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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year
ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-15022
FRONTIER INSURANCE GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 14-1681606
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
195 LAKE LOUISE MARIE ROAD, ROCK HILL, NEW YORK 12775-8000
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 796-2100
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
-------------------- ----------------------
Common Stock, $.01 par value New York Stock Exchange
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.
[x] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock (Common Stock, $.01 par value)
held by non-affiliates of the Registrant was $344,416,100 on March 25, 1996,
based on the closing sales price of the Common Stock on such date.
The aggregate number of shares of the Registrant's Common Stock, $.01 par value,
outstanding on March 25, 1996, was 13,068,205.
Documents incorporated by reference:
None
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: This Annual Report, on Form 10-K, contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 which are not historical facts, and
involve risks and uncertainties that could cause actual results to differ
materially from those expected and projected. Such risks and uncertainties
include the following: general economic conditions and conditions specific to
the property and casualty insurance industry including its cyclical nature,
regulatory changes and conditions, rating agency policies and practices,
competitive factors, claims development and the impact thereof on loss reserves
and the Company's reserving policies, the adequacy of the Company's reinsurance
programs, developments in the securities markets and the impact on the Company's
investment portfolio, the success of the Company's acquisition program, changes
in generally accepted accounting principles and the risk factors listed from
time to time in the Company's Securities and Exchange Commission filings.
Accordingly, there can be no assurance that the actual results will conform to
the forward-looking statements in the Annual Report.
-------------------
PART I
Item 1. Business.
General
The Company is an insurance holding company which, through its five wholly-owned
subsidiaries, Frontier Insurance Company ("Frontier Insurance"), Medical
Professional Liability Agency, Ltd. ("Med Pro"), Pioneer Claim Management, Inc.
("Pioneer"), Frontier Pacific Insurance Company ("Frontier Pacific," formerly
Contractors' Surety Company), Spencer Douglass Insurance Associates ("SDIA") and
its 50% ownership of Douglass/Frontier LLC ("Douglass/Frontier"), conducts
business as a specialty property and casualty insurer and reinsurer, and
performs claims adjusting and management services. Frontier Insurance, the
Company's principal insurance company subsidiary, commenced business in August
1966, and was acquired by the Company in April 1986. Med Pro, which underwrites
the majority of the Company's medical and dental malpractice programs, commenced
business in July 1986 and was acquired by the Company in June 1987. Pioneer,
which performs claims adjusting and claims management services for the Company's
insurance lines, was organized and commenced business in October 1989 as the
successor to a claims adjusting company. Frontier Pacific, the Company's
California insurance company subsidiary, commenced business in December 1982,
was acquired by Frontier Insurance in October 1991, and changed its name from
Contractors' Surety Company in September 1993. SDIA was acquired by the Company
in April 1994 and is involved in placing and servicing license and permit bond
business in California and other western states. Douglass/Frontier was formed as
a joint venture in May 1995 and is involved in placing and servicing bail bond
business.
The Company's underwriting strategy is to identify niche markets or programs
that are unattractive to other insurers due to the limited potential market or
perceived excessive risks, which the Company believes afford favorable
opportunities for profitability due to limited potential competition and the
Company's innovative underwriting and value added services, principally risk
management, coverage enhancements and specialized claims management. The Company
underwrites specialty niche market programs, including medical and dental
malpractice for physicians, social service care providers, alternative risk
physicians, psychiatrists, chiropractors, and dentists, predominantly in New
York, Florida, Illinois, Ohio, and Massachusetts. The Company also underwrites a
variety of specialty programs under general liability, workers' compensation,
surety bonds for small contractors, contractor license bonds, license and permit
bonds, bail bonds, custom bonds and other miscellaneous lines. The medical and
dental malpractice programs are currently produced on a direct basis through Med
Pro and are also marketed, together with all other lines, through a network of
independent general agents and retail brokers.
Frontier Insurance is licensed as a property and casualty insurer in 49 states,
the District of Columbia, Puerto Rico and the Virgin Islands, and is rated A-
(Excellent) by A.M. Best Company, Inc. Additionally, Standard & Poor's Insurance
Rating Services has given Frontier Insurance an Insurer Claims-Paying Ability
Rating of A+ (Excellent). Frontier Pacific is licensed in California and Nevada
and is rated A-
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(Excellent) by A.M. Best. A.M. Best's and Standard & Poor's ratings are based on
an analysis of the financial condition and operations of an insurance company as
they relate to the industry in general, are not designed for the protection of
investors and do not constitute recommendations to buy, sell or hold any
security.
The following chart provides examples of typical niche markets/programs
underwritten by the Company for specific types of customers:
<TABLE>
<CAPTION>
Customer Type Coverage/Line of Business Hypothetical Claim
- ------------- ------------------------- ------------------
<S> <C> <C>
Doctors and dentists medical malpractice patient injured
Cattle feedlot operators general liability, workers' worker injured on
compensation the job
White water raft operators general liability rafter injured
through operator's
negligence
Social service agencies medical malpractice, general client sues agency or
liability, fire professional
Crane operators general liability crane damages a third
party's property
Alarm installers general liability house is burglarized
through faulty alarm
installation
Small-construction contractors surety bonds electrician or plumber
fails to complete job
Self-Insured Employer general liability workers' compensation
loss exceeds
employers' self-insured
retention
U.S. Customs customs bonds importer fails to pay duty
California businesses earthquake (difference in conditions) earthquake damage
to building disrupts
operations
</TABLE>
Insurance Lines
The following table sets forth the gross and net premiums by principal lines of
insurance written by the Company and the related percentages of the total such
premiums represented thereby for the year ended December 31, 1995:
<TABLE>
<CAPTION>
Year Ended December 31, 1995
--------------------------------------------------
Gross Premiums Written NetPremiums Written
---------------------- -------------------
Dollars Percentage Dollars Percentage
------- ---------- ------- ----------
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Medical malpractice (including
dental malpractice and social services) $117,431 44.4% $99,382 45.0%
General liability 69,713 26.4 56,872 25.8
Surety 49,279 18.6 43,545 19.7
Workers' compensation 11,616 4.4 9,933 4.5
Other 16,275 6.2 11,025 5.0
-------- ---- ------- -----
Total $264,314 100.0% $220,757 100.0%
======== ===== ======== =====
</TABLE>
3
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Medical Malpractice
The Company commenced underwriting medical malpractice insurance in 1981 under
programs developed for physicians with varied practices, including part-time
physicians, internists, physicians and other health care professionals providing
medical services to clients of social service care facilities (mental health,
home care, etc.), family practitioners, psychiatrists, chiropractors,
dermatologists, and other specialists. Physicians covered under the Company's
programs generally must be members of a national, state, or county society for
their particular specialty and must limit their practice to such specialty, or
be employed by a social services care facility, or be in practice or employed on
a part-time basis. The Company has implemented strict underwriting guidelines in
an attempt to screen-out undesirable risks and reduce its exposure. The
Company's medical malpractice insurance is written on both an occurrence and a
claims made basis predominantly in New York, Florida, Illinois, Ohio, Texas, and
Massachusetts. Additionally, the Company markets a specialty program for
physicians unable to obtain traditional malpractice coverage as a result of
excessive malpractice claims, professional disciplinary proceedings and/or drug
or alcohol abuse. Coverage under this program is written with a deductible and
is priced substantially higher than the Company's standard medical malpractice
programs.
At December 31, 1995, approximately 17,400 physicians were insured by the
Company, of whom 700, or 4%, were employed as faculty members at medical schools
of the State University of New York ("SUNY"), 9,700, or 55.8%, were physicians
who were members of 19 medical associations which endorsed or approved the
Company's medical malpractice insurance program, and 7,000, or 40.2% were
physicians and other health care professionals providing medical services
covered by the Company's social services care insurance program. Since December
31, 1990, the number of SUNY physicians insured by the Company has decreased by
approximately 330, attributable to increased competition and other factors,
including a 1990 decision by the New York State Court of Claims relating to SUNY
physicians in favor of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Litigation with the State of New
York."
Dental Malpractice
In August 1987, the Company commenced underwriting dental malpractice insurance
for dentists viewed by the Company as preferred risks. Dentists who practice
oral surgery or who utilize anesthesia to render their patients unconscious are,
among others, not viewed as preferred risks and, accordingly, are not eligible
for coverage. As with medical malpractice, the endorsement of related
professional organizations is a key element in marketing, which the Company
benefited significantly from the endorsement in 1994 by the Academy of General
Dentistry. Dental malpractice is written by the Company predominantly in New
York, Florida, and Ohio. At December 31, 1995, approximately 3,500 dentists were
insured by the Company under its dental malpractice program.
Surety
The Company directly underwrites surety bonds for small contractors, customs
bonds, contractor license bonds, bail bonds, license and permit bonds, and
self-insured workers' compensation bonds.
General Liability
The Company underwrites general liability coverages for day care centers, crane
operators, white water rafting, health and social services programs, pest
control operators, fire protection equipment dealers and installers, security
guards, excess workers' compensation/employer's liability for self-insured
employers, and a variety of other programs. Further, the Company underwrites
umbrella coverage up to $5,000,000 over an underlying $1,000,000 general
liability coverage. Although the Company believes
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that the classes of insurance which it underwrites have no material exposure to
environmental pollution claims, there can be no such assurance in view of the
expansion of liability for environmental claims in recent litigation.
Workers' Compensation
The Company underwrites workers' compensation coverage for cotton gins, jockeys,
feed lots, and other specialty niches. Additionally, the Company assumes
workers' compensation business as a result of its required participation in the
National Workers' Compensation Reinsurance Pool and other residual market
mechanisms. Due to adverse underwriting results, the Company discontinued all
workers' compensation business in 1993 except its cotton gin and feedlot
programs in Texas, its New Jersey jockey program, and its social services
program.
Other
The Company underwrites other lines of insurance, including commercial
multi-peril, inland marine, property, and excess of loss group accident and
health.
Reinsurance
During 1993 and 1994, the Company assumed no reinsurance from unaffiliated
companies other than that derived from its required participation in residual
market pools such as the National Workers' Compensation Reinsurance Pool. See
"Business--Relationship with Markel/Rhulen" for reinsurance formerly assumed
under a reinsurance pooling arrangement. In conjunction with the acquisition of
a book of realtors' E&O business in 1995 from Bankers Multiple Line Insurance
Company ("BMLIC"), the Company is reinsuring certain policies issued by BMLIC
until such time as the policies can be directly written by the Company.
Effective January 1, 1995, the Company entered into a stop loss reinsurance
contract with Centre Reinsurance Company of New York ("Centre Re") for 1995 and
future years. Under the terms of the agreement, Centre Re provides reinsurance
protection for losses and LAE in excess of a predetermined ratio of these
expenses to net premiums earned for a given accident year for all lines of
business except bail, customs, license and permit, bid, and miscellaneous surety
bonds. The loss and LAE ratio above which the reinsurance provides coverage is
66%, 65%, and 64% for accident years 1995 through 1997, respectively. The
maximum amount recoverable for an accident year is 175% of the reinsurance
premium paid for that accident year, or $162,500,000 in the aggregate for the
three years. The additional reinsurance coverages described below are underlying
reinsurance coverages which inure to the benefit of this stop loss contract.
Effective July 15, 1995, the Company implemented a reinsurance program, for its
commercial DIC (Difference in Condition) earthquake program. The program is
reinsured by twenty-six reinsurers through a per risk excess of loss agreement
and four layers of inuring catastrophe reinsurance. The Company retains $50,000
per risk, $2,500,000 per occurrence. The catastrophe layers attach at $2,500,000
per occurrence up to $40,000,000 per occurrence and allow one full reinstatement
per year.
Effective January 1, 1996, the Company entered into a clash reinsurance
agreement with Mutual Assurance, Inc., the Doctors' Insurance Company, and
Reliance Insurance Company, with respect to its medical malpractice business.
Under the terms of the agreement, reinsurance is provided for occurrences
involving multiple physicians for $3,000,000 excess of $2,000,000 per
occurrence, subject to an aggregate of $6,000,000.
The majority of the Company's business is reinsured by Swiss Reinsurance America
Corporation, and its umbrella liability business by Munich American Reinsurance
Company. Effective January 1, 1996, the Company reinsured its medical
malpractice business with Mutual Assurance, Inc., The Doctors' Insurance
Company, and Reliance Insurance Company.
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Munich American Reinsurance Company is currently rated A+ (Superior), and Centre
Reinsurance Company of New York and Swiss Reinsurance America Corporation are
currently rated A (Excellent) by A.M. Best Company, Inc.
The following table is a summary of the maximum amount of loss typically
retained and ceded by Frontier Insurance and Frontier Pacific as of January 1,
1996 (exclusive of facultative reinsurance and in 1995 the Centre Re stop loss
contract):
<TABLE>
<CAPTION>
Maximum Retained Loss Maximum Ceded Loss
Per Occurrence/ Per Occurrence/
Risk/Principal (1) Risk/Principal (1)
--------------------- -------------------
(dollar amounts in thousands)
<S> <C> <C>
Property lines $ 200 $ 800
Casualty lines (excluding medical
malpractice, health specialties,
and social services) 1,000 1,000
Medical malpractice, health
specialties and social services 1,000 (2) 1,000
Workers' compensation 1,000 2,000
Surety 1,000 (3)(6) 4,000 (3)(6)
Custom bonds 3,000 (4) N/A
Umbrella liability 1,000 4,000
Group accident and health 250 750
Excess workers' compensation/
employers' liability 1,000 (5) 9,000 (5)
Earthquake` 2,500 37,500
</TABLE>
- --------------
(1) Amounts presented represent those amounts which are generally the maximum
retained or ceded by the Company, but which are occasionally exceeded.
(2) Maximum retained loss amount of $1,000,000 relates only to losses on
policies effective during 1994 and reinsurance ceded treaty years 1985
through 1991 which have been commuted. For all other years, the maximum
retained loss per occurrence is $500,000. On a very limited basis, the
maximum retained loss per occurrence is $2,000,000.
(3) A limited number of bonds were written in which the maximum retained loss
per principal was $9,000,000, and the maximum ceded loss was $4,000,000.
(4) Amount indicated is the maximum face amount (limit) on the bond issued,
which represents the value of goods being imported that are subject to
U.S. Customs duty. The actual exposure to the Company is the amount of any
unpaid duty on the goods imported, which is generally approximately 15% of
the face value of the goods, and any penalties associated with the late
payment of the duty.
(5) Subject to a catastrophe retention of $3,000,000 per occurrence and a
maximum ceded loss of $40,000,000 per occurrence.
(6) Effective December 1, 1995, two layers of excess reinsurance were added
for a maximum limit of $20 million per principal on a direct basis, $4.1
million on a net basis.
6
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Marketing
The Company relies on multiple distribution channels to market its insurance
products. Medical malpractice and dental malpractice insurance are produced on a
direct basis by Med Pro and by independent brokers and agents. License and
permit bonds are marketed directly by Frontier Pacific and SDIA, and through
independent brokers and agents. Bail bonds are produced by Douglass/Frontier
through a nationwide network of bail bondsmen.
The Company relies primarily on independent insurance agencies and insurance
brokerage firms to generate sales of its remaining lines of business. General
liability, workers' compensation, multi-peril and property policies are produced
through general agents, principally in California, Florida, New Jersey, New
York, Pennsylvania, and Texas, and selected small agencies in New York on a
brokerage basis. Surety bonds for small contractors are produced through
independent insurance agents acting as retail brokers and general agents and
several small insurance companies which also act as reinsurers on the business
they produce. Custom bonds are produced through a specialty agency in New York
which derives the business from a nationwide network of customs brokers located
in the various ports of entry.
The following tables set forth the gross and net premiums written produced by
major agency or brokerage sources during the three years ended December 31,
1995:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1995 1994 1993
------------------- --------------------- ------------------
Premiums Percent Premiums Percent Premiums Percent
Written of Total Written of Total Written of Total
-------- -------- -------- -------- -------- --------
(dollar amounts in thousands)
GROSS PREMIUMS
- --------------
<S> <C> <C> <C> <C> <C> <C>
Internal (Med Pro, SDIA,
BMLIC, Douglass/Frontier
and Frontier Pacific) $ 56,118 21.3% $ 48,099 24.2% $ 52,058 35.0%
Markel/Rhulen (1) 68 0.0 1,825 0.9 13,860 9.3
Cornwall & Stevens 2,160 0.8 7,013 3.5 9,761 6.6
All others 205,968 77.9 141,955 71.4 73,071 49.1
-------- ----- -------- ----- -------- ------
Total $264,314 100.0% $198,892 100.0% $148,750 100.0%
======== ===== ======== ===== ======== =====
NET PREMIUMS
- ------------
Internal (Med Pro, SDIA,
BMLIC, Douglass/Frontier
and Frontier Pacific) $ 49,126 22.3% $ 47,050 25.1% $ 41,746 35.1%
Markel/Rhulen (1) 57 0.0 577 0.3 5,025 4.2
Cornwall & Stevens 1,804 0.8 6,708 3.6 8,769 7.4
All others 169,770 76.9 132,953 71.0 63,279 53.3
-------- ----- -------- ----- -------- -----
Total $220,757 100.0 $187,288 100.0% $118,819 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
(1) See "Business--Relationship with Markel/Rhulen."
Other than as reflected above, no producer accounted for 5% or more of the gross
or net premiums written by the Company during the years indicated.
7
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Relationship with Markel/Rhulen
Prior to October 1989, a significant portion of the Company's business was
produced and underwritten by Rhulen Agency, Inc. ("Rhulen") which on October 1,
1989, sold substantially all of its insurance operations to Markel Services,
Inc. ("Markel/Rhulen"), a subsidiary of Markel Corporation. Concurrent with
Rhulen's sale of its insurance operations to Markel/Rhulen the Company entered
into an agency agreement with Markel/Rhulen, substantially similar to the prior
agency agreement between the Company and Rhulen. In addition, the Company and
Markel/Rhulen entered into an insurance placement agreement whereby
Markel/Rhulen agreed to use its best efforts to place insurance and reinsurance
with the Company through September 1992, in the amount, of the type and in the
proportions previously placed by Rhulen. Incidental to the placement agreement,
a series of reinsurance agreements were established which, when aggregated,
functioned as a reinsurance pooling arrangement ("pooling") for certain
specialty programs produced and underwritten by Markel/Rhulen. Under this
pooling, the Company assumed reinsurance from Munich Reinsurance Company (U.S.
Branch) and ceded reinsurance to Insurance Company of Evanston, Munich American
Reinsurance Company and Munich Reinsurance Company (U.S. Branch). The Company's
agency and insurance placement agreements with Markel/Rhulen expired September
30, 1992 and were not renewed, and the pooling arrangement was terminated.
Under the terms of an agreement effective October 1, 1992, the Company acquired
for $1,680,000 in commissions, of which one-half was paid in 1992 and the
balance in 1993, the rights to certain program insurance business previously
underwritten by Markel/Rhulen and insured by the Company. Under this agreement,
the Company continued to issue policies to insure the remaining risks in
programs originally produced and underwritten by Markel/Rhulen through October
1994 where Markel/Rhulen did not have its own insuring facility and provided
such risks were 100% reinsured through a reinsurance facility arranged and
guaranteed by Markel/Rhulen; since October 1992, such risks have been reinsured
with Insurance Company of Evanston to which the Company cedes 100% of the risks
and premiums. See "Business-Insurance Lines-Reinsurance." Under this same
agreement, the Company and Markel/Rhulen agreed not to compete for two years
(until October 1994) with respect to the program business each retained.
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Operating Ratios
- ----------------
Statutory Combined Ratio
The statutory combined ratio is the traditional measure of underwriting
experience for insurance companies. Generally, if the statutory combined ratio
is below 100%, an insurance company has an underwriting profit and if it is
above 100%, the insurer has an underwriting loss.
The following table reflects the consolidated statutory loss ratios, expense
ratios and combined ratios of the Company's primary insurance operating
subsidiaries, Frontier Insurance and, beginning October 1, 1991, Frontier
Pacific, determined in accordance with statutory accounting practices, together
with the property and casualty industry-wide statutory combined ratios after
policyholders' dividends as compiled by the Insurance Information Institute, for
the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loss ratio 60.0% 69.9% 66.4% 71.9% 70.3%
Expense ratio 31.5 27.9 26.9 24.9 25.7
---- ----- ----- ----- -----
Combined ratio 91.5 97.8 93.3% 96.8% 96.0%
==== ===== ===== ===== =====
Industry combined ratio after
policyholders' dividends 105.3 109.4% 109.2% 115.7% 108.8%
===== ===== ===== ===== =====
</TABLE>
Premium-to-Surplus Ratio
While there are no statutory provisions governing premium-to-surplus ratios,
regulatory authorities regard this ratio as an important indicator, since the
lower the ratio, the greater the insurer's ability to withstand abnormal loss
experience. Guidelines established by the National Association of Insurance
Commissioners provide that an insurer's premium-to-surplus ratio is satisfactory
if it is below 3 to 1.
The following table sets forth the ratio of net premiums written during the year
to policyholders' surplus at the end of the year for Frontier Insurance and for
Frontier Pacific for the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Frontier Insurance:
Net premiums written
during the year $205,614 $179,058 $115,028 $113,508 $81,943
Policyholders' surplus
at end of year $171,362 $104,871 $101,418 $76,438 $64,130
Ratio 1.20/1 1.71/1 1.13/1 1.48/1 1.28/1
Frontier Pacific:
Net premiums written
during the year $15,143 $8,230 $3,791 $2,740 $2,746
Policyholders' surplus
at end of year $17,155 $16,127 $15,108 $6,522 $5,767
Ratio 0.88/1 0.51/1 0.25/1 0.42/1 0.48/1
</TABLE>
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Loss and LAE Reserves
Significant periods of time, ranging up to several years, may elapse between the
occurrence of an insured loss, the reporting of the loss to the Company and its
payment of such loss. Medical malpractice and general liability usually have a
much longer period of time between occurrence of a loss and payment than
property lines. To recognize liabilities for unpaid losses, the Company
establishes reserves, which are balance sheet liabilities representing estimates
of amounts needed to pay claims and related expenses with respect to insured
events which have occurred, including those not yet reported ("IBNR").
All claims are investigated, supervised and adjusted by personnel of Pioneer,
which selects counsel and outside adjusting firms, if required, and monitors the
case and approves any settlement. Any payment in excess of $50,000 requires
approval by an officer of the Company. The Company believes claims management is
critical to controlling the amount of paid losses, and has an internal staff of
experienced claims adjusters and attorneys, assigned exclusively to managing and
adjusting claims.
When a claim is reported, the Company's claims adjusting personnel establish a
formula case reserve, which is based on historical average claim costs, for the
estimated amount to be paid. As more pertinent information becomes available on
a claim, adjusting personnel change the reserve from a formula reserve to a case
basis reserve. This case basis reserve is an estimate of the amount of ultimate
payment which reflects the informed judgment of such personnel, based on the
Company's reserving practices and the experience and knowledge of such personnel
regarding the nature and value of the specific type of claim. Additionally,
reserves are established by the Company on an aggregate basis to provide for
IBNR losses and to maintain the overall adequacy of reserves. The Company also
establishes a related loss adjustment expense ("LAE") reserve on an aggregate
basis representing the estimated expense of settling claims, including legal and
other fees and general expenses of administering the claims adjustment process
with respect to reported and unreported losses. Virtually all of the Company's
LAE is classified as allocated LAE as a result of its method of handling claims
through Pioneer. The Company does not discount its reserves either on the basis
of generally accepted accounting practices ("GAAP") or statutory accounting
practices.
The reserves for losses and LAE are estimated using loss evaluations and
actuarial projections and represent estimates of the ultimate net cost of all
unpaid losses and LAE incurred through December 31 of each year. These estimates
are subject to the effect of trends in claims severity and frequency and are
continually reviewed. As part of this process, historical data are reviewed and
consideration is given to the anticipated impact of various factors, such as
legal developments, changes in social attitudes, and economic conditions,
including the effects of inflation and anticipated subrogation recoveries with
respect to the surety line of business. As experience develops and other data
becomes available, these estimates are revised, as required, resulting in
increases or decreases in reserves for insured events of prior years. Future
adjustments, if any, will be reflected in the results of operations in the
period in which recognized.
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The following table sets forth a reconciliation of the beginning and ending loss
and LAE reserve balances, net of reinsurance ceded, for each of the three years
in the period ended December 31, 1995:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
1995 1994 1993
---- ---- ----
(amounts in thousands)
<S> <C> <C> <C>
Reserves at beginning of year--
net of reinsurance ceded $263,202 $216,486 $185,074
Provision for losses & LAE
for claims occurring in
the current year 126,764 97,044 74,267
Increase in reserves--loss portfolio
transfer from BMLIC 5,500
Increase (decrease) in estimated
losses & LAE for claims occurring
in prior years (7,514) 13,874 3,314
Loss & LAE payments for
claims occurring during:
Current year 13,052 7,216 7,869
Prior years 80,507 56,986 38,300
-------- -------- --------
Net reserves at end of year 294,393 263,202 216,486
Reinsurance recoverable on unpaid
losses & LAE at end of year 73,043 49,435 57,549
-------- -------- --------
Reserves at end of year--gross of
reinsurance ceded $367,436 $312,637 $274,035
======== ======== ========
</TABLE>
- --------------
The Company's net reserves for unpaid losses and LAE, net of related reinsurance
recoverable, at December 31, 1994 were decreased in the following year by
approximately $7,500,000, and at December 31, 1993 and 1992 the reserves were
increased in the following year by approximately $13,900,000 and $3,300,000,
respectively, for claims that had occurred on or prior to the balance sheet
dates. No premiums have been accrued as a result of the changes to prior-year
loss and LAE reserves.
The net $7,500,000 decrease in the prior years' reserves in 1995 was the result
of favorable claims development on the general liability and worker's
compensation lines and to subrogation recoveries in the surety line of business
in excess of expectations. Included in the net development, is an increase in
prior year's reserves of approximately $19,000,000 which was entirely offset by
subrogation recoverable recognized in connection with a favorable court ruling
in 1995. The significant increase in the reinsurance recoverable in 1995 is due
to the change in the type of reinsurance from an aggregate claim excess of loss
to a stop loss for the majority of the Company's losses.
The $13,900,000 increase in prior years' reserves in 1994 resulted from a
$17,500,000 increase in the reserves attributable to adverse medical malpractice
claims development in Florida from higher than anticipated dollar settlements
and from redundancies in other lines. The 1993 deficiencies resulted principally
from settling case-basis reserves for medical malpractice and workers'
compensation exposures established in prior years for amounts that were greater
than projected, net of redundancies for more recent years' claims.
