reassured shall render a
statement to the Reinsurers showing the actual reinsurance
premiums due hereunder, calculated as provided in Paragraph A. of
this ARTICLE 14., PREMIUM, and, if the premium so calculated is
greater than the deposit premium, the additional premium shall
hereupon be paid to the Reinsurers. If the premium so calculated
in Paragraph A. of this ARTICLE 14., PREMIUM, is less than the
minimum premium, Reinsurers will immediately return the
difference between the minimum premium and the deposit premium
previously paid by the Reassured. If the premium calculated in
Paragraph A. of this ARTICLE 14., PREMIUM, is greater than the
minimum premium but less than the deposit premium, Reinsurers
will immediately return the difference between the reinsurance
premium due and the deposit premium previously paid by the
Reassured.
<PAGE>
-8-
ARTICLE 15., CURRENCY
Whenever the word "Dollars" or the "$" sign appears in
this Contract, they shall be construed to mean United States
Dollars and all transactions under this Contract shall be in
United States Dollars.
Amounts paid or received by the Reassured in any other
currency shall be converted to United States Dollars at the rate
of exchange at the date such transaction is entered on the books
of the Reassured.
ARTICLE 16., ERRORS AND OMISSIONS
Inadvertent delays, errors or omissions made in
connection with this Contract shall not relieve either party from
any liability which would have attached had such delay, error or
omission not occurred, provided always that such delay, error or
omission shall be rectified as soon as possible after discovery
by the Reassured's Home Office.
ARTICLE 17., TAXES
In consideration of the terms under which this Contract
is issued, the Reassured undertakes not to claim any deduction of
the premium hereon when making Canadian tax returns or when
making tax returns, other than income or profits tax returns, to
any state or territory of the United States of America or to the
District of Columbia.
ARTICLE 18., ACCESS TO RECORDS
The Reassured shall place at the disposal of the
Reinsurers at all reasonable times, and, the Reinsurers shall
have the right to inspect through their designated
representatives, during the term of this Contract and thereafter,
all books, records and papers of the Reassured in connection with
any reinsurance hereunder, or the subject matter hereof.
ARTICLE 19., INTERMEDIARY
Towers Perrin Reinsurance is hereby recognized as the
Intermediary negotiating this Contract for all business
hereunder. All communications (including but not limited to
notices, statements, premium, return premium, commissions, taxes,
losses, loss adjustment expense, salvages and loss settlements)
relating thereto shall be transmitted to the Reassured or the
Reinsurers through Towers Perrin Reinsurance, Mellon Bank Center,
1735 Market Street, Philadelphia, Pennsylvania 19103-7501.
Payments by the Reassured to the Intermediary shall be deemed to
constitute payment to the Reinsurers. Payments by the Reinsurers
to the Intermediary shall be deemed to constitute payment to the
Reassured only to the extent that such payments are actually
received by the Reassured.
<PAGE>
-9-
ARTICLE 20., INSOLVENCY
A. In the event of insolvency of the Reassured, the
reinsurance under this Contract shall be payable by the
Reinsurers to the Reassured or to its liquidator, receiver, or
statutory successor on the basis of the liability of the
Reassured under the policy or policies reinsured without
diminution because of the insolvency of the Reassured.
B. It is further agreed that the liquidator, or receiver,
or statutory successor of the Reassured shall give written notice
to the Reinsurers of the pendency of any claim against the
Reassured on the policies reinsured within a reasonable time
after such claim is filed in the insolvency proceeding, and that
during the pendency of such claim the Reinsurers may investigate
such claim and interpose, at their own expense, in the proceeding
where such claim is to be adjudicated, any defense or defenses
which they may deem available to the Reassured or to its
liquidator, or receiver, or statutory successor. The expense
thus incurred by the Reinsurers shall be chargeable, subject to
court approval, against the Reassured as part of the expense of
liquidation to the extent of a proportionate share of the benefit
which may accrue to the Reassured solely as a result of the
defense undertaken by the Reinsurers.
ARTICLE 21., ARBITRATION
A. Any dispute or other matter in question between the
Reassured an the Reinsurers arising out of or relating to the
formation, interpretation, performance, or breach of this
Contract, whether such dispute arises before or after termination
this Contract, shall be settled by arbitration. Arbitration
shall be initiated by the delivery of a written notice of demand
for arbitration by one party to the other within a reasonable
time after the dispute has arisen.
B. If more than one Reinsurer is involved in the same
dispute, all such Reinsurers shall constitute and act as one
party for the purposes of this ARTICLE 21., ARBITRATION,
provided, however, that nothing herein shall impair the rights of
such Reinsurers to assert several, rather than joint, defenses or
claims, nor be construed as changing the liability of the
Reinsurers under the terms of this Contract from several to
joint.
C. Each party shall appoint an individual as arbitrator
and the two so appointed shall then appoint a third arbitrator.
If either party refuses or neglects to appoint an arbitrator
within sixty days, the other party may appoint the second
arbitrator. If the two arbitrators do not agree on a third
arbitrator within sixty days of their appointment, each of the
arbitrators shall nominate three individuals. Each arbitrator
shall then decline two of the nominations presented by the other
arbitrator. The third arbitrator shall then be chosen from the
remaining two nominations by drawing lots. The arbitrators shall
be active or retired officers of insurance or reinsurance
companies or Lloyd's London Underwriters; the arbitrators shall
not have a personal or financial interest in the result of the
arbitration.
<PAGE>
-10-
D. The arbitration hearings shall be held in Englewood,
Colorado, or such other place as may be mutually agreed. Each
party shall submit its case to the arbitrators within sixty days
of the selection of the third arbitrator or within such longer
period as may be agreed by the arbitrators. The arbitrators
shall not be obliged to follow judicial formalities or the rules
of evidence except to the extent required by governing law, that
is, the state law of the situs of the arbitration as herein
agreed; they shall make their decisions according to the practice
of the reinsurance business. The decision rendered by a majority
of the arbitrators shall be final and binding on both parties.
Such decision shall be a condition precedent to any right of
legal action arising out of the arbitrated dispute which either
party may have against the other. Judgment upon the award
rendered may be entered in any court having jurisdiction thereof.
E. Each party shall pay the fee and expenses of its own
arbitrator and one-half of the fee and expenses of the third
arbitrator. All other expenses of the arbitration shall be
equally divided between the parties.
F. Except as provided above, arbitration shall be based,
insofar as applicable, upon the procedures of the American
Arbitration Association.
G. In the event of the insolvency of the Reassured, all
arbitration proceedings must also be subject to the laws of the
state of Colorado.
ARTICLE 22., RESERVES
A. If a jurisdiction of the United States will not permit
the Reassured, in the statements required to be filed with its
regulatory authority(ies), to receive full credit as admitted
reinsurance for any Reinsurer's share of obligations, the
Reassured shall forward to such Reinsurer a statement of the
Reinsurer's share of such obligations. Upon receipt of such
statement the Reinsurer shall promptly apply for, and provide the
Reassured with, a "clean," unconditional and irrevocable Letter
of Credit, in the amount specified in the statement submitted,
with terms and bank acceptable to the regulatory authority(ies)
having jurisdiction over the Reassured. An acceptable bank is a
"qualified United States Financial institution" as defined by
Regulation No. 10-1-102 (9.5) promulgated by the Colorado
Insurance Department.
B. "Obligations," as used in this ARTICLE 22., RESERVES,
shall mean the sum of losses paid and allocated loss adjustment
expenses paid by the Reassured but not yet recovered from the
Reinsurer, plus reserves for reported losses and allocated loss
adjustment expenses. It shall not include reserves for losses
incurred but not reported.
C. The Reinsurers hereby agrees that the Letter of Credit
will provide for automatic extension of the Letter of Credit
without amendment for one year from the date of expiration of
said Letter or any future expiration date unless thirty (30) days
prior to any expiration the issuing bank shall notify the
Reassured by registered mail that the issuing bank elects not to
consider the Letter of Credit renewed for any additional period.
<PAGE>
-11-
D. Notwithstanding any other provision of this Contract,
the Reassured or any successor by operation of law of the
Reassured including, without limitation, any liquidator,
rehabilitator, receiver or conservator of the Reassured may draw
upon such credit, without diminution because of the insolvency of
any party hereto, at any time and undertakes to use and apply
such credit for one or more of the following purposes only:
1. To pay the Reinsurers share or to reimburse the
Reassured for the Reinsurer's share of any
obligations, as stipulated in the statement
submitted by the Reassured to the Reinsurers,
which is due to the Reassured and not otherwise
paid by the Reinsurer.
2. In the event the Reassured has received effective
notice o non-renewal of the Letter of Credit and
the Reinsurers liability remains unliquidated and
undischarged thirty (30) days prior t the expiry
date of the Letter of Credit, to withdraw the
balance of the Letter of Credit and place such
sums in an interest bearing trust account to
secure the continuing liabilities of than
Reinsurers under this Contract until a renewal
Letter of Credit acceptable to the regulatory
authority(ies) having jurisdiction over the
Reassured, or a substitute in lieu thereof
acceptable t the regulatory authority(ies) having
jurisdiction over than Reassured, has been
received by the Reassured. The Reassured shall
provide to the Reinsurers payment of an interest
thereon accruing from such account.
3. To make refund of any sum which is in excess of the actual
amount required for Sub-paragraphs 1. and 2. of this
Paragraph D., of ARTICLE 22., RESERVES.
E. At annual intervals or more frequently as determined by
the Reassured, but never more frequently than quarterly, the
Reassured shall prepare a specific statement, for the sole
purpose of amending the Letter of Credit, of the Reinsurer's
share of any obligations. If the statement shows that the
Reinsurer's share of obligations exceeds the balance of credit as
of the statement date, the Reinsurer shall, within thirty (30)
days after receipt of notice of such excess, secure delivery to
the Reassured of an amendment of the Letter of Credit increasing
the amount of credit by the amount of such difference. If the
statement shows, however, that the Reinsurer's share of
obligations is less than the balance of credit as of the
statement date, the Reassured shall, within thirty (30) days
after receipt of written request from the Reinsurer, release such
excess credit by agreeing to secure an amendment to the Letter of
Credit reducing the amount of credit available by the amount of
such excess credit.
F. The bank shall have no responsibility whatsoever in
connection with the propriety of withdrawals made by the
Reassured or the disposition of funds withdrawn, except to assure
that withdrawals are made only upon the order of properly
authorized representatives of the Reassured. The Reassured shall
incur no obligation to the bank in acting upon the credit, other
than as appears in the express terms thereof.
<PAGE>
-12-
ARTICLE 23., SERVICE OF SUIT (Paragraphs A. and B. of this
ARTICLE 23., SERVICE OF SUIT, only apply
to Reinsurers domiciled outside of the
United States and/or unauthorized in the
State of New York)
A. It is agreed that in the event of the failure of the
Reinsurers hereon to pay any amount claimed to be due hereunder,
the Reinsurers hereon, at the request of the Reassured, will
submit to the jurisdiction of a Court of competent jurisdiction
within the United States. Nothing in this ARTICLE 23., SERVICE
OF SUIT, constitutes or should be understood to constitute a
waiver of Reinsurers' rights to commence an action in any Court
of competent jurisdiction in the United States, to remove an
action to a United States District Court, or to seek a transfer
of a case to another Court as permitted by the laws of the United
States or of any State in the United States. It is further
agreed that service of process in such suit may be made upon
Mendes and Mount, 750 Seventh Avenue, New York, New York 10019-
6829, and that in any suit instituted against any one of them
upon this Contract, such Reinsurers(s) will abide by the final
decision of such Court or of any Appellate Court in the event of
an appeal.
B. The above-named are authorized and directed to accept
service of process on behalf of Reinsurers in any such suit
and/or upon the request of than Reassured to give a written
undertaking to the Reassured that they will enter general
appearance upon Reinsurers' behalf in the event such a suit shall
be instituted.
C. Further, pursuant to any statute of any state,
territory or district of the United States which makes provision
therefore, Reinsurers hereon hereby designate the Superintendent,
Commissioner or Director of Insurance or other officer specified
for that purpose in the statute, or his successor or successors
in office, as their true and lawful attorney upon whom may be
served any lawful process in any action, suit or proceeding
instituted by or on behalf of the Reassured or any beneficiary
hereunder arising out of this Contract of reinsurance, and hereby
designate the above-named as the person to whom the said officer
is authorized to mail such process or a true copy thereof.
ARTICLE 24., OFFSET
The Reassured 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 Contract or any other contract
heretofore or hereafter entered into between the Reassured 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 Reassured or the Reinsurer.
<PAGE>
-13-
ARTICLE 25., ENTIRE AGREEMENT
This agreement embodies the whole agreement of the
parties and there are no promises, terms, conditions, obligations
other than those contained herein.
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
1. This reinsurance does not cover any loss or liability accruing
to the Reassured, directly or indirectly and whether as Insurer
or Reinsurer, from any Pool of Insurers or Reinsurers formed for
the purpose of covering for the purpose of covering Atomic or
Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph (1) of
this Clause, this reinsurance does not cover any loss or
liability accruing to the Reassured, directly or indirectly and
whether as Insurer or Reinsurer, from any insurance against
Physical Damage (including business interruption or consequential
loss arising out of such Physical Damage) to:
I. Nuclear reactor power plants including all auxiliary property on
the site, or
II. Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and "critical facilities" as such, or
III. Installations for fabricating complete fuel elements or for
processing substantial quantities of "special nuclear material,"
and for reprocessing, salvaging, chemically separating, storing
or disposing of "spent" nuclear fuel or waste materials, or
IV. Installations other than those listed in paragraph (2) III above
using substantial quantities of radioactive isotopes or other
products of nuclear fission.