11
<PAGE>
<PAGE>
The following table reflects the Company's loss and LAE reserves development
through December 31, 1995, for each of the preceding the ten years:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for unpaid
losses & LAE $12,867 $27,271 $43,813 $64,971 $92,384 $120,096 $161,263 $185,074 $216,486 $263,202 $294,393
Reserves reestimated
at December 31:
1 year later 13,281 28,495 46,385 67,486 93,419 119,875 162,121 188,387 230,360 255,689
2 years later 14,781 29,587 49,495 68,793 91,457 120,550 158,746 196,005 229,334
3 years later 14,685 31,906 50,890 66,532 91,527 115,310 163,537 191,401 -
4 years later 15,655 33,425 49,694 66,656 86,508 114,790 154,217 - -
5 years later 15,999 32,730 49,895 64,254 87,795 107,907 - - -
6 years later 15,630 32,740 49,492 64,700 79,459 - - - -
7 years later 15,937 33,563 48,749 55,300 - - - - -
8 years later 16,235 32,357 43,099 - - - - - -
9 years later 15,336 30,720 - - - - - - -
10 years later 15,089 - - - - - - - -
Cumulative redundancy
(deficiency) (2,232) (3,449) 714 9,671 12,925 12,189 7,046 (6,327) (12,848) 7,513
Cumulative amount of liability
paid through December 31:
1 year later 2,308 3,760 6,208 9,611 16,823 8,129 41,486 38,300 56,986 80,507
2 years later 3,858 7,477 12,946 20,006 13,230 35,864 62,175 74,113 113,471
3 years later 5,167 11,953 20,339 11,196 32,987 45,973 80,888 112,017 -
4 years later 6,845 16,605 14,902 24,825 39,166 58,043 104,672 - -
5 years later 9,098 12,916 24,426 30,919 50,406 74,659 - - -
6 years later 8,156 18,466 27,766 39,664 61,276 - - - -
7 years later 9,719 20,999 32,372 47,784 - - - - -
8 years later 11,186 23,259 38,271 - - - - - -
9 years later 11,874 27,412 - - - - - - -
10 years later 11,874 - - - - - - - -
Net Reserve - December 31 $216,486 $263,202 $294,393
Reinsurance Recoverables 57,549 49,435 $73,043
-------- -------- --------
Gross Reserve $274,035 $312,637 $367,436
======== ======== ========
</TABLE>
- --------------
The loss and LAE reserves of Frontier Insurance and Frontier Pacific, as
reported in their Annual Statements prepared in accordance with statutory
accounting practices and filed with state insurance departments, are identical
with those reflected in the Company's financial statements prepared in
accordance with GAAP included herein, before elimination of inter-company
transactions and except for a change resulting from the rescission by Frontier
Insurance in April 1986 of an offer to assume reinsurance under a proposed
treaty with another insurer which has been given retroactive effect herein but
was not reflected in the statutory filing with the New York Insurance Department
until the March 31, 1986 quarterly statement, thereby reducing the GAAP reserves
at December 31, 1985, by $861,000 from the statutory reserves at such date.
Further, at December 31, 1986, Frontier Insurance's loss and LAE reserves under
GAAP were lower by $138,000 than its 1986 statutory reserves as a result of the
revision of certain estimates with respect to liquor law liability claims.
Investments
Funds, including reserve funds, are invested until required for the Company's
operations, subject to restrictions on permissible investments established by
applicable state insurance codes. The Company's investment strategy is to
maximize after-tax income while generally limiting investments to investment
grade securities with high liquidity. The Company has retained Asset Allocation
& Management Company and New England Asset Management, Inc., registered
investment advisors which specialize in insurance company portfolio management,
to provide investment advisory and related services to the Company pursuant to
investment guidelines established by the Company.
12
<PAGE>
<PAGE>
The following table contains information concerning the Company's investment
portfolio at December 31, 1995:
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------------
Market Amount Reflected Percent
Cost(1) Value on Balance Sheet of Total
------- ------ ---------------- --------
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Available-for-sale securities
Fixed maturity securities:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 29,602 $ 31,118 $ 31,118 5.7%
Obligations of states and
political subdivisions 189,363 192,906 192,906 35.6
Foreign governments 20 20 20 0.0
Corporate securities 102,667 105,264 105,264 19.4
Mortgage-backed securities
188,404 192,094 192,094 35.4
-------- -------- -------- -----
Total Fixed Maturity Securities 510,056 521,402 521,402 96.1
Equity Securities 20,132 21,024 21,024 3.9
-------- -------- -------- -----
Total available-for-sale-securities $530,188 $542,426 $542,426 100.0%
======== ======== ======== =====
</TABLE>
(1) Original cost of equity and short-term securities and, as to fixed
maturities, original cost reduced by repayments and adjusted for
amortization of premiums or accrual of discounts.
The following table sets forth a profile of the Company's fixed maturity
investment portfolio by rating at December 31, 1995:
<TABLE>
<CAPTION>
Amount Reflected Percent
Market on of
S&P/Moody's Rating (1) Value Balance Sheet Portfolio
- ---------------------- ------ ---------------- ---------
(dollar amounts in thousands)
<S> <C> <C> <C>
AAA/Aaa (including U.S. Treasuries of $14,726) $318,000 $318,000 61.0%
AA/Aa 90,188 90,188 17.3
A/A 76,248 76,248 14.6
BBB/Baa 36,699 36,699 7.0
All other 267 267 .1
-------- -------- -----
Total $521,402 $521,402 100.0%
======== ======== =====
</TABLE>
- --------------
(1) Ratings are as assigned primarily by Standard & Poor's Corporation with
remaining ratings as assigned by Moody's Investors Service Inc.
13
<PAGE>
<PAGE>
The following table sets forth the maturity profile of the Company's portfolio
of fixed maturity investments at December 31, 1995:
<TABLE>
<CAPTION>
Amount Reflected Percent
Market on of
Maturity Value Balance Sheet Portfolio
- -------- ------ ---------------- ---------
(dollar amounts in thousands)
<S> <C> <C> <C>
Due in one year or less $ 5,614 $ 5,614 1.1%
Due after one year to 5 years 43,517 43,517 8.3
Due after five years to 10 years 116,141 116,141 22.2
Due after 10 years 164,036 164,036 31.5
Mortgage-backed securities 192,094 192,094 36.9
-------- -------- -----
Total $521,402 $521,402 100.0%
======== ======== =====
</TABLE>
The following table summarizes the Company's investment results for the five
years ended December 31, 1995, calculated on the mean of total investments as of
the first and last day of each calendar quarter:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Total net investment income $30,055 $22,975 $22,371 $20,208 $16,690
Average annual pre-tax yield 6.4% 6.6% 7.8% 7.9% 8.2%
Average annual after-tax yield 4.9% 5.4% 6.3% 6.2% 6.5%
Effective federal income tax rate
on total net investment income 23.7% 19.8% 19.3% 21.2% 20.8%
</TABLE>
Regulation
Frontier Insurance and Frontier Pacific are subject to varying degrees of
regulation and supervision in the jurisdictions in which they transact business
under statutes which delegate regulatory, supervisory and administrative powers
to state insurance commissioners. Such regulation generally is designed to
protect policyholders rather than investors and relates to such matters as the
standards of solvency which must be met and maintained; the licensing of
insurers and their agents; the nature of and examination of the affairs of
insurance companies, which includes periodic market conduct examinations by the
regulatory authorities; annual and other reports, prepared on a statutory
accounting basis, required to be filed on the financial condition of insurers or
for other purposes; establishment and maintenance of reserves for unearned
premiums and losses; and requirements regarding numerous other matters. In
general, Frontier Insurance and Frontier Pacific must file all rates for
insurance directly underwritten with the insurance department of each state in
which they operate on an admitted basis; reinsurance generally is not subject to
rate regulation. Medical malpractice rates in New York are established by the
New York State Insurance Department (the "Department"). Further, state insurance
statutes typically place limitations on the amount of dividends or other
distributions payable by insurance companies in order to protect their solvency.
New York, the jurisdiction of incorporation of Frontier Insurance, requires that
dividends be paid only out of earned surplus and limits the annual amount
payable without the prior approval of the Department to the lesser of 10% of
policyholders' surplus or 100% of adjusted net investment income. California,
the jurisdiction of incorporation of Frontier Pacific, currently limits the
annual amount of dividends payable without the prior approval of the California
Insurance Department to the greater of 10% of policyholders' surplus at the end
of the previous
14
<PAGE>
<PAGE>
calendar year or 100% of net income for the previous calendar year.
The Company is also subject to statutes governing insurance holding company
systems in various jurisdictions. Typically, such statutes require the Company
to file information periodically with the state insurance regulatory
authorities, including information concerning its capital structure, ownership,
financial condition and general business operations. Under the terms of
applicable state statutes, any person or entity desiring to purchase more than a
specified percentage (commonly 10%) of the Company's outstanding voting
securities is required to obtain regulatory approval for the purchase. Article
15 of the New York Insurance Law relating to holding companies, to which the
Company is subject, requires, inter alia, disclosure of transactions between
Frontier Insurance and the Company or any of its subsidiaries, that such
transactions satisfy certain standards, including that they be fair, equitable
and reasonable and that certain material transactions be specifically
non-disapproved by the Department. Further, prior approval by the Department is
required of affiliated sales, purchases, exchanges, loans or extensions of
credit, or investments, any of which involve 5% or more of Frontier Insurance's
admitted assets as of the preceding December 31st. In addition, any documents
relating to the offering of securities by the Company, the proceeds of which
will be used for Frontier Insurance, must be approved by the Department. With
respect to Frontier Pacific, California law with respect to holding companies is
substantially equivalent to that of New York.
The National Association of Insurance Commissioners ("NAIC") has established
eleven financial ratios to assist state insurance departments in their oversight
of the financial condition of insurance companies operating in their respective
states. The NAIC calculates these ratios based on information submitted by
insurers on an annual basis and shares the information with the applicable state
insurance departments. The ratios relate to leverage, profitability, liquidity
and loss reserve development. Frontier Insurance's percentage increase in
surplus exceeded the acceptable range during 1995 due to a $45 million capital
infusion by the Company, pursuant to an agreement with AM Best in order to fund
projected growth and retain Frontier Insurance's A(-) Excellent rating.
Additionally, Frontier Insurance's estimated current reserve deficiency to
surplus ratio exceeded the acceptable range primarily as a result of reserve
strengthening. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
In their ongoing effort to improve solvency regulation, the NAIC and individual
states have enacted certain laws and statutory financial statement reporting
requirements. For example, NAIC rules require audit certification of statutory
financial statements as well as actuarial certification of loss and LAE reserves
therein. Other activities are focused on greater disclosure of an insurer's
reliance on reinsurance and changes in its reinsurance programs, and tighter
rules on accounting for certain overdue reinsurance. In addition, the NAIC has
implemented risk-based capital requirements for property and casualty insurance
companies commencing in 1994 (see below). These regulatory initiatives, and the
overall focus on solvency, may intensify the restructuring and consolidation of
the insurance industry. It is also possible that Congress may enact legislation
regulating the insurance industry. While the impact of these regulatory efforts
on the Company's operations cannot be quantified until enacted, the Company
believes it will be adequately positioned to compete in an environment of more
stringent regulation.
In 1994, the NAIC implemented a risk-based capital measurement formula to be
applied to all property-casualty insurance companies, which formula calculates a
minimum required statutory net worth, based on the underwriting, investment,
credit loss reserve and other business risks applicable to the insurance
company's operations. An insurance company that does not meet threshold
risk-based capital measurement standards could be required to reduce the scope
of its operations and ultimately could become subject to statutory receivership
proceedings. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Regulation."
15
<PAGE>
<PAGE>
Competition
The property and casualty insurance business is highly competitive, principally
in terms of price and extent of coverage. In New York State, there are three
major competitors, as well as a number of other insurers, writing medical
malpractice insurance for physicians, the Company's principal insurance program,
and in Florida such coverage is offered by a larger number of insurers. However,
the Company benefits from the endorsement or approval of various medical
associations, many of whose physician members are insured by the Company.
Moreover, the Company's program, unlike those of its competitors, is limited to
specified classes of physicians. Dental malpractice coverage in all
jurisdictions is significantly more competitive than medical malpractice with
respect to rates and terms of coverage. Although the Company's underwriting
strategy is to underwrite specialty programs for niche markets, it nevertheless
encounters competition from carriers engaged in insuring risks in the broader
lines of business which encompass niche programs.
Employees
The Company currently has 579 full-time employees, 16 of whom are executive
management, and 36 part-time employees. The Company is not a party to any
collective bargaining agreement and believes its relationship with its employees
to be good.
Item 2. Properties.
The Company owns a three-story office building at 195 Lake Louise Marie Road,
Rock Hill, New York, in which its executive offices and insurance operations are
located.
The Company owns a one-story Commercial building in Rock Hill, New York, which
is used for storage and rental property.
The Company leases approximately 15,786 square feet of office space in Bedford
Hills, New York, under a lease expiring in December 1996 at a monthly rental of
$18,169, at which Med Pro conducts its medical malpractice insurance agency
operations.
The Company leases approximately 3,325 square feet of office space in an office
building in Los Angeles, California, under a lease expiring in February 2001 at
a monthly rental of $4,489, at which Frontier Pacific conducts its insurance
operations.
The Company leases approximately 4,472 square feet of office space in an office
building in Great Neck, New York, under a lease expiring in March 1999 at a
monthly rental of $8,788, at which claims settlement and adjusting services are
performed.
The Company leases approximately 940 square feet of office space in an office
building in San Jose, California, under a lease expiring in December 1997 at a
monthly rental of $1,175, at which SDIA conducts branch agency operations.
The Company leases approximately 7,204 square feet of office space in an office
building in La Jolla, California, under a lease expiring in August 1999 at a
monthly rental of $9,005, at which SDIA conducts its insurance agency
operations.
The Company leases approximately 6,590 square feet of office space in an office
building in Fort Lauderdale, Florida, under a lease expiring in February 2000 at
a monthly rental of $8,441, at which claims settlement and adjusting services
are performed.
The Company leases approximately 616 square feet of office space in an office
building in Phoenix, Arizona, under an open lease at a monthly rental of $722,
at which SDIA conducts branch agency operations.
16
<PAGE>
<PAGE>
The Company leases approximately 363 square feet of office space in an office
building in Las Vegas, Nevada, under a lease expiring in April 1996 at a monthly
rental of $1,200, at which SDIA conducts branch agency operations.
The Company leases approximately 720 square feet of office space in an office
building in Reno, Nevada, under a lease expiring in December 1995 at a monthly
rental of $800, at which SDIA conducts branch agency operations.
The Company leases approximately 1,100 square feet of office space in Canton,
Ohio, under a lease expiring in May 1998 at a monthly rental of $958, at which
medical malpractice insurance agency operations are performed.
The Company leases approximately 1,429 square feet of office space in an office
building in Houston, Texas, under a lease expiring in August 1998 at a monthly
rental of $1,548, at which medical malpractice insurance agency operations are
performed.
The Company leases approximately 5,478 square feet of office space in an office
building in Orlando, Florida, under a lease expiring in February 2002 at a
monthly rental of $7,989, at which claims settlement and adjusting services are
performed.
Item 3. Legal Proceedings.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Shareholder Litigation"
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
17
<PAGE>
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters.
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol FTR. The following table sets forth the high and low sales prices for the
Company's Common Stock, as reported by the New York Stock Exchange, for each
calendar quarter during the periods indicated, as adjusted to reflect stock
dividends paid and stock splits:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1994:
First Quarter $30.00 $25.42
Second Quarter 33.38 30.18
Third Quarter 37.50 29.00
Fourth Quarter 30.75 16.75
1995:
First Quarter $24.75 $20.25
Second Quarter 27.00 23.50
Third Quarter 32.00 25.25
Fourth Quarter 33.75 27.50
1996:
First Quarter (through March 25, 1996) 32.13 28.25
</TABLE>
On March 25, 1996, the Company had approximately 864 holders of record of its
Common Stock, which did not include beneficial owners for shares registered in
nominee or street name.
During 1995, the Company declared four quarterly cash dividends of $.12 per,
share the Company's sixteenth consecutive quarterly cash dividend. (See
"Business-Regulation" for restrictions on the payment of dividends by Frontier
Insurance, the Company's wholly-owned subsidiary.)
18
<PAGE>
<PAGE>
Item 6. Selected Financial Data
Frontier Insurance Group, Inc. and Subsidiaries
The following selected financial data are derived from the Company's
consolidated financial statements. The data should be read in conjunction with
the consolidated financial statements, related notes, and other financial
information included elsewhere in this report.
<TABLE>
<CAPTION>
Income Statement Data: Year Ended December 31
- --------------------- ---------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands, except per share dollar amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
Gross premiums written $264,314 $198,892 $148,750 $149,504 $127,428
======== ======== ======== ======== ========
Net premiums written $220,757 $187,288 $118,819 $116,248 $ 82,573
======== ======== ======== ======== ========
Net premiums earned $196,220 $156,755 $116,372 $105,171 $ 78,018
Net investment income 30,035 24,453 22,523 19,875 15,904
Realized capital gains (losses) 20 (1,478) (152) 333 786
Gross claims adjusting income 130 255 424 1,356 1,562
-------- -------- -------- -------- --------
Total revenues 226,405 179,985 139,167 126,735 96,270
Expenses:
Losses and loss adjustment expenses 119,255 110,918 77,581 74,933 54,414
Amortization of policy acquisition costs,
underwriting, and other expenses 62,975 47,737 31,293 26,604 21,470
Interest expense 895
241
-------- -------- -------- -------- --------
Total expenses 183,125 158,655 108,874 101,537 76,125
-------- -------- -------- -------- --------
Income before income taxes and
cumulative effect of change in
accounting principle 43,280 21,330 30,293 25,198 20,145
Income taxes 12,069 4,350 7,130 6,236 5,157
-------- -------- -------- -------- --------
Income before cumulative effect
of change in accounting principle 31,211 16,980 23,163 18,962 14,988
Cumulative effect of change in
accounting for income taxes 708
-------- -------- -------- -------- --------
Net Income $ 31,211 $ 16,980 $ 23,871 $ 18,962 $ 14,988
======== ========= ========= ========= =========
Net income per share $2.40 $1.31 $2.09 $1.76 $1.52
===== ===== ===== ===== =====
Cash dividends declared per share $ .48 $ .46 $ .40 $ .40
===== ===== ===== ===== =====
Balance Sheet Data:
December 31
------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Total investments $552,714 $407,618 $343,591 $262,010 $235,451
Total assets 773,348 599,117 527,657 406,149 343,561
Reserves for gross unpaid losses and
loss adjustment expenses 367,436 312,637 274,035 238,941 195,719
Total liabilities 543,615 408,853 341,963 299,400 252,344
Total capital 229,733 190,264 185,694 106,749 91,217
- --------------
Supplemental Per Share Data:
Realized capital gains (losses)-net of tax $ $ (.07) $ (.01) $ .02 $ .05
Federal income tax "Fresh Start" benefits .03 .03
Cumulative effect of accounting change .06
Operating income 2.40 1.38 2.04 1.71 1.44
------ ------ ------ ----- -----
Net income $ 2.40 $ 1.31 $ 2.09 $1.76 $1.52
====== ====== ====== ===== =====
Book value $17.59 $14.61 $14.34 $9.89 $8.52
Statutory Combined Ratio 91.5% 97.8% 93.3% 96.8% 96.0%
GAAP Combined Ratio 92.7% 101.0% 93.2% 95.4% 95.3%
</TABLE>
19
<PAGE>
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
report.
Results of Operations
The following table sets forth the Company's net premiums earned by principal
lines of insurance for the three years indicated and the dollar amount and
percentage of change therein from year to year:
<TABLE>
<CAPTION>
Increase (Decrease)
--------------------------------------
Year Ended December 31 1994 to 1995 1993 to 1994
------------------------- ------------- ----------------
1995 1994 1993 Amount % Amount %
---- ---- ---- ------ - ------ -
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Medical malpractice
(including dental
malpractice and social services) $ 88,295 $ 74,877 $ 49,720 $ 13,418 17.9 $ 25,157 50.6
General liability 50,026 28,631 16,704 21,395 74.7 11,927 71.4
Surety 39,756 30,344 18,415 9,412 31.0 11,929 64.8
Workers' compensation 10,320 16,671 23,717 (6,351) (38.1) (7,046) (29.7)
Other 7,823 6,232 7,816 1,591 25.5 (1,584) (20.3)
-------- -------- -------- -------- --------
Total $196,220 $156,755 $116,372 $ 39,465 25.2 $ 40,383 34.7
======== ======== ======== ======== ========
</TABLE>
The following table sets forth the expense components of the Company's combined
ratio calculated as a percentage of net premiums earned on the basis of
generally accepted accounting principles ("GAAP Combined Ratio") for the three
years indicated:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Losses 45.6% 54.1% 49.8%
Loss adjustment expenses ("LAE") 15.2 16.7 16.9
---- ---- ----
Losses and LAE 60.8 70.8 66.7
Acquisition, underwriting, interest, and other expenses 31.9 30.2 26.5
---- ---- ----
GAAP Combined Ratio 92.7% 101.0% 93.2%
==== ===== ====
</TABLE>
Calendar Year 1995 Compared to Calendar Year 1994
A variety of factors accounted for the 25.2% growth in net premiums earned, the
principal factor being increases in the majority of the Company's core and new
program business, partially offset by a decrease in workers' compensation,
particularly the cotton gin program, and by the increased ceding of earned
premiums under the Company's aggregate excess of loss reinsurance contract
effective January 1, 1995, pursuant to which 14% of earned premium for all lines
of business, except bail, customs, license and permit, and miscellaneous surety
bonds is ceded.
The increase in medical malpractice net premiums earned was primarily
attributable to an increase in the number of physicians insured, principally
those associated with mental health, home care, and other social service
organizations, growth in the program for psychiatrists, greater penetration of
the Ohio physician market, growth in the dental program endorsed by the Academy
of General Dentistry, and rate increases in Florida and other geographic areas.
Net premiums earned for the general liability line increased primarily because
of increases in various programs, including social services, alarms and guards,
pest control and excess employer's liability. These increases were partially
offset by a decrease in net written premiums earned in the umbrella and in the
crane operator liability programs.
20
<PAGE>
<PAGE>
Growth in the surety net premiums earned continued in 1995, primarily
attributable to expanded writings of license and permit bonds, with bonds for
small contractors, miscellaneous bonds, and bail bonds also showing substantial
percentage increases. The increase in license and permit bonds was primarily
attributable to the Company's acquisition in April 1994 of the license and
permit bond business of a California insurance agency.
Net premiums earned for the workers' compensation line decreased primarily as a
result of decreases in the specialty niche program for cotton gins caused by a
weather-related reduction in the cotton crop, and decreases in other smaller
programs due to the Company's decision not to renew accounts deemed
unprofitable, and decreased required participation in the National Workers'
Compensation Reinsurance Pools. These decreases were partially offset by
increases in workers' compensation premiums written in the social services
programs.
Net premiums earned for the other lines of business increased primarily due to
increased volume in commercial package policies in the social services program,
and the recent start-up of an earthquake program. These increases were partially
offset by decreases in other miscellaneous small programs.
Net investment income before realized capital gains and losses increased 22.8%
due principally to increases in invested assets resulting from the proceeds of
the $25 million borrowing under a line of credit facility, the January 1995
commutation of certain medical malpractice reinsurance treaties, and cash inflow
from regular operations, partially offset by the interest charge on funds held
by the Company for the benefit of the reinsurer of the Company's aggregate
excess of loss reinsurance contract. Total net investment income increased 30.8%
due to the aforementioned increase in net investment income and a decrease in
realized capital losses. The average annual pre-tax yield on investments,
excluding the charge for funds held under the aggregate excess of loss
reinsurance contract and realized capital gains and losses, decreased to 6.4%
from 6.6%. This decrease is primarily the result of generally lower interest
rates available for funds invested in 1994 and 1995, and a decrease in the
Company's holdings of higher yielding investments, as a result of maturities and
calls for redemption. The average annual after-tax yield on investments,
excluding the charge for funds held under the aggregate excess of loss
reinsurance contract and realized capital gains and losses, decreased to 4.9%
from 5.4%, primarily for the reasons described above.
Gross claims adjusting income decreased 49.0% primarily as a result of a
decrease in claim services provided to outside companies, principally Markel
Corporation.
Total revenues increased 25.8% as a result of the above.
Total expenses increased by 15.4% compared to the 25.2% increase in net premiums
earned. Losses and loss adjustment expenses ("LAE") increased by 7.5% as a
result of a 5.5% increase in losses and a 14.1% increase in LAE. The increase in
losses was substantially lower than that for net premiums earned as a result of
the one-time addition of $17.5 million to the 1994 loss reserves applicable to
the Company's medical malpractice business in Florida, subrogation recoveries in
the surety line of business in excess of expectations, favorable reserve
development in accident years prior to 1995 for general liability and workers'
compensation and recoveries under the aggregate excess of loss reinsurance
contract which provides coverage for certain losses and LAE in excess of 66% of
the net earned premium for the 1995 accident year. These decreases were
partially offset by carrying higher loss and LAE ratios to premiums earned for
1995 business. The Company also increased prior years reserves by approximately
$19.0 million, offset by subrogation recoverable of like amount, recognized in
conjunction with the favorable ruling in the New York Court of Appeals as more
fully described in Note--C of the Notes to Consolidated Financial Statements.
The 14.1% increase in LAE resulted from the increase in loss and LAE ratios,
partially offset by a change in the line of business mix to those having a lower
percentage relationship of LAE to losses and the allocation of recoveries under
the aggregate excess of loss contract and the favorable court ruling mentioned
above. Due to the disproportionate relationship of losses and LAE to earned
premium, the loss and LAE component of the GAAP Combined Ratio was 9.6
percentage points lower than in the comparable 1994 period. The 38.7% increase
in the
21
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amortization of policy acquisition costs was attributable primarily to an
increase in direct commission expense resulting from growth in programs with
higher commission rates, a decrease in reinsurance contingent commissions,
increased staffing and marketing expenses related to expansion, and salary
increases, partially offset by a decrease in assumed commission expense
resulting from the continued decrease in assumed written premiums. The 25.1%
increase in underwriting, other expenses and interest expense was primarily the
result of the interest expense associated with the borrowing under the line of
credit facility, an increase in the additions to allowance for bad debts,
increased staffing, increased facilities, equipment and materials expense
necessitated by the Company's growth, a reduction in assessment recoveries from
the Texas Workers' Compensation Insurance Facility, and salary increases,
partially offset by a decrease in policyholder dividends. As the non-claim
related component of the GAAP Combined Ratio increased at a greater rate than
premiums earned, the non-claim component was 1.7 percentage points higher than
in the comparable 1994 period. The total GAAP Combined Ratio decreased by 8.3
percentage points to 92.7% as a result of the above.
The foregoing changes resulted in income before income taxes of $43.3 million
for the year ended 1995, a 102.9% increase from the comparable 1994 period. Net
income for the year increased by $14.2 million, or 83.8%. The comparative
results were significantly impacted by the $17.5 million addition to loss
reserves in the third quarter of 1994 reflected above, which resulted in a
disproportionately lower net income for the 1994 period.
Calendar Year 1994 Compared to Calendar Year 1993
A variety of factors accounted for the 34.7% growth in net premiums earned, a
principal factor being a January 1994 change in a major portion of the Company's
reinsurance ceded arrangements. Commencing January 1, 1994, the Company
increased its risk retention level from $500,000 to $1,000,000 per occurrence on
medical malpractice, surety, and major components of its other principal lines,
thereby significantly decreasing the amounts of premiums ceded and increasing
the amount of premiums retained. As premiums are recognized as earned over the
term of the related policy, the positive impact of this change on the Company's
net premiums earned was recognized increasingly throughout 1994.
The increase in medical malpractice net premiums earned was attributable
primarily to an increase in the number of physicians insured associated with
mental health, home care, and other social service organizations, growth in the
Company's program for psychiatrists, greater penetration of the Ohio physician
market, and rate increases, which were partially offset by rate decreases on
dental malpractice insurance.
Growth in surety net premiums earned continued in 1994, primarily attributable
to expanded writings of bonds for small contractors, bail bonds, miscellaneous
bonds, and license and permit bonds. The increase in license and permit bonds
was primarily attributable to the Company's acquisition in April 1994 of the
license and permit bond business of a California insurance agency.
Net premiums earned for the general liability line increased primarily because
of new programs, including cranes and excess employers' liability, and increases
in various other programs, including social services, and alarms and guards.
These increases were partially offset by decreases resulting from the continued
decline in the number of risks covered under the liquor liability program, which
the Company has discontinued.
Net premiums earned for the workers' compensation line decreased primarily as a
result of decreases in the specialty niche program for cotton gins and other
smaller programs due to the Company's decision not to renew accounts deemed
unprofitable. This trend is expected to continue due to the continued
re-underwriting of the workers' compensation line and elimination of
unprofitable risks. Net premiums earned further declined by a reduction in the
required participation in the National Workers' Compensation Reinsurance Pools,
primarily attributable to a decrease in the Company's participation percentage
in the pools. These decreases were partially offset by an increase in workers'
compensation
22
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written in the social services program.
Net premiums earned for the other lines of business decreased primarily due to
decreased volume in commercial and farm package policies and commercial auto,
attributable to the 1993 non-renewal of the insurance placement agreement with
Markel Services, Inc. ("Markel/Rhulen"). These decreases were partially offset
by increases in commercial package policies in the social services program and
in accident and health policies in the excess medical stop loss program.
Net investment income, before realized capital losses, increased by 8.6% due
principally to significant increases in investable assets resulting from the
cash proceeds of a public offering of the Company's Common Stock in September
1993, the January 1994 commutation of certain medical malpractice reinsurance
treaties, the decrease in cash outflow attributable to the 1994 ceded
reinsurance treaty changes, and the cash inflow from regular operations. This
increase was partially offset by an increase in tax-advantaged securities which
have lower pre-tax yields than taxable securities. Total net investment income,
however, increased by only 2.7% due to a significant increase in realized
capital losses recognized by a short-term fund limited partnership in which the
Company is an investor and other short-term bond fund investments, which were
adversely affected by the 1994 increase in interest rates. The average annual
pre-tax yield on investments, excluding realized capital losses, decreased to
6.6% from 7.8%, primarily as the result of an increase in the proportion of
tax-advantaged investment income to taxable income, compounded by generally
lower available interest rates. The average annual after-tax yield on
investments, excluding realized capital losses, decreased to 5.4% in 1994 from
6.3% in 1993, primarily as a result of generally lower available interest rates.
Gross claims adjusting income decreased 39.7% primarily as a result of a
decrease in claim services provided to outside companies, principally
Markel/Rhulen, partially offset by an increase in the rates charged for certain
services.
Total revenues increased 29.3% as a result of the above.
Total expenses increased by 45.7% compared to the 34.7% increase in net premiums
earned. Losses and loss adjustment expenses ("LAE") increased at a 42.9% rate as
a result of a 46.4% increase in losses and a 32.8% increase in LAE. The
percentage increase in losses, which was substantially greater than the
percentage increase in net premiums earned, was primarily attributable to a
$17.5 million addition to loss reserves in the third quarter due to adverse
medical malpractice claims development in Florida resulting from the higher than
anticipated dollar settlements. The Company has taken a number of steps to
address the Florida loss experience, including rate increases, and the opening
of a Company claims office in Ft. Lauderdale in February 1995 staffed on a local
basis by claims examiners and attorneys employed by the Company to adjust and
defend claims. This increase was partially offset by a change in the mix of
business to other programs having lower loss ratios and the reduction of some
redundant reserves on other lines of business. The 32.8% increase in LAE was
relatively proportionate to growth in net premiums earned, and was attributable
to the increased volume of claims resulting from the increased volume of
insurance in force. The increase in losses and LAE resulted in a loss and LAE
component of the GAAP Combined Ratio 4.1 percentage points higher than in the
comparable prior period. The 52.5% increase in amortization of policy
acquisition costs, underwriting, and other expenses resulted from a 75.8%
increase in amortization of policy acquisition costs and a 23.7% increase in
underwriting and other expenses. The 75.8% increase in amortization of policy
acquisition costs was attributable primarily to an increase in direct commission
expense resulting from the growth in programs with higher commission rates, a
decrease in ceded commissions resulting from the January 1994 change in
reinsurance ceded arrangements, a decrease in contingent reinsurance ceded
commissions, increased staffing and marketing expenses related to expansion, and
salary increases, partially offset by a decrease in assumed commission expense
resulting from the continued decrease in assumed written premiums. The 23.7%
increase in underwriting and other expenses was primarily the result of
increased staffing, increased facilities expenses, and equipment and materials
expense necessitated by the Company's growth, salary increases, and an increase
in policyholder dividends, partially offset by decreases in assessments for
state and residual market funds.
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Since the non-claim related expenses increased at a percentage rate more than
that of net premiums earned, the non-claim related component of the GAAP
Combined Ratio was 3.7 percentage points higher than in the prior year. The
total GAAP Combined Ratio increased by 7.8 percentage points to 101% for the
year.
The foregoing changes resulted in income before income taxes and cumulative
effect of change in accounting for income taxes of $21,330,000 for 1994, a
decrease of 29.6% from 1993. Net income for the year decreased by $6,891,000, or
28.9%, a lower percentage change than for pre-tax income as a result of a lower
effective tax rate caused by an increase in the proportion of investment income
which is tax preferenced.
Asset Portfolio Review
At December 31, 1995, the Company's total assets of $773.3 million was comprised
of the following: cash and investments, 72.1%; reinsurance recoverables, 10.0%;
premiums receivable, 6.5%; deferred expenses (policy acquisition costs and
deferred federal income taxes), 5.5%; home office building and equipment, 3.6%;
and other assets, 2.3% .
The Company generally invests in securities with fixed maturities with the
objective of providing reasonable returns while limiting liquidity and credit
risk. As a result, its investment portfolio consists primarily of government and
governmental agency securities and high-quality marketable corporate securities
which are rated at investment grade levels. At December 31, 1995, the Company
held rated, or better-than-investment grade, corporate debt securities with a
carrying amount of $521.1 million. Those holdings amounted to 99.95% of the
Company's fixed maturity investments.
At December 31, 1995 and 1994, the Company's fixed maturity securities include
mortgage-backed bonds of $192.1 million and $57.3 million, respectively, which
are subject to risks associated with variable prepayments of the underlying
mortgage loans. Prepayments cause those securities to have different actual
maturities than that expected at the time of purchase. Securities that have an
amortized cost greater than par that are backed by mortgages that prepay faster
than expected will incur a reduction in yield or loss, while securities that
have an amortized cost less than par that are backed by mortgages that prepay
faster than expected will generate an increase in yield or gain. The degree to
which a security is susceptible to either gains or losses is influenced by the
difference between its amortized cost and par, the relative sensitivity of the
underlying mortgages backing the assets to prepayments in a changing interest
rate environment and the repayment priority of the securities in the overall
securitization structure.
The Company limits the extent of its credit risk by purchasing securities that
are backed by stable collateral and by concentrating on securities with enhanced
priority in the securitization structure. Such securities with reduced risk
typically have a lower yield (but higher liquidity) than higher-risk
mortgage-backed bonds (i.e., mortgage-backed bonds structured to share in
residual cash flows or which cover only interest payments). At selected times,
higher-risk securities may be purchased if they do not compromise the safety of
the Company's general portfolio. There are negligible default risks in the
Company's mortgage-backed bond portfolio as the vast majority of these bonds are
either guaranteed by U.S. government-sponsored entities or are supported in the
securitization structure by junior securities resulting in the bonds having high
investment grade status.
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At December 31, 1995, the following table provides a profile of the Company's
fixed maturity investment portfolio by rating:
<TABLE>
<CAPTION>
Amount
Reflected Percent
Market on of
S&P/Moody's Rating Value Balance Sheet Portfolio
------------------ ------ ------------- ---------
(Amounts in thousands)
<S> <C> <C> <C>
AAA/Aaa (including U.S. Treasuries of $27,633) $318,000 $318,000 61.0%
AA/Aa 90,188 90,188 17.3
A/A 76,248 76,248 14.6
BBB/Baa 36,699 36,699 7.0
All other 267 267 .1
-------- -------- -----
Total $521,402 $521,402 100.0%
======== ======== =====
</TABLE>
In December 1995, the Company reclassified all of its previously held securities
classified as held-to-maturity, to available-for-sale as permitted by the FASB's
Special Report, A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equities Questions and Answers. The
reclassification increased shareholders' equity by $2,753,000 at December 31,
1995.
As of January 1, 1994, the Company adopted FASB Statement 115 and reclassified a
portion of its fixed maturity securities portfolio as "available-for-sale," with
the remainder being classified as "held-to-maturity." With that
reclassification, the fixed maturity securities classified as
"available-for-sale" are carried at fair value and changes in fair values, net
of applicable income taxes, are charged or credited directly to shareholders'
equity. "Held-to-maturity" securities are reported at amortized cost. The
adoption of Statement 115 increased shareholders' equity by $3,651,000 at
January 1, 1994.
Prior to January 1, 1994, the Company classified fixed maturity securities in
accordance with the then existing accounting standards and, accordingly, those
fixed maturity securities that were not intended to be held-to-maturity were
designated as actively managed, and were carried at fair value with unrealized
holding gains and losses reported in a separate caption in shareholders' equity.
Other fixed maturity securities were carried at amortized cost, since the
Company had both the ability and intent to hold those securities until maturity.
Liquidity and Capital Resources
The Company is a holding company, receiving cash principally through sales of
equities, borrowings, and dividends from its subsidiaries, certain of which are
subject to dividend restrictions described in Note I to the consolidated
financial statements. The ability of insurance and reinsurance companies to
underwrite insurance and reinsurance is based on maintaining liquidity and
capital resources sufficient to pay claims and expenses as they become due. The
primary sources of liquidity for the Company's subsidiaries are funds generated
from insurance and reinsurance premiums, investment income, commission and fee
income, capital contributions from the Company and proceeds from sales and
maturities of portfolio investments. The principal expenditures are for payment
of losses and LAE, underwriting and other operating expenses, commissions, and
dividends to shareholders and policyholders.
The Company's subsidiaries maintain liquid operating positions and follow
investment guidelines that are intended to provide for an acceptable return on
investment while preserving capital, maintaining sufficient liquidity to meet
their obligations, and as to the Company's insurance subsidiaries, maintaining a
sufficient margin of capital and surplus to ensure their unimpaired ability to
write insurance and assume reinsurance.
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Cash flow generated from operations for 1995, 1994, and 1993 was $105.0 million,
$81.9 million, and $51.2 million, respectively, amounts adequate to meet all of
the Company's obligations.
In January 1993, 1994, and 1995, investment funds were increased by $9.2
million, $9.0 million and $3.9 million, respectively, from the commutation of
the 1989, 1990, and 1991 treaty years under the medical malpractice reinsurance
treaties, resulting in the receipt of $5.4 million, $6.1 million, and $3.9
million, respectively, in cash and a concomitant increase in reserves for unpaid
losses and LAE, with the balance received from the collection of contingent
commissions earned by the Company for the 1994 and 1993 treaty years.
In September 1993, the Company sold 2.097 million shares of Common Stock in a
public offering realizing net proceeds of approximately $58.9 million, all of
which was added to the Company's working capital to be used for general
corporate purposes, including contributions to the statutory surplus of its two
insurance company subsidiaries to expand their capacity to write insurance and
for the possible acquisitions of insurance related lines and/or businesses.
In April 1994, the Company completed the acquisition of Spencer Douglass
Insurance Associates, Inc., a California license and permit bond insurance
agency, for $3.2 million and entered into a five-year consulting agreement with
the owner/principal of the agency. Personnel of the agency involved in placing
and servicing the acquired business have become employees of the Company,
operating from their respective locations in Phoenix, Arizona; Reno and Las
Vegas, Nevada; and San Jose, Orange County and La Jolla, California. All new and
renewal policies with respect to the approximately $5 to $6 million of license
and permit bond business acquired are issued by the Company.
In May 1995, the Company and R. Spencer Douglas III ("Douglass") formed a
California limited liability corporation, Douglass/Frontier, LLC (
Douglass/Frontier ), a bail bond insurance agency. The company made an initial
cash investment of $2,400,000 and Douglass contributed the assets of his
wholly-owned existing bail bond agency. The Company and Douglass share equally
in the ownership of Douglass/Frontier.
On June 29, 1995, the Company obtained a 4 1/2 year, $35 million line of credit
facility from The Bank of New York, under which it borrowed $25 million at an
interest rate of 6.87% per annum, payable quarterly. The bank's commitment
reduces by $5 million at the end of each of 1996, 1997, and 1998, and expires at
the end of 1999. The Company has no other outstanding debt.
As a result of a review by AM Best of Frontier Insurance Company's A-
(Excellent) rating, the Company agreed with AM Best to make a $45 million
capital infusion to Frontier Insurance Company by June 30, 1995 in order to fund
its projected growth and retain its A- rating. At June 30, 1995 the Company had
completed the $45 million capital infusion, utilizing a combination of funds
previously held by the Company and loan proceeds from The Bank of New York loan.
In November 1995, the Company acquired the realtors, errors, and omissions book
of business from Bankers Multiple Line Insurance Company ("BMLIC"). The purchase
price was $400,000 with $200,000 remitted the date of closing, and an additional
$200,000 due January 15, 1997, with downward adjustments possible if certain
commitments are not kept. The personnel of BMLIC involved in placing and
servicing the acquired business have become employees of the Company and will
continue to operate from their location in Louisville, Kentucky.
In March 1992, the Company commenced quarterly cash dividend payments. Cash
dividends declared in 1995, 1994 and 1993 were $6,200,000, $6,000,000, and
$4,400,000, respectively.
On November 10, 1994, the Company authorized a stock repurchase program to
purchase up to 1,000,000 shares of its Common Stock at such times and prices as
the Company deems advantageous, in compliance with SEC Rule 10b-18 at the
discretion of the Chairman of the Board. There is no commitment or obligation on
the part of the Company to purchase any particular number of shares, and
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the program may be suspended at any time at the Company's discretion. In 1995
and 1994, in conjunction with this repurchase program, the Company acquired
6,000 and 35,400 shares of Common Stock at a cost of $134,000 and $654,000,
respectively.
Reinsurance
Effective January 1, 1995, the Company has entered into a stop loss reinsurance
contract with Centre Reinsurance Company of New York ("Centre Re") for accident
years 1995 and future. Under the terms of the agreement, Centre Re provides
reinsurance protection within certain accident year and contract aggregate
dollar limits for losses and LAE in excess of a predetermined ratio of these
expenses to net premiums earned for a given accident year for all lines of
business except bail, customs, license and permit, and miscellaneous surety
bonds. The loss and LAE ratio above which the reinsurance provides coverage is
66%, 65%, and 64%, respectively, for accident years 1995 through 1997,
respectively. The maximum amount recoverable for an accident year is 175% of the
reinsurance premium paid for the accident year, or $162,500,000 in the aggregate
for the three years.
Litigation with the State of New York
In December 1990, the New York State Court of Claims rendered a decision in
favor of the Company holding that a State University of New York ("SUNY")
medical school faculty member engaged in the clinical practice of medicine at a
SUNY medical facility, corollary to such physician's faculty activities, was
within the scope of such physician's employment by SUNY and was protected
against malpractice claims arising out of such activity by the State of New York
and not under the Company's medical malpractice policy. The decision was
affirmed on appeal by the New York State Appellate Division in November 1991 and
not appealed by the State. In July 1992, the State of New York enacted
legislation eliminating medical school faculty members of SUNY engaged in the
clinical practice of medicine at a SUNY medical facility from indemnification by
the State with respect to malpractice claims arising out of such activity,
retroactive to July 1, 1991. In an opinion filed on September 3, 1993 the Court
of Claims of the State of New York held, inter alia, that the July 1992
legislation by the State of New York eliminating SUNY medical school faculty
members engaged in the clinical practice of medicine, as part of their
employment by SUNY, from indemnification by the State with respect to
malpractice claims arising out of such activity, was not to be applied
retroactively. This decision was affirmed by the New York State Appellate
Division in April 1994. Subsequently, in February 1995, the Appellate Division
granted leave to Frontier and the State of New York to have the issues of
Frontier's entitlement to recover its costs of defense and its costs of
settlement ruled on by the State's highest Court, the New York Court of Appeals.
In December 1995, the New York Court of Appeals ruled on this issue and
concluded that Frontier was entitled to recoveries from the State for such
medical malpractice claims. As a result of this decision, the Company believes
the above-referenced decisions are controlling precedents and that it will
benefit economically by not being ultimately responsible for certain claims
against SUNY physicians for whom it presently carries reserves and be entitled
to reimbursement of certain claims previously paid; accordingly, effective
December 31, 1995, Frontier recorded a subrogation recoverable of approximately
$19,000,000 representing the amount of claims already paid and the reserves
currently held by Frontier on open cases that management believes are
reimbursable by the State of New York. To the extent that the amount of the
actual recovery varies, such difference will be reported in the period
recognized. The Company is continuing to defend all SUNY faculty members against
malpractice claims that have been asserted and is maintaining reserves therefor
adjusted for the anticipated recoveries.
Regulation
In its ongoing effort to improve solvency regulation, the National Association
of Insurance Commissioners ("NAIC") and individual states have enacted certain
laws and financial statement changes. The NAIC has adopted Risk-Based Capital
("RBC") requirements for property/casualty insurance companies to evaluate the
adequacy of statutory capital and surplus in relation to investment
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<PAGE>
and insurance risks such as asset quality, mortality and morbidity, asset and
liability matching, benefit and loss reserve adequacy, and other business
factors. The RBC formula will be used by state insurance regulators as an early
warning tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. In addition,
the formula defines new minimum capital standards that will supplement the
current system of low fixed minimum capital and surplus requirements on a
state-by-state basis. Regulatory compliance is determined by a ratio of the
enterprise's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level RBC, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of which
requires specific corrective action. The levels and ratios are as follows:
<TABLE>
<CAPTION>
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
------------------------ ----------------------------------
<S> <C>
Company action level 2*
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
</TABLE>
*Or, 2.5 with negative trend.
The ratios of Total Adjusted Capital to Authorized Control Level RBC for the
Company's insurance subsidiaries were all in excess of 3:1 at both December 31,
1995 and 1994.
Similarly, the NAIC has proposed a new Model Investment Law that may affect the
statutory carrying values of certain investments; however, the final outcome of
this proposal is not certain, nor is it possible to predict what impact the
proposal will have on the Company in the event it is adopted.
The thrust of these regulatory efforts at all levels is to improve the solvency
of insurers. These regulatory initiatives, and the overall focus on solvency,
may intensify the restructuring and consolidation of the insurance industry.
While the impact of these regulatory efforts on the Company's operations cannot
be quantified until enacted, the Company believes it will be adequately
positioned to compete in an environment of more stringent regulation.
Impact of Inflation
Property and casualty insurance premiums are established before the amount of
losses and LAE, or the extent to which inflation may affect such expenses, are
known. Consequently, the Company attempts, in establishing its premiums, to
anticipate the potential impact of inflation. However, for competitive and
regulatory reasons, the Company may be limited in raising its premiums
commensurate with anticipated inflation, in which event the Company, rather than
its insureds, would absorb inflation costs. Inflation also affects the rate of
investment return on the Company's investment portfolio with a corresponding
effect on the Company's investment income.
Environmental Issues
Although the Company believes that the classes of insurance which it underwrites
have no material exposure to environmental pollution claims, there can be no
such assurance in view of the expansion of liability for environmental claims in
recent litigation.
Shareholder Litigation
The Company has been served with several purported class actions alleging
violations of federal securities laws by the Company and, in some cases, by
certain of its officers and directors; certain other
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actions also allege violations of the common law. The complaints relate to the
Company's November 8, 1994 announcement of its third-quarter financial results
and allege that the Company previously had omitted and/or misrepresented
material facts with respect to its earnings and profits. The Company believes
the suits are without merit and has retained special legal counsel to contest
them vigorously.
Item 8. Financial Statements and Supplementary Data.
See Index to Financial Statements on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table lists each director and each executive officer of the
Company, together with his age and office(s) held:
<TABLE>
<CAPTION>
Name Age Office
- -------------------- --- -----------------------------------------
<S> <C> <C>
Walter A. Rhulen 64 President and Chairman of the Board
Peter L. Rhulen 57 Vice President and Director
Dennis F. Plante 50 Vice President - Finance and Treasurer
Harry W. Rhulen 32 Vice President
Thomas J. Dietz 54 Vice President
Linda Markovits 47 Vice President - Investor Relations
Peter H. Foley 48 Vice President - Mergers and Acquisitions
Lawrence E. O'Brien 55 Director
Douglas C. Moat 64 Director
Alan Gerry 67 Director
</TABLE>
Walter A. Rhulen has been the President and Chairman of the Board of the
Company since commencement of its operations in July 1986 and the President of
Frontier Insurance since 1976. Mr. Rhulen was also the President of Rhulen
Agency, a position he held for more than 22 years, which office he resigned in
1986. Mr. Rhulen, a chartered property and casualty underwriter (CPCU), has more
than 40 years experience in the insurance business.
Peter L. Rhulen has been a Vice President and director of the Company
since commencement of its operations in July 1986 and a Vice President of
Frontier Insurance since 1976. Mr. Rhulen was formerly Vice Chairman of
Markel/Rhulen, a position he held from October 1989 to September 1992, and now
acts as an independent insurance consultant. Mr. Rhulen is also Vice Chairman of
the Board and President of RAI Partners, Inc. (formerly Rhulen Agency), a firm
of which he has been an executive officer for more than 25 years and which firm
is winding down its business affairs after the sale of substantially all of its
assets to Markel/Rhulen. Mr. Rhulen devotes only minimal time to the affairs of
the Company in his capacity as Vice President.
Dennis F. Plante has been the Vice President-Finance and Treasurer of the
Company since commencement of its operations in July 1986 and is the Treasurer
of Frontier Insurance, a position he has held since October 1983. Mr. Plante, a
certified public accountant, received an MBA degree from the University of Texas
at San Antonio, and has more than 23 years' experience in the insurance
business.
Harry W. Rhulen has been a Vice President of the Company since June 1990
and an employee of the Company since June 1989. For four years prior thereto,
Mr. Rhulen was a graduate student at Syracuse University, where he received his
MBA and JD degrees in 1989.
Thomas J. Dietz has been a Vice President of the Company since July 1990
and the President of Med Pro since its inception in 1986. For more than five
years prior thereto, Mr. Dietz was a Vice President of Medical Quadrangle, Inc.,
an insurance agency which acted as a broker to the Company through February
1987. Mr. Dietz, a CPCU, has more than 28 years' experience in the insurance
business.
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Linda Markovits has been an employee of the Company since 1987, was
elected an Assistant Vice President in January 1989 and a Vice President in June
1993. Ms. Markovits has 17 years of experience in the insurance business and is
an Associate in Management (AIM) and an Accredited Advisor in Insurance (AAI).
Peter H. Foley has been a Vice President and employee of the Company since
June 1995. For more than 22 years' prior thereto, Mr. Foley held various
executive officer positions within the insurance industry, as well as a
principal in his own consulting firm. Mr. Foley received his MBA degree from
Fairleigh Dickinson University in Madison, New Jersey.
Lawrence E. O'Brien has been a director of the Company since June 1990 and
a member of the Audit Committee since that date. Mr. O'Brien, a CPCU, is the
President of O'Brien Management Company, Inc., an insurance consulting firm, a
position he has held since January 1988, and co-founder and a director of
Underwriter Management Associates, a managing general insurance agency with
which he had been associated since its inception in 1983 until its sale in
September 1990. From 1976 to 1987, Mr. O'Brien was Executive Vice President of
Associated Risk Managers, a New York statewide affiliation of independent
insurance agents marketing specialized insurance programs.
Douglas C. Moat has been a director of the Company since August 1991 and a
member of the Audit Committee since that date. Mr. Moat, a JD, CLU, and FLMI, is
Chairman of the Manhattan Group, Inc., an insurance and financial services firm.
Mr. Moat has over 40 years' experience in insurance and financial services sales
and management including 13 years as a private consultant. During his career, he
has held positions as Executive Vice President, The Home Group; Director -
Financial Services Corporate Staff, ITT Corp.; Vice President, USLIFE Corp., and
President of USLIFE's mutual fund subsidiary; Vice President, The Glens Falls
Group and the National Life Assurance Company of Canada. Mr. Moat is a member of
the New York Bar Association, serves on several insurance and banking
committees, and writes and speaks extensively on insurance topics, often acting
as an expert witness.
Alan Gerry was elected a director of the Company in March 1996. Mr. Gerry
is the founder of Cablevision Industries Corporation, the eighth largest
multiple cable system operator in the United States and its Chairman of the
Board and Chief Executive Officer until its merger with Time Warner
Entertainment in January 1996. Mr. Gerry is a member of the Board of Directors
of Time Warner Entertainment, the National Cable Television Association, and
C-SPAN, the industry public affairs programming network. He was a founding
member of the Board of the Cable Alliance for Education and is a past President
of the New York State Cable Television Association.
-------------------
Messrs. Walter A. Rhulen and Peter L. Rhulen are brothers and Mr. Harry W.