3. Without in any way restricting the operations of paragraphs
(1) and (2) hereof, this reinsurance does not cover any loss or
liability by radioactive contamination accruing to the Reassured,
directly or indirectly, and whether as Insurer or Reinsurer, from
any insurance on property which is on the same site as a nuclear
reactor power plant or other nuclear installation and which
normally would be insured therewith except that this paragraph
(3) shall not operate
(a) where Reassured does not have knowledge of such nuclear
reactor power plant or nuclear installation, or
(b) where said insurance contains a provision excluding
coverage for damage to property caused by or resulting
from radioactive contamination, however caused. However
on and after 1st January 1960 this sub-paragraph (b)
shall only apply provided the said radioactive
contamination exclusion provision has been approved by
the Governmental Authority having jurisdiction thereof.
4. Without in any way restricting the operations of
paragraphs (1), (2) and (3) hereof, this reinsurance does
not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or
indirectly, and whether as Insurer or Reinsurer, when
such radioactive contamination is a named hazard
specifically insured against.
5. It is understood and agreed that this Clause shall not
extend to risks using radioactive isotopes in any form where
the nuclear exposure is not considered by the Reassured to be
the primary hazard.
6. The term "special nuclear material" shall have the meaning
given it in the Atomic Energy Act of 1954 or by any law
amendatory thereof.
7. Reassured to be sole judge of what constitutes:
a) substantial quantities, and
b) the extent of installation, plant or site.
NOTE-Without in any way restricting the operation of paragraph
(1) hereof, it is understood and agreed that
a) all policies issued by the Reassured on or before 31st
December 1957 shall be free from the application of the other
provisions of this Clause until expiry date or 31st December 1960
whichever first occurs whereupon all the provision s of this
Clause shall apply.
b) with respect to any risk located in Canada policies issued by
the Reassured on or before 31st December 1958 shall be free from
the application of the other provisions of this Clause until
expiry date or 31st December 1960 whichever first occurs
whereupon all the provisions of this Clause shall apply.
<PAGE>
POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE
SECTION A
It is agreed that the following is excluded hereunder:
(1) All business derived directly or indirectly from any Pool,
Association or Syndicate which maintains its own reinsurance
facilities.
(2) Any Pool or Scheme, (whether voluntary or mandatory) formed
after 1st March, 1968 for the purpose of insuring property
whether on a country-wide basis or in respect of designated
areas. This exclusion shall not apply to so-called
Automobile Insurance Plans or other Pools formed to provide
coverage for Automobile Physical Damage.
SECTION B
It is agreed that business written by the Reassured for the same
perils, which is known at the time to be insured by, or in excess
of underlying amounts placed in the following Pools, Associations
or Syndicates, whether by way of insurance or reinsurance, is
excluded hereunder.
Industrial Risk Insurers
Associated Factory Mutuals
Improved Risk Mutuals
Any Pool, Association or Syndicate formed for the purpose of
writing oil, gas or petrochemical plants and/or oil or gas
drilling rigs
United States Aircraft Insurance Group
Canadian Aircraft Insurance Group
Associated Aviation Underwriters
American Aviation Underwriters
Section B does not apply:
(1) Where the Total Insured Value over all interests of the risk
in question is less than $250,000,000.
(2) to interests traditionally underwritten as Inland Marine or
Stock and/or Contents written on a Blanket Basis.
(3) to Contingent Business Interruption, except when the
Reassured is aware that the key location is known at the
time to be insured in any Pool, Association or Syndicate
named above.
(4) to risks as follows:
offices, hotels, apartments, hospitals, educational
establishments, public utilities (other than railroad
schedules) and builder's risks on the classes of risks
specified in this subsection (4) only.
Where this Clause attaches to Catastrophe Excess of Loss
Reinsurance Agreements, the following SECTION C is added:
SECTION C
Nevertheless the Reinsurers specifically agree that liability
accruing to the Reassured from its participation in:
(1) The following so-called "Coastal Pools"
Alabama Insurance Underwriting Association
Florida Windstorm Underwriting Association
Louisiana Insurance Underwriting Association
Mississippi Windstorm Underwriting Association
North Carolina Insurance Underwriting Association
South Carolina Windstorm and Hail Underwriting Association
Texas Catastrophe Property Insurance Association
(2) All "Fair Plan" and "Rural Risk Plan" Business,
for all perils otherwise protected hereunder shall not be
excluded, except that this reinsurance does not include any
increase in such liability resulting from:
(i) The inability of any other participant in such
"Coastal Pool" and/or "Fair Plan" and/or "Rural Risk
Plan" to meet its liability.
(ii) Any claim against such "Coastal Pool" and/or "Fair Plan"
and/or "Rural Risk Plan" or any participant therein, including
the Reassured whether by way of subrogation or otherwise, brought
by or on behalf of any insolvency fund (as defined in the
Insolvency Funds Exclusion Clause incorporated in this
Agreement).
<PAGE>
Reference No.
PROPERTY FIRST CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
FIRST EXCESS & REINSURANCE CORPORATION
MISSOURI
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurers agrees to assume severally and not
jointly with other participants
a 5.75% share
of the liability described in the attached Contract
and, as consideration, the Reinsurers shall receive
a 5.75% share of the premium named therein.
Signed in Overland Park, Kansas, this 11th day of May, 1996
FIRST EXCESS & REINSURANCE
CORPORATION
BY s/Michael C.S.Burn,
TITLE Michael C. S. Burn, Vice President
<PAGE>
Reference No.
PROPERTY FIRST CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
HANNOVER RUCKVERSICHERUNG AG 80%
EISEN UND STAHL RUCKVERSICHERUNG AG 20%
HANNOVER,GERMANY
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurer agrees to assume severally and not
jointly with other participants
a 5.00% share
of the liability described in the attached
Contract and, as consideration, the Reinsurer
shall receive a 5.00% share of the premium named
therein.
Signed in Hannover, Germany, this 15th day of August, 1996,
HR ES HANNOVER RUCKVERSICHERUNG AG
Hereof EISEN UND STAHL RUCKVERSICHERUNG AG
80% HANNOVER Ruck Hannover
20% EISEN UND STAHL Ruck Ruckversicherungs-Aktiengesellschaft
RUCK Closings to EISEN UND STAHL
Hannover Ruck Ruckversicherungs-Aktiengesellschaft
Reference Number 0-411213-3000
BY s/Konrad Rentrup
s/Andreas Steinweg
TITLE________________
North American Treaty Dpt.- VR 10
<PAGE>
Reference No.
PROPERTY FIRST CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
THE HANOVER INSURANCE COMPANY
NEW HAMPSHIRE
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurer agrees to assume severally and not
jointly with other participants
a 4.00% share
of the liability described in the attached
Contract and, as consideration, the Reinsurers
shall receive a 4.00% share of the premium named
therein.
Signed in Florham Park, New Jersey, this 24th day of June, 1996,
ALLMERICA RE for and on behalf of THE
HANOVER INSURANCE COMPANY
BY s/Phillip A. Werund
TITLE Vice President
<PAGE>
Reference No.
PROPERTY FIRST CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
INSURANCE COMPANY OF THE WEST
CALIFORNIA
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurer, agrees to assume severally and not
jointly with other participants
a 19.50% share
of the liability described in the attached
Contract and, as consideration, the Reinsurer
shall receive a 19.50% share of the premium named
therein.
Signed in San Diego, California, this 13th day of May 1996,
INSURANCE COMPANY OF THE WEST
BY s/John DiValco
TITLE Senior Vice President
<PAGE>
Reference No.
PROPERTY FIRST CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
MUNCHENER RUCKVERSICHERUNGS-GESELL
MUNICH, GERMANY
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurer, agrees to assume severally and not
jointly with other participants
a 17.25% share
of the liability described in the attached
Contract and, consideration, the Reinsurers shall
receive a 17.25% share of the premium named
therein.
Signed in Munich, Germany, this 19th day of September, 1996,
Cash deposit (at market interest MUNCHENER RUCKVERSICHERUNGS-
rate) or securities deposit with GESSELL
ceding company in cases where Munchener Ruckversicherungs-Gessellschaft
Letter of Credit is required
- --------------------------------
Munchener Ruckversicherungs BY s/Christian Juttner
-Gessellschaft s/Christine Hutter
- -------------------------------- TITLE________________
FET not applicable as per IRS Closing
Agreement of CC:INTL-0321-92
dated June 19, 1992
<PAGE>
REFERENCE NO.
PROPERTY FIRST CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY OF CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY OF WISCONSIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
NATIONWIDE MUTUAL INSURANCE COMPANY
OHIO
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above Reinsurer agrees to
assume severally and not jointly with other participants
a 20.00% share
of this liability described in the attached Contract and, as
consideration, the Reinsurer shall receive a 20.00% share of
the premium named therein.
Signed in Columbus, Ohio, this 14th day of May, 1996
NATIONWIDE MUTUAL INSURANCE COMPANY
BY s/Raymond B. Blake
TITLE Vice President - Reinsurance
s/John J.Elder
TITLE Insurance Manager
<PAGE>
REFERENCE NO.
PROPERTY FIRST CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY OF CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY OF WISCONSIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
NEW JERSEY RE-INSURANCE COMPANY
NEW JERSEY
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above Reinsurer agrees to assume
severally and not jointly with other participants
a 2.50% share
of the liability described in the attached Contract and, as
consideration, the Reinsurer shall receive a 2.50% share of the
premium named therein.
Signed in West Trenton, New Jersey, this 26th day of August, 1996,
NEW JERSEY RE-INSURANCE COMPANY
BY s/Thomas A. Lynch
TITLE Vice President
<PAGE>
REFERENCE NO. 9612
PROPERTY FIRST CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY OF CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE OMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY OF WISCONSIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
PRUDENTIAL REINSURANCE COMPANY
DELEWARE
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above Reinsurer agrees to assume
severally and not jointly with other participants
a 17.25% share
of the liability described in the attached Contract and, as
consideration, the Reinsurer shall receive a 17.25% share of the
premium named therein.
Signed in Newark, New Jersey, this 25th day of July, 1996,
PRUDENTIAL REINSURANCE COMPANY
BY: s/Halina Herc
TITLE: Director
Effective April 2, 1996
Prudential Reinsurance Company
changed its name to
Everest Reinsurance Company
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REFERENCE NO.
PROPERTY FIRST CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY OF CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY OF WISCONSIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
SAN FRANCISCO REINSURANCE COMPANY
CALIFORNIA
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above Reinsurer agrees to assume
severally and not jointly with other participants
a 6.75% share
of the liability described in the attached Contract and, as
consideration, the Reinsurer shall receive a 6.75% share of the
premium named therein.
Signed in Novato, California, this 24th day of May, 1996
SAN FRANCISCO REINSURANCE COMPANY
BY: s/Thomas T. Sweeney
TITLE: Vice President
<PAGE>
REFERENCE NO.
PROPERTY FIRST CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY OF CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY OF WISCONSIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
UNITED FIRE & CASUALTY COMPANY
IOWA
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above Reinsurer agrees to assume
severally and not jointly with other participants
a 2.00% share
of the liability described in the attached Contract and, as
consideration, the Reinsurer shall receive a 2.00% share of
the premium named therein.
Signed in Cedar Rapids, Iowa, this 17th day of May, 1996,
UNITED FIRE & CASUALTY COMPANY
BY: s/John R. Cruise
TITLE: Vice President
<PAGE>
and signed in Englewood, Colorado, this 30th day of August, 1996,
BY: s/Roger Ware
TITLE: Chief Executive Officer
PART OF THE
PROPERTY FIRST CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY OF CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY OF WISCONSIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY OF CALIFORNIA
LANDMARK AMERICAN INSURANCE COMPANY
VIKING INSURANCE COMPANY OF WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
PROPERTY SECOND CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY.1, 1996, 12:01 A.M., LOCAL STANDARD TIME
INDEX
ARTICLE SUBJECT PAGE
1 PREAMBLE 1
2 BUSINESS COVERED 1
3 TERM 1
4 DEFINITION OF POLICIES 1
5 TERRITORY 1
6 EXCLUSIONS 2
7 RETENTION AND LIMIT 3
8 REINSTATEMENT 3
9 DEFINITION OF LOSS OCCURRENCE 4
10 NET LOSS 5
11 NET RETAINED LINES 6
12 LIABILITY OF THE REINSURER 6
13 NOTICE OF LOSS AND LOSS SETTLEMENT 6
14 SALVAGE AND SUBROGATION 7
15 PREMIUM 7
16 CURRENCY 8
17 ERRORS AND OMISSIONS 8
18 TAXES 8
19 ACCESS TO RECORDS 8
20 INTERMEDIARY 8
21 INSOLVENCY 9
22 ARBITRATION 9
23 RESERVES 10
24 SERVICE OF SUIT 12
25 OFFSET 12
26 ENTIRE AGREEMENT 13
ATTACHMENTS
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE -
REINSURANCE
POOLS EXCLUSION CLAUSE
<PAGE>
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GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY OF CALIFORNIA
LANDMARK AMERICAN INSURANCE COMPANY
VIKING INSURANCE COMPANY OF WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
PROPERTY SECOND CATASTROPHE EXCESS OF LOSS CONTRACT
PREAMBLE
The Reinsurers hereby reinsure the net excess liability
of the Reassured resulting from any loss occurrence or loss
occurrences which may take place during the term of this Contract
under the Reassured's policies subject to the following
conditions:
ARTICLE 1., BUSINESS COVERED
This Contract shall cover policies in force at the
inception of the Contract or written or renewed subsequent to its
inception, issued by or on behalf the Reassured and classified by
the Reassured as property including Fire, Allied Lines, Inland
Marine, Section I of Farmers Multiple Peril, Homeowners Multiple
Peril and Commercial Multiple Peril and Auto Physical Damage but
excluding Collision.
ARTICLE 2., TERM
A. The term of this Contract shall be from 12:01 a.m.,
Local Stand Time, January 1, 1996 through 12:01 a.m., Local
Standard Time, January 1, 1997.
B. If this Contract should terminate while a loss
occurrence cove hereunder is in progress, the Reinsurers shall be
liable subject to all other conditions of this Contract, for
their share of all individual losses resulting from such loss
occurrence whether any such individual losses take place before
or after such termination.
ARTICLE 3., DEFINITION OF POLICIES
The term "policies", whenever used herein, shall mean
all bind policies, contracts, certificates and other obligations,
whether oral or written, of insurance.
ARTICLE 4., TERRITORY
Subject to all other terms and conditions of this
Contract, this Contract shall apply to losses occurring anywhere
within the territorial limits of the Reassured's policy by which
it was insured.
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ARTICLE 5., EXCLUSIONS
A. This Contract does not apply to and specifically
excludes the following:
1 Business classified by the Reassured as Accident
and Health, Workers' Compensation, Employers'
Liability, all forms of third party Bodily Injury
Liability, and Fidelity and Surety;
2. Hail damage to growing or standing crops;
3. Nuclear incidents in accordance with the Nuclear
Incident Exclusion Clause - Physical Damage -
Reinsurance attached to and forming part of this
Contract;
4. Reinsurance treaty business, including pro rata
and excess of loss, assumed by the Reassured, but
not to exclude business from State and County
Mutual Fire, Security Insurance of Hartford and
affiliated companies;
5. Pools, Associations and Syndicate business as
excluded by the provisions of the "Pools
Exclusions Clause" attached to and forming part of
this Contract;
6. Loss or damage 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 from of policy containing a
standard War Exclusion Clause;
7. Financial Guaranty and Insolvency;
8. All liability of the Reassured arising by
contract, operation of law, or otherwise, from its
participation or membership, whether voluntary or
involuntary, in any insolvency fund shall be
excluded hereunder. "Insolvency Fund" includes
any guaranty fund, insolvency fund, plan, pool,
association, fund or other arrangement, howsoever
denominated, established or governed; which
provides for any assessment of or payment or
assumption by the Reassured of part or all of any
claim, debt, charge, fee, or other obligation of
an insurer, or its successors or assigns, which
has been declared by any competent authority to be
insolvent, or which is otherwise deemed unable to
meet any claim, debt, charge, fee or other
obligation in whole or in part;
9. Loss/or Damage/or Costs/or Expenses arising from
Seepage and/or Pollution and/or Contamination,
other than Contamination from Smoke Damage.
Nevertheless, this exclusion does not preclude any
payment of the cost of the removal of debris of
property damaged by a loss otherwise
<PAGE>
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covered hereunder, but subject always to a limit
of 25.0% of the Reassured's Property loss under
the original policy. it is agreed that all
business the subject of the Contract contains the
full I.S.O. Seepage and Pollution Exclusion Clause
or so deemed.
B. Policies or coverages excluded under the provisions of
this ARTICLE 5., EXCLUSIONS, (other than items (3), (6), (7) and
(9) which are inadvertently issued or issued in error or issued
without the Reassured's knowledge and consent shall be covered
hereunder provided such policies are canceled or reinsure
elsewhere as soon as possible upon the Reassured's Home Office
Underwriting Management becoming aware that they are excluded.
ARTICLE 6., RETENTION AND LIMIT
The Reinsurers shall be liable for each and every loss
occurrence, irrespective of the number and kinds of risks and
perils involved, for 95% of the net loss in excess of $10,000,000
each and every loss occurrence; but the Reinsurers' shall not be
liable for more than $9,500,000 (being 95% of $10,000,000) for
each and every loss occurrence. In the event the aggregate
losses recoverable under this Contract are expected to exceed
$18,000,000, the Reassured shall immediately notify the State of
Colorado Division of Insurance of the impending exhaustion of the
reinsurance coverage.
ARTICLE 7., REINSTATEMENT
A. Each claim hereunder shall reduce the amount of the
Reinsurers' liability from the time of the occurrence of the loss
by the sum paid, but the sum so exhausted immediately shall be
reinstated from the time of the occurrence of the loss.
B. For each amount so reinstated, the Reassured agrees to
pay an additional premium calculated by multiplying 100% of the
annual premium hereon by the product of the percentage that the
amount reinstated bears to the limit (i.e. $9,500,000) of this
Contract. Nevertheless, the liability of the Reinsurers shall
never be more than $9,500,000 in respect of any one loss
occurrence, nor more than $19,000,000 in all in respect of all
losses occurring during the term of this Contract.
C. A provisional reinstatement premium shall be paid by
the Reassured at the time the Reinsurers pay the loss giving rise
to the reinstatement premium through an offset of the provisional
reinstatement premium due the Reinsurers against the loss payment
due the Reassured, with only the net amount due to be remitted by
the Reinsurers to the Reassured. The amount of this provisional
reinstatement premium shall be based on 100% of the estimated
annual reinsurance premium as calculated in Paragraph A. of
ARTICLE 14., PREMIUM (or the annual deposit premium as stated in
Paragraph C. of ARTICLE 14., PREMIUM, if prior to the conclusion
of a full calendar year).
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D. As promptly as possible after the loss has been paid by
the Reinsurers and the annual reinsurance premium hereunder has
been finally determined, the Reassured shall prepare and submit
to the Reinsurers a final statement of reinstatement premium due.
Any reinstatement premium shown to be due the Reinsurers (less
prior payments, if any) shall be remitted by the Reassured with
its statement. Any return reinstatement premium shown to be due
the Reassured shall be remitted by the Reinsurers as promptly as
possible after receipt of the Reassured's final statement.
ARTICLE 8., DEFINITION OF LOSS OCCURRENCE
A. The term "Loss Occurrence" shall mean the sum of all
individual losses directly occasioned by any one disaster,
accident or loss or series o disasters, accidents or losses
arising out of one event which occurs within the are of one state
of the United States or province of Canada and states or province
contiguous thereto and to one another. However, the duration and
extent of an one "Loss Occurrence" shall be limited to all
individual losses sustained by the Reassured occurring during any
period of 168 consecutive hours arising out of an directly
occasioned by the same event except that the term "Loss
Occurrence" shall be further defined as follows:
1. As regards windstorm, hail, tornado, hurricane,
cyclone including ensuing collapse and water
damage, all individual losses sustained by the
Reassured occurring during a period of 72
consecutive hours arising out of and dire
occasioned by the same event. However, the event
need n 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 loss sustained by the Reassured
occurring during any period of consecutive hours
within the area of one municipality county and the
municipalities or counties contiguous the arising
out of and directly occasioned by the same event.
maximum duration of 72 consecutive hours may be
extend in respect of individual losses which occur
beyond such consecutive hours during the continued
occupation of assured's premises by strikers,
provided such occupation commenced during the
aforesaid period.
3. As regards earthquake (the epicenter of which need
necessarily be within the territorial confines
referred to in opening paragraph of this ARTICLE
8., DEFINITION OF LOSS OCCURRENCE) and fire
following directly occasioned by earthquake, only
those individual fire losses which commence during
the period of 168 consecutive hours may be
included in the Reassured's "Loss Occurrence".
<PAGE>
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4. As regards "Freeze", only individual losses
directly occasioned by collapse, breakage of glass
and water damage (caused by bursting of frozen
pipes and tanks) may be included in the
Reassured's "Loss Occurrence".
B. For all "Loss Occurrences", other than those referred
to in sub-paragraph A. 2 of this ARTICLE 8., DEFINITION OF LOSS
OCCURRENCE, the Reassured 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 Reassured arising out
of that disaster, accident or loss and provided that only one
such period of 168 consecutive hours shall apply with respect to
one event except for any "Los Occurrences" referred to in sub-
paragraph A. 1. of this ARTICLE 8., DEFINITION 0F LOSS OCCURRENCE
where only one such period of 72 consecutive hours shall apply
with respect to one event.
C. As respects those "Loss Occurrences" referred to in sub-
paragraph A.. 2. of this ARTICLE 8., DEFINITION OF LOSS
OCCURRENCE, if the disaster, accident or loss occasioned by the
event is of greater duration than 72 consecutive hours, then the
Reassured may divide that disaster, accident or loss into two or
more "Loss Occurrences" provided no two periods overlap and no
individual loss 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 Reassured arising out of that disaster, accident or loss.
D. No individual losses occasioned by an event that would
be covered by 72 hours clauses may be included in any "Loss
Occurrence" claimed under the 168 hours provision.
ARTICLE 9., NET LOSS
A. The term "net loss" shall mean the actual loss incurred
by the Reassured under policies covered hereunder. Such loss
shall include sums paid in settlement of claims and suits and in
satisfaction of judgments, including prejudgment interest when
added to a judgment. Such loss also shall include all allocated
loss adjustment expenses paid by the Reassured including but not
limited to expenses sustained in connection with settlement and
litigation of claims and suits, satisfaction of judgments,
resistance to or negotiations concerning a loss (which shall
include the pro rata share of the Reassured's outside employees
according to the time occupied in adjusting such loss and the
expenses of the Reassured's employees while diverted from their
normal duties to the service of field adjustment but shall not
include any salaries of officers nor normal overhead expenses of
the Reassured) and any interest on judgments other than
prejudgment interest when added to a judgment.
B. All salvages, recoveries, payments and reversals or
reductions of verdicts or judgments (net of the cost of obtaining
such salvage, recovery, payment or reversal or reduction of a
verdict or judgment) whether recovered, received or obtained
prior or subsequent to loss settlement under this Contract,
including
<PAGE>
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amounts recoverable under other reinsurance whether collected or
not, shall be applied as if recovered, received or obtained prior
to the aforesaid settlement and shall be deducted from the actual
losses sustained to arrive at the amount of the net loss.
Nothing in this ARTICLE 9., NET LOSS, shall be construed to mean
losses are not recoverable until the net loss to the Reassured
finally has been ascertained.
ARTICLE 10., NET RETAINED LINES
A. This Contract applies only to that portion of any
insurance or reinsurance which the Reassured retains net for its
own account and in calculating the amount of any loss hereunder
and also in computing the amount or amounts in excess of which
this Contract attaches, only loss or losses in respect of that
portion of any insurance or reinsurance which the Reassured
retains net for its own account shall be included.
B. It is agreed, however, that the amount of the
Reinsurers' liability hereunder in respect of any loss or losses
shall not be increased by reason of the inability of the
Reassured to collect from any other Reinsurers, whether specific
or general, any amounts which may have become due from them,
whether such inability arises from the insolvency of such other
Reinsurers or otherwise.
C. It is understood that the Reassured carries underlying
per risk excess reinsurance, recoveries under which shall inure
to the benefit of the Reinsurers hereunder and shall be deducted
in determining the net loss subject to this Contract.
ARTICLE 11., LIABILITY OF THE REINSURER
A. The liability of the Reinsurers shall follow that of
the Reassured in every case, and be subject in all respects to
all the general and special stipulations, clauses, waivers and
modifications of the Reassured's policies and any endorsements
thereon.
B. All terms of this Contract shall De subject to the laws
of the state of Colorado.
C. Nothing herein shall in any manner create any
obligations or establish any rights against the Reinsurers in
favor of any third party or any persons not parties to this
Contract.
ARTICLE 12., NOTICE OF LOSS AND LOSS SETTLEMENT
A. The Reassured shall advise the Reinsurers promptly of
all loss occurrences which, in the opinion of the Reassured, may
result in a claim hereunder and of all subsequent developments
thereto which, in the opinion of the Reassured, may materially
affect the position of the Reinsurers. Inadvertent omission or
oversight in giving such notice shall in no way affect the
liability of the Reinsurers. However, the Reinsurers shall be
informed of such omission or oversight promptly upon its
discovery.
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B. All loss settlements made by the Reassured, provided
they are within the terms of this Contract, shall be
unconditionally binding upon the Reinsurers, who agree to pay all
amounts for which they may be liable immediately upon being
furnished b the Reassured with reasonable evidence of the amount
due.
ARTICLE 13., SALVAGE AND SUBROGATION
The Reinsurers shall be credited with salvage (i.e.,
reimbursement obtained or recovery made by the Reassured, less
the actual cost, excluding salaries of officials and employees of
the Reassured and sums paid to attorneys as retainer, of
obtaining such reimbursement or making such recovery) on account
of claims and settlements involving reinsurance hereunder.