Rhulen is the son of Walter A. Rhulen.
All directors hold office until the next annual meeting of shareholders and
until their successors are elected and qualified. Officers are elected annually
and serve at the pleasure of the Board of Directors, subject to rights, if any,
under contracts of employment.
31
<PAGE>
<PAGE>
Item 11. Executive Compensation
The following table sets forth a summary of the compensation 1995 earned by the
Company's Chief Executive Officer and by each other executive officers whose
compensation during such year exceeded $100,000 as well as similar summary
information for such individuals for 1995 and 1994.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- Awards
Name and ------
Principal Salary Bonus All Other
Position Year ($) ($) Options (#) Compensation($)(1)
- ---------- ---- ------- ----- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Walter A. Rhulen 1995 500,000 296,900 -- 23,400
President 1994 500,000 -- -- 27,300
and Chairman 1993 500,000 200,000 375,000(2)(3) 26,600
Thomas J. Dietz 1995 215,000 35,400 -- 16,300
Vice President 1994 215,000 -- -- 15,000
1993 182,500 109,900 67,500(2) 19,000
Dennis F. Plante 1995 136,300 23,500 2,500(4) 14,600
Vice President 1994 129,000 10,000 -- 13,800
and Treasurer 1993 125,300 25,700 1,650(5) 10,300
Harry W. Rhulen 1995 105,000 23,900 2,500(4) 10,000
Vice President 1994 90,000 10,000 -- 9,200
1993 80,800 16,500 2,475(5) 6,600
Peter H. Foley 1995 77,900 45,300 10,000(6) 3,600
Vice President 1994 -- -- -- --
1993 -- -- -- --
</TABLE>
(1) Represents the allocable amount accrued for contribution by the Company to
its profit sharing plan and the allocable amount of the Company's
contribution to its 401K plan. The allocable amount, accrued for
contribution to the Company's profit sharing plan for Messrs. W. Rhulen,
Dietz, Plante, and H. Rhulen, was $8,700, $8,700,$8,700 and $6,200,
respectively, and the allocable amount contributed to the Company's 401K
Plan for Messrs. W. Rhulen, Dietz, Plante, H. Rhulen, and Foley was $14,600,
$7,600, $5,900 $3,900, and $3,600, respectively.
(2) Exercisable at an exercise price of $50.00 per share at any time through
December 31, 1999 provided the optionee is in the then employ of the Company
or has continuously been so employed through December 31, 1997, if exercised
thereafter. In the event the optionee dies while in the employ of the
Company, or the Company is acquired, the option automatically is modified so
that 25% of the shares subject thereto become exercisable at $34.67 per
share subsequent to November 5, 1994, with an additional 25% exercisable
cumulatively annually thereafter at exercise prices increasing by
approximately $8.00 per share for each 25% tranche.
(3) As permitted by the terms of the option, Mr. Rhulen transferred his option
to his children on December 30, 1993.
(4) Exercisable cumulatively at the rate of 25% of the underlying shares per
year, commencing March 3, 1996.
(5) Exercisable cumulatively at the rate of 25% of the underlying shares per
year, commencing June 18, 1994.
(6) Exercisable cumulatively at the rate of 25% of the underlying shares per
year, commencing June 5, 1996.
-------------------
32
<PAGE>
<PAGE>
The following table presents the value of unexercised options held at
December 31, 1995 by the individuals named in the Summary Compensation Table:
Options Value Table
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options Options
at Year-End (#) at Year-End ($)*
Exercisable (E)/ Exercisable (E)/
Name Unexercisable (U) Unexercisable (U)
- ----------------- ----------------- -----------------
<S> <C> <C>
Walter A. Rhulen -- --
Thomas J. Dietz 74,642 (E) 163,900 (E)
Dennis F. Plante 1,450 (E) 10,900 (E)
2,700 (U) 20,900 (U)
Harry W. Rhulen 95,612 (E) (1) 12,900 (E)
3,113 (U) 26,900 (U)
Peter H. Foley 10,000 (U) 75,000 (U)
</TABLE>
- --------------
* Values are calculated by subtracting the exercise price from the fair market
value of the Common Stock at year-end.
(1) Includes 93,750 shares purchasable at $50.00 per share upon exercise of
options granted to Mr. Walter A. Rhulen, his father, and gifted to Mr. Harry
W. Rhulen by his father.
-------------------
Mr. Harry W. Rhulen is the son of Mr. Walter A. Rhulen
33
<PAGE>
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of the Record Date the beneficial ownership of
the Company's Common Stock by (i) each person known by the Company to own
beneficially five percent or more of such shares, (ii) each director, all of
whom are nominees for election as a director, (iii) each person named in the
Summary Compensation Table under "Executive Compensation" on page 21, and (iv)
all directors and executive officers as a group, together with their respective
percentage ownership of the outstanding shares:
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership
----------------------------------------------------
Currently Acquirable Percent of
Name and Address Owned Within 60 Days (1) Outstanding
- ---------------- ---------- ------------------ -----------
<S> <C> <C> <C>
Walter A. Rhulen (2)......... 926,349(3) -- 7.1
Peter L. Rhulen (2).......... 915,528(4) -- 7.0
Lawrence E. O'Brien.......... 42,175 625 *
Douglas C. Moat.............. 893 10,153 *
Alan Gerry -- -- *
Thomas J. Dietz.............. 68,095 67,500 1.0
Harry W. Rhulen.............. 89,470(5) 95,612 (6) 1.4
Dennis F. Plante............. 37,676 1,450 *
Peter H. Foley -- -- *
Estate of Jesse M. Farrow (2) 900,523 -- 6.9
Denver Investment Advisors LLC
1225 - 17th Street, 26th Floor
Denver, CO 80202.......... 1,190,007(7) -- 9.1
Wellington Management Company
75 State Street
Boston, MA 02109........... 672,840(8) -- 5.1
All directors and executive
officers as a group (9 persons) 2,090,800 177,952 17.4
</TABLE>
- --------------
* Less than 1%
(1) Reflects number of shares of Common Stock acquirable upon exercise of
options.
(2) Address is 195 Lake Louise Marie Road, Rock Hill, NY 12775-8000
(3) Does not include 4,192 shares of Common Stock owned by the wife of Walter A.
Rhulen, the beneficial ownership of which Mr. Rhulen disclaims.
(4) Does not include 12,015 shares of Common Stock owned by the wife of Peter L.
Rhulen and 30,000 shares of Common Stock owned by a charitable foundation of
which Mr. Rhulen acts as trustee. Mr. Rhulen disclaims beneficial ownership
of the aforementioned shares.
(5) Includes 3,086 shares owned by a daughter of Mr. Harry W. Rhulen for whom he
acts as custodian under the Uniform Gifts to Minors Act. Does not include
5,879 shares of Common Stock owned by Mr. Rhulen's wife as to which Mr.
Rhulen disclaims beneficial ownership.
(6) Includes 93,750 shares purchasable at $50.00 per share upon exercise of
options granted to Mr. Walter A. Rhulen, his father, and gifted to Mr. Harry
W. Rhulen by his father.
(7) Information is from Schedule 13G, dated March 6, 1996, filed by Denver
Investment Advisors, LLC, which reflects shared dispositive power with
respect to 1,190,007 shares.
(8) Information is from a Schedule 13G, dated January 31, 1996, filed by
Wellington Management Company, which reflects shared dispositive power with
respect to 672,840 shares.
34
<PAGE>
<PAGE>
Item 13. Certain Relationships and Related Transactions.
See "Item 1. Business--Relationship with Markel/Rhulen."
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) List of documents filed as part of this Report.
(1), (2) Financial Statements and Schedules.
See Index to Financial Statements on page F-1.
(3) The list of exhibits required to be filed with this Report
is set forth in the Index to Exhibits herein.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See Index to Exhibits
35
<PAGE>
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2), (c), and (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1995
FRONTIER INSURANCE GROUP, INC.
ROCK HILL, NEW YORK
<PAGE>
<PAGE>
FORM 10-K--ITEM 14(a)(1) AND (2)
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and supplementary data of
Frontier Insurance Group, Inc. and subsidiaries are included in Item 8:
<TABLE>
<S> <C>
Consolidated Balance Sheets--December 31, 1995 and 1994......................................F- 3
Consolidated Statements of Income--Years Ended
December 31, 1995, 1994, and 1993........................................................F- 5
Consolidated Statements of Capital--Years Ended
December 31, 1995, 1994, and 1993........................................................F- 6
Consolidated Statements of Cash Flows--Years Ended
December 31, 1995, 1994, and 1993........................................................F- 7
Notes to Consolidated Financial Statements...................................................F- 8
Supplemental Data--Quarterly Results of Operations (Unaudited)...............................F- 28
The following consolidated financial statement schedules of Frontier Insurance
Group, Inc. and subsidiaries are included in Item 14(d):
Schedule I --Summary of Investments--Other than Investments in Related Parties............F- 29
Schedule III --Condensed Financial Information of Registrant................................F- 30
Schedule IV --Reinsurance....................................................................F- 33
Schedule V --Valuation and Qualifying Accounts..............................................F- 34
Schedule VI --Supplemental Information Concerning
Property/Casualty Insurance Operations.............................F- 35
</TABLE>
All other schedules to the consolidated financial statements required by Article
7 of Regulation S-X are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Frontier Insurance Group, Inc.
We have audited the accompanying consolidated balance sheets of Frontier
Insurance Group, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, capital, and cash flows for each of
the three years in the period ended December 31, 1995. Our audits also included
the financial statement schedules listed in the Index at Item 14(a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Frontier Insurance Group, Inc. and subsidiaries at December 31, 1995 and 1994,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As described in Note B to the consolidated financial statements, the Company
made certain accounting changes in 1994 and 1993.
/S/ Ernst & Young LLP
New York, New York
March 15, 1996
F-2
<PAGE>
<PAGE>
CONSOLIDATED BALANCE SHEETS
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
ASSETS
(dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31
------------------------
1995 1994
---- ----
<S> <C> <C>
Investments--Note H:
Fixed maturities, held to maturity--
principally at amortized cost
(market: 1994--$190,875) $202,129
Securities, available for sale--at fair value
Fixed maturities (amortized cost:
1995--$510,056; 1994--$149,846) $521,402 143,956
Equity securities (cost: 1995--$20,132;
1994--$52,458) 21,024 48,646
Short-term investments--(principal
balances which approximate fair value) 7,353 12,887
Investment in limited liability corporation 2,935
-------- --------
TOTAL INVESTMENTS 552,714 407,618
Cash 5,115 6,362
Agents' balances due, less
allowances for doubtful accounts
(1995--$3,346; 1994--$2,132) 25,779 20,909
Premiums receivable from insureds,
less allowances for doubtful accounts
(1995--$45; 1994--$105) 24,177 20,222
Deferred federal income tax benefit--Note E 23,627 30,767
Accrued investment income 7,458 5,078
Deferred policy acquisition costs 18,797 13,213
Net reinsurance recoverables less
allowances for possible uncollectible
amounts (1995--$115; 1994--$115) 76,955 54,779
Data processing equipment and software--
at cost, less accumulated depreciation
and amortization (1995--$2,259;
1994--$1,747) 1,434 1,618
Insurance renewal and claims adjusting
rights and other intangible assets,
less accumulated amortization
(1995--$2,370; 1994--$1,525) 3,082 3,295
Home office building and equipment--
at cost, less accumulated depreciation
(1995--$5,031; 1994--$3,103) 28,043 27,403
Federal income taxes recoverable 217 246
Other assets 5,950 7,607
-------- --------
TOTAL ASSETS $773,348 $599,117
======== ========
</TABLE>
See notes to the consolidated financial statements.
F-3
<PAGE>
<PAGE>
CONSOLIDATED BALANCE SHEETS--Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
LIABILITIES AND CAPITAL
(dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
December 31
-------------------------
1995 1994
---- ----
<S> <C> <C>
LIABILITIES
Policy liabilities--Notes C and D:
Unpaid losses $309,164 $266,261
Unpaid loss adjustment expenses 58,272 46,376
Unearned premiums 107,282 81,224
-------- --------
TOTAL POLICY LIABILITIES 474,718 393,861
Note payable - Note F 25,000
Funds withheld under reinsurance contract 28,226 647
Cash dividend payable to shareholders 1,568 1,563
Other liabilities 14,103 12,782
-------- --------
TOTAL LIABILITIES 543,615 408,853
COMMITMENTS AND CONTINGENT LIABILITIES--Note L
CAPITAL--Notes A, G, I, and J
Preferred Stock, par value $.01
per share; authorized and
unissued--1,000,000 shares
Common Stock, par value $.01 per share;
authorized--20,000,000 shares; issued
(1995--13,062,501 shares; 1994--13,021,058 shares) 130 130
Additional paid-in capital 167,587 167,209
Net unrealized appreciation (depreciation)
of investments in available-for-sale
securities--Note H 7,955 (6,307)
Retained earnings 54,849 29,886
-------- --------
SUBTOTAL 230,521 190,918
Less Treasury Stock--at cost (1995--41,400 shares;
1994--35,400 shares) (788) (654)
-------- --------
TOTAL CAPITAL 229,733 190,264
-------- --------
TOTAL LIABILITIES AND CAPITAL $773,348 $599,117
======== ========
See notes to the consolidated financial statements.
</TABLE>
F-4
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
(dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
REVENUES--Note D
Premiums written $264,314 $198,892 $148,750
Premiums ceded (43,557) (11,604) (29,931)
-------- -------- --------
NET PREMIUMS WRITTEN 220,757 187,288 118,819
Increase in unearned premiums (24,537) (30,533) (2,447)
-------- -------- --------
NET PREMIUMS EARNED 196,220 156,755 116,372
Net investment income 30,035 24,453 22,523
Realized capital gains (losses) 20 (1,478) (152)
-------- -------- --------
TOTAL NET INVESTMENT
INCOME--Note H 30,055 22,975 22,371
Gross claims adjusting income--Note B 130 255 424
-------- -------- --------
TOTAL REVENUES 226,405 179,985 139,167
EXPENSES
Losses--Notes C and D 89,422 84,777 57,890
Loss adjustment expenses--Notes C and D 29,833 26,141 19,691
Amortization of policy acquisition
costs--Note B 42,258 30,463 17,327
Underwriting and other expenses 20,717 17,274 13,966
Interest expense 895
-------- -------- --------
TOTAL EXPENSES 183,125 158,655 108,874
-------- -------- --------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 43,280 21,330 30,293
Income taxes--Note E
State 1,173 554 1,111
Federal 10,896 3,796 6,019
-------- -------- --------
TOTAL INCOME TAXES 12,069 4,350 7,130
-------- -------- --------
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 31,211 16,980 23,163
CUMULATIVE EFFECT OF CHANGE
IN METHOD OF ACCOUNTING
FOR INCOME TAXES 708
-------- -------- --------
NET INCOME $ 31,211 $ 16,980 $ 23,871
======== ======== ========
PER SHARE DATA--Note M
Income per share, before cumulative
effect of accounting change $2.40 $1.31 $2.03
Cumulative effect of accounting change .06
----- ----- -----
NET INCOME PER SHARE $2.40 $1.31 $2.09
===== ===== =====
</TABLE>
See notes to the consolidated financial statements.
F-5
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF CAPITAL
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
Three Years Ended December 31, 1995
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
(Depreciation)
Additional of Investments in
Common Paid-in Available-for-Sale Retained Treasury Total
Stock Capital and Equity Securities Earnings Stock Capital
------ ------- --------------------- -------- -------- -------
(dollar amounts in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1993 $ 66 $78,234 $ 193 $28,256 $106,749
Add (deduct):
Net income 23,871 23,871
10% Common Stock dividends 6 28,871 (28,877)
Stock options exercised 328 328
Depreciation in equity securities (net of tax) (138) (138)
Issuance of 1,408,000 shares of Common Stock 14 59,230 59,244
Cash dividends paid and accrued ($.40 per share) (4,360) (4,360)
---- -------- ------- ------- ----- --------
Balances at December 31, 1993 86 166,663 55 18,890 185,694
Add (deduct):
Net income 16,980 16,980
Expenses associated with 1993 issuance
of 1,408,000 shares of Common Stock (47) (47)
3 for 2 Stock split 43 (43)
Purchase of 35,400 shares as Treasury Stock $(654) (654)
Stock options exercised 1 636 637
Cumulative effect of change in accounting
principle -- Note B 3,651 3,651
Depreciation in available-for-sale
securities (net of tax) (10,013) (10,013)
Cash dividends paid and accrued ($.46 per share) (5,984) (5,984)
---- -------- ------- ------- ----- --------
Balances at December 31, 1994 130 167,209 (6,307) 29,886 (654) 190,264
---- -------- ------- ------- ----- --------
Add (deduct):
Net income 31,211 31,211
Purchase of 6,000 shares as Treasury Stock (134) (134)
Stock options exercised 378 378
Transfer of securities to available-for-sale
(net of tax) - Note B 2,753 2,753
Appreciation in available-for-sale
securities (net of tax) 11,509 11,509
Cash dividends paid and accrued ($.48 per share) (6,248) (6,248)
---- -------- ------- ------- ----- --------
Balances at December 31, 1995 $130 $167,587 $ 7,955 $54,849 $(788) $229,733
==== ======== ======= ======= ===== ========
See notes to the consolidated financial statements.
F-6
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
1995 1994 1993
---- ---- ----
(dollar amounts in thousands)
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 31,211 $ 16,980 $ 23,871
Adjustments to reconcile net
income to net cash provided
by operating activities:
Increase in policy liabilities 80,857 63,274 35,471
Change in federal income taxes 7,169 (4,014) (6,679)
Decrease (increase) in
reinsurance balances 5,403 15,619 (1,246)
Decrease (increase) in agents'
balances and premiums receivable (8,825) (6,950) (216)
Change in deferred policy
acquisition costs (5,584) (6,393) (873)
Change in accrued
investment income (2,380) (161) (922)
Depreciation and amortization 2,384 305 510
Realized capital (gains)/losses (20) 1,478 152
Other (5,234) 1,723 1,092
--------- -------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 104,981 81,861 51,160
INVESTING ACTIVITIES
Securities available-for-sale (1995 and 1994):
Purchases-fixed maturities (294,379) (35,994)
Sales-fixed maturities 46,650 26,245
Calls, paydowns and maturities 77,999 25,250
Purchases-equities (4,559) (68,783) (143,862)
Sales-equities 36,465 63,200 99,475
Securities held-to-maturity (held-for-
investment in 1993)
Purchases (33,327) (109,127) (109,681)
Sales 12,534 21,001
Calls, pay downs and maturities 33,783 19,175 55,428
Net (purchases) sales of
short-term investments 5,534 4,001 (2,978)
Investment in limited liability corporation (2,400)
Purchase of renewal rights (633) (3,427)
Purchases of home office
building and equipment (2,568) (2,191) (12,947)
Purchases of data processing
equipment and software (328) (996) (419)
--------- -------- --------
NET CASH USED BY
INVESTING ACTIVITIES (125,229) (82,647) (93,983)
FINANCING ACTIVITIES
Proceeds from borrowings 25,000
Purchase of Treasury Stock (134) (654)
Issuance of Common Stock 378 590 59,129
Cash dividends paid (6,243) (5,717) (4,359)
--------- -------- --------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES 19,001 (5,781) 54,770
--------- -------- --------
INCREASE (DECREASE) IN CASH (1,247) (6,567) 11,947
Cash at beginning of year 6,362 12,929 982
--------- -------- --------
CASH AT END OF YEAR $ 5,115 $ 6,362 $ 12,929
========= ======== ========
</TABLE>
See notes to the consolidated financial statements.
F-7
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE A--ORGANIZATION
Frontier Insurance Group, Inc., and its subsidiaries (the Company ), is
principally a specialty property and casualty insurer operating in 50 states.
The Company's principal lines of business are medical malpractice, general
liability, and surety, accounting for approximately 44.4%, 26.4%, and 18.6% of
gross premiums written in 1995, respectively. The medical malpractice programs
are marketed principally through the Company's wholly-owned subsidiary, Medical
Professional Liability Agency, Ltd ("Med Pro"). The bail bond program is
marketed through Douglass/Frontier LLC, a fifty percent owned entity (see
below), and the other lines of business are marketed primarily through
independent agents.
In April 1994, the Company completed the acquisition of certain of the assets of
Spencer Douglass Insurance Associates, Inc. ("SDIA") constituting that company's
California license and permit bond insurance agency business for $3,200,000 and
entered into a five-year consulting agreement with the owner/principal. This
acquisition was accounted for as a purchase. The purchase price of $3,200,000
exceeded by the same amount the net book value of the business acquired.
In May 1995, the Company and R. Spencer Douglas III ("Douglass") formed a
California limited liability corporation, Douglass/Frontier LLC
("Douglass/Frontier"), a bail bond insurance agency. The Company made an initial
cash investment of $2,400,000, and Douglass contributed the assets and
liabilities of his wholly-owned existing bail bond agency. The Company and
Douglass share equally in the ownership of Douglass/Frontier. 100% of the
Company's bail bond business is written through Douglass/Frontier and for the
year ended December 31, 1995, was approximately $4,800,000. At December 31,
1995, Douglass/Frontier had premium balances due the Company in the normal
course of business of $1,271,000 and a variable rate demand note of $212,000.
The Company has an interest of $535,000 in the undistributed earnings of
Douglass/Frontier.
In December 1995, the Company purchased certain assets from Bankers Multiple
Line Insurance Company ("BMLIC") constituting BMLIC's realtors errors and
omissions ("Realtors' E & O") business for $400,000. The purchase agreement
provides that, if certain conditions cease to exist in future years, the
purchase price may be reduced. In addition, the Company was paid approximately
$8,000,000 to assume BMLIC's obligations under its existing Realtors' E & O
policies consisting of $2,287,000 of unearned premium reserves and $5,713,000 of
undiscounted loss and LAE reserves at the acquisition date. The Company's
maximum liability relative to its assumption of the loss and LAE reserves is
$7,141,000 with BMLIC retaining the liability for any losses in excess of this
amount.
The Company's Preferred Stock may be issued from time to time by the Board of
Directors in one or more series and classes and with such dividend rights,
conversion rights, voting rights, redemption provisions, liquidation
preferences, and other rights and restrictions as the Board of Directors may
determine.
F-8
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE B--SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company, and its
subsidiaries, all of which are wholly owned, are summarized below.
Basis of Presentation and Principles of Consolidation: The accompanying
financial statements have been prepared in accordance with generally accepted
accounting principles ("GAAP"), which, as to Frontier Insurance and Frontier
Pacific differ from the statutory accounting practices prescribed or permitted
by regulatory authorities, and include the accounts and operations of the
Company, Frontier Insurance Company ("Frontier Insurance"), and from the dates
of their acquisition, Frontier Pacific Insurance Company ("Frontier Pacific"),
Pioneer Claim Management, Inc. ("Pioneer"), Spencer Douglas Insurance Associates
("SDIA"), and Medical Professional Liability Agency, Ltd. ("Med Pro"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates: The preparation of financial statements of insurance companies
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Such estimates and
assumptions could change in the future as more information becomes known which
could impact the amounts reported and disclosed herein.
Recognition of Premium Revenues: Direct, assumed, and ceded reinsurance premiums
written are recognized as earned pro rata over the terms of the related
insurance policies.
Investments: Effective January 1, 1994, the Company adopted Financial Accounting
Standards Board ("FASB") Statement 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("FASB 115"). Under FASB 115, investments are
classified in three categories: held-to-maturity securities, trading securities
and available-for-sale securities. Held-to-maturity securities are reported at
cost, adjusted for amortization of premium or discount; trading securities are
reported at fair value, with unrealized gains and losses included in earnings;
and available-for-sale securities are reported at fair value with unrealized
gains and losses excluded from earnings and reported in a separate component of
capital, net of applicable income taxes. This change in accounting had no effect
on net income; however, the accounting change increased capital at January 1,
1994 by $3,651,000, net of applicable income taxes, by increasing the amount of
unrealized appreciation of fixed-maturity investments classified as
available-for-sale. Under the former rules, debt securities (principally bonds,
notes and redeemable preferred stocks) were carried at cost, adjusted for the
amortization of premium or discount and other-than-temporary market value
declines. Unrealized gains and losses were excluded from both earnings and
shareholders' equity.
In December 1995, the Company reclassified all of its securities classified as
held-to-maturity to the available-for-sale category as permitted by the FASB's
Special Report, A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities - Questions and Answers. The
securities reclassified had a carrying value of $190,474,000 and a market value
of $194,709,000 at the date of transfer. The reclassification resulted in a
$2,753,000 increase, net of applicable income taxes, in capital.
Fixed maturities classified as held-to-maturity (principally bonds, notes, and
redeemable preferred stocks) at December 1994, are carried at cost, adjusted for
the amortization of premium or discount and other-than-temporary market value
declines. Fixed maturities available-for-sale (principally bonds and notes) are
carried at market. Fair values for held-to-maturity and available-for-sale fixed
maturity securities are based on quoted market prices, where available.
F-9
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--Continued
For fixed maturity securities not actively traded, fair values are estimated
using values obtained from independent pricing services. For mortgage backed
securities, the Company considers estimates of future principal prepayments in
the calculation of the constant effective yield necessary to apply the interest
method. If a difference arises between the prepayments anticipated and actual
prepayments received, the Company recalculates the effective yield to reflect
the actual payments received and the anticipated future payments. Equity
securities (principally common and nonredeemable preferred stocks) are carried
at current market value which is considered equal to their fair value.
Short-term investments are carried at their principal balances, which
approximates their fair value. Realized gains and losses from the sales or
liquidation of investments are determined using the specific identification
basis. Changes in the fair value of fixed maturities available-for-sale, equity
securities and short-term investments are reflected as unrealized appreciation
or depreciation directly in capital net of federal income tax.
The investment in Douglass/Frontier is accounted for under the equity method
based on Douglas/Frontier's GAAP results of operations.
Home Office Building and Equipment: Home office building is stated at cost, net
of accumulated depreciation computed, for financial reporting and federal income
tax purposes, on the straight-line basis over an estimated useful life of 31.5
years. Equipment is stated at cost net of accumulated depreciation computed, for
financial reporting purposes, on the straight-line basis over estimated useful
lives of seven to ten years and, for federal income tax purposes, using the
accelerated cost recovery system and guideline lives ranging from five to seven
years. During 1995, 1994, and 1993, the depreciation expense for the Home office
building and equipment was $1,928,000, $1,480,000, and $1,060,000, respectively.