Salvage thereon shall always be used to reimburse the excess
carriers in the reverse order of their priority according to
their participation before being used in any way to reimburse the
Reassured for its primary loss. The Reassured hereby agrees to
enforce its rights to salvage or subrogation relating to any
loss, a part of which loss was sustained by the Reinsurer, and to
prosecute all claims arising out of such rights.
ARTICLE 14., PREMIUM
A. The premium due the Reinsurers shall be calculated
by applying a rate of .408% to the Reassured's gross net written
premium income during the term of this Contract.
The term "gross net written premium income" shall
mean gross premiums written on business covered hereunder less
premiums paid for reinsurance, recoveries under which would
reduce the loss under this Contract.
B. For purposes of this Contract, 100% of the Reassured's
written premium for property, including Fire, Allied Lines,
Inland Marine, Section I of Farmowners Multiple Peril, Homeowners
Multiple Peril and Commercial Multiple Peril and Auto Physical
Damage excluding Collision shall be reported hereunder.
C. A deposit premium of $369,000, shall be payable to the
Reinsurers in four equal installments of $92,250, each, the first
payment being due at inception of this Contract and the second
and subsequent payments being payable as of April 1, July 1 and
October 1, 1996. This Contract shall be subject to a minimum
premium of $295,200. As promptly as possible after the
termination of this Contract, the Reassured shall render a
statement to the Reinsurers showing the actual reinsurance
premiums due hereunder, calculated as provided in Paragraph A. of
this ARTICLE 14., PREMIUM, and, if the premium so calculated is
greater than the deposit premium, the additional premium shall
hereupon be paid to the Reinsurers. If the premium so calculated
in Paragraph A. of this ARTICLE 14., PREMIUM, is less than the
minimum premium, Reinsurers will immediately return the
difference between the minimum premium and the deposit premium
previously paid by the Reassured. If the premium calculated in
Paragraph A. of this ARTICLE 14., PREMIUM, is greater than the
minimum premium but less than the deposit premium, Reinsurers
will immediately return the difference between the reinsurance
premium due and the deposit premium previously paid by the
Reassured.
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ARTICLE 15., CURRENCY
Whenever the word "Dollars" or the "$" sign appears in
this Contract, they shall be construed to mean United States
Dollars and all transactions under this Contract shall be in
United States Dollars.
Amounts paid or received by the Reassured in any other
currency shall be converted to United States Dollars at the rate
of exchange at the date such transaction is entered on the books
of the Reassured.
ARTICLE 16., ERRORS AND OMISSIONS
Inadvertent delays, errors or omissions made in
connection with this Contract shall not relieve either party from
any liability which would have attached had such delay, error or
omission not occurred, provided always that such delay, error or
omission shall be rectified as soon as possible after discovery
by the Reassured's Home Office.
ARTICLE 17., TAXES
In consideration of the terms under which this Contract
is issued, the Reassured undertakes not to claim any deduction of
the premium hereon when making Canadian tax returns or when
making tax returns, other than income or profits tax returns, to
any state or territory of the United States of America or to the
District of Columbia.
ARTICLE 18., ACCESS TO RECORDS
The Reassured shall place at the disposal of the
Reinsurers at all reasonable times, and the Reinsurers shall have
the right to inspect through their designated representatives,
during the term of this Contract and thereafter, all books,
records and papers of the Reassured in connection with any
reinsurance hereunder, or the subject matter hereof.
ARTICLE 19., INTERMEDIARY
Towers Perrin Reinsurance is hereby recognized as the
Intermediary negotiating this Contract for all business
hereunder. All communications (including but not limited to
notices, statements, premium, return premium, commissions, taxes,
losses, loss adjustment expense, salvages and loss settlements)
relating thereto shall be transmitted to the Reassured or the
Reinsurers through Towers Perrin Reinsurance, Mellon Bank Center,
1735 Market Street, Philadelphia, Pennsylvania, 19103-7501.
Payments by the Reassured to the intermediary shall be deemed to
constitute payment to the Reinsurers. Payments by the Reinsurers
to the Intermediary shall be deemed to constitute payment to the
Reassured only to the extent that such payments are actually
received by the Reassured.
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ARTICLE 20., INSOLVENCY
A. In the event of insolvency of the Reassured, the
reinsurance under this Contract shall be payable by the
Reinsurers to the Reassured or to its liquidator, receiver, or
statutory successor on the basis of the liability of the
Reassured under the policy or policies reinsured without
diminution because of the insolvency of the Reassured.
B. It is further agreed that the liquidator, or receiver,
or statutory successor of the Reassured shall give written notice
to the Reinsurers of the pendency of any claim against the
Reassured on the policies reinsured within a reasonable time
after such claim is filed in the insolvency proceeding, and that
during the pendency of such claim the Reinsurers may investigate
such claim and interpose, at their own expense, in the proceeding
where such claim is to be adjudicated, any defense or defenses
which they may deem available to the Reassured or to its
liquidator, or receiver, or statutory successor. The expense
thus incurred by the Reinsurers shall be chargeable, subject to
court approval, against the Reassured as part of the expense of
liquidation to the extent of a proportionate share of the benefit
which may accrue to the Reassured solely as a result of the
defense undertaken by the Reinsurers.
ARTICLE 21., ARBITRATION
A. Any dispute or other matter in question between the
Reassured and the Reinsurers arising out of or relating to the
formation, interpretation, performance, or breach of this
Contract, whether such dispute arises before or after termination
of this Contract, shall be settled by arbitration. Arbitration
shall be initiated by the delivery of a written notice of demand
for arbitration by one party to the other within a reasonable
time after the dispute has arisen.
B. If more than one Reinsurer is involved in the same
dispute, all such Reinsurers shall constitute and act as one
party for the purposes of this ARTICLE 21., ARBITRATION,
provided, however, that nothing herein shall impair the rights of
such Reinsurers to assert several, rather than joint, defenses or
claims, nor be construed as changing the liability of the
Reinsurers under the terms of this Contract from several to
joint.
C. Each party shall appoint an individual as arbitrator
and the two so appointed shall then appoint a third arbitrator.
If either party refuses or neglects to appoint an arbitrator
within sixty days, the other party may appoint the second
arbitrator. If the two arbitrators do not agree on a third
arbitrator within sixty days of their appointment, each of the
arbitrators shall nominate three individuals. Each arbitrator
shall then decline two of the nominations presented by the other
arbitrator. The third arbitrator shall then be chosen from the
remaining two nominations by drawing lots. The arbitrators shall
be active or retired officers of insurance or reinsurance
companies or Lloyd's London Underwriters; the arbitrators shall
not have a personal or financial interest in the result of the
arbitration.
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D. The arbitration hearings shall be held in Englewood.
Colorado, or such other place as may be mutually agreed. Each
party shall submit its case to the arbitrators within sixty days
of the selection of the third arbitrator or within such longer
period as may be agreed by the arbitrators. The arbitrators
shall not be obliged to follow judicial formalities or the rules
of evidence except to the extent required by governing law, that
is, the state law of the situs of the arbitration as herein
agreed; they shall make their decisions according to the practice
of the reinsurance business. The decision rendered by a majority
of the arbitrators shall be final and binding on both parties.
Such decision shall be a condition precedent to any right of
legal action arising out of the arbitrated dispute which either
party may have against the other. Judgment upon the award
rendered may be entered in any court having jurisdiction thereof.
E. Each party shall Pay the fee and expenses of its own
arbitrator and one-half of the fee and expenses of the third
arbitrator. All other expenses of the arbitration shall be
equally divided between the parties.
F. Except as provided above, arbitration shall be based,
insofar as applicable, upon the procedures of the American
Arbitration Association.
G. In the event of the insolvency of the Reassured, all
arbitration proceedings must also be subject to the laws of the
state of Colorado.
ARTICLE 22., RESERVES
A. If a jurisdiction of the United States will not permit
the Reassured, in the statements required to be filed with its
regulatory authority(ies), to receive full credit as admitted
reinsurance for any Reinsurers share of obligations, the
Reassured shall forward to such Reinsurer a statement of the
Reinsurer's share of such obligations. Upon receipt of such
statement the Reinsurer shall promptly apply for, and provide the
Reassured with, a "clean," unconditional and irrevocable Letter
of Credit, in the amount specified in the statement submitted,
with terms and bank acceptable to the regulatory authority(ies)
having jurisdiction over the Reassured. An acceptable bank is a
"qualified United States Financial institution" as defined by
Regulation No. 10-1-102 (9.5) promulgated by the Colorado
Insurance Department.
B. "Obligations," as used in this ARTICLE 22., RESERVES,
shall mean the sum of losses paid and allocated loss adjustment
expenses paid by the Reassured but not yet recovered from the
Reinsurer, plus reserves for reported losses and allocated loss
adjustment expenses. It shall not include reserves for losses
incurred but not reported.
C. The Reinsurer hereby agrees that the Letter of Credit
will provide for automatic extension of the Letter of Credit
without amendment for one year from the date of expiration of
said Letter or any future expiration date unless thirty (30) days
prior to any expiration the issuing bank shall notify the
Reassured by registered mail that the issuing bank elects not to
consider the Letter of Credit renewed for any additional period.
<PAGE>
-11-
D. Notwithstanding any other provision of this Contract,
the Reassured or any successor by operation of law of the
Reassured including, without limitation, any liquidator,
rehabilitator, receiver or conservator of the Reassured may draw
upon such credit, without diminution because of the insolvency of
any party hereto, at any time and undertakes to use and apply
such credit for one or more of the following purposes only:
1 To pay the Reinsurer's share or to reimburse the
Reassure for the Reinsurer's share of any
obligations, as stipulated in the statement
submitted by the Reassured to the Reinsurer, which
is due to the Reassured and not otherwise paid by
the Reinsurer.
2. In the event the Reassured has received effective
notice of non-renewal of the Letter of Credit and
the Reinsurer's liability remains unliquidated and
undischarged thirty (30) days prior to the expiry
date of the Letter of Credit, to withdraw the
balance of the Letter of Credit and place such
sums in an interest bearing trust account to
secure the continuing liabilities of the Reinsurer
under this Contract until a renewal Letter of
Credit acceptable to the regulatory authority(ies)
having jurisdiction over the Reassured, or a
substitute in lieu thereof acceptable to the
regulatory authority(ies) having jurisdiction over
the Reassured, has been received by the Reassured.
The Reassured shall provide to the Reinsurer
payment of any interest thereon accruing from such
account.
3. To make refund of any sum which is in excess of
the actual amount required for Sub-paragraphs 1.
and 2. of this Paragraph D., of ARTICLE 22.,
RESERVES.
E. At annual intervals or more frequently as determined by
the Reassured, but never more frequently than quarterly, the
Reassured shall prepare a specific statement, for the sole
purpose of amending the Letter of Credit, of the Reinsurer's
share of any obligations. If the statement shows that the
Reinsurer's share of obligations exceeds the balance of credit as
of the statement date, the Reinsurer shall, within thirty (30)
days after receipt of notice of such excess, secure delivery to
the Reassured of an amendment of the Letter of Credit increasing
the amount of credit by the amount of such difference. If the
statement shows, however, that the Reinsurer's share of
obligations is less than the balance of credit as of the
statement date, the Reassured shall, within thirty (30) days
after receipt of written request from the Reinsurer, release such
excess credit by agreeing to secure an amendment to the Letter of
Credit reducing the amount of credit available by the amount of
such excess credit.
F. The bank shall have no responsibility whatsoever in
connection with the propriety of withdrawals made by the
Reassured or the disposition of funds withdrawn, except to assure
that withdrawals are made only upon the order of properly
authorized representatives of the Reassured. The Reassured shall
incur no obligation to the bank in acting upon the credit, other
than as appears in the express terms thereof.
<PAGE>
-12-
ARTICLE 23., SERVICE OF SUIT Paragraphs A. and B. of this
ARTICLE 23., SERVICE OF SUIT, only
apply to Reinsurers domiciled
outside of the United States and/or
unauthorized in the State of New
York)
A. It is agreed that in the event of the failure of the
Reinsurers hereon to pay any amount claimed to be due hereunder,
the Reinsurers hereon, at the request of the Reassured, will
submit to the jurisdiction of a Court of competent jurisdiction
within the United States. Nothing in this ARTICLE 23., SERVICE
OF SUIT, constitutes or should be understood to constitute a
waiver of Reinsurers' rights to commence an action in any Court
of competent jurisdiction in the United States, to remove an
action to a United States District Court, or to seek a transfer
of a case to another Court as permitted by the laws of the United
States or of any State in the United States. It is further
agreed that service of process in such suit may be mad upon
Mendes and Mount, 750 Seventh Avenue, New York, New York 10019-
6829, and that in any suit instituted against any one of them
upon this Contract, such Reinsurer(s) will abide by the final
decision of such Court or of any Appellate Court in the event of
an appeal.
B. The above-named are authorized and directed to accept
service process on behalf of Reinsurers in any such suit and/or
upon the request of t Reassured to give a written undertaking to
the Reassured that they will enter general a appearance upon
Reinsurers' behalf in the event such a suit shall be instituted.