In April 1993, the Company put into service and began to occupy its new home
office facility. The cost of the facility's construction was financed internally
by the Company. However, to receive favorable tax status, title to the facility
resides with the County of Sullivan Industrial Development Agency ("IDA") which,
in turn, issued to the Company its twenty-year bonds with a face value equal to
the total cost of the project. Under the provisions of related agreements, title
to the facility reverts to the Company on maturity of the bonds, or sooner for a
nominal fee, should the Company so desire. Accordingly, as a result of these
agreements, the new facility is reported in the accompanying financial
statements as, "Home office building and equipment". As of December 31, 1995,
the outstanding, par value of the IDA bonds was $20,479,000.
Data Processing Equipment and Software: Data processing equipment ("EDP") and
software is stated at cost, net of accumulated depreciation and amortization
computed, for financial reporting purposes, on a straight line basis over
estimated useful lives of three to five years and, for federal income tax
purposes, using the declining balance method over lives ranging from three to
five years. During 1995, 1994, and 1993, the depreciation/amortization expense
for EDP and software was $512,000, $459,000, and $432,000, respectively.
Deferred Policy Acquisition Costs: Recoverable policy acquisition costs that
vary with and are directly related to the production of business, such as
commissions and premium taxes, net of reinsurance allowances, are deferred and
amortized to income as the related premiums are earned. Anticipated losses, loss
adjustment expenses ("LAE"), and policy maintenance expenses, based on
historical and current experience, are considered in determining the
recoverability of such deferred policy acquisition
F-10
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--Continued
costs. When the anticipated losses, LAE, acquisition and policy maintenance
expenses exceed the related unearned premiums, without considering anticipated
investment income, a provision for the indicated deficiency is recorded.
Insurance Renewal and Claims Adjusting Rights and Other Intangible Assets:
Insurance renewal and claims adjusting rights and other intangible assets are
stated at cost, net of accumulated amortization computed on a straight-line
basis over estimated useful lives ranging from two to seven years for insurance
renewal rights, three years for claims adjusting rights, and five to fifteen
years for other intangible assets.
Unpaid Losses and LAE: The liabilities for unpaid losses and LAE represent the
estimated liabilities for reported claims, claims incurred but not yet reported
("IBNR"), and the related LAE. The liabilities for unpaid losses and LAE are
determined using case-basis evaluations and actuarial analyses and represent
estimates of the ultimate expected cost of all losses and LAE unpaid at the
balance sheet dates.
The liabilities for unpaid losses and LAE have been reduced by estimated salvage
and subrogation recoverable and have not been reduced from their ultimate values
by the effects of discounting estimated ultimate payments to their present
value.
Reinsurance: Assumed reinsurance premiums written, commissions, and unpaid
losses are accounted for based principally on the reports received from the
ceding insurance companies and in a manner consistent with the terms of the
related reinsurance agreements. Liabilities for unpaid losses, LAE and unearned
premiums are stated gross of ceded reinsurance recoverables. Deferred policy
acquisition costs are stated net of the amounts of reinsurance ceded, as are
premiums written and earned, losses and LAE incurred, and amortized acquisition
costs.
Contingent Reinsurance Commissions: Contingent reinsurance commissions are
accounted for on an earned basis and are accrued, in accordance with the terms
of the applicable reinsurance agreement, based on the estimated level of
profitability relating to such reinsured business. Accordingly, the
profitability of the reinsured business is continually reviewed and as
adjustments become necessary, such adjustments are reflected in current
operations.
Income Taxes: Income tax provisions are based on income reported for financial
statement purposes, adjusted for permanent differences between financial and
taxable income. Deferred federal income taxes are recognized using the liability
method, whereby tax rates are applied to cumulative temporary differences based
on when and how they are expected to affect the tax return. Such temporary
differences are related principally to the deferral of acquisition costs, excess
depreciation, bad debt expense, the nondiscounting of the liabilities for unpaid
losses and LAE, the disallowance of a portion of the unearned premium reserve,
and the non-recognition of the discounted amount of estimated salvage and
subrogation recoverable (see Note E). Deferred tax assets and liabilities are
adjusted for tax rate changes, and the adjustment is reflected in income during
the period recognized.
In 1993, the Company adopted FASB Statement 109, "Accounting for Income Taxes".
As permitted a cumulative effect adjustment, resulting in an increase of
approximately $708,000 in the deferred federal tax asset and income, was
recorded. Prior to this adoption, income taxes were provided using the deferred
method based upon the provisions of Accounting Principles Board Opinion 11.
F-11
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--Continued
Gross Claims Adjusting Income: Claims adjusting income is accounted for on an
accrual basis, gross of related expenses. During 1995, 1994, and 1993, operating
expenses included with underwriting and other expenses associated with claims
adjusting income amounted to $203,000, $331,000, and $466,000, respectively.
Impact of Recently Issued Accounting Standards: In March 1995, the FASB issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, which required impairment losses to be
recorded on long-lived assets, certain identifiable intangibles, and goodwill
related to those assets, when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. The Company will adopt Statement 121 in the first
quarter of 1996 and, based on current circumstances, does not believe the effect
of adoption will be material.
In October 1995, the FASB issued Statement No. 123, Accounting for Stock-Based
Compensation, SFAS No. 123 encourages but does not require entities to adopt the
fair value based method of accounting for all employee stock compensation plans,
under which compensation cost is measured based on the fair value of the award
at the grant date and recognized over the service period. Entities may continue
to account for these plans using the intrinsic value based method of accounting,
under which compensation cost is measured as the excess, if any, of the quoted
market price of the stock at the grant date over the amount an employee must pay
to acquire the stock. Statement No. 123 is effective for years beginning after
December 15, 1995. The Company plans to continue to use the intrinsic value
based method to measure compensation costs for these plans.
Reclassification: Certain prior year amounts have been reclassified to conform
to the 1995 presentation
NOTE C--UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The liabilities for unpaid losses and LAE are estimated by management utilizing
methods and procedures which they believe are reasonable. These liabilities are
necessarily subject to the impact of future changes in claim severity and
frequency, as well as numerous other factors. Although management believes that
the estimated liabilities for unpaid losses and LAE are reasonable, because of
the extended period of time over which such losses are reported and settled, the
subsequent development of these liabilities may not conform to the assumptions
inherent in their determination and, accordingly, may vary from the estimated
amounts included in the accompanying financial statements. To the extent that
the actual emerging loss experience varies from the assumptions used in the
determination of these liabilities, they are adjusted to reflect actual
experience. Such adjustments, to the extent they occur, are reported in the
period recognized.
The anticipated effect of inflation is implicitly considered when estimating
reserves for losses and LAE.
Although anticipated price increases due to inflation are considered in
estimating the ultimate claim costs, the increase in average severities of
claims is caused by a number of factors that vary with the types of policies
written. Average severities are projected based on historical trends adjusted
for implemented changes in underwriting standards, policy provisions, and
general economic trends. Those anticipated trends are monitored based on actual
development and are adjusted as necessary. The effects of such adjustments are
reported in the period recognized.
F-12
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE C--UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES--Continued
In December 1990, the New York State Court of Claims rendered a decision in
favor of the Company holding that a State University of New York ("SUNY")
medical school faculty member engaged in the clinical practice of medicine at a
SUNY medical facility, corollary to such physician's faculty activities, was
within the scope of such physician's employment by SUNY and was protected
against malpractice claims arising out of such activity by the State of New York
and not under the Company's medical malpractice policy. The decision was
affirmed on appeal by the New York State Appellate Division in November 1991 and
not appealed by the State. In July 1992, the State of New York enacted
legislation eliminating medical school faculty members of SUNY engaged in the
clinical practice of medicine at a SUNY medical facility from indemnification by
the State with respect to malpractice claims arising out of such activity,
retroactive to July 1, 1991. In an opinion filed on September 3, 1993 the Court
of Claims of the State of New York held, inter alia, that the July 1992
legislation by the State of New York eliminating SUNY medical school faculty
members engaged in the clinical practice of medicine, as part of their
employment by SUNY, from indemnification by the State with respect to
malpractice claims arising out of such activity was not to be applied
retroactively. This decision was affirmed by the New York State Appellate
Division in April 1994. Subsequently, in February 1995, the Appellate Division
granted leave to Frontier and the State of New York to have the issues of
Frontier's entitlement to recover its costs of defense and its costs of
settlement ruled on by the State's highest Court, the New York Court of Appeals.
In December 1995, the New York Court of Appeals ruled on this issue and
concluded that Frontier was entitled to recoveries from the State for such
medical malpractice claims. As a result of this decision, the Company believes
the above-referenced decisions are controlling precedents and that it will
benefit economically by not being ultimately responsible for certain claims
against SUNY physicians for whom it presently carries reserves and be entitled
to reimbursement for certain claims previously paid; accordingly, effective
December 31, 1995, Frontier recorded a subrogation recoverable of approximately
$19,000,000 representing the amount of claims already paid and the reserves
currently held by Frontier on the open cases that management believes are
reimbursable by the State of New York. To the extent the amount of the actual
recovery varies, such difference will be reported in the period recognized. The
Company is continuing to defend all SUNY faculty members against malpractice
claims that have been asserted and is maintaining reserves therefor adjusted for
the anticipated recoveries.
F-13
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE C--UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES--Continued
The following table sets forth a reconciliation of the beginning and ending loss
and LAE reserve balances, net of reinsurance ceded, for each of the three years
in the period ended December 31, 1995:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1994 1993
---- ---- ----
(amounts in thousands)
<S> <C> <C> <C>
Reserves at beginning of year-
net of reinsurance ceded $263,202 $216,486 $185,074
Provision for losses and LAE for claims
occurring in the current year 126,764 97,044 74,267
Increase in reserves -- loss portfolio
transfer from BMLIC 5,500
Increase (decrease) in estimated losses
and LAE for claims occurring in prior years (7,514) 13,874 3,314
Loss and LAE payments for claims
occurring during:
Current year 13,052 7,216 7,869
Prior years 80,507 56,986 38,300
-------- -------- --------
Net reserves at end of year 294,393 263,202 216,486
Reinsurance recoverable on unpaid
losses and LAE at end of year 73,043 49,435 57,549
-------- -------- --------
Reserves at end of year-gross of
reinsurance ceded $367,436 $312,637 $274,035
======== ======== ========
</TABLE>
The Company's net reserves for unpaid losses and LAE, net of related reinsurance
recoverable, at December 31, 1994 were decreased in the following year by
approximately $7,500,000, and at December 31, 1993 and 1992 the reserves were
increased in the following year by approximately $13,900,000 and $3,300,000,
respectively, for claims that had occurred on or prior to the balance sheet
dates. No premiums have been accrued as a result of the changes to prior-year
loss and LAE reserves.
The net $7,500,000 decrease in the prior years' reserves in 1995 was the
result of favorable development on the general liability and worker's
compensation claim reserves/loss adjustment expense reserves and to subrogation
recoveries in the surety line of business in excess of expectations.
Included in the net development, is an increase in prior year's reserves
of approximately $19,000,000, which was entirely offset by subrogation
recoverable recognized in connection with the favorable court ruling. The
significant increase in the reinsurance recoverable in 1995 is due to the change
in the type of reinsurance from an aggregate claim excess of loss, to a stop
loss for the majority of the Company's losses.
The $13,900,000 increase in prior years' reserves in 1994 resulted from a
$17,500,000 increase in the reserves attributable to adverse medical malpractice
claims development in Florida from higher than anticipated dollar settlements
and from redundancies in other lines. The 1993 deficiencies resulted principally
from settling case-basis reserves for medical malpractice and workers'
compensation exposures established in prior years for amounts that were greater
than projected, net of redundancies for more recent years' claims.
F-14
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE C--UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES--Continued
Because of the adverse development experienced in 1994 and 1993, the Company has
significantly restructured the manor in which it adjudicates its claims. The
change in process included, among other things, placing more reliance on
internal claim examiners and in-house attorneys than on third parties,
especially for the Company's medical malpractice claims in Florida. Management
believes that the revised process will result in better control over the
ultimate costs to adjudicate its claims and the related indemnity costs enabling
management to settle such claims for amounts reflected in the accompanying
financial statements. However, management recognizes that many factors could
impact the successful implementation of its revised process, and to the extent,
future claim costs are not reduced from current levels as anticipated in the
implementation plan, actual ultimate claim costs could vary, perhaps
significantly, from those included in the accompanying financial statements.
NOTE D--REINSURANCE
Frontier Insurance maintains reinsurance with various unrelated insurance
companies, principally for its direct business written, whereby amounts written
in excess of certain retention limits are ceded to those companies generally
under reinsurance treaty arrangements. Beginning in 1995, Frontier Insurance
maintains a three-year stop loss reinsurance contract with Centre Reinsurance
Company of New York ("Centre Re"). Under the terms of the agreement, Centre Re
provides reinsurance protection within certain accident year and contract
aggregate dollar limits for losses and LAE in excess of a predetermined ratio of
these expenses to earned premiums for a given accident year for all lines of
business except bail, customs, license and permit, and miscellaneous surety
bonds. The loss and LAE ratio above which the reinsurance provides coverage is
66%, 65%, and 64% for accident years 1995 through 1997, respectively.
Although the companies are liable to Frontier Insurance for the amounts
reinsured, Frontier Insurance remains liable to its insureds for the full amount
of the policies written whether or not the reinsurance companies meet their
obligations to Frontier Insurance. Consequently, allowances are established for
amounts deemed uncollectible. To minimize its exposure to significant losses
from reinsurance insolvencies, the Company evaluates the financial condition of
its reinsurers and monitors concentration of credit risk from similar geographic
regions, activities or economic characteristics of the reinsurers. At December
31, 1995, the Company has outstanding gross reinsurance recoverables of
$31,567,000 from its largest reinsurer, Centre Re; however, under the terms of
the reinsurance arrangements, Frontier is withholding $28,248,000 of funds due
Centre Re. Accordingly, the net outstanding recoverable from Centre Re is
$3,319,000, with the remaining net reinsurance recoverables of 89.5% are due
from three reinsurers, with one rated A+ (Superior), one rated A (Excellent),
and one rated A- (Excellent), by A.M. Best Company, Inc.
F-15
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE D--REINSURANCE--Continued
The following is a summary of the maximum amount of loss retained and ceded by
Frontier Insurance for new and renewal policies as of December 31, 1995, 1994,
and 1993 (exclusive of facultative reinsurance and in 1995 the Centre Re stop
loss contract):
<TABLE>
<CAPTION>
Maximum Retained Loss Maximum Ceded Loss
Per Occurrence/ Per Occurrence/
Risk/Principal Risk/Principal
December 31 December 31
---------------------------------- ------------------------------------
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Property lines $ 200 $ 200 $ 200 $ 800 $ 800 $ 800
Casualty lines (excluding medical
malpractice, health
specialties and social services) 1,000 1,000 500 1,000 1,000 1,500
Medical malpractice, health
specialties and social services 1,000(1) 1,000(1) 1,000(1) 1,000 1,000 1,500
Workers' compensation 1,000 1,000 500 2,000 2,000 2,500
Surety 1,000(2)(5) 1,000 500 4,000(2)(5) 500 500
Custom bonds 3,000(3) 650(3) 200(3) N/A N/A N/A
Umbrella liability 1,000 400 400 4,000 4,800 4,800
Group accident and health 250 250 250 750 750 750
Excess workers' compensation/
employers' liability 1,000(4) 1,000(4) 9,000(4) 9,000(4)
Earthquake 2,500 37,500
</TABLE>
(1) Maximum retained loss amount of $1,000,000 relates only to losses on
policies effective during 1994, and reinsurance ceded treaty years 1985
through 1991 which have been commuted. For all other years, the maximum
retained loss per occurrence is $500,000. On a very limited basis, the
maximum retained loss per occurrence is $2,000,000.
(2) A limited number of bonds were written in which the maximum retained loss
per principal was $9,000,000, and the maximum ceded loss per principal was
$4,000,000.
(3) Amount indicated is the maximum face amount (limit) on the bond issued,
which represents the value of goods being imported that are subject to U.S.
Customs duty. The actual exposure to the Company is the amount of any unpaid
duty on the goods imported, which is generally approximately 15% of the face
value of the goods, and any penalties associated with the late payment of
the duty.
(4) Subject to a catastrophe retention of $3,000,000 per occurrence and a
maximum ceded loss of $40,000,000 per occurrence.
(5) Effective December 1, 1995 two layers of excess reinsurance were added for a
maximum limit of $20 million per principal on a direct basis, $4.1 million
on a net basis.
F-16
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE D--REINSURANCE--Continued
Frontier Insurance assumes reinsurance under various reinsurance treaty
arrangements through 1993 and through mandatory participation in various states'
residual market pools and reinsurance facilities. The amount of risk assumed by
Frontier Insurance varies in amount by treaty and does not exceed $500,000 per
occurrence/risk/surety bond principal after retrocessions. As part of its
acquisition of BMLIC `S realtors' errors and omissions business, the company is
reinsuring policies issued by BMLIC until such time as the program is filed and
can be underwritten on the Frontier Insurance policies.
In 1995, 1994, and 1993, Frontier Insurance's medical malpractice reinsurers
agreed to a commutation for treaty years 1991, 1990, and 1989, respectively. As
a result of their commutation, Frontier Insurance recaptured its liability for
ceded unpaid losses and LAE of approximately $3,900,000, $6,100,000, and
$5,400,000 for treaty years 1991, 1990, and 1989, respectively, and received
cash of an equal amount, resulting in no gain or loss to Frontier Insurance.
After the commutation, there was no change in the net incurred losses or loss
ratios as a result of these transactions.
In 1995, 1994, and 1993, Frontier Insurance recognized and accrued (reduced)
reinsurance contingent profit commissions earned of ($783,000) ,($337,000), and
$840,000, respectively.
The components of the net reinsurance recoverables balances included in the
accompanying balance sheets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
Ceded paid losses & LAE recoverable $ 2,639 $ 3,946
Ceded unpaid losses and LAE 73,043 49,435
Ceded unearned premiums 5,541 3,885
Ceded reinsurance payable (4,268) (2,487)
------- -------
TOTAL $76,955 $54,779
======= =======
</TABLE>
The reinsurance ceded components of the amounts relating to the accompanying
income statements are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Ceded premiums earned $42,086 $17,562 $31,976
Ceded incurred losses 25,557 14,114 20,158
Ceded incurred LAE 11,700 3,664 3,537
</TABLE>
F-17
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE D--REINSURANCE--Continued
The effect of reinsurance on premiums written and earned in 1995, 1994 and 1993
was as follows (in thousands) :
<TABLE>
<CAPTION>
1995 1994 1993
Premiums Premiums Premiums
----------------- ------------------ -----------------
Written Earned Written Earned Written Earned
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Direct $259,222 $235,696 $195,614 $169,893 $141,635 $138,756
Assumed 5,092 2,610 3,278 4,424 7,115 9,592
Ceded (43,557) (42,086) (11,604) (17,562) (29,931) (31,976)
-------- -------- -------- -------- -------- --------
Net premiums $220,757 $196,220 $187,288 $156,755 $118,819 $116,372
======== ======== ======== ======== ======== ========
</TABLE>
NOTE E--INCOME TAXES
State income taxes represent the amount of current state income taxes incurred.
The Company files a consolidated federal income tax return, which includes the
income and expenses of its subsidiaries from the dates of their acquisition.
The components of federal income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal income tax expense (benefit):
Current $11,071 $8,958 $9,871
Deferred (175) (5,162) (3,852)
------- ------ ------
TOTAL FEDERAL INCOME TAX EXPENSE $10,896 $3,796 $6,019
======= ====== ======
</TABLE>
A reconciliation of federal income tax expense, based on the prevailing
corporate income tax rate of 35% to the federal income tax expense reflected in
the accompanying financial statements is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income tax at prevailing
corporate income tax rate
applied to pre-tax income $15,148 $ 7,465 $10,603
Add (deduct) tax effect of:
Tax-exempt interest income (2,754) (2,726) (2,828)
Dividend received deduction (634) (805) (677)
State income taxes (410) (194) (389)
1% effective tax rate change (551)
Other (454) 56 (139)
------- ------- --------
TOTAL FEDERAL INCOME TAX EXPENSE $10,896 $ 3,796 $ 6,019
======= ======= ========
</TABLE>
F-18
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets at December 31, 1995 and 1994
are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
-----------------------
1995 1994
---- ----
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs $ 6,579 $ 4,625
Net unrealized gains on available-
for-sale securities 4,284
Other 976 186
------- -------
Total deferred tax liabilities 11,839 4,811
Deferred tax assets:
Reserve discounting, including
salvage and subrogation 26,466 26,341
Unearned premium reserve 7,121 5,404
Net unrealized losses on available-
for-sale securities 3,396
Other 1,879 437
------- -------
Total deferred tax assets 35,466 35,578
------- -------
Net deferred tax assets $23,627 $30,767
======= =======
Deferred federal income taxes result from timing differences in the recognition
of certain income and expenses for tax and financial statement purposes and are
summarized as follows (in thousands):
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Reserve discounting, including
salvage and subrogation $ (125) $(4,997) $(3,953)
Unearned premium reserve (1,718) (2,137) (260)
Deferred policy acquisition costs 1,955 2,258 365
Excess depreciation expense 220 64 24
Bad debt expense (credit) (404) (354) (9)
Other (103) 4 (19)
------- -------- --------
TOTAL DEFERRED FEDERAL
INCOME TAX BENEFIT $ (175) $(5,162) $(3,852)
====== ======= =======
The Company made income tax payments of $12,829,000, $9,330,000, and
$13,051,000, in 1995, 1994, and 1993, respectively.
At December 31, 1995, the Company had a capital loss carryforward of $29,000
that expires in 1997.
F-19
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE F--CREDIT FACILITY
In 1995, the Company obtained a line of credit for $35,000,000 with the Bank of
New York . Under this arrangement, the Company borrowed $25,000,000 and used the
proceeds to increase the capital in Frontier Insurance. The bank's commitment
reduces by $5,000,000 at the end of each of 1996, 1997, and 1998 and expires at
the end of 1999. The loan under the arrangement bears an annual interest rate of
6.87%. The interest incurred in 1995 relating to this credit arrangement was
$895,000. At December 31, 1995, the outstanding debt is carried at its unpaid
principal balance an amount that approximates its fair value.
F-20
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTE G--STATUTORY-BASIS CAPITAL AND NET INCOME
A reconciliation of the amounts of Frontier Insurance's capital as of December
31, 1995 and 1994, and consolidated net income for each of the three years in
the period ended December 31, 1995, on a statutory accounting basis ("SAP") and
as reported to the New York Insurance Department to the related GAAP amounts
included in the accompanying financial statements, is as follows (in thousands):
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
------------------------ ------------------------ ------
Net Net Net
Capital Income Capital Income Income
------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Frontier Insurance's statutory-basis amounts $171,362 $24,699 $104,871 $ 5,492 $17,104
Add (deduct):
Deferred policy acquisition costs 20,637 5,274 15,363 7,267 878
Nonadmitted assets and unauthorized
reinsurance 14,853 6,887
Investment valuation 11,346 (5,890)
Allowance for doubtful accounts (3,506) (1,154) (2,237) (1,011) 13
Amortization of intangibles 589 471 118 (147) 118
Deferred income taxes 22,833 49 28,817 4,715 4,480
Other than temporary market decline (490) (490)
Frontier Pacific Insurance 2,351 2,867 1,091 1,839 781
-------- ------- -------- ------- -------
FRONTIER INSURANCE'S CONSOLIDATED
GAAP AMOUNTS 239,975 31,716 149,020 18,155 23,374
Company's capital and net income (loss),
excluding amounts arising from its
investment in Frontier Insurance (10,242) (505) 41,244 (1,175) 497
-------- ------- -------- ------- -------
CONSOLIDATED AMOUNTS--GAAP BASIS $229,733 $31,211 $190,264 $16,980 $23,871
======== ======= ======== ======= =======
</TABLE>
F-21
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE H--INVESTMENTS
The major categories of total net investment income are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest and dividends:
Fixed maturities $28,338 $20,942 $20,277
Equity securities 1,745 3,774 2,196
Short-term and other investments 2,529 695 734
Interest expense on funds held (2,174)
Limited liability corporation 535
------- ------- -------
Total interest and dividends 30,973 25,411 23,207
Less investment expenses 938 958 684
------- ------- -------
Net investment income 30,035 24,453 22,523
Realized capital gains (losses):
Securities available-for-sale (1995):
Fixed maturity securities 1,940 325
Equity securities (1,920) (1,743) 367
Short-term investments (1) (150)
Fixed maturities held-to-maturity
(held for investment in 1993) (59) (369)
------- ------- -------
Total realized capital gains (losses) 20 (1,478) (152)
------- ------- -------
TOTAL NET INVESTMENT INCOME $30,055 $22,975 $22,371
======= ======= =======
</TABLE>
Gross realized capital gains on available-for-sale securities in 1995 and 1994
and on held-for-investment securities in 1993 were $2,509,000, $987,000, and
$1,235,000, respectively. Gross realized capital losses on available-for-sale
securities in 1995 and 1994 and on held-for-investment securities in 1993 were
$3,164,000, $2,604,000, and $1,558,000, respectively. Also, gross realized
capital gains in 1995 and 1994 on held-to-maturity securities were $675 000 and
$27,000, respectively, and gross realized capital losses were $-0- and $86,000,
respectively, resulting from calls, paydowns, maturities, and sales of these
securities.
The change in unrealized (depreciation) appreciation on fixed-maturity
securities was $28,490,000, $(25,177,000), and $3,699,000 in 1995, 1994, and
1993, respectively; the corresponding amounts for equity securities were
$4,704,000, $(3,896,000), and $(208,000).
At December 31, 1995, bonds and notes with an amortized cost of $14,193,000 were
on deposit with various regulatory authorities to meet statutory requirements.