C. Further, pursuant to any statute of any state,
territory or district of t United States which makes provision
therefore, Reinsurers hereon hereby design the Superintendent,
Commissioner or Director of Insurance or other officer specified
for that purpose in the, statute, or his successor or successors
in office, as their t and lawful attorney upon whom may be served
any lawful process in any action, s or proceeding instituted by
or on behalf of the Reassured or any beneficiary hereunder
arising out of this Contract of reinsurance, and hereby designate
t above-named as the person to whom the said officer is
authorized to mail such process or a true copy therof.
ARTICLE 24., OFFSET
The Reassured 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 Contract or any other contract
heretofore or hereafter entered into between the Reassured 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 Reassured or the Reinsurer.
<PAGE>
-13-
ARTICLE 25., ENTIRE AGREEMENT
This agreement embodies the whole agreement of the
parties and there are no promises, terms, conditions, obligations
other than those contained herein.
<PAGE>
Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance
1. This reinsurance does not cover any loss or liability
accruing to the Reassured, directly or Indirectly and whether as
Insurer or Reinsurer, from Any Pool of Insurers or Reinsurers
formed for the purpose of covering Atomic or Nuclear Energy
risks.
2. Without in any way restricting the operation of paragraph
(1) of this Clause, this reinsurance does not cover any loss or
liability accruing to the Reassured, directly or indirectly and
whether as Insurer or Reinsurer, from any insurance against
Physical Damage (including business interruption or consequential
loss arising out of such Physical Damage) to:
I. Nuclear reactor power plants including all auxiliary
property on the site, or
II. Any other nuclear reactor installation. including
laboratories handling radioactive materials in
connection with reactor installations, and "critical
facilities" as such. or
III. Installations for fabricating Complete fuel elements or
for processing substantial quantities of "special
nuclear material," and for reprocessing, salvaging,
chemically separating, storing or disposing Of "spent"
nuclear fuel or waste materials, or
IV. Installations other than those listed in paragraph (2)
III above mine substantial quantities of radioactive
isotopes or other products of nuclear fission.
3. Without in any way restricting the operations of paragraphs
(1) and (2) hereof, this reinsurance does not cover any loss or
liability by radioactive contamination accruing to the Reassured,
directly or indirectly, and whether as Insurer or Reinsurer, from
any insurance on property which is on the same site as a nuclear
reactor power plant or other nuclear installation and which
normally would be Insured therewith except that this paragraph
(3) shall not operate
(a) where Reassured does not have knowledge of such nuclear
reactor power plant or nuclear installation, or
(b) where said insurance contains, a provision excluding
coverage for damage to property caused by or resulting
from radioactive contamination, however caused.
However on and after 1st January 1960 this sub-
paragraph (b) shall only apply provided the said
radioactive contamination exclusion provision has bases
Approved by the Governmental Authority having
jurisdiction thereof.
4. Without in any way restricting the operations of paragraphs
(1). (2) and (3) hereof, this reinsurance does not cover any loss
or liability by radioactive contamination accruing to the
Reassured, directly or indirectly, and whether as Insurer or
Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
5. It is understood and agreed that this Clause shall not
extend to risks using radioactive isotopes in any form where the
nuclear exposure is not considered by the Reassured to be the
primary hazard.
6. The term "special nuclear material" shall have the meaning
given it in the Atomic Energy Act of 1954 or by any law
amendatory thereof.
7. Reassured to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
NOTE--Without in any way restricting the operation of paragraph
(1) hereof, it is understood and agreed that
(a) all policies issued by the Reassured on or before 31st
December 1957 shall be free from the application of the
other provisions of this Clause until expiry date or
31st December 1960 whichever first occurs whereupon all
the provisions of this Clause shall apply.
(b) with respect to any risk located in Canada policies
issued by the Reassured on or before 31st December 1958
shall be free from the application of the other
provisions of this Clause until expiry date or 31st
December 1960 whichever first occurs whereupon all the
provisions of this Clause shall apply.
<PAGE>
POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE
SECTION A
It is agreed that the following is excluded hereunder:
(1) All business derived directly or indirectly from any Pool,
Association or Syndicate which maintains its own reinsurance
facilities.
(2) Any Pool or Scheme, (whether voluntary or mandatory) formed
after 1st March, 1968 for the purpose of insuring property
whether on a country-wide basis or in respect of designated
areas. This exclusion shall not apply to so-called
Automobile Insurance Plans or other Pools formed to provide
coverage for Automobile Physical Damage.
SECTION B
It is agreed that business written by the Reassured for the same
perils, which is known at the time to be insured by, or in excess
of underlying amounts placed in the following Pools, Associations
or Syndicates, whether by way of insurance or reinsurance, is
excluded hereunder.
Industrial Risk Insurers
Associated Factory Mutuals
Improved Risk Mutuals
Any Pool, Association or Syndicate formed for the purpose of
writing oil, gas or petro-chemical plants and/or oil or gas
drilling rigs
United States Aircraft Insurance Group
Canadian Aircraft Insurance Group
Associated Aviation Underwriters
American Aviation Underwriters
Section B does not apply:
(1) Where the Total Insured Value over all interests of the risk
in question is less than $250,000,000.
(2) to interests traditionally underwritten as Inland Marine or
Stock and/or Contents written on a Blanket Basis.
(3) to Contingent Business interaction, except when the
Reassured is aware that the key location is known at the
time to be insured in any Pool, Association or Syndicate
named above.
(4) to risks as follows:
offices, hotels, apartments, hospitals, educational
establishments, public utilities (other than railroad
schedules) and builder's risks on the classes of risks
specified in this subsection (4) only.
Where this Clause attaches to Catastrophe Excess of Loss
Reinsurance Agreements, the following SECTION C is added:
SECTION C
Nevertheless the Reinsurers specifically agree that liability
accruing to the Reassured from its participation in:
(1) The following so-called "Coastal Pools"
Alabama Insurance Underwriting Association
Florida Windstorm Underwriting Association
Louisiana Insurance Underwriting Association
Mississippi Windstorm Underwriting Association
North Carolina insurance Underwriting Association
South Carolina Windstorm and Hail Underwriting Association
Texas Catastrophe Property Insurance Association
(2) All "Fair Plan" Business, including but not limited to the
Florida Residential Property and Casualty Joint Underwriting
Association and the Florida Property and Casualty Joint
Underwriting Association; and all "Rural Risk Plan"
Business,
for all perils otherwise protected hereunder shall not be
excluded, except that this reinsurance does not include any
increase in such liability resulting from:
(i) The inability of any other participant in such "Coastal
Pool" and/or "Fair Plan" and/or "Rural Risk Plan" to
meet its liability.
(ii) Any claim against such "Coastal Pool" and/or "Fair
Plan" and/or "Rural Risk Plan" or any participant therein,
including the Reassured whether by way of subrogation or
otherwise, brought by or on behalf of any insolvency fund (as
defined in the Insolvency Funds Exclusion Clause incorporated in
this Agreement).
<PAGE>
Reference No.
PROPERTY SECOND CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
FIRST EXCESS & REINSURANCE CORPORATION
MISSOURI
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurers agrees to assume severally and not
jointly with other participants
a 4.50% share
of the liability described in the attached Contract
and, as consideration, the Reinsurers shall receive
a 4.50% share of the premium named therein.
Signed in Overland Park, Kansas, this 11th day of May, 1996
FIRST EXCESS & REINSURANCE
CORPORATION
BY s/Michael C. S. Burn,
TITLE Michael C. S. Burn, Vice President
<PAGE>
Reference No.
PROPERTY SECOND CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
HANNOVER RUCKVERSICHERUNG AG 80%
EISEN UND STAHL RUCKVERSICHERUNG AG 20%
HANNOVER,GERMANY
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurer agrees to assume severally and not
jointly with other participants
a 10.00% share
of the liability described in the attached
Contract and, as consideration, the Reinsurer
shall receive a 10.00% share of the premium named
therein.
Signed in Hannover, Germany, this 15th day of August, 1996,
HRES HANNOVER RUCKVERSICHERUND AG
Hereof EISEN UND STAHLHANNOVER RUCKKVERSICHERUNG AG
80% HANNOVER RUCK HANNOVER
20% EISEN UND STAHL Ruckversicherungs-Aktiengesellschaft
- ------------------- EISEN UND STAHL
Closings to Hannover Ruck Ruckversicherungs-Aktiengesellschaft
Reference Number 0-411713-3000
By s/Konrad Rentrup
s/Adreas Steinweg
TITLE:________________
North American Treaty Dpt.- VR 10
<PAGE>
Reference No.
PROPERTY SECOND CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
THE HANOVER INSURANCE COMPANY
NEW HAMPSHIRE
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurer agrees to assume severally and not
jointly with other participants
a 5.00% share
of the liability described in the attached
Contract and, as consideration, the Reinsurers
shall receive a 5.00% share of the premium named
therein.
Signed in Florham Park, New Jersey, this 24th day of June,
1996,
ALLMERICA RE for and on behalf of
THE HANOVER INSURANCE COMPANY
BY s/Phillip A. Werund
TITLE Vice President
<PAGE>
Reference No.
PROPERTY SECOND CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCECOMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
INSURANCE COMPANY OF THE WEST
CALIFORNIA
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurer, agrees to assume severally and not
jointly with other participants
a 7.75% share
of the liability described in the attached
Contract and, as consideration, the Reinsurer
shall receive a 7.75% share of the premium named
therein.
Signed in San Diego, California, this 13th day of May 1996,
INSURANCE COMPANY OF THE WEST
BY s/John DiValco
TITLE Senior Vice President
<PAGE>
Reference No.
PROPERTY SECOND CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCECOMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
MUNCHENER RUCKVERSICHERUNGS-GESELL
MUNICH, GERMANY
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurer, agrees to assume severally and not
jointly with other participants
a 22.50% share
of the liability described in the attached
Contract and, consideration, the Reinsurers shall
receive a 22.50% share of the premium named
therein.
Signed in Munich, Germany, this 20th day of June, 1996,
Cash deposit (at MUNCHENER RUCKVERSICHERUNG
market interest rate) GESELL
or securities deposit Munchener Ruckversicherungs-
with ceding company Gesellschaft
in cases where Letter
of Credit is required
Munchener Ruckversicherungs-Gesellschaft
FET not applicable BY s/Peter Wagner and
as IRS Closing s/Christine Hutter
Agreement TITLE: _______________
CC:INTL-0321-92
dated June 19, 1992
subject to the exclusion of extra contractual obligations
(article 5-Exclusions)
<PAGE>
Reference No.
PROPERTY SECOND CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
NATIONWIDE MUTUAL INSURANCE COMPANY
OHIO
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurer, agrees to assume severally and not
jointly with other participants
a 15.00% share
of the liability described in the attached
Contract and, consideration, the Reinsurers shall
receive a 15.00% share of the premium named
therein.
Signed in Columbus, Ohio, this 14 day of May, 1996,
NATIONWIDE MUTUAL INSURANCE COMPANY
BY s/Raymond B. Blake
s/John J. Elder
TITLE Vice President-Reinsurance
Insurance Manager
<PAGE>
Reference No.
PROPERTY SECOND CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
NEW JERSEY RE-INSURANCE COMPANY
NEW JERSEY
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurers agrees to assume severally and not
jointly with other participants
a 6.00% share
of the liability described in the attached
Contract and, as consideration, the Reinsurers
shall receive a 6.00% share of the premium named
therein.
Signed in West Trenton, New Jersey, this 21st day of August,
1996,
NEW JERSEY RE-INSURANCE COMPANY
BY: s/Thomas A. Lynch
TITLE: Vice President
<PAGE>
Reference No. 9613
PROPERTY SECOND CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
PRUDENTIAL REINSURANCE COMPANY
DELAWARE
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurers agrees to assume severally and not
jointly with other participants
a 7.00% share
of the liability described in the attached
Contract and, as consideration, the Reinsurer
shall receive a 7.00% share of the premium named
therein.
Signed in Newark, New Jersey, this 25th day of July, 1996,
PRUDENTIAL REINSURANCE COMPANY
Effective April 2, 1996 BY: s/Halina Herc
Prudential Reinsurance TITLE: Director
Company changed its
name to
Everest Reinsurance
Company
<PAGE>
Reference No.
PROPERTY SECOND CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
SAN FRANCISCO REINSURANCE COMPANY
CALIFORNIA
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurers agrees to assume severally and not
jointly with other participants
a 2.50% share
of the liability described in the attached
Contract and, as consideration, the Reinsurers
shall receive a 2.50% share of the premium named
therein.
Signed in Novato, California, this 24th day of May, 1996,
SAN FRANCISCO REINSURANCE COMPANY
BY: s/Thomas T. Sweeney
TITLE: Vice President
<PAGE>
Reference No.
PROPERTY SECOND CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
ST. PAUL FIRE & MARINE INSURANCE COMPANY
MINNESOTA
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurers agrees to assume severally and not
jointly with other participants
a 10.00% share
of the liability described in the attached
Contract and, as consideration, the Reinsurers
shall receive a 10.00% share of the premium named
therein.
Signed in New York, New York, this 10th day of June, 1996,
ST. PAUL FIRE & MARINE INSURANCE
COMPANY through ST. PAUL
REINSURANCE MANAGEMENT CORPORATION
BY: s/Cathryn A. Carea
TITLE: Vice President
<PAGE>
Reference No.
PROPERTY SECOND CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
SUMITOMO MARINE & FIRE INSURANCE COMPANY, LTD.-U.S.
NEW YORK
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurers agrees to assume severally and not
jointly with other participants
a 1.75% share
of the liability described in the attached
Contract and, as consideration, the Reinsurers
shall receive a 1.75% share of the premium named
therein.
Signed in New York, New York, this 12th day of August, 1996,
SUMITOMO MARINE & FIRE INSURANCE
COMPANY, LTD.-U.S. through SUMITOMO
MARINE RE MANAGEMENT, INC.
BY s/John Schmech
TITLE Assistant Vice President
<PAGE>
Reference No.
PROPERTY SECOND CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
UNITED FIRE & CASUALTY COMPANY
IOWA
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurers agrees to assume severally and not
jointly with other participants
a 2.00% share
of the liability described in the attached
Contract and, as consideration, the Reinsurers
shall receive a 2.00% share of the premium named
therein.
Signed in Cedar Rapids, Iowa, this 17th day of May, 1996,
UNITED FIRE & CASUALTY COMPANY
BY s/John R. Cruise
TITLE Vice President
<PAGE>
Reference No.
PROPERTY SECOND CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
(hereinafter called the "Reassured")
by
USF RE INSURANCE COMPANY
MASSACHUSETTS
(hereinafter called, with other participants, the "Reinsurers")
Under the terms of this Contract the above
Reinsurers agrees to assume severally and not
jointly with other participants
a 6.00% share
of the liability described in the attached
Contract and, as consideration, the Reinsurers
shall receive a 6.00% share of the premium named
therein.
Signed in Costa Mesa, California, this 3rd day of June, 1996,
USF RE INSURANCE COMPANY
BY s/James Dik
TITLE Vice President
<PAGE>
and signed in Englewood, Colorado, this 30th day of August, 1996.
BY s/Roger Ware
TITLE Chief Executive Officer
PART OF THE
PROPERTY SECOND CATASTROPHE EXCESS OF LOSS CONTRACT
EFFECTIVE JANUARY 1, 1996, 12:01 A.M., LOCAL STANDARD TIME
for the
GUARANTY NATIONAL INSURANCE COMPANY
COLORADO CASUALTY INSURANCE COMPANY
PEAK PROPERTY AND CASUALTY INSURANCE CORPORATION
GUARANTY NATIONAL INSURANCE COMPANY 0F CALIFORNIA
ENGLEWOOD, COLORADO
LANDMARK AMERICAN INSURANCE COMPANY
OKLAHOMA CITY, OKLAHOMA
VIKING INSURANCE COMPANY 0F WISCONIN
MADISON, WISCONSIN
VIKING COUNTY MUTUAL INSURANCE COMPANY
AUSTIN, TEXAS
TAX SHARING AGREEMENT
AGREEMENT, dated as of December 20, 1996, by and between
Orion Capital Corporation, a Delaware corporation ("Orion"), and
Guaranty National Corporation, a Colorado corporation ("GNC").
W I T N E S S E T H :
WHEREAS, Orion is the common parent corporation of an
"affiliated group" of corporations (the "Orion Group"), as that term
is defined in Section 1504(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), which group now includes GNC and any corporation
that is or subsequently becomes a member of an "affiliated group" of
which GNC would be the "common parent," as such terms are defined in
Section 1504(a) of the Code, if GNC were owned by individuals (GNC and
any present or future member of its affiliated group being referred to
herein as the "GNC Group"); and
WHEREAS, Orion and GNC desire to agree on an equitable basis
for determining the amount to be paid by GNC to Orion on account of
the GNC Group's inclusion in the Orion Group's consolidated federal
income tax returns.
<PAGE>
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants contained herein, the parties hereto agree as
follows:
1. Inclusion in Orion Return. GNC agrees to join, and
shall cause each other member of the GNC Group to join, in the filing
of the Orion Group's consolidated federal income tax return for any
taxable year for which GNC is eligible to join in such filing. GNC
agrees to, and agrees to cause each member of the GNC Group to, file
such consents, elections, and other documents and to take such other
action as may be necessary or appropriate to carry out the purposes of
this Agreement. Orion agrees that Orion shall timely file the Orion
Group's consolidated federal income tax return for the taxable year
and shall pay the amount of tax reflected thereon.
In all matters relating to the Orion Group's consolidated
tax liability, Orion is the agent for each member of the Orion Group,
including GNC. As said agent, Orion has the sole authority and
discretion to make any election for each member, including any
election that must be made to determine a member's separate taxable
income for purposes of computing the consolidated taxable income of
the Orion Group.
<PAGE>
2. The GNC Group's Hypothetical Tax. For purposes of
this Agreement, the "GNC Group's hypothetical tax" for any taxable
year covered by this Agreement shall be the federal income tax
liability that the GNC Group would have had for such taxable year if
the GNC Group had filed its own consolidated federal income tax return
for such taxable year, taking into account any carryovers to, or
carrybacks from, other taxable years of the GNC Group (or any member
thereof) that are available in such taxable year of the GNC Group, or
would have been so available if the GNC Group had filed its own
consolidated (or where applicable, separate) federal income tax
returns for such other taxable years, and the GNC Group was subject to
tax on all of its taxable income at the applicable maximum rate
specified in the Code but without the benefit of any surtax exemption;
provided, however, that in computing such hypothetical tax: (i) there
will be eliminated from taxable income any intercompany dividends that
would be eliminated under Treasury Regulation Section 1.1502-14(a);
(ii) intercompany transactions between members of the Orion Group that
would be deferred under Treasury Regulation Section 1.1502-13 shall be
deferred; (iii) the allowable credits against tax shall be limited to
those credits attributable to the GNC Group that are actually allowed
as credit against tax on the Orion Group consolidated
<PAGE>
federal income tax return for the taxable year of reference (allocated
pursuant to the Treasury Regulations under Section 1552 of the Code);
and (iv) in computing the deduction under Section 167 of the Code,
property shall not lose its character as a result of a transfer from
one member of the Orion Group to another. All intercompany
transactions (as defined in Treasury Regulation Section 1.1502-13(a))
between members of the Orion Group will be taken into account in
computing the GNC Group hypothetical tax at the time provided under
Treasury Regulation Section 1.1502-13.
3. Payment. With respect to each taxable year for
which GNC is part of the Orion Group:
(a) On each due date for payment of estimated federal
income tax and on the due date for filing the Orion Group
consolidated return (determined without regard to any
extensions), GNC shall pay to Orion the federal income tax that
would have been payable by the GNC Group on such date if the GNC
Group were filing its own consolidated federal income tax return
for such taxable year based upon the GNC Group's hypothetical
tax. In computing GNC's estimated federal income tax payments,
each payment shall be sufficient to avoid incurring any addition
to tax under Section 6655 of the Code by reason of an
underpayment by a "large corporation" within the
<PAGE>
meaning of Section 6655(g)(2) of the Code and shall be consistent
with the
elections permitted to be made under Section 6655(d) and (e) of
the Code to be made by Orion, in its sole discretion, for such
taxable year and communicated to GNC.
(b) On or prior to the date the Orion Group
consolidated return is actually filed for a taxable year, GNC
shall pay to Orion, or Orion shall pay to GNC, as the case may
be, the difference between the GNC Group's hypothetical tax for
such taxable year and the amount paid by GNC to Orion pursuant to
paragraph 3(a) hereof. If the GNC Group for any taxable year has
a loss or credit which could be carried back to and which would
reduce the GNC Group's hypothetical tax (as adjusted) for any
earlier taxable year for which the GNC Group was included in the
Orion Group, then (x) if and to the extent such loss or credit is
utilized to actually reduce the Orion Group's tax liability for
such taxable year, Orion shall pay to GNC on the date the Orion
Group consolidated return is actually filed for such taxable year
the amount by which the GNC Group's hypothetical tax in such
earlier taxable year is reduced by reason of such carryback or
(y) if and to the extent such loss or credit is actually carried
back to an
<PAGE>
earlier taxable year, Orion shall pay to GNC on the date any
refund of tax is actually received the amount by which the GNC
Group's hypothetical tax in such earlier year is reduced by
reason of such carryback together with any applicable interest.
4. Adjustments. GNC agrees that Orion shall be
responsible for, and shall have sole and absolute discretion with
respect to, claiming any deductions or credits not claimed on the
Orion Group consolidated return as filed, agreeing to, contesting, or
settling any adjustments to the Orion Group's federal income tax li
ability for any taxable year covered by this Agreement, and Orion
shall pay any deficiencies in, or receive any refunds of, the Orion
Group's federal income tax liability for any such taxable year
resulting from a final determination by the Internal Revenue Service
or the courts, or from carrybacks or carryovers of the Orion Group
from or to other taxable years. On or prior to the date of payment or
receipt or, if there is to be no payment or receipt, then on or prior
to the date on which there is an adjustment in the GNC Group's
hypothetical tax resulting from a final determination by the Internal
Revenue Service or the courts, or from carrybacks or carryovers of the
Orion Group from other taxable years, GNC shall pay to Orion or Orion
shall pay to GNC, as the case may be, the
<PAGE>
amount necessary to reflect the adjustment in the GNC Group's
hypothetical tax liability, together with any applicable interest and
penalties.
5. Resolution of Disputes as to the GNC Group's
Hypothetical Tax. In the event of a disagreement between the parties
hereto as to the amount of the GNC Group's hypothetical tax for any
taxable year covered by this Agreement, such amount shall be
determined by the independent certified public accountants who audit
Orion's certified financial statements for such taxable year, and the
determination of such accountants shall be final and binding on the
parties hereto.
6. Earnings and Profits and Characterization of Payments.
Earnings and profits of each member of the Orion Group shall be
calculated by allocating the federal income tax liability of the Orion
Group to each member in accordance with the method described in
Section 1552(a)(2) of the Code and the applicable Treasury Regulations
thereunder.
7. Miscellaneous Provisions.
(a) Entire Understanding. This Agreement contains the
entire understanding of the parties hereto with respect to the subject
matter hereof. No alteration, amendment or modification of any of the
terms of this Agreement shall be
<PAGE>
valid unless made by an instrument signed in writing by an authorized
officer of each of the parties hereto.
(b) Further Assurances. The parties hereto shall execute
and deliver such further instruments and do such further acts and
things (including, without limitation, by causing their subsidiaries
to execute and deliver such instruments and to do such acts and
things) as may be required to carry out the intent and purpose of this
Agreement. The parties each shall cooperate with the other with
respect to the preparation and filing of any tax return or the conduct
of any tax audit or other tax proceeding. If any party has possession
of documents or records which relate to, or could affect, any item of
income, loss, deduction, credit, tax basis or other tax attributes of
any other party hereto, such party shall take reasonable steps to
preserve such documents or records for the same period and to the same
extent as such party preserves and protects its own similar tax
documents, and prior to destroying or discarding any such records
shall notify the party to whom the records relate and offer such party
the opportunity, at such parties' expense, to take possession or
control of such documents.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers as of the
date first above written.
<PAGE>
ORION CAPITAL CORPORATION
By: s/Daniel L. Barry
Title: Chief Financial Officer
Attest:___________________
GUARANTY NATIONAL CORPORATION
By: s/Shelly J. Hengsteler
Title: Assistant Treasurer
Attest: s/Michael L. Pautler
GUARANTY NATIONAL CORPORATION
EQUITY INCENTIVE PLAN
Section 1. Purpose of the Plan
The purpose of the Guaranty National Corporation Equity
Incentive Plan (the "Plan") is to further the interests of Guaranty
National Corporation (the "Company") and its shareholders by providing
long-term performance incentives to those key employees of the Company
and its Subsidiaries who are largely responsible for the management,
growth and protection of the business of the Company and its
Subsidiaries.
Section 2. Definitions
For purposes of the Plan, the following terms shall be
defined as set forth below:
(a) "Award" means any Option, Performance Unit, Restricted Stock, Stock
granted as a bonus or in lieu of other awards, other Stock-Based Award,
Tax Bonus or other cash payments granted to a Participant under the Plan.
(b) "Award Agreement" shall mean the written agreement,
instrument or document evidencing an Award.
(c) "Change of Control" means and includes each of the
following: (i) the acquisition, in one or more transactions, of
beneficial ownership (within the meaning of Rule 13d-3 under the
Exchange Act) by any person or entity or any group of persons or
entities who constitute a group (within the meaning of Section
13(d)(3) of the Exchange Act), other than (x) Orion Capital Corporation or
a direct or indirect subsidiary thereof or (y) a trustee or other
fiduciary holding securities under an employee benefit plan of the
Company or a Subsidiary, of any securities of the Company such that,
as a result of such acquisition, such person, entity or group either
(A) beneficially owns (within the meaning of Rule l3d-3 under the Ex
change Act), directly or indirectly, more than 20% of the Company's
outstanding voting securities entitled to vote on a regular basis for
a majority of the members of the Board of Directors of the Company or
(B) otherwise has the ability to elect, directly or indirectly, a
majority of the members of the Board; (ii) a change in the composition
of the Board of Directors of the Company such that a majority of the
members of the Board of Directors of the Company are not Continuing
Directors; or (iii) the stockholders of the Company approve a merger
or consolidation of the Company with any other corporation, other than
a merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of
<PAGE>
the surviving entity) at least 80% of the total voting power rep
resented by the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or
the stockholders of the Company approve a plan of complete liquidation
of the Company or an agreement for the sale or disposition by the
Company of (in one or more transactions) all or substantially all of
the Company's assets.