F-22
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE H--INVESTMENTS--Continued
Investments in available-for-sale securities are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Market
Cost Gains Losses Value
---- ---------- ---------- ---------
<S> <C> <C> <C> <C>
At December 31, 1995:
Available-for-sale securities
Fixed maturity securities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 29,602 $ 1,519 $ (3) $ 31,118
Obligations of states and
political subdivisions 189,363 4,154 (611) 192,906
Foreign governments 20 20
Corporate securities 102,667 3,992 (1,395) 105,264
Mortgage-backed securities 188,404 5,080 (1,390) 192,094
-------- ------- ------- --------
Total fixed maturity securities 510,056 14,745 (3,399) 521,402
Equity securities 20,132 1,191 (299) 21,024
-------- ------- ------- --------
TOTAL $530,188 $15,936 $(3,698) $542,426
======== ======= ======= ========
At December 31, 1994:
Available-for-sale securities
Fixed maturity securities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 9,292 $ 53 $ (580) $ 8,765
Obligations of states and
political subdivisions 92,073 445 (3,164) 89,354
Corporate securities 11,889 8 (1,290) 10,607
Mortgage-backed scurities 36,592 117 (1,479) 35,230
-------- ------- ------- --------
Total fixed maturity securities 149,846 623 (6,513) 143,956
Equity securities 52,458 260 (4,072) 48,646
-------- ------- ------- --------
TOTAL $202,304 $ 883 $(10,585) $192,602
======== ========= ======== ========
</TABLE>
F-23
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE H--INVESTMENTS--Continued
Investments in held-to-maturity securities are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Market
Cost Gains Losses Value
---- ---------- ---------- ---------
<S> <C> <C> <C> <C>
At December 31, 1994:
Held-to-maturity securities
Fixed maturity securities
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 52,589 $101 $ (1,400) $ 51,290
Obligations of states and
political subdivisions 71,597 161 (4,210) 67,548
Debt securities issued by
foreign governments 20 20
Corporate securities 55,259 85 (5,370) 49,974
Mortgage-backed securities 22,664 100 (721) 22,043
-------- ---- -------- --------
TOTAL $202,129 $447 $(11,701) $190,875
======== ==== ======== ========
</TABLE>
At December 31, 1995, the amortized cost and estimated market value of debt
securities, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Market
Cost Value
---- ---------
(in thousands)
<S> <C> <C>
Due in one year or less $ 5,594 $ 5,614
Due after one year to five years 41,974 43,517
Due after five years to ten years 113,005 116,141
Due after ten years 161,079 164,036
Mortgage backed securities 188,404 192,094
-------- --------
TOTAL $510,056 $521,402
======== ========
</TABLE>
NOTE I--DIVIDEND AND CAPITAL RESTRICTIONS
Cash dividends of Frontier Insurance may be paid only out of its statutory
earned surplus, which was approximately $79,538,000 at December 31, 1995.
Generally, the payment of dividends is subject to statutory restrictions imposed
by New York insurance law. The maximum amount of dividends that may be paid in
any twelve-month period without the prior approval of the New York Insurance
Department is the lesser of net investment income or 10% of statutory surplus
($171,362,000 at December 31, 1995) as such terms are defined in the New York
insurance law. Accordingly, the maximum amount of dividend payable in 1996 by
Frontier Insurance to its parent company without prior approval of the New York
Insurance Department is $17,136,000.
F-24
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE I--DIVIDEND AND CAPITAL RESTRICTIONS--Continued
At December 31, 1995, $91,824,000 of consolidated capital represented net assets
of Frontier Insurance that cannot be transferred in the form of dividends,
loans, or advances to the Company. Generally, the net assets of Frontier
Insurance available for transfer to the Company are limited to the amounts that
Frontier Insurance's net assets, as determined in accordance with statutory
accounting practices, exceed certain minimum statutory capital requirements;
however, as explained above, payments of such amounts as dividends may be
subject to approval by the New York Insurance Department.
NOTE J--STOCK OPTIONS
The Company has adopted stock option plans (the "Plans") under which 807,872
shares of Common Stock are reserved for issuance upon exercise of options
granted pursuant to the Plans. Under the Plans, incentive stock options may be
granted to employees and nonqualified stock options may be granted to employees,
directors, and such other persons as the Board of Directors (or a committee
appointed by the Board) determines will assist the Company's business endeavors,
at exercise prices equal to at least 100% of the fair market value of the Common
Stock on the date of grant. Incentive stock options granted under the Plans are
not exercisable until one year after grant and expire five years after the date
of grant. In addition to selecting the optionees, the Board (or such committee)
determines the number of shares subject to each option, the expiration date of
nonqualified stock options and otherwise administers the Plans. Certain of the
Company's officers are ineligible to participate in the Plans. Incentive stock
options have been granted at various times and for varying amounts.
Information on stock options, under the Plans, is shown in the following table:
<TABLE>
<CAPTION>
Shares
Outstanding Exercisable Price Range
----------- ----------- ------------------
<S> <C> <C> <C>
Balances at January 1, 1993 216,093 82,639 $ 3.03 - $12.79
Granted 137,268 $27.12 - $29.83
Became Exercisable 65,689 $ 7.81 - $29.83
Exercised (40,053) (40,053) $ 3.03 - $10.69
Canceled (5,363) (5,363) $ 3.03 - $27.35
---------- ---------- ----------------
Balances at December 31, 1993 307,945 102,912 $ 7.81 - $29.83
Granted 2,250 $30.33 - $30.33
Became Exercisable 87,534 $ 7.81 - $29.83
Exercised (73,782) (73,782) $ 7.81 - $27.35
Canceled (8,975) (8,975) $ 7.81 - $23.35
---------- ---------- ----------------
Balances at December 31, 1994 227,438 107,689 $ 7.87 - $30.33
Granted 159,250 $20.75 - $28.75
Became Exercisable 72,628 $ 7.87 - $30.33
Exercised (41,391) (41,391) $ 7.87 - $27.35
Canceled (27,630) (27,630) $ 7.87 - $29.83
--------- --------- ----------------
Balances at December 31, 1995 317,667 111,296 $ 9.05 - $30.33
======== ======== ================
</TABLE>
At December 31, 1995, options to purchase 317,667 shares of Common Stock, at per
share exercise prices ranging from $9.05 to $30.33, were outstanding; and at
December 31, 1994, options to purchase 227,438 shares of Common Stock, at per
share exercise prices ranging from $7.87 to $30.33 were outstanding under the
Plans. Options to purchase 111,296 and 107,689 shares of Common Stock were
F-25
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE J--STOCK OPTIONS--Continued
exercisable at December 31, 1995 and December 31, 1994, respectively, under the
Plans. During 1995, 41,391 options were exercised with an average per share
exercise price of $9.12.
During 1993, the Company granted the President and Chairman of the Board, and a
Vice President, separate stock options outside of the Plans to purchase 375,000
and 67,500 shares, respectively, of the Company's Common Stock at $50.00 per
share at any time through December 31, 1999, which options were outstanding at
December 31, 1995.
The number of shares subject to options and the per share option prices have
been adjusted to reflect stock dividends.
NOTE K--EMPLOYEE SAVINGS PLAN
The Company sponsors an employee savings plan (401(k)) whereby the Company
contributes a base of 2% of the salary of all eligible employees and matches 50%
of each eligible employee's personal contribution up to 2% of the employee's
salary. The maximum Company contribution, base and match, is 4% of an employee's
salary. The plan commenced in 1993, and the Company's contribution expense for
1995 and 1994 was $636,000, and $499,000, respectively.
NOTE L--COMMITMENTS AND CONTINGENCIES
At December 31, 1995, the future minimum rental commitment for operating leases
was as follows: 1996--$759,000; 1997--$513,000; 1998--$496,000; 1999--$366,000;
2000--$181,000; 2001--$118,000 and 2002--$18,000. These leases are for the
rental of office space, the initial terms of which run five years, with a
negotiated renewal option at the end of the term. Total rental expense for 1995,
1994, and 1993 amounted to $720,000, $479,000, and $321,000, respectively.
The Company has been served with several purported class actions alleging
violations of federal securities laws by the Company and, in some cases, by
certain of its officers and directors; certain other actions also allege
violations of the common law. The complaints relate to the Company's November 8,
1994 announcement of its third quarter financial results and allege that the
Company previously had omitted and/or misrepresented material facts with respect
to its earnings and profits. The amount of potential loss is not possible to
estimate as of the present due to the fact that these actions allege differing
class periods, and until an actual class is certified in the consolidation
action, the number of shares impacted by the claims cannot be ascertained. The
Company believes the suits are without merit and has retained special legal
counsel to contest them vigorously. The Company is involved in other unrelated
litigation which is considered incidental to its business. The ultimate outcome
of all litigation is not expected to be material in relation to the Company's
financial position and results of operations.
On November 10, 1994, the Company authorized a stock repurchase program to
purchase up to 1,000,000 shares of its Common Stock at such times and prices the
Company deems advantageous in compliance with SEC Rule 10b-18 at the discretion
of the Chairman of the Board. There is no commitment or obligation on the part
of the Company to purchase any particular number of shares, and the program may
be suspended at any time at the Company's discretion. In 1995 and 1994, in
conjunction with this repurchase program, the Company acquired 6,000 and 35,400
shares at a cost of $134,000 and $654,000, respectively.
F-26
<PAGE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
NOTE M--NET INCOME PER SHARE
Net income per share is based on the weighted average number of shares of Common
Stock and Common Stock equivalents outstanding during the year. The weighted
average shares outstanding have been adjusted retroactively to reflect the
effects of the 3 for 2 stock split in June 1994, and the ten percent stock
dividend paid in July 1993, and were 13,011,433, 12,992,059, and 11,418,864,
shares, respectively, for 1995, 1994, and 1993. The effect of the outstanding
stock options are not material and are antidilutive with respect to the
computation of the net income per share data.
NOTE N--CONCENTRATIONS
The Company, which is licensed to conduct business in 50 states, attempts to
diversify its exposures geographically, as well as across various types of
risks. However, its medical malpractice business in the Florida marketplace
comprises 9.7% of the Company's gross premiums written and its surety and bond
business, which is focused primarily in the California marketplace, accounts for
18.8% of its gross premiums written in 1995. Also, the Company relies primarily
on a small number of reinsurers. At December 31, 1995, the Company has
outstanding gross reinsurance recoverables of $31,567,000 from its largest
reinsurer, Centre Re; however, under the terms of the reinsurance arrangements,
Frontier is withholding $28,248,000 of funds due Centre Re. Accordingly, the net
outstanding recoverable from Centre Re is $3,319,000.
NOTE O--SUBSEQUENT EVENT
On February 29, 1996, the Company announced that it executed definitive
agreements to acquire, through its wholly-owned subsidiary Frontier Insurance,
100% of the stock of United Capitol Holding Company and it's subsidiaries,
United Capitol Insurance Company, United Capitol Managers, Inc., and Fischer
Underwriting Group, Inc., subject to regulatory approval, at a purchase price of
approximately $30,920,000.
F-27
<PAGE>
<PAGE>
SUPPLEMENTAL DATA
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for 1995
and 1994:
<TABLE>
<CAPTION>
1995 1994
------------------------------------------ --------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
------- -------- ------ ------- ------- ------- ------ -------
(thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net premiums earned $45,754 $46,440 $49,873 $54,153 $35,588 $31,911 $41,428 $47,828
Total net investment
income 5,981 7,434 8,168 8,472 5,506 5,978 4,930 6,561
Income (loss) before
cumulative
effect of change in
accounting principle 6,886 7,785 8,245 8,295 6,740 7,328 (5,080) 7,992
Net income (loss) 6,886 7,785 8,245 8,295 6,740 7,328 (5,080) 7,992
Per share data:
Income (loss) before
cumulative effect
of accounting change .53 .60 .63 .64 .52 .57 (.39) .61
Net income (loss) .53 .60 .63 .64 .52 .57 (.39) .61
</TABLE>
Earnings per share information is based on the weighted average number of shares
outstanding for the period and have been adjusted to reflect the effects of
stock dividends and stock splits. The effect of stock options was nondilutive to
the computation of earnings per share information.
The 1994 third quarter results were adversely affected by a $17,500,000 addition
to loss reserves due to unfavorable development in medical malpractice claims in
Florida.
In the fourth quarter of 1995, the Company increased prior year's reserves by
approximately $19,000,000, which was entirely offset by subrogation recoverable
recognized in connection with the favorable Court of Appeals decision.
F-28
<PAGE>
<PAGE>
SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
December 31, 1995
<TABLE>
<CAPTION>
Column A Col. B Col. C. Col. D.
- -------------------------------------------------- ---------- ---------- ---------------
Amount at Which
Shown in the
Type of Investment Cost(1) Value(2) Balance Sheet
- -------------------------------------------------- ---------- ---------- ---------------
<S> <C> <C> <C>
Available-for-sale securities
Fixed maturity securities:
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 29,602 $ 31,118 $ 31,118
Obligations of states and political subdivisions 189,363 192,906 192,906
Foreign governments 20 20 20
Corporate securities 102,667 105,264 105,264
Mortgage-backed securities 188,404 192,094 192,094
--------- --------- ---------
Total Fixed Maturity Securities 510,056 521,402 521,402
Equity Securities 20,132 21,024 21,024
--------- ---------- ----------
TOTAL AVAILABLE-FOR-SALE SECURITIES 530,188 542,426 542,426
Short-term investments 7,353 7,353 7,353
---------- ----------- -----------
Investment in limited liability corporation 2,935 (3) 2,935 2,935
---------- ----------- -----------
TOTAL INVESTMENTS $540,476 $552,714 $552,714
======== ======== ========
</TABLE>
(1) Original cost of equity and short-term securities and, as to fixed
maturities, original cost reduced by repayments and adjusted for
amortization of premiums or accrual of discounts.
(2) Fair values are based on quoted market values, where available, except
short-term investments which cost approximates fair value. The amount shown
for the limited liability corporation is based on book value.
(3) Accounted for under the equity method based on the GAAP results of
operations plus the original cost.
F-29
<PAGE>
<PAGE>
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FRONTIER INSURANCE GROUP, INC. (PARENT COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
---------------------------------
1995 1994
------------------ ----------
<S> <C> <C>
ASSETS (in thousands)
Investments in subsidiaries $239,557 $148,873
Securities, available for sale--at fair value
Equity securities (cost: 1994--$29,859,000) 26,729
Investment in limited liability corporation 2,935
Investment in partnership 47 4,064
Short-term investments--(principal balances which
approximate fair value) 1,129
Cash 99 2,250
Equipment and software--at cost, less accumulated
depreciation (1995--$2,046,000;1994--$1,103,000) 5,589 4,898
Insurance renewal and claims adjusting
rights and other intangible assets,
less accumulated amortization
(1995--$2,370,000; 1994--$1,525,000) 3,082 3,501
Real estate 853 458
Other assets 4,889 1,550
-------- --------
TOTAL ASSETS $258,180 $192,323
======== ========
LIABILITIES AND CAPITAL
LIABILITIES
Note payable $ 25,000
Accrued expenses and other liabilities 3,447 $ 2,059
--------- ----------
TOTAL LIABILITIES 28,447 2,059
CAPITAL
Preferred Stock, par value $.01 per share;
authorized and unissued--1,000,000 shares
Common Stock; par value $.01 per share;
authorized--20,000,000 shares; issued
and outstanding (1995--13,062,501 shares;
1994--13,021,058 shares) 130 130
Additional paid-in capital 167,587 167,209
Net unrealized appreciation (depreciation)
of investments in available-for-sale
securities (net of tax) 7,955 (6,307)
Retained earnings 54,849 29,886
--------- ---------
SUBTOTAL 230,521 190,918
Less: Treasury stock--at cost
(1995--41,400 shares; 1994--35,400 shares) (788) (654)
--------- ---------
TOTAL CAPITAL 229,733 190,264
--------- ---------
TOTAL LIABILITIES AND CAPITAL $258,180 $192,323
======== ========
</TABLE>
These condensed financial statements should be read in conjunction with the
accompanying consolidated financial statements and notes thereto of Frontier
Insurance Group, Inc. and Subsidiaries.
F-30
<PAGE>
<PAGE>
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--Continued
FRONTIER INSURANCE GROUP, INC. (PARENT COMPANY)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------
1995 1994 1993
--------- ------------ ---------
<S> <C> <C> <C>
REVENUES
Dividend income from subsidiary $ 2,000
Investment income $ 1,544 $ 2,296 1,141
Realized capital losses (377) (1,259) (146)
--------- -------- --------
TOTAL REVENUES 1,167 1,037 2,995
EXPENSES
Operating and administrative 714 944 632
Interest expense - Note payable 895
--------- -------- --------
TOTAL EXPENSES 1,609 944 632
INCOME (LOSS) BEFORE FEDERAL
INCOME TAXES AND EQUITY
IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES (442) 93 2,363
Federal income tax (benefit) (207)(1) 20 71
--------- -------- --------
INCOME (LOSS) BEFORE EQUITY
IN UNDISTRIBUTED INCOME
OF SUBSIDIARIES (235) 73 2,292
Equity in undistributed
income of subsidiaries 31,446 16,907 21,579
--------- -------- --------
NET INCOME $31,211 $16,980 $23,871
======= ======= =======
</TABLE>
(1) Under the terms of its tax sharing agreement with its subsidiaries, income
tax provisions for the individual companies are computed on a separate
company basis. Accordingly, the Company's income tax benefit results from
the utilization of the parent company separate return loss to reduce the
consolidated taxable income of the Company and its subsidiaries.
These condensed financial statements should be read in conjunction with the
accompanying consolidated financial statements and notes thereto of Frontier
Insurance Group, Inc. and Subsidiaries.
F-31
<PAGE>
<PAGE>
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--CONTINUED
FRONTIER INSURANCE GROUP, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1995 1994 1993
---------- ----------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) before equity in
undistributed income of subsidiaries $ (235) $ 73 $ 2,292
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Change in federal income taxes 2,447 (1,502) 422
Depreciation and amortization 1,788 977 1,025
Prepaid expenses (100) 2 8
Change in due to (from) subsidiaries (4,838) 1,950 (1,292)
Realized capital losses 377 1,259 146
Other 821 (146) 254
------- ------ -------
NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES 260 2,612 2,855
INVESTING ACTIVITIES
Capital contribution to subsidiary (19,445)(1) (10,000)
Acquisition of policy renewal rights (426) (3,427)
(Purchases) sales of equity securities 4,017 (864) (32,561)
Purchases of equipment (1,634) (1,209) (4,611)
Investment in limited liability corporation (2,400)
Purchase of real estate (395)
Net (purchases) sales of
short-term investments (1,129) 10,406 (9,981)
------- ------ -------
NET CASH PROVIDED BY
(USED IN) INVESTING ACTIVITIES (21,412) 4,906 (57,153)
FINANCING ACTIVITIES
Proceeds from credit arrangement 25,000
Purchase of Treasury Stock (134) (654)
Issuance of Common Stock 378 590 59,130
Cash dividends paid (6,243) (5,717) (4,360)
------- ------ -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 19,001 (5,781) 54,770
------- --------- --------
INCREASE (DECREASE) IN CASH (2,151) 1,737 472
Cash at beginning of year 2,250 512 40
------- ------ -------
CASH AT END OF YEAR $ 99 $ 2,250 $ 512
======= ======== =======
</TABLE>
(1) In conjunction with the cash capital contribution, the Company transferred
$28.0 million of equity securities to its subsidiary, for a total contribution
of $47.4 million.
These condensed financial statements should be read in conjunction with the
accompanying consolidated financial statements and notes thereto of Frontier
Insurance Group, Inc. and Subsidiaries.
F-32
<PAGE>
<PAGE>
SCHEDULE IV--REINSURANCE
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(amounts in thousands)
Col. A Col. B Col. C Col. D Col. E
- ----------------- ---------- ------------------------ ---------- ------------
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed to
Description Amount Companies Companies Amount Net
- ----------------- ---------- ------------------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995:
Premiums written:
Medical malpractice $ 117,431 $18,049 $ 99,382
General liability 65,900 12,841 $3,813 56,872 6.7%
Surety 49,137 5,734 142 43,545 0.3
Workers' compensation 11,047 1,683 569 9,933 5.7
Other 15,707 5,250 568 11,025 5.2
-------- -------- ------- ---------- ---
TOTAL $259,222 $43,557 $5,092 $ 220,757 2.3%
======== ======== ====== ========= ===
Year Ended December 31, 1994:
Premiums written:
Medical malpractice $ 90,107 $2,338 $ 87,769
General liability 45,072 4,419 $ 46 40,699 0.1%
Surety 36,871 388 296 36,779 0.8
Workers' compensation 12,940 1,087 2,704 14,557 18.6
Other 10,624 3,373 233 7,484 3.1
-------- ------- -------- -------- ---
TOTAL $195,614 $11,605 $ 3,279 $187,288 1.8%
======== ======= ======== ======== ===
Year Ended December 31, 1993:
Premiums written:
Medical malpractice $ 68,079 $ 14,161 $ 53,919
Workers' compensation 20,285 5,130 $ 6,947 22,102 31.4%
Surety 22,149 530 198 21,817 0.9
General liability 22,046 5,325 (16) 16,705 (0.1)
Other 9,076 4,785 (14) 4,276 (0.3)
---------- -------- ----- -------- ----
TOTAL $141,635 $29,931 $7,115 $118,819 6.0%
======== ======= ====== ======== ====
</TABLE>
F-33
<PAGE>
<PAGE>
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
(amounts in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
-----------------------------------------
Description Balance at (1) (2) Deductions Balance at
Beginning of Charged to Costs Charged to Other Describe end of
Period and Expenses Accounts-Describe Period
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $2,237 $1,154 $3,391
Allowance for possible reinsurance
uncollectible amounts 115 115
Year Ended December 31, 1994:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts 1,240 997 2,237
Allowance for possible reinsurance
uncollectible amounts 101 14 115
Year Ended December 31, 1993:
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts 1,307 67 (a) 1,240
Allowance for possible reinsurance
uncollectible amounts 47 54 101
</TABLE>
(a)--Recovered during the period
F-34
<PAGE>
<PAGE>
SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
(Thousands of Dollars)
(Net of Reinsurance)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E Col. F Col. G Col. H Col. I Col. J Col. K
- ---------------- -------- --------- ------ -------- --------- ------- ------------------ -------- -------- -------
Claims and Claim
Net Adjustment Expenses Amortization
Deferred Unpaid Claims Discount, Total Incurred Related to of Deferred Paid Claims
Policy and Claim if any, Net Net (1) (2) Policy and Claim Net
Affiliation Acquisition Adjustment Deducted in Unearned Earned Investment Current Prior Acquisition Adjustment Premiums
with Registrant Costs Expenses Column C Premiums Premiums Income Year Years Costs Expenses Written
- ----------------- ----------- --------- ---------- --------- -------- --------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 Consolidated $18,797 $294,393 $101,741 $196,220 30,055 $126,764 $(7,514) $42,258 $93,559 220,757
1994 Consolidated 13,213 263,202 77,339 156,755 22,975 97,044 13,874 30,463 64,202 187,288
1993 Consolidated 6,820 216,486 46,672 116,372 22,371 74,267 3,314 17,327 46,169 118,819
</TABLE>
F-35
<PAGE>
<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.
FRONTIER INSURANCE GROUP, INC.
By: /s/ WALTER A. RHULEN
--------------------------------
Walter A. Rhulen
Chairman of the Board and President
Date: March 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual
report on Form 10-K has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature and Title Date
--------------------- ------
<S> <C>
/s/ WALTER A. RHULEN March 27, 1996
----------------------------------------
Walter A. Rhulen
Chairman of the Board, President
and Director
(Principal Executive Officer)
/s/ PETER L. RHULEN March 27, 1996
----------------------------------------
Peter L. Rhulen
Vice President and Director
/s/ LAWRENCE E. O'BRIEN March 27, 1996
----------------------------------------
Lawrence E. O'Brien
Director
/s/ DOUGLAS C. MOAT March 27, 1996
----------------------------------------
Douglas C. Moat
Director
/s/ DENNIS F. PLANTE March 27, 1996
----------------------------------------
Dennis F. Plante
Sr. Vice President - Finance
and Treasurer
(Principal Financial and Accounting Officer)
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
<S> <C>
3.1(a) Copy of Registrant's Restated Certificate of Incorporation......................... (1)
3.2 Copy of Registrant's By-Laws....................................................... (2)
10.1 Copy of Registrant's Stock Option Plan, including forms of option.................. (1)
10.2(a) Copy of Employment Agreement between Registrant
and Walter A. Rhulen........................................................... (5)
10.6 Copy of Registrant's Profit Sharing Plan........................................... (2)
10.7 Copy of Asset Purchase Agreement between Registrant
and Rhulen Agency, Inc......................................................... (3)
10.8 Copy of Insurance Placement Agreement between Frontier
Insurance Company and Markel Service, Incorporated............................. (3)
10.9 Copy of Agency Agreement between Frontier Insurance Company
and Markel Service, Incorporated............................................... (3)
10.10 Copy of Registrant's 1992 Incentive and Non-Incentive
Stock Option Plan.............................................................. (4)
10.11 Copy of Division of Business and Non-Competition Agreement
between Markel Service, Inc. and Frontier Insurance Company.................... (4)
10.12 Description of Registrant's Executive Bonus Plan................................... (5)
10.13 Copy of Credit Agreement between Registrant and The Bank of New York...............
11 Computation of Per Share Earnings
21(a) List of Registrant's Subsidiaries
23 Consent of Independent Auditors
29 Schedule P of Annual Statement for year ended December 31, 1995, filed
as a paper format exhibit on Form SE pursuant to Section 232.311 of
Regulation ST, of Frontier Insurance Company and of Frontier Pacific
Insurance Company, as filed with the New York State Department of
Insurance and the California Department of Insurance, respectively
</TABLE>
- ---------------------
(1) Filed as the same numbered Exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 33-7340) and incorporated herein by
reference.
(2) Filed as the same numbered Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988 and incorporated herein by
reference.
(3) Filed as the same numbered Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1989 and incorporated herein by
reference.
(4) Filed as the same numbered Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992 and incorporated herein by
reference.
(5) Filed as the same numbered Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993 and incorporated herein by
reference.