Notwithstanding the foregoing, the preceding events shall
not be deemed to be a Change of Control if, prior to any transaction
or transactions causing such change, a majority of the Continuing Di
rectors shall have voted not to treat such transaction or transactions
as resulting in a Change of Control.
(d) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(e) A "Continuing Director" means, as of any date of
determination, any member of the Board of Directors of the Company who
(i) was a member of such Board on the effective date of the Plan or
(ii) was nominated for election or elected to such Board with the af
firmative vote of a majority of either the Continuing Directors who
were members of such Board at the time of such nomination or election,
or the shares beneficially owned by Orion Capital Corporation and its
subsidiaries.
(f) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
(g) "Fair Market Value" means, with respect to Stock, Awards, or
other property, the fair market value of such Stock, Awards, or other
property determined by such methods or procedures as shall be
established from time to time by the Committee in good faith and in
accordance with applicable law. Unless otherwise determined by the
Committee, the Fair Market Value of Stock shall mean the mean of the
high and low sales prices of Stock on the relevant date as reported on
the stock exchange or market on which the Stock is primarily traded,
or if no sale is made on such date, then the Fair Market Value is the
weighted average of the mean of the high and low sales prices of the
Stock on the next preceding day and the next succeeding day on which
such sales were made, as reported on the stock exchange or market on
which the Stock is primarily traded.
(h) "ISO" means any Option designated as an incentive stock
option within the meaning of Section 422 of the Code.
(i) "Option" means a right granted to a Participant pursuant to
Section 6(b) to purchase Stock at a specified price during specified
time periods. An Option may be
<PAGE>
either an ISO or a nonstatutory Option (an Option not designated as an
ISO).
(j) "Performance Unit" means a right granted to a Participant
pursuant to Section 6(c) to receive a payment in cash and or stock
equal to the increase in the book value of the Company during
specified time periods if specified performance goals are met.
(k) "Restricted Stock" means Stock awarded to a Participant
pursuant to Section 6(d) that may be subject to certain restrictions
and to a risk of forfeiture.
(l) "Stock-Based Award" means a right that may be denominated or
payable in, or valued in whole or in part by reference to the market
value of, Stock, including, but not limited to, any Option, Restricted Stock,
Stock granted as a bonus or Awards in lieu of cash obligations.
(m) "Subsidiary" shall mean any corporation, partnership, joint
venture or other business entity of which 50% or more of the
outstanding voting power is beneficially owned, directly or
indirectly, by the Company.
(n) "Tax Bonus" means a payment in cash in the year in which an
amount is included in the gross income of a Participant in respect of
an Award of an amount equal to the federal, foreign, if any, and
applicable state and local income and employment tax liabilities
payable by the Participant as a result of (i) the amount included in
gross income in respect of the Award and (ii) the payment of the
amount in clause (i) and the amount in this clause (ii). For purposes
of determining the amount to be paid to the Participant pursuant to
the preceding sentence, the Participant shall be deemed to pay
federal, foreign, if any, and state and local income taxes at the
highest marginal rate of tax imposed upon ordinary income for the year
in which an amount in respect of the Award is included in gross
income, after giving effect to any deductions therefrom or credits
available with respect to the payment of any such taxes.
Section 3. Administration of the Plan
The Plan shall be administered by the Compensation Committee
of the Board of Directors of the Company (the "Committee"). No member
of the Committee while serving as such shall be eligible for
participation in the Plan. Any
<PAGE>
action of the Committee in administering the Plan shall be final,
conclusive and binding on all persons, including the Company, its
Subsidiaries, employees, Participants, persons claiming rights from or
through Participants and stockholders of the Company.
Subject to the provisions of the Plan, the Committee shall
have full and final authority in its discretion (a) to select the key
employees who will receive Awards pursuant to the Plan
("Participants"), (b) to determine the type or types of Awards to be
granted to each Participant, (c) to determine the number of shares of
Stock to which an Award will relate, the terms and conditions of any
Award granted under the Plan (including, but not limited to, re
strictions as to transferability or forfeiture, exercisability or
settlement of an Award and waivers or accelerations thereof, and
waivers of or modifications to performance conditions relating to an
Award, based in each case on such considerations as the Committee
shall determine) and all other matters to be determined in connection
with an Award; (d) to determine whether, to what extent, and under
what circumstances an Award may be settled, or the exercise price of
an Award may be paid, in cash, Stock, other Awards or other property,
or an Award may be canceled, forfeited, or surrendered; (e) to
determine whether, and to certify that, performance goals to which the
settlement of an Award is subject are satisfied; (f) to correct any
defect or supply any omission or reconcile any inconsistency in the
Plan, and to adopt, amend and rescind such rules and regulations as,
in its opinion, may be advisable in the administration of the Plan;
and (g) to make all other determinations as it may deem necessary or
advisable for the administration of the Plan. The Committee may
delegate to officers or managers of the Company or any Subsidiary or
to unaffiliated service providers the authority, subject to such terms
as the Committee shall determine, to perform administrative functions
and to perform such other functions as the Committee may determine, to
the extent permitted under Rule 16b-3, Section 162(m) of the Code and
applicable law.
Section 4. Participation in the Plan
Participants in the Plan shall be selected by the Committee
from among the key employees of the Company and its Subsidiaries.
Section 5. Plan Limitations; Shares Subject to the Plan
(a) Subject to the provisions of Section 8(a) hereof, the
aggregate number of shares of common stock, $1.00 par value, of the
Company (the "Stock") available for issuance as Awards under the Plan
shall not exceed 700,000 shares.
No Award may be granted if the number of shares to which
such Award relates, when added to the number of shares previously
issued under the Plan and the number of shares which may then be
acquired pursuant to other outstanding,
<PAGE>
unexercised Awards, exceeds the number of shares available for
issuance pursuant to the Plan. If any shares subject to an Award are
forfeited or such Award is settled in cash or otherwise terminates for
any reason whatsoever without an actual distribution of shares to the
Participant, any shares counted against the number of shares available
for issuance pursuant to the Plan with respect to such Award shall, to
the extent of any such forfeiture, settlement, or termination, again
be available for Awards under the Plan; provided, however, that the
Committee may adopt procedures for the counting of shares relating to
any Award to ensure appropriate counting, avoid double counting, and
provide for adjustments in any case in which the number of shares
actually distributed differs from the number of shares previously
counted in connection with such Award.
(b) Subject to the provisions of Section 8(a) hereof, the
aggregate number of Performance Units which may be awarded under the
Plan shall not exceed 350,000. If any Performance Units awarded under
the Plan shall be forfeited or canceled, such Performance Units shall
thereafter be available for award under the Plan.
Section 6. Awards
(a) General. Awards may be granted on the terms and conditions
set forth in this Section 6. In addition, the Committee may impose on
any Award or the exercise thereof, at the date of grant or thereafter
(subject to Section 8(a)), such additional terms and conditions, not
inconsistent with the provisions of the Plan, as the Committee shall
determine, including terms requiring forfeiture of Awards in the event
of termination of employment by the Participant; provided, however,
that the Committee shall retain full power to accelerate or waive any
such additional term or condition as it may have previously imposed.
All Awards shall be evidenced by an Award Agreement.
(b) Options. The Committee may grant Options to Participants on
the following terms and conditions:
(i) Exercise Price. The exercise price of each Option
shall be determined by the Committee at the time the Option is
granted, but (except as provided in Section 7(a)) the exercise price
of any Option shall not be less than the Fair Market Value of the
shares covered thereby at the time the Option is granted.
(ii) Time and Method of Exercise. The Committee shall
determine the time or times at which an Option may be exercised in
whole or in part, whether the exercise price shall be paid in cash or
by the surrender at Fair Market Value of Stock, or by any combination
of cash and shares of Stock, including, without limitation, cash,
Stock, other Awards, or other property (including notes or other
contractual obligations of Participants to make payment on a deferred
basis, such as through "cashless exercise" arrange-
<PAGE>
ments, to the extent permitted by applicable law), and the methods by
which Stock will be delivered or deemed to be delivered to Partici
pants.
(iii) Incentive Stock Options. The terms of any Option
granted under the Plan as an ISO shall comply in all respects with the
provisions of Section 422 of the Code, including, but not limited to,
the requirement that no ISO shall be granted more than ten years after
the effective date of the Plan.
(c) Performance Units. The Committee is authorized to grant
Performance Units to Participants on the following terms and
conditions:
(i) Performance Criteria and Period. At the time it makes
an award of Performance Units, the Committee shall establish both the
performance goal or goals and the performance period or periods
applicable to the Performance Units so awarded. A performance goal
shall be a goal, expressed in terms of growth in book value, earnings
per share, return on equity or any other financial or other mea
surement deemed appropriate by the Committee, or may relate to the
results of operations or other measurable progress of either the
Company as a whole or the Participant's Subsidiary, division or depart
ment. The performance period will be the period of time over which
one or more of the performance goals must be achieved, which may be of
such length as the Committee, in its discretion, shall select.
Neither the performance goals nor the performance periods need be
identical for all Performance Units awarded at any time or from time
to time. The Committee shall have the authority, in its discretion,
to accelerate the time at which any performance period will expire or
waive or modify the performance goals of any Participant or
Participants. The Committee may also make such adjustments, to the
extent it deems appropriate, to the performance goals for any
Performance Units awarded to compensate for, or to reflect, any
material changes which may have occurred in accounting practices, tax
laws, other laws or regulations, the financial structure of the
Company, acquisitions or dispositions of business or Subsidiaries or
any unusual circumstances outside of management's control which, in
the sole judgment of the Committee, alters or affects the computation
of such performance goals or the performance of the Company or any
relevant Subsidiary, division or department.
(ii) Value of Performance Units. The value of each Per
formance Unit at any time shall equal the book value per share of the
Company's Stock, as such value appears on the consolidated balance
sheet of the Company as of the end of the fiscal quarter immediately
preceding the date of valuation.
(d) Restricted Stock. The Committee is authorized to grant
Restricted Stock to Participants on the following terms and
conditions:
<PAGE>
(i) Restricted Period. Restricted Stock awarded to a
Participant shall be subject to such restrictions on transferability
and other restrictions for such periods as shall be established by the
Committee, in its discretion, at the time of such Award, which
restrictions may lapse separately or in combination at such times,
under such circumstances, or otherwise, as the Committee may
determine.
(ii) Forfeiture. Restricted Stock shall be forfeitable to
the Company upon termination of employment during the applicable
restricted periods. The Committee, in its discretion, whether in an
Award Agreement or anytime after an Award is made, may accelerate the
time at which restrictions or forfeiture conditions will lapse or
remove any such restrictions, including upon death, disability or
retirement, whenever the Committee determines that such action is in
the best interests of the Company.
(iii) Certificates for Stock. Restricted Stock granted
under the Plan may be evidenced in such manner as the Committee shall
determine. If certificates representing Restricted Stock are
registered in the name of the Participant, such certificates may bear
an appropriate legend referring to the terms, conditions and
restrictions applicable to such Restricted Stock.
(iv) Rights as a Shareholder. Subject to the terms and
conditions of the Award Agreement, the Participant shall have all the
rights of a stockholder with respect to shares of Restricted Stock
awarded to him or her, including, without limitation, the right to
vote such shares and the right to receive all dividends or other
distributions made with respect to such shares. If any such dividends
or distributions are paid in Stock, the Stock shall be subject to
restrictions and a risk of forfeiture to the same extent as the
Restricted Stock with respect to which the Stock has been distributed.
<PAGE>
(e) Bonus Stock and Awards in Lieu of Cash Obligations. The
Committee is authorized to grant Stock as a bonus, or to grant Stock
or other Awards in lieu of Company or Subsidiary obligations to pay
cash or deliver other property under other plans or compensatory
arrangements; provided that, in the case of Participants subject to
Section 16 of the Exchange Act, such cash amounts are determined under
such other plans in a manner that complies with applicable
requirements of Rule 16b-3 so that the acquisition of Stock or Awards
hereunder shall be exempt from Section 16(b) liability. Stock or
Awards granted hereunder shall be subject to such other terms as shall
be determined by the Committee.
(f) Other Stock-Based Awards. The Committee is authorized,
subject to limitations under applicable law, to grant to Participants
such other Stock-Based Awards in addition to those provided in
Sections 6(b) and (d) hereof, as deemed by the Committee
to be consistent with the purposes of the Plan. The Committee shall
determine the terms and conditions of such Awards. Stock delivered
pursuant to an Award in the nature of a purchase right granted under
this Section 6(f) shall be purchased for such consideration and paid
for at such times, by such methods, and in such forms, including,
without limitation, cash, Stock, other Awards, or other property, as
the Committee shall determine.
(g) Cash Payments. The Committee is authorized, subject to
limitations under applicable law, to grant to Participants Tax Bonuses
and other cash payments, whether awarded separately or as a supplement
to any Stock-Based Award. The Committee shall determine the terms and
conditions of such Awards.
Section 7. Additional Provisions Applicable to Awards
(a) Stand-Alone, Additional, Tandem, and Substitute Awards.