<PAGE>
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. 1995 FORM 10-K EXHIBIT 10.13
- -------------------------------------------------------------------------------
CREDIT AGREEMENT
by and among
FRONTIER INSURANCE GROUP, INC.,
THE BANK OF NEW YORK,
as Agent
and
THE LENDERS PARTY HERETO
--------------------------
$35,000,000
--------------------------
Dated as of June 29, 1995
- -------------------------------------------------------------------------------
<PAGE>
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION ............................... 1
1 1 Definitions ........................................................ 1
1.2 Principles of Construction ......................................... 11
2. AMOUNT AND TERMS OF LOANS ................................................ 13
2.1 Loans .............................................................. 13
2.2 Notes ............................................................. 13
2.3 Notice of Borrowing ............................................... 13
2.4 Use of Proceeds ................................................... 14
2.5 Termination or Reduction of Commitments ............................ 14
2.6 Prepayments of the Loans ........................................... 15
2.7 Extension of Commitment Termination Date ........................... 15
3. PROCEEDS, PAYMENTS, CONVERSIONS, INTEREST, YIELD
PROTECTION AND FEES ............................. ....................... 16
3.1 Disbursement of the Proceeds of the Loans .......................... 16
3.2 Payments .......................................................... 17
3.3 Conversions; Other Matters ........................................ 17
3.4 Interest Rates and Payment Dates ................................... 19
3.5 Indemnification for Loss ........................................... 20
3.6 Reimbursement for Costs, Etc. ...................................... 21
3.7 Illegality of Funding .............................................. 22
3.8 Option to Fund; Substituted Interest Rate .......................... 23
3.9 Certificates of Payment and Reimbursement .......................... 24
3.10 Taxes; Net Payments ............................................... 24
3.11 Commitment Fee .................................................... 25
4. REPRESENTATIONS AND WARRANTIES ........................................... 25
4.1 Existence and Power ................................................ 25
4.2 Authority ......................................................... 25
4.3 Binding Agreement ................................................. 26
4.4 Litigation ........................................................ 26
4.5 No Conflicting Agreements .......................................... 26
4.6 Taxes ............................................................. 26
4.7 Compliance with Applicable Laws; Filings ........................... 27
4.8 Governmental Regulations .......................................... 27
4.9 Federal Reserve Regulations; Use of Loan Proceeds .................. 27
<PAGE>
<PAGE>
4.10 No Misrepresentation .............................................. 28
4.11 Plans ............................................................. 28
4.12 Environmental Matters ............................................ 28
4.13 Financial and Annual Statutory Statements .......................... 29
5. CONDITIONS OF LENDING - LOANS ON THE FIRST BORROWING DATE ............... 29
5.1 Evidence of Corporate Action ....................................... 29
5.2 Notes ............................................................. 30
5.3 Litigation ......................................................... 30
5.4 Opinion of Special Counsel ......................................... 30
5.5 Opinions of Counsel to the Borrower ................................ 30
5.6 Payment of Fees .................................................... 30
6. CONDITIONS OF LENDING - ALL LOANS ........................................ 30
6.1 Compliance ........................................................ 30
6.2 Loan Closings ..................................................... 31
7. AFFIRMATIVE AND FINANCIAL COVENANTS ..................................... 31
7.1 Legal Existence ................................................... 31
7.2 Taxes ............................................................. 31
7.3 Insurance ......................................................... 31
7.4 Performance of Obligations ......................................... 32
7.5 Condition of Property .............................................. 32
7.6 Observance of Legal Requirements ................................... 32
7.7 Financial Statements and Other Information ......................... 32
7.8 Records ........................................................... 33
7.9 Authorizations .................................................... 34
7.10 Interest Coverage Ratio ........................................... 34
7.11 Debt Service Ratio ................................................ 34
7.12 FIC Statutory Capital and Surplus ................................. 34
7.13 FIC Total Adjusted Capital ......................................... 34
7.14 FIC Compliance with IRIS Ratios ................................... 34
7.15 Participation in IRIS .............................................. 34
7.16 Concerning the Tax Sharing Agreement .............................. 34
8. NEGATIVE COVENANTS ....................................................... 35
8.1 Liens ............................................................. 35
8.2 Dispositions ...................................................... 35
8.3 Acquisitions ...................................................... 36
8.4 Line of Business ................................................... 36
8.5 Transactions with Affiliates ...................................... 36
8.6 Adoption of Pension Plans .......................................... 36
<PAGE>
<PAGE>
9. DEFAULT .................................................................. 36
9.1 Events of Default ................................................ 36
9.2 Contract Remedies ................................................ 38
10. THE AGENT ............................................................... 39
10.1 Appointment ...................................................... 39
10.2 Delegation of Duties ............................................. 39
10.3 Exculpatory Provisions ........................................... 39
10.4 Reliance by Agent ................................................ 40
10.5 Notice of Default ................................................ 40
10.6 Non-Reliance ..................................................... 41
10.7 Indemnification .................................................. 41
10.8 Agent in its Individual Capacity ................................. 42
10.9 Successor Agent .................................................. 42
11. OTHER PROVISIONS ........................................................ 42
11.1 Amendments, Waivers, Etc. ........................................ 42
11.2 Notices .......................................................... 43
11.3 No Waiver; Cumulative Remedies ................................... 44
11.4 Survival of Representations and Warranties ....................... 44
11.5 Payment of Expenses and Taxes .................................... 44
11.6 Lending Offices .................................................. 45
11.7 Successors and Assigns ........................................... 45
11.8 Counterparts ..................................................... 46
11.9 Set-off and Sharing of Payments .................................. 47
11.10 Indemnity ........................................................ 48
11.11 Governing Law .................................................... 48
11.12 Severability ..................................................... 48
11.13 Integration ...................................................... 49
11.14 Treatment of Certain Information ................................. 49
11.15 Acknowledgments .................................................. 49
11.16 Consent to Jurisdiction .......................................... 49
11.17 Service of Process ............................................... 50
11.18 No Limitation on Service or Suit ................................. 50
11.19 WAIVER OF TRIAL BY JURY .......................................... 50
EXHIBITS
Exhibit A List of Commitments, Lending Offices and Addresses for Notices
<PAGE>
<PAGE>
Exhibit B Form of Note
Exhibit C Form of Borrowing Request
Exhibit D Form of Opinion of Counsel to the Borrower
Exhibit E Form of Opinion of Special Counsel
Exhibit F Form of Assignment and Acceptance Agreement
Exhibit G Form of Negotiated Rate Advance Request
Exhibit H Form of Compliance Certificate
Exhibit I List of Other Expenses
SCHEDULES
Schedule 4.4 List of Litigation
Schedule 8.1 List of Existing Liens
<PAGE>
<PAGE>
CREDIT AGREEMENT, dated as of June 29, 1995, by and among FRONTIER
INSURANCE GROUP, INC., a Delaware corporation (the "Borrower"), THE BANK OF NEW
YORK ("BNY") and such other Lenders becoming parties hereto from time to time in
accordance with the provisions hereof (each a "Lender" and, collectively, the
"Lenders") and BNY, as agent for the Lenders (in such capacity, the "Agent").
1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION
1.1 Definitions
When used herein, each of the following terms shall have the meaning
ascribed thereto unless the context hereof otherwise specifically requires:
"ABR Advances": the Loans (or any portions thereof) at such time as they
(or such portions) are made or are being maintained at a rate of interest based
upon the Alternate Base Rate.
"Accumulated Funding Deficiency": as defined in Section 302 of ERISA.
"Acquisition": with respect to any Person, any consolidation or merger into
or with another Person, or the acquisition by such Person of all or
substantially all of the assets of another Person, or the entry by such Person
into a binding agreement to do any of the foregoing which is not contingent on
obtaining the consent of the Required Lenders.
"Advance": an ABR Advance, a Fixed Rate Advance or a Negotiated Rate
Advance, as the case may be.
"Affected Advance": as defined in Section 3.8(b).
"Affiliate": with respect to any Person at any time and from time to time,
any other Person (other than a consolidated subsidiary of such Person) which, at
such time (a) controls such Person, (b) is controlled by such Person or (c) is
under common control with such Person. The term "control", as used in this
definition with respect to any Person, means the power, whether direct, or
indirect through one or more intermediaries, to
- 3 -
<PAGE>
<PAGE>
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities or other interests, by
contract or otherwise.
"Aggregate Commitment Amount": at any date, the sum of the Commitment
Amounts of all Lenders on such date.
"Agreement": this Credit Agreement, as the same may be amended,
supplemented or otherwise modified from time to time.
"Alternate Base Rate": for any day, a rate per annum equal to the greater
of (a) the BNY Rate in effect on such day, or (b) 0.50% plus the Federal Funds
Effective Rate (rounded, if necessary, to the nearest 1/100th of 1% or, if
- 4 -
<PAGE>
<PAGE>
there is no nearest 1/100 of 1%, then to the next higher 1/100 of 1%) in effect
on such day.
"Annual Statutory Statement": with respect to each Insurance Subsidiary,
any financial statement, together with related rates and schedules, which such
Insurance Subsidiary is obligated to file on an annual basis with any Applicable
Insurance Regulatory Authority.
"Applicable Insurance Regulatory Authority": with respect to any Insurance
Subsidiary, the insurance department or similar Governmental Authority located
in the jurisdiction in which such Insurance Subsidiary is domiciled and, to the
extent that it has any regulatory authority over such Insurance Subsidiary, in
each other jurisdiction in which such Insurance Subsidiary is licensed.
"Applicable Lending Office": in respect of each Lender and for each Type of
Loan, the "Lending Office" of such Lender (or of an Affiliate of such Lender)
designated for such Type of Loan on Exhibit A or such other office of such
Lender (or of an Affiliate of such Lender) as such Lender may from time to time
specify to the Agent and the Borrower as the office by which its Loans of such
Type are to be made and maintained.
"Assessment Rate": with respect to any CD Interest Period applicable to a
CD Advance, the rate (expressed as a decimal, rounded, if necessary, to the
nearest 1/100 of 1% or, if there is no nearest 1/100 of 1%, then to the next
higher 1/100 of 1%), as reasonably determined by the Agent at the commencement
of such Interest Period, to be the current maximum annual assessment rate
(exclusive of any credits) payable by BNY to the Federal Deposit Insurance
Corporation (or any successor) for insurance of domestic time deposits at the
principal office of BNY in New York City.
"Assignment": as defined in Section 11.7(c).
"Assignment and Acceptance Agreement": an assignment and acceptance
agreement executed by an assignor and an assignee pursuant to which, subject to
the terms and conditions hereof, the assignor assigns to the assignee all or any
portion of such assignor's Loans, Notes and Commitment, substantially in the
form of Exhibit F.
- 5 -
<PAGE>
<PAGE>
"Assignment Fee": as defined in Section 11.7(c).
"Authorized Control Level Risk-Based Capital": the amount, as calculated by
the NAIC as the risk-based capital requirement for property/casualty insurance
companies, set forth on page 20, line 26 of the Annual Statutory Statement of
FIC most recently filed with the New York State Department of Insurance, or if
such amount is not set forth in such Statement, the amount required to be set
forth on such page and line in any other Annual Statutory Statement of FIC most
recently filed with an Applicable Insurance Regulatory Authority.
"Benefited Lender": as defined in Section 11.9(b).
"BNY Rate": a rate of interest per annum equal to the rate of interest
publicly announced in New York City by BNY from time to time as its prime rate,
such rate to be adjusted automatically (without notice) on the effective date of
any change in such publicly announced rate.
"Borrowing Date": each date upon which one or more Loans is made.
"Borrowing Request": a request for Loans in the form of Exhibit C.
"CD Advance": a given portion of the Loans selected by the Borrower to bear
interest during a CD Interest Period selected by the Borrower at a rate per
annum based upon a CD Rate determined with reference to such CD Interest Period,
all pursuant to and in accordance with Sections 2.3 and 3.3.
"CD Interest Period": the period commencing on any Domestic Business Day
selected by the Borrower in accordance with Section 2.3 or Section 3.3 and
ending 30, 60, 90 or 180 days thereafter, as selected by the Borrower in
accordance with such Sections, provided, however, that if any CD Interest Period
would otherwise end on a day which is not a Domestic Business Day, such CD
Interest Period shall be extended to the immediately succeeding Domestic
Business Day.
- 6 -
<PAGE>
<PAGE>
"CD Rate": with respect to each CD Advance and as determined by the Agent,
a rate of interest per annum (rounded, if necessary, to the nearest 1/100 of 1%
or, if there is no nearest 1/100 of 1%, then to the next higher 1/100 of 1%)
equal to the sum of (i) the Assessment Rate, plus (ii) the product of (a) the
Dealer Bid Rate, and (b) Statutory Reserves.
"Code": the Internal Revenue Code of 1986, as the same may be amended, or
any successor thereto, and the rules and regulations issued thereunder, as from
time to time in effect.
"Commitment": in respect of any Lender, such Lender's undertaking to make
Loans to the Borrower, subject to the terms and conditions hereof, in an
aggregate outstanding principal amount not exceeding the Commitment Amount of
such Lender.
"Commitment Amount": as of any date and with respect to any Lender, the
amount set forth adjacent to its name under the heading "Commitment Amount" in
Exhibit A on such date or, in the event that such Lender is not listed in
Exhibit A, the "Commitment Amount" which such Lender shall have assumed from
another Lender in accordance with Section 11.7 on or prior to such date, as all
of the same may be adjusted from time to time pursuant to Sections 2.5 and
11.7(c).
"Commitment Fee": as defined in Section 3.11.
"Commitment Percentage": as of any date and with respect to any Lender, a
fraction the numerator of which is such Lender's Commitment Amount on such date,
and the denominator of which is the Aggregate Commitment Amount on such date.
"Commitment Period": the period commencing on the Effective Date and ending
on the Commitment Termination Date or such earlier date as all of the
Commitments shall have been terminated in accordance herewith.
"Commitment Termination Date": December 31, 1999, as the same may be
extended from time to time in accordance with Section 2.7.
- 7 -
<PAGE>
<PAGE>
"Compensatory Interest Payment": as defined in Section 3.4(c).
"Compliance Certificate": a certificate in the form of Exhibit H.
"Consolidated": the Borrower and the Subsidiaries on a consolidated basis
in accordance with GAAP.
"Contingent Obligation": as to any Person (the "secondary obligor"), any
obligation of such secondary obligor (a) guaranteeing or in effect guaranteeing
any return on any investment made by another Person, or (b) guaranteeing or in
effect guaranteeing any Indebtedness, lease, dividend or other obligation
("primary obligations") of any other Person (the "primary obligor") in any
manner, whether directly or indirectly, including any obligation of such
secondary obligor, whether contingent, (i) to purchase any such primary
obligation or any Property constituting direct or indirect security therefor,
(ii) to advance or supply funds (A) for the purchase or payment of any such
primary obligation or (B) to maintain working capital or equity capital of the
primary obligor or otherwise to maintain the net worth or solvency of the
primary obligor, (iii) to purchase Property, securities or services primarily
for the purpose of assuring the beneficiary of any such primary obligation of
the ability of the primary obligor to make payment of such primary obligation,
(iv) otherwise to assure or hold harmless the beneficiary of such primary
obligation against loss in respect thereof, and (v) in respect of the
Indebtedness of any partnership in which such secondary obligor is a general
partner, except to the extent that such Indebtedness of such partnership is
nonrecourse to such secondary obligor and its separate Property; provided,
however, that the term "Contingent Obligation" shall not include the indorsement
of instruments for deposit or collection in the ordinary course of business.
"Continuing Lenders": as defined in Section 2.7(b).
"Control Person": as defined in Section 3.6.
"Convert", "Conversion", and "Converted": each a reference to a conversion
pursuant to Section 3.3 of one Type of Loan into another Type of Loan.
- 8 -
<PAGE>
<PAGE>
"Dealer Bid Rate": with respect to each CD Advance, the average, as
determined by the Agent (rounded, if necessary, to the nearest 1/100 of 1% or,
if there is no nearest 1/100 of 1%, then to the next higher 1/100 of 1%), of the
rate per annum determined by BNY to be the rate per annum bid at or about 11:00
A.M. on the first day of the Interest Period applicable to such CD Advance by
two or more New York City certificate of deposit dealers of recognized standing
selected by BNY for the purchase on such day, at par, of its certificates of
deposit in an amount approximately equal to its Commitment Percentage of such CD
Advance and having a period to maturity approximately equal to the Interest
Period applicable to such CD Advance, provided, however, that if such quotations
from such dealers are not available to BNY, such bank shall notify the Agent of
a reasonably equivalent rate determined by it on the basis of another source or
sources selected by it.
"Debt Service Ratio": for any period, the ratio of Dividend/Investment
Income for such period to Interest Expense and Principal Reduction for such
period.
"Default": any of the events specified in Section 9.1, whether or not any
requirement for the giving of notice, the lapse of time, or both, or any other
condition, has been satisfied.
"Disposition": with respect to any Person, any sale, assignment, transfer
or other disposition by such Person, by any means, of any Property of such
Person.
"Dividend/Investment Income": for any period, the sum of (a) stockholder
dividends permitted by law to be paid to the Borrower by FIC during such period
without prior regulatory approval, (b) net investment income received by the
Borrower in cash during such period on investments held by the Borrower in
entities which are not Affiliates of the Borrower and (c) the gross amount paid
to the Borrower during such period by its Consolidated Subsidiaries under the
Tax Sharing Agreement, minus the aggregate amount of taxes paid by the Borrower
during such period on behalf of itself and its Consolidated Subsidiaries.
"Dollar" or "$": lawful currency of the United States of America.
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<PAGE>
"Domestic Business Day": any day (other than a Saturday, Sunday or legal
holiday in the State of New York) on which banks are open for business in New
York City.
"Effective Date": June 29, 1995.
"Employee Benefit Plan": an employee benefit plan within the meaning of
Section 3(3) of ERISA maintained, sponsored or contributed to by the Borrower,
any Subsidiary or any ERISA Affiliate.
"ERISA": the Employee Retirement Income Security Act of 1974, as amended
from time to time, or any successor thereto, and the rules and regulations
issued thereunder, as from time to time in effect.
"ERISA Affiliate": when used with respect to an Employee Benefit Plan,
ERISA, the PBGC or a provision of the Code pertaining to employee benefit plans,
any Person that is a member of any group of organizations within the meaning of
Sections 414(b) or (c) of the Code or, solely with respect to applicable
provisions of the Code, Sections 414(m) or (o) of the Code, of which the
Borrower or any Subsidiary is a member.
"Eurodollar Advance": a given portion of the Loans selected by the Borrower
to bear interest during an Interest Period selected by the Borrower at a rate
per annum based upon a Eurodollar Rate determined with reference to such
Interest Period, all pursuant to and in accordance with Sections 2.3 and 3.3.
"Eurodollar Business Day": any Domestic Business Day, other than a Domestic
Business Day on which banks are not open for dealings in Dollar deposits in the
London interbank market.
"Eurodollar Interest Period": the period commencing on any Eurodollar
Business Day selected by the Borrower in accordance with Section 2.3 or Section
3.3 and ending one, two, three or six months thereafter, as selected by the
Borrower in accordance with such Sections, subject to the following:
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<PAGE>
(i) if any Interest Period would otherwise end on a day which is not a
Eurodollar Business Day, such Interest Period shall be extended to the
immediately succeeding Eurodollar Business Day unless the result of such
extension would be to carry the end of such Interest Period into another
calendar month, in which event such Interest Period shall end on the Eurodollar
Business Day immediately preceding such day; and
(ii) if any Interest Period shall begin on the last Eurodollar
Business Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period),
such Interest Period shall end on the last Eurodollar Business Day of such
latter calendar month.
"Eurodollar Rate": with respect to each Eurodollar Advance and as
determined by the Agent, a rate of interest per annum (rounded, if necessary, to
the nearest 1/16 of 1% or, if there is no nearest 1/16 of 1%, then to the next
higher 1/16 of 1%) equal to a fraction, the numerator of which is the rate per
annum quoted by BNY at approximately 11:00 A.M. New York time (or as soon
thereafter as practicable) two Eurodollar Business Days prior to the first day
of such Interest Period to leading banks in the interbank eurodollar market as
the rate at which BNY is offering Dollar deposits in an amount approximately
equal to its Commitment Percentage of such Eurodollar Advance and having a
period to maturity approximately equal to the Interest Period applicable to such
Eurodollar Advance, and the denominator of which is an amount equal to 1.00
minus the aggregate of the then stated maximum rates during such Interest Period
of all reserve requirements (including marginal, emergency, supplemental and
special reserves), expressed as a decimal, established by the Board of Governors
of the Federal Reserve System and any other banking authority to which BNY and
other major United States money center banks are subject, in respect of
eurocurrency liabilities without benefit of credits for proration, exceptions or
offsets which may be available from time to time to BNY.
"Event of Default": any of the events specified in Section 9.1, provided
that any requirement for the giving of notice, the lapse of time, or both, or
any other condition has been satisfied.
"Extension Request": as defined in Section 2.7.
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"Federal Funds Effective Rate": for any period, a fluctuating interest rate
per annum 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 Domestic Business Day, for the next preceding Domestic
Business Day) by the Federal Reserve Bank of New York, or, if such rate is not
so published for any day which is a Domestic Business Day, the average (rounded,
if necessary, to the nearest 1/100 of 1% or, if there is no nearest 1/100 of 1%,
then to the next higher 1/100 of 1%) 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.
"FIC": Frontier Insurance Company, a New York corporation and a
wholly-owned subsidiary of the Borrower.
"FIC Contribution": the capital contribution to be made by the Borrower to
FIC on or before July 1, 1995 in an amount up to $45,000,000.
"Financial Statements": as defined in Section 4.13(a).
"Fixed Rate": a CD Rate or a Eurodollar Rate, as the case may be.
"Fixed Rate Advance": a CD Advance or a Eurodollar Advance, as the case may
be.
"GAAP": generally accepted accounting principles as from time to time in
effect in the United States.
"Governmental Authority": any foreign, federal, state, municipal or other
government, or any department, commission, board, bureau, agency, public
authority or instrumentality thereof, or any court or arbitrator.
"Highest Lawful Rate": the maximum rate of interest, if any, which at any
time or from time to time may be contracted for, taken, charged or received on
the Loans or the Notes or which may be owing to any Lender pursuant to this
Agreement under the laws applicable to such Lender and this Agreement.
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"Indebtedness": as to any Person, at a particular time, all items of such
Person which constitute, without duplication, (a) indebtedness for borrowed
money or the deferred purchase price of Property (other than trade payables and
accrued expenses incurred in the ordinary course of business), (b) indebtedness
evidenced by notes, bonds, debentures or similar instruments, (c) obligations
with respect to any conditional sale or other title retention agreement, (d)
indebtedness arising under acceptance facilities and the amount available to be
drawn under all letters of credit issued for the account of such Person and,
without duplication, all drafts drawn thereunder to the extent such Person shall
not have reimbursed the issuer in respect of the issuer's payment of such
drafts, (e) all liabilities secured by any Lien on any Property owned by such
Person even though such Person shall not have assumed or otherwise become liable
for the payment thereof (other than carriers', warehousemen's, mechanics',
repairmen's or other like non-consensual Liens arising in the ordinary course of
business), (f) that portion of any obligation of such Person, as lessee, which
in accordance with GAAP is required to be capitalized on the balance sheet of
such Person, and (g) Contingent Obligations; provided that, for purposes of this
definition, Indebtedness shall not include obligations in respect of interest
rate caps, collars, exchanges, swaps or other similar agreements.
"Indemnified Liabilities": as defined in Section 11.5.
"Insurance Subsidiary": a Subsidiary engaged in insurance underwriting.
"Interest Coverage Ratio": for any period, the ratio of Dividend/Investment
Income to Interest Expense for such period.
"Interest Expense": for any period, the sum of all interest and Other
Expenses (other than income tax expenses) of the Borrower for such period,
excluding dividends paid by the Borrower to shareholders during such period.
"Interest Expense and Principal Reduction": for any period, the sum of (i)
all Interest Expense of the Borrower for such period and (ii) the amount, if
any, by which the Aggregate Commitment Amount is required to be reduced under
Section 2.5(b) for such period.
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"Interest Payment Date": (i) as to any ABR Advance, the last day of each
March, June, September and December commencing on the first of such days to
occur after such ABR Advance is made or any Fixed Rate Advance is converted to
an ABR Advance, (ii) as to any Fixed Rate Advance in respect of which the
Borrower has selected an Interest Period of one, two or three months or 30, 60
or 90 days, the last day of such Interest Period, (iii) as to any Negotiated
Rate Advance in respect of which the Borrower has selected a Negotiated Rate
Interest Period of 90 days or less, the last day of such Interest Period, (iv)
as to any Eurodollar Advance in respect of which the Borrower has selected an
Interest Period greater than three months, the last day of the third month of
such Interest Period and the last day of such Interest Period, and (v) as to any
CD Advance or Negotiated Rate Advance in respect of which the Borrower has
selected an Interest Period greater than 90 days, each 90th day of such Interest
Period and the last day of such Interest Period.
"Interest Period": a CD Interest Period, a Eurodollar Interest Period or a
Negotiated Rate Period, as the case may be.
"IRIS": the Insurance Regulatory Information System maintained by the NAIC.
"IRIS Ratio": the financial ratios used under IRIS to measure the financial
condition of insurance companies, as the same may be revised by the NAIC from
time to time.
"Level Event": a Company Action Level Event, Regulatory Action Level Event,
Authorized Control Level Event or Mandatory Control Level Event, or any event of
similar import, as defined by the NAIC for its calculation of risk-based capital
requirements of property/casualty insurance companies.
"Lien": any mortgage, pledge, assignment, lien, charge, encumbrance or
security interest of any kind, or the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement.
"Loan Documents": this Agreement and, upon the execution and delivery
thereof, the Notes.
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<PAGE>
"Loans": as defined in Section 2.1.
"Margin Stock": any "margin stock", as said term is defined in Regulation U
of the Board of Governors of the Federal Reserve System, as the same may be
amended or supplemented from time to time.
"Material Adverse": with respect to any change or effect, a material
adverse change in, or effect on, as the case may be, (i) the financial
condition, operations, business, prospects or Property of the Borrower and the
Subsidiaries taken as a whole or (ii) the ability of the Borrower to perform its
obligations under the Loan Documents.
"Multiemployer Plan": a Pension Plan which is a multiemployer plan as
defined in Section 4001(a)(3) of ERISA.
"NAIC": the National Association of Insurance Commissioners, or any
Governmental Authority succeeding to the functions thereof.
"Negotiated Rate": a rate per annum agreed to in writing between the
Borrower and the Agent, after consultation with the Lenders, pursuant to and in
accordance with Section 2.3(b).
"Negotiated Rate Advance": a given portion of the Loans selected by the
Borrower to bear interest during a Negotiated Rate Period selected by the
Borrower at a Negotiated Rate.
"Negotiated Rate Advance Request": a request by the Borrower, in the form
of Exhibit G, for a Negotiated Rate Advance.
"Negotiated Rate Period": as to any Negotiated Rate Advance, the period
commencing on the date of such Negotiated Rate Advance and ending on the date
requested in the Negotiated Rate Advance Request with respect to such Negotiated
Rate Advance, which shall not be earlier than 7 days after the date of such
Advance or later than such period as shall be agreed to by the Borrower and the
Agent after the date of such Advance; provided, however, that if any Negotiated
Rate Interest Period would end on a
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day other than a Domestic Business Day, such Interest Period shall be extended
to the next succeeding Domestic Business Day, unless such next succeeding
Domestic Business Day would be a date on or after the Commitment Termination
Date. Interest shall accrue from and including the first day of a Negotiated
Rate Interest Period to but excluding the last day of such Negotiated Rate
Interest Period.
"Negotiated Rate Loan": each loan from a Lender to the Borrower pursuant to
Section 2.3(b).
"1994 Annual Statutory Statement": as defined in Section 4.13(b).
"Non-Extending Lender": as defined in Section 2.7(b).
"Note": as defined in Section 2.2.
"Other Expenses": expenses listed on Exhibit I.
"PBGC": the Pension Benefit Guaranty Corporation established pursuant to
Subtitle A of Title IV of ERISA, or any Governmental Authority succeeding to the
functions thereof.