Awards granted under the Plan may, in the discretion of the Committee,
be granted either alone or in addition to, in tandem with, or in
substitution for, any other Award granted under the Plan or any award
granted under any other plan of the Company or any Subsidiary, or any
business entity acquired by the Company or any Subsidiary, or any
other right of a Participant to receive payment from the Company or
any Subsidiary. If an Award is granted in substitution for another
Award or award, the Committee shall require the surrender of such
other Award or award in consideration for the grant of the new Award.
Awards granted in addition to, or in tandem with other Awards or
awards may be granted either as of the same time as, or a different
time from, the grant of such other Awards
<PAGE>
or awards. The per share exercise price of any Option, or purchase price of
any other Award conferring a right to purchase Stock:
(i) granted in substitution for an outstanding Award or
award, shall be not less than the lesser of (A) the Fair Market Value
of a share of Stock at the date such substitute Award is granted or
(B) such Fair Market Value at that date, reduced to reflect the Fair
Market Value at that date of the Award or award required to be
surrendered by the Participant as a condition to receipt of the
substitute Award; or
(ii) retroactively granted in tandem with an outstanding
Award or award, shall not be less than the lesser of the Fair Market
Value of a share of Stock at the date of grant of the later Award or
at the date of grant of the earlier Award or award.
(b) Exchange and Buy Out Provisions. The Committee may at any
time offer to exchange or buy out any previously granted Award for a
payment in cash, Stock, other Awards (subject to Section 7(a)), or
other property based on such terms and conditions as the Committee
shall determine and communicate to a Participant at the time that such
offer is made.
(c) Performance Conditions. The right of a Participant to
exercise or receive a grant or settlement of any Award, and the timing
thereof, may be subject to such performance conditions as may be
specified by the Committee.
(d) Term of Awards. The term of each Award shall, except as
provided herein, be for such period as may be determined by the
Committee; provided, however, that in no event shall the term of any
ISO exceed a period of ten
years from the date of its grant (or such shorter period as may be
applicable under Section 422 of the Code).
(e) Form of Payment. Subject to the terms of the Plan and any
applicable Award Agreement, payments or transfers to be made by the
Company or a Subsidiary upon the grant or exercise of an Award may be
made in such forms as the Committee shall determine, including,
without limitation, cash, Stock, other Awards, or other property (and
may be made in a single payment or transfer, in installments, or on a
deferred basis), in each case determined in accordance with rules
adopted by, and at the discretion of, the Committee. (Such payments
may include, without limitation, provisions for the payment or
crediting of reasonable interest on installments or deferred
payments.) The Committee, in its discretion, may accelerate any
payment or transfer upon a change in control as defined by the
Committee. The Committee may also authorize payment upon the exercise
of an Option by net issuance or other cashless exercise methods.
<PAGE>
(f) Loan Provisions. With the consent of the Committee, and
subject at all times to laws and regulations and other binding
obligations or provisions applicable to the Company, the Company may
make, guarantee, or arrange for a loan or loans to a Participant with
respect to the exercise of any Option or other payment in connection
with any Award, including the payment by a Participant of any or all
federal, state, or local income or other taxes due in connection with
any Award. Subject to such limitations, the Committee shall have full
authority to decide whether to make a loan or loans hereunder and to
determine the amount, terms, and provisions of any such loan or loans,
including the interest rate to be charged in respect of any such loan
or loans, whether the loan or loans are to be with or without recourse
against the borrower, the terms on which the loan is to be repaid and
the conditions, if any, under which the loan or loans may be forgiven.
(g) Awards to Comply with Section 162(m). The Committee may
(but is not required to) grant an Award pursuant to the Plan to a
Participant who, in the year of grant, may be a "covered employee,"
within the meaning of Section 162(m) of the Code, which is intended to
qualify as "performance-based compensation" under Section 162(m) of
the Code (a "Performance-Based Award"). The right to receive a
Performance-Based Award, other than Options and SARs granted at not
less than Fair Market Value, shall be conditional upon the achievement
of performance goals established by the Committee in writing at the
time such Performance-Based Award is granted. Such performance goals,
which may vary from Participant to Participant and Performance-Based
Award to Performance-Based Award, shall be based upon the attainment
by the Company or any Subsidiary, division or department of specific
amounts of, or increases in, one or more of the following, any of
which may be measured either in absolute terms or as compared to
another company or companies: revenues, earnings, cash flow, net
worth, book value, stockholders' equity, financial return ratios,
market performance or total stockholder return, and/or the completion
of certain business or capital transactions. Before any compensation
pursuant to a Performance-Based Award is paid, the Committee shall
certify in writing that the performance goals applicable to the
Performance-Based Award were in fact satisfied.
The maximum amount which may be granted as Performance-Based
Awards to any Participant in any calendar year shall not exceed (i)
Stock-Based Awards for 100,000 shares of Stock (whether payable in
cash or stock), subject to adjustment as provided in Section 8(a)
hereof, (ii) 100,000 Performance Units, (iii) a Tax Bonus payable with
respect to the Stock-Based Awards described in clause (i) and
Performance Units described in clause (ii), and (iv) cash payments
(other than Tax Bonuses) of $1,000,000.
(h) Change of Control. In the event of a Change of Control of
the Company, all Awards granted under the Plan (including Performance-
Based Awards) that are still
<PAGE>
outstanding and not yet vested or exercisable or which are subject to
restrictions shall become immediately 100% vested in each Participant
or shall be free of any restrictions, as of the first date that the
definition of Change of Control has been fulfilled, and shall be
exercisable for the remaining duration of the Award. All Awards that
are exercisable as of the effective date of the Change of Control will
remain exercisable for the remaining duration of the Award.
Section 8. Adjustments upon Changes in Capitalization;
Acceleration in Certain Events
(a) In the event that the Committee shall determine that any
stock dividend, recapitalization, forward split or reverse split,
reorganization, merger, consolidation, spin-off, combination,
repurchase or share exchange, or other similar corporate transaction
or event, affects the Stock or the book value of the Company such that
an adjustment is appropriate in order to prevent dilution or
enlargement of the rights of Participants under the Plan, then the
Committee shall, in such manner as it may deem equitable, adjust any
or all of (i) the number and kind of shares of Stock which may
thereafter be issued in connection with Awards, (ii) the number and
kind of shares of Stock issuable in respect of outstanding Awards,
(iii) the aggregate number and kind of shares of Stock available under
the Plan, (iv) the number of Performance Units which may thereafter be
granted and the book value of the Company with respect to outstanding
Performance Units, and (v) the exercise price, grant price, or pur
chase price relating to any Award or, if deemed appropriate, make
provision for a cash payment with respect to any outstanding Award;
provided, however, in each case, that no adjustment shall be made
which would cause the Plan to violate Section 422(b)(1) of the Code
with respect to ISOs or would adversely affect the status of a
Performance-Based Award as "performance-based compensation" under
Section 162(m) of the Code.
(b) In addition, the Committee is authorized to make adjustments
in the terms and conditions of, and the criteria included in, Awards
in recognition of unusual or nonrecurring events (including, without
limitation, events described in the preceding paragraph) affecting the
Company or any Subsidiary, or in response to changes in applicable
laws, regulations, or accounting principles. Notwithstanding the
foregoing, no adjustment shall be made in any outstanding Performance-
Based Awards to the extent that such adjustment would adversely affect
the status of that Performance-Based Award as "performance-based
compensation" under Section 162(m) of the Code.
Section 9. General Provisions
(a) Changes to the Plan and Awards. The Board of Directors of
the Company may amend, alter, suspend, discontinue, or terminate the
Plan or the Committee's authority to grant Awards under the Plan
without the consent
<PAGE>
of the Company's stockholders or Participants, except that any such
amendment, alteration, suspension, discontinuation, or termination
shall be subject to the approval of the Company's stockholders within
one year after such Board action if such stockholder approval is
required by any federal or state law or regulation or the rules of any
stock exchange or automated quotation system on which the Stock may
then be listed or quoted, and the Board may otherwise, in its
discretion, determine to submit other such changes to the Plan to the
stockholders for approval; provided, however, that without the consent
of an affected Participant, no amendment, alteration, suspension,
discontinuation, or termination of the Plan may materially and
adversely affect the rights of such Participant under any Award there
tofore granted and any Award Agreement relating thereto. The
Committee may waive any conditions or rights under, or amend, alter,
suspend, discontinue, or terminate, any Award theretofore granted and
any Award Agreement relating thereto; provided, however, that without
the consent of an affected Participant, no such amendment, alteration,
suspension, discontinuation, or termination of any Award may
materially and adversely affect the rights of such Participant under
such Award.
The foregoing notwithstanding, any performance condition
specified in connection with an Award shall not be deemed a fixed
contractual term, but shall remain subject to adjustment by the
Committee, in its discretion at any time in view of the Committee's
assessment of the Company's strategy, performance of comparable
companies, and other circumstances, except to the extent that any such
adjustment to a performance condition would adversely affect the
status of a Performance-Based Award as "performance-based compensa
tion" under Section 162(m) of the Code.
Notwithstanding the foregoing, if the Plan is ratified by
the stockholders of the Company at the Company's 1997 Annual Meeting
of Stockholders, then unless approved by the stockholders of the Com
pany, no amendment will: (i) change the class of persons eligible to
receive Awards; (ii) materially increase the benefits accruing to
Participants under the Plan, or (iii) increase the number of shares of
Stock or the number of Performance Units subject to the Plan.
(b) No Right to Award or Employment. No employee or other
person shall have any claim or right to receive an Award under the
Plan. Neither the Plan nor any action taken hereunder shall be
construed as giving any employee any right to be retained in the
employ of the Company or any Subsidiary.
(c) Taxes. The Company or any Subsidiary is authorized to
withhold from any Award granted, any payment relating to an Award
under the Plan, including from a distribution of Stock or any payroll
or other payment to a Participant amounts of withholding and other
taxes due in connection with any transaction involving an Award, and to
<PAGE>
take such other action as the Committee may deem advisable to enable
the Company and Participants to satisfy obligations for the payment of
withholding taxes and other tax obligations relating to any Award.
This authority shall include authority to withhold or receive Stock or
other property and to make cash payments in respect thereof in
satisfaction of a Participant's tax obligations.
(d) Limits on Transferability; Beneficiaries. No Award or other
right or interest of a Participant under the Plan shall be pledged,
encumbered, or hypothecated to, or in favor of, or subject to any
lien, obligation, or liability of such Participants to, any party,
other than the Company or any Subsidiary, or assigned or transferred
by such Participant otherwise than by will or the laws of descent and
distribution, and such Awards and rights shall be exercisable during
the lifetime of the Participant only by the Participant or his or her
guardian or legal representative. Notwithstanding the foregoing, the
Committee may, in its discretion, provide that Awards or other rights
or interests of a Participant granted pursuant to the Plan (other than
an ISO) be transferable, without consideration, to immediate family
members (i.e., children, grandchildren or spouse), to trusts for the
benefit of such immediate family members and to partnerships in which
such family members are the only partners. The Committee may attach
to such transferability feature such terms and conditions as it deems
advisable. In addition, a Participant may, in the manner established
by the Committee, designate a beneficiary (which may be a person or a
trust) to exercise the rights of the Participant, and to receive any
distribution, with respect to any Award upon the death of the
Participant. A beneficiary, guardian, legal representative or other
person claiming any rights under the Plan from or through any
Participant shall be subject to all terms and conditions of the Plan
and any Award Agreement applicable to such Participant, except as
otherwise determined by the Committee, and to any additional
restrictions deemed necessary or appropriate by the Committee.
(e) No Rights to Awards; No Stockholder Rights. No Participant
shall have any claim to be granted any Award under the Plan, and there
is no obligation for uniformity of treatment of Participants. No
Award shall confer on any Participant any of the rights of a
stockholder of the Company unless and until Stock is duly issued or
transferred to the Participant in accordance with the terms of the
Award.
(f) Discretion. In exercising, or declining to exercise, any
grant of authority or discretion hereunder, the Committee may consider
or ignore such factors or circumstances and may accord such weight to
such factors and circumstances as the Committee alone and in its sole
judgment deems appropriate and without regard to the affect such
exercise, or declining to exercise such grant of authority or
discretion, would have upon the affected Participant, any other
Participant, any employee, the
<PAGE>
Company, any Subsidiary, any stockholder or any other person.
(g) Effective Date. The effective date of the Plan is October
29, 1996.
(h) Shareholder Approval. Unless and until the Plan is approved
by the stockholders of the Company at the Company's 1997 Annual
Meeting of Stockholders, no Stock-Based Award may be granted to any
officer of the Company.
Exhibit 21.1 - Subsidiaries of Registrant
Name State of Incorporation
---- ----------------------
Guaranty National Insurance Company Colorado
Landmark American Insurance Company Oklahoma
Auto Insurance Centers, Incorporated Nevada
Intercon General Agency, Inc. Texas
Colorado Casualty Insurance Company Colorado
Peak Property & Casualty Insurance
Corporation Colorado
Guaranty National Insurance Company of
California California
Viking Insurance Holdings, Inc. Delaware
Viking Insurance Company of Wisconsin Wisconsin
Viking General Agency, Inc. Texas
Guaranty National Warranty Services Colorado
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statement No. 33-44613 of Guaranty National Corporation on Form S-8 of
our report dated February 14, 1997, appearing in this Annual Report on
Form 10-K of Guaranty National Corporation for the year ended
December 31, 1996.
s/DELOITTE & TOUCHE LLP
Denver, Colorado
March 5, 1997