"Pension Plan": at any time, any Employee Benefit Plan (including a
Multiemployer Plan) the funding requirements of which (under Section 302 of
ERISA or Section 412 of the Code) are, or at any time within the six years
immediately preceding such date, were, in whole or in part, the responsibility
of the Borrower, any Subsidiary or an ERISA Affiliate.
"Person": any individual, firm, partnership, limited liability company,
joint venture, corporation, association, business enterprise, joint stock
company, unincorporated association, trust, Governmental Authority or any other
entity, whether acting in an individual, fiduciary, or other capacity, and for
the purpose of the definition of "ERISA Affiliate", a trade or business.
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"Primary Iris Ratio": any of the items numbered 3, 4, 5, 6, 7 and 8 under
the caption "FIC results" on page 2 of the Compliance Certificate Computations
attached to Exhibit H.
"Property": in respect of any Person, all types of real, personal or mixed
property and all types of tangible or intangible property owned or leased by
such Person.
"Proposed Lender": as defined in Section 3.6(c).
"Quarterly Statement": with respect to each Insurance Subsidiary, any
financial statement which such Insurance Subsidiary is obligated to file on a
quarterly basis with any Applicable Insurance Regulatory Authority.
"Regulatory Change": (a) the introduction or phasing in of any law, rule or
regulation after the date hereof, (b) the issuance or promulgation after the
date hereof of any directive, guideline or request from any central bank or
United States or foreign Governmental Authority (whether or not having the force
of law), or (c) any change after the date hereof in the interpretation of any
existing law, rule, regulation, directive, guideline or request by any central
bank or United States or foreign Governmental Authority charged with the
administration thereof, in each case with respect to banks in general.
"Required Lenders": at any time prior to the Commitment Termination Date or
such earlier date as all of the Commitments shall have terminated or been
terminated in accordance herewith, Lenders having Commitment Amounts equal to or
more than 66 2/3% of the Aggregate Commitment Amount, and at all other times,
Lenders holding Notes having an unpaid principal balance equal to or more than
66 2/3% of all Loans outstanding.
"SAP": with respect to each Annual Statutory Statement, the statutory
accounting practices which, in accordance with applicable law, are required to
be used in connection with the preparation of such Annual Statutory Statement.
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"Secondary Iris Ratio": any of the items numbered 1, 1a, 2, 9, 10 and 11
under the caption "FIC results" on page 2 of the Compliance Certificate
Computations attached to Exhibit H.
"Senior Officer": with respect to the Borrower, its Chairman of the Board,
President, Vice President, Finance or Treasurer.
"Special Counsel": Emmet, Marvin & Martin, LLP, or any other counsel as the
Agent shall retain as its counsel in connection herewith.
"Statutory Capital and Surplus": the amount presently reported on line 25
of page 3 of the Annual Statutory Statement of any Insurance Subsidiary.
"Statutory Reserves": with respect to each CD Advance and as determined by
the Agent, a decimal (rounded, if necessary, to the nearest 1/100 of 1% or, if
there is no nearest 1/100 of 1%, then to the next higher 1/100 of 1%) equal to a
fraction, the numerator of which is 1.00, and the denominator of which is 1.00
minus the aggregate at the commencement of the Interest Period applicable to
such CD Advance of the reserve percentages established by the Board of Governors
of the Federal Reserve System and applicable to BNY for non-personal time
deposits in Dollars over $100,000 having a period to maturity approximately
equal to such Interest Period.
"Subsidiary": at any time and from time to time, any corporation,
association, partnership, limited liability company, joint venture or other
business entity of which the Borrower and/or any Subsidiary of the Borrower,
directly or indirectly at such time, either (a) in respect of a corporation,
owns or controls more than 50% of the outstanding stock having ordinary voting
power to elect a majority of the board of directors or similar managing body,
irrespective of whether a class or classes shall or might have voting power by
reason of the happening of any contingency, or (b) in respect of an association,
partnership, limited liability company, joint venture or other business entity,
is entitled to share in more than 50% of the profits and losses, however
determined.
"Tax Sharing Agreement": a Federal Income Tax Allocation Agreement to be
entered into, subject to any required regulatory approvals, among the Borrower,
FIC, Pioneer
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Claim Management, Inc., Medical Professional Liability Agency, Ltd. and Spencer
Douglass Insurance Company, substantially in the form submitted to the Agent on
June 26, 1995.
"Total Adjusted Capital": with respect to any Person, the sum of such
Person's Statutory Capital and Surplus and such other items as are provided in
the NAIC's risk-based capital instructions for calculating Total Adjusted
Capital.
"Type": with respect to any Loan, the characteristic of such Loan as an ABR
Advance, a CD Advance, a Eurodollar Advance or a Negotiated Rate Advance, each
of which constitutes a Type of Loan.
"Unqualified Amount": as defined in Section 3.4(c).
1.2 Principles of Construction
(a) All capitalized terms defined in this Agreement shall have the meanings
given such capitalized terms herein when used in the other Loan Documents or any
certificate, opinion or other document made or delivered pursuant hereto or
thereto, unless otherwise expressly provided therein.
(b) Unless otherwise expressly provided herein, the word "fiscal" when used
herein shall refer to the relevant fiscal period of the Borrower. Unless
otherwise specified herein, all accounting terms used herein shall be
interpreted, all accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder shall be prepared in
accordance with generally accepted accounting principles as in effect from time
to time, applied on a basis consistent (except for changes concurred in by the
Borrower's independent public accountants) with the then most recent audited
Consolidated financial statements of the Borrower delivered to the Lenders,
provided, however, that if either (i) the Borrower notifies the Agent that the
Borrower wishes to eliminate the effect of any change in generally accepted
accounting principles on the operation of any covenant contained in Section 7,
or (ii) the Agent notifies the Borrower that the Required Lenders wish to effect
such an elimination, then the Borrower's compliance with such covenant shall be
determined on the basis of generally
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accepted accounting principles without giving effect to such change, until
either (A) such notice is withdrawn by the party giving such notice, or (B) such
covenant is amended in a manner satisfactory to the Borrower and the Required
Lenders to reflect such change in generally accepted accounting principles.
(c) The words "hereof", "herein", "hereto" and "hereunder" and similar
words when used in each Loan Document shall refer to such Loan Document as a
whole and not to any particular provision of such Loan Document, and Section,
schedule and exhibit references contained therein shall refer to Sections
thereof or schedules or exhibits thereto unless otherwise expressly provided
therein.
(d) All references herein to a time of day shall mean the then applicable
time in New York, New York, unless otherwise expressly provided herein.
(e) Section headings have been inserted in the Loan Documents for
convenience only and shall not be construed to be a part thereof. Unless the
context otherwise requires, words in the singular number include the plural, and
words in the plural include the singular.
(f) Whenever in any Loan Document or in any certificate or other document
made or delivered pursuant thereto, the terms thereof require that a Person sign
or execute the same or refer to the same as having been so signed or executed,
such terms shall mean that the same shall be, or was, duly signed or executed by
(i) in respect of any Person that is a corporation, any duly authorized officer
thereof, and (ii) in respect of any other Person (other than an individual), any
analogous counterpart thereof, in either case in respect of whom the Agent shall
have received an incumbency certificate in all respects reasonably satisfactory
to the Agent.
(g) The words "include" and "including", when used in each Loan Document,
shall mean that the same shall be included "without limitation", unless
otherwise specifically provided.
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(h) Interest on the Loans shall be calculated such that the same shall
accrue commencing on, and including, the date of the making thereof to, but
excluding, the date of the payment or deemed payment thereof.
2. AMOUNT AND TERMS OF LOANS
2.1 Loans
Subject to the terms and conditions hereof, each Lender severally (and not
jointly) agrees to make loans (each a "Loan" and, collectively with each other
Loan of such Lender and/or with each Loan of each other Lender, the "Loans") to
the Borrower from time to time during the Commitment Period, during which period
the Borrower may borrow, prepay and reborrow Loans in accordance with the
provisions hereof, provided that (i) the aggregate unpaid principal balance of
each Lender's Loans shall at no time exceed such Lender's Commitment Amount, and
(ii) immediately after making each Loan, the aggregate unpaid principal balance
of all Loans shall not exceed the Aggregate Commitment Amount. The principal
amount of each Lender's Loan made on a Borrowing Date shall be an amount equal
to its Commitment Percentage of all Loans made on such date. Subject to the
provisions of Sections 2.3 and 3.3, Loans may be made as (a) one or more ABR
Advances, (b) one or more Eurodollar Advances, (c) one or more CD Advances, (d)
one or more Negotiated Rate Advances or (e) any combination thereof.
2.2 Notes
The Loans made by each Lender shall be evidenced by a promissory note of
the Borrower, substantially in the form of Exhibit B (each, as indorsed or
modified from time to time, a "Note"), payable to the order of such Lender,
dated the first Borrowing Date, and in the maximum stated principal amount equal
to such Lender's Commitment Amount.
2.3 Notice of Borrowing
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(a) ABR and Fixed Rate Advances. The Borrower agrees to notify the Agent,
which notification shall be irrevocable, no later than 11:00 A.M. at least (a)
on the same Domestic Business Day, in the case of ABR Advances, (b) two Domestic
Business Days, in the case of a CD Advance, and (c) three Eurodollar Business
Days, in the case of a Eurodollar Advance, in each such case prior to each
proposed Borrowing Date, specifying the aggregate amount requested to be
borrowed under the Commitments, the proposed Borrowing Date, whether the
borrowing is to be of one or more ABR Advances, one or more Fixed Rate Advances,
or a combination thereof and the amount of each thereof, and the Interest Period
for each Fixed Rate Advance, which notice shall be promptly confirmed by
delivery to the Agent of a Borrowing Request, provided, however, that (i) each
Eurodollar Advance to be made on a Borrowing Date, when aggregated with all
amounts to be Converted to a Eurodollar Advance on such date and having the same
Interest Period as such first Eurodollar Advance, shall equal $5,000,000] or an
integral multiple of $1,000,000 in excess thereof, (ii) each CD Advance to be
made on a Borrowing Date, when aggregated with all amounts to be Converted to a
CD Advance on such date and having the same Interest Period as such first CD
Advance, shall equal $5,000,000 or an integral multiple of $1,000,000 in excess
thereof, and (iii) each ABR Advance made on each Borrowing Date shall equal
$5,000,000 or an integral multiple of $1,000,000 in excess thereof or, if less,
the excess of the Aggregate Commitment Amount over the aggregate unpaid
principal balance of all Loans. The Agent shall promptly notify each Lender (by
telephone or otherwise, such notice to be confirmed by facsimile or other
writing) of such borrowing request. Subject to its receipt of each such notice
from the Agent and subject to the terms and conditions hereof, each Lender shall
make immediately available funds available to the Agent at the address
designated in Section 11.2 not later than 1:00 P.M. on each Borrowing Date in an
amount equal to such Lender's Commitment Percentage of the Loans requested by
the Borrower on such Borrowing Date.
(b) Negotiated Rate Advances. The Borrower may request a Negotiated Rate
Advance by delivering to the Agent, by facsimile or otherwise, a Negotiated Rate
Advance Request by no later than 11:00 A.M. at least one Domestic Business Day
prior to the requested Borrowing Date for such Negotiated Rate Advance,
specifying the aggregate amount requested to be borrowed under the Commitments,
the proposed Borrowing Date and the proposed Negotiated Rate Period. Each
Negotiated Rate Advance shall
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be in an aggregate principal amount equal to $5,000,000 or an integral multiple
of $1,000,000 in excess thereof or, if less, the excess of the Aggregate
Commitment Amount over the aggregate unpaid principal balance of all Loans. The
Borrower and the Agent, after consultation with the Lenders, may, but shall not
be obligated to, agree in writing (by facsimile or otherwise) upon the
applicable Negotiated Rate for such Negotiated Rate Advance, and the Agent shall
deliver to each Lender a copy of such written agreement. Subject to its receipt
of each such written agreement from the Agent and subject to the terms and
conditions hereof, each Lender shall make immediately available funds available
to the Agent at the address therefor set forth in Section 11.2 not later than
1:00 P.M. on each Borrowing Date in an amount equal to such Lender's Commitment
Percentage of the Negotiated Rate Loans requested by the Borrower on such
Borrowing Date.
2.4 Use of Proceeds
The Borrower agrees that the proceeds of the Loans shall be used solely (i)
to make the FIC Contribution and (ii) for the Borrower's general corporate
purposes, including Acquisitions, not inconsistent with the provisions hereof.
Notwithstanding anything to the contrary contained in any Loan Document, the
Borrower further agrees that no part of the proceeds of any Loan will be used,
directly or indirectly, for a purpose which violates any law, rule or regulation
of any Governmental Authority, including the provisions of Regulations G, U or X
of the Board of Governors of the Federal Reserve System, as amended.
2.5 Termination or Reduction of Commitments
(a) Voluntary Termination or Reductions. At the Borrower's option and
upon at least three Domestic Business Days' prior irrevocable notice to the
Agent, (i) the Borrower may terminate the Commitments at any time or (ii) the
Borrower may permanently reduce the Aggregate Commitment Amount in part at any
time and from time to time, provided, however, that (1) each such partial
reduction shall be in an amount equal to at least $3,000,000 or an integral
multiple of $1,000,000 in excess thereof, (2) immediately after giving effect to
each such reduction, the Aggregate Commitment Amount shall equal or exceed the
aggregate outstanding principal balance of all Loans and (3)
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each such partial reduction shall be applied in reduction of the scheduled
reduction amounts in the Aggregate Commitment Amount set forth in Section 2.5(b)
below, in the order of such mandatory reductions.
(b) Mandatory Reductions. On each date set forth below, the Aggregate
Commitment Amount shall be permanently reduced in the amount set forth below
next to such date:
<TABLE>
<CAPTION>
Amount of Reduction in
Date Aggregate Commitment Amount
---- ---------------------------
<S> <C>
December 31, 1996 $5,000,000
December 31, 1997 $5,000,000
December 31, 1998 $5,000,000
Commitment Termination
Date $20,000,000.
</TABLE>
(c) In General. Each reduction of the Aggregate Commitment Amount shall be
made by reducing each Lender's Commitment Amount by a sum equal to such Lender's
Commitment Percentage of the amount of such reduction.
2.6 Prepayments of the Loans
(a) Voluntary Prepayments. The Borrower may, at its option, prepay the
Loans, in whole or in part, without premium or penalty, but subject to Section
3.5, at any time and from time to time, by notifying the Agent in writing at
least three Eurodollar Business Days, in the case of prepayments of Eurodollar
Advances, two Domestic Business Days, in the case of prepayments of CD Advances
or Negotiated Rate Advances, or one Domestic Business Day, in the case of
prepayments of an ABR Advances, prior to the proposed prepayment date and
specifying (i) the amount to be prepaid, and (ii) and the date of prepayment.
Upon receipt of each such notice, the Agent shall promptly notify each Lender
thereof. Each such notice given by the Borrower pursuant to this Section 2.6(a)
shall be irrevocable. Each partial prepayment under this Section 2.6(a) shall be
in a minimum amount of $3,000,000 or an integral multiple of $1,000,000 in
excess thereof.
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(b) Mandatory Prepayments. Simultaneously with each reduction of the
Aggregate Commitment Amount pursuant to Section 2.5, the Borrower shall prepay
the Loans by the amount, if any, by which the aggregate unpaid principal balance
of the Loans exceeds the amount of the Aggregate Commitment Amount as so
reduced. Any such prepayment made pursuant to this Section 2.6(b) shall be
applied to the outstanding principal balance of Loans of a Type and, if
applicable, with an Interest Period, to be selected by the Borrower, provided,
however, that each such prepayment shall be subject to the provisions of Section
3.5.
(c) In General. Simultaneously with each prepayment hereunder, the
Borrower shall prepay all accrued interest on the amount prepaid through the
date of prepayment.
2.7 Extension of Commitment Termination Date
(a) Provided that no Default or Event of Default shall exist, the
Borrower may request that the Commitment Period be extended for up to two
additional one year periods by giving written notice thereof (each an "Extension
Request") to the Agent at any time during the period which is not more than 60
days nor less than 30 days prior to the then current Commitment Termination Date
and, upon receipt of each such notice, the Agent shall promptly notify each
Lender thereof. Subject to Section 2.7(b), the then current Commitment
Termination Date shall not be extended unless and until each Lender, in its sole
and absolute discretion, shall have consented on or after the 30th day, but no
later than the 20th day, prior to the then current Commitment Termination Date,
in writing, to such request, in which event such then existing Commitment
Termination Date shall be extended to the date occurring one year from the date
of the last such consent. In the event that any Lender shall not have granted
its consent to an Extension Request, the then current Commitment Termination
Date shall remain in effect. Each Lender which shall have failed so to respond
within the required period shall be deemed not to have consented to an Extension
Request. In the event that any Lender declines to grant an Extension Request,
the Agent shall notify the Borrower of the name of each such Lender.
(b) Notwithstanding any provision of Section 2.7(a) to the contrary,
in the event Lenders having Commitment Amounts equal to or more than 75% of the
Aggregate Commitment Amount desire to extend the Commitment Termination Date
pursuant to Section 2.7(a) (the "Continuing Lenders"), the Borrower shall have
the right, provided no Default or Event
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of Default shall have occurred and be continuing, to replace or remove any
Lender that does not desire to extend the Commitment Termination Date (a
"Non-Extending Lender") by giving the Agent notice, no later than 15 days prior
to the then current Commitment Termination Date, of its intent to extend the
Commitment Termination Date. On or prior to the then current Commitment
Termination Date, the Borrower shall, with respect to each Non-Extending Lender,
either (i) reduce the Aggregate Commitment Amount to an amount equal to the
aggregate Commitment Amount of the Continuing Lenders and pay to the Agent for
the account of such Non-Extending Lender all principal, interest, accrued
Commitment Fees and other amounts owing to such Non-Extending Lender under the
Loan Documents (in which case the Commitment of such Non-Extending Lender shall
automatically terminate), or (ii) replace such Non-Extending Lender. In the
event of a replacement of a Non-Extending Lender, such Non-Extending Lender
agrees to assign its rights and obligations under the Loan Documents to a bank
selected by the Borrower with the consent of the Agent (which consent shall not
be unreasonably withheld) upon payment by such bank to such Non-Extending Lender
of such Non-Extending Lender's Commitment Percentage of all outstanding Loans
and accrued interest, fees and other sums payable under the Loan Documents, and
to execute and deliver such documents evidencing such assignment as shall be
necessary or reasonably requested by the Borrower and reasonably satisfactory to
such Non-Extending Lender. In the event that the Borrower shall have elected to
replace or remove a Lender pursuant to this Section 2.7(b), then on the date, if
any, upon which all of the Borrower's obligations under this Section 2.7(b)
shall have been satisfied, the then existing Commitment Termination Date shall
be extended to the day which is one year after the date such obligations were
satisfied (or, if such day is not a Domestic Business Day, the Domestic Business
Day immediately preceding such day), provided, however, that if the Borrower
shall not have satisfied such obligations on or prior to the then existing
Commitment Termination Date, such Commitment Termination Date shall not be
extended.
3. PROCEEDS, PAYMENTS, CONVERSIONS, INTEREST, YIELD PROTECTION AND FEES
3.1 Disbursement of the Proceeds of the Loans
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The Agent shall disburse the proceeds of the Loans at its office designated
in Section 11.2 by crediting the funds received from each Lender to an account
of the Borrower maintained with the Agent. The Agent shall have no obligation to
advance any funds not received from a Lender.
3.2 Payments
(a) Each payment, including each prepayment, of principal and interest
on the Loans, of the Commitment Fee, and of all of the other amounts to be paid
to the Agent and the Lenders in connection with this Agreement shall be made by
the Borrower to the Agent at its office set forth in Section 11.2 in funds
immediately available in New York by 1:00 P.M. on the due date for such payment.
The failure of the Borrower to make any such payment by such time shall not
constitute a default hereunder, provided that such payment is made on such due
date, but any such payment made after 1:00 P.M. on such due date shall be deemed
to have been made on the next Domestic Business Day or Eurodollar Business Day,
as the case may be, for the purpose of calculating interest on amounts
outstanding on the Loans. Promptly upon receipt thereof by the Agent, each
payment of principal and interest on the Loans shall be remitted by the Agent in
like funds as received to each Lender (i) first, pro rata according to the
amount of interest which is then due and payable to the Lenders, and (2) second,
pro rata according to the amount of principal which is then due and payable to
the Lenders. Promptly upon receipt thereof by the Agent, each payment of the
Commitment Fee shall be remitted by the Agent in like funds as received to each
Lender pro rata according to such Lender's Commitment Amount or, if the
Commitments shall have terminated or been terminated, according to the
outstanding principal balance of such Lender's Loans.
(b) If any payment hereunder or under the Loans shall be due and
payable on a day which is not a Domestic Business Day or Eurodollar Business
Day, as the case may be, the due date thereof (except as otherwise provided in
the definition of Eurodollar Interest Period) shall be extended to the next
Domestic Business Day or Eurodollar Business Day, as the case may be, and
(except with respect to payments in respect of the Commitment Fee) interest
shall be payable at the applicable rate specified herein during such extension.
3.3 Conversions; Other Matters
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(a) The Borrower may elect at any time and from time to time to
Convert one or more Fixed Rate Advances or Negotiated Rate Advances to an ABR
Advance by giving the Agent at least one Domestic Business Day's prior
irrevocable notice of such election, specifying the amount to be so Converted,
provided, that any such Conversion shall only be made on the last day of the
Interest Period applicable to each such Fixed Rate Advance. In addition, the
Borrower may elect from time to time to Convert an ABR Advance to any one or
more new Fixed Rate Advances or Negotiated Rate Advances or to Convert any one
or more existing Fixed Rate Advances or Negotiated Rate Advances to any one or
more new Fixed Rate Advances or Negotiated Rate Advances by giving the Agent at
least one Domestic Business Days' prior notice, in the case of a requested
Conversion to a Negotiated Rate Advance (which shall in all cases be subject to
the provisions of Section 2.3(b), two Domestic Business Days' prior irrevocable
notice, in the case of a Conversion to a CD Advance, or three Eurodollar
Business Days' prior irrevocable notice, in the case of a Conversion to a
Eurodollar Advance, of such election, specifying the amount to be so Converted
and the initial Interest Period relating thereto, provided that (i) any such
Conversion of an Advance to a Eurodollar Advance shall only be made on a
Eurodollar Business Day, (ii) any such Conversion of an Advance to a CD Advance
shall only be made on a Domestic Business Day, and (iii) any such Conversion of
an existing Fixed Rate Advance or a Negotiated Rate Advance shall only be made
on the last day of the Interest Period applicable thereto. The Agent shall
promptly provide the Lenders with notice of each such election. Loans may be
Converted pursuant to this Section 3.3 in whole or in part, provided that (1)
the amount to be Converted to each Eurodollar Advance, when aggregated with any
Eurodollar Advance to be made on such date in accordance with Section 2.3(a) and
having the same Interest Period as such first Eurodollar Advance, shall equal
$5,000,000 or an integral multiple of $1,000,000 in excess thereof, (2) the
amount to be Converted to each CD Advance, when aggregated with any CD Advance
to be made on such date in accordance with Section 2.3(a) and having the same
Interest Period as such first CD Advance, shall equal $5,000,000 or an integral
multiple of $1,000,000 in excess thereof and (3) the amount requested to be
Converted to each Negotiated Rate Advance, when aggregated with any Negotiated
Rate Advance to be made on such date in accordance with Section 2.3(b) and
having the same Negotiated Rate and Interest Period as such first Negotiated
Advance, shall equal $5,000,000 or an integral multiple of $1,000,000 in excess
thereof.
(b) Notwithstanding anything in this Agreement to the contrary, upon
the occurrence and during the continuance of a Default or an Event of Default,
the Borrower shall
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have no right to elect to Convert any existing ABR Advance to a new Fixed Rate
Advance or to request a Negotiated Rate Advance or to Convert any existing Fixed
Rate Advance or Negotiated Rate Advance to a new Fixed Rate Advance or requested
Negotiated Rate Advance. In such event, such ABR Advance shall be automatically
continued as an ABR Advance or such Fixed Rate Advance or Negotiated Rate
Advance shall be automatically Converted to an ABR Advance on the last day of
the Interest Period applicable to such Fixed Rate Advance or Negotiated Rate
Advance, as the case may be.
(c) Each such Conversion shall be effected by each Lender by applying
the proceeds of the new ABR Advance, Fixed Rate Advance or requested Negotiated
Rate Advance, as the case may be, to the existing Advance (or portion thereof)
being Converted (it being understood that such Conversion shall not constitute a
borrowing for purposes of Sections 4, 5 or 6).
(d) Notwithstanding any other provision of any Loan Document:
(i) if the Borrower shall have failed to elect a Fixed Rate
Advance or request a Negotiated Rate Advance (with respect to which
the Borrower and the Agent shall have agreed upon an interest rate)
under Section 2.3 or 3.3, as the case may be, in connection with any
borrowing of new Loans or expiration of an Interest Period with
respect to any existing Fixed Rate Advance or Negotiated Rate Advance,
the amount of the Loans subject to such borrowing or such existing
Fixed Rate Advance or Negotiated Rate Advance shall thereafter be an
ABR Advance until such time, if any, as the Borrower shall elect a new
Fixed Rate Advance pursuant to this Section 3.3 or request a
Negotiated Rate Advance pursuant to Section 2.3(b),
(ii) the Borrower shall not be permitted to select any Fixed Rate
Advance the Interest Period in respect of which ends later than the
date upon which all of the Commitments shall have been voluntarily
terminated by the Borrower in accordance with Section 2.5,
(iii) when electing a Fixed Rate Advance or requesting a
Negotiated Rate Advance, the Interest Period in respect of which
extends beyond any date on which a mandatory scheduled repayment is
required pursuant to Section 2.7, the Borrower shall
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select Interest Periods such that, on such date, the outstanding
principal balance of all ABR Advances, when added to the aggregate
principal balance of each Fixed Rate Advance and Negotiated Rate
Advance the Interest Periods in respect of which shall end prior to
such date, shall equal or exceed the amount of the reduction required
to be made on such date, and
(iv) the Borrower shall not be permitted to have more than 5
Advances, in the aggregate, outstanding at any one time.
3.4 Interest Rates and Payment Dates
(a) Prior to Maturity. Except as otherwise provided in Section 3.4(b)
and Section 3.4(c), the Loans shall bear interest on the unpaid principal
balance thereof at the applicable interest rate or rates per annum set forth
below next to the applicable Type:
TYPE RATE
---- ----
Each ABR Advance Alternate Base Rate.
Each Eurodollar Advance Eurodollar Rate applicable
thereto plus 0.625%.
Each CD Advance CD Rate applicable thereto
plus 0.750%.
Each Negotiated Rate Negotiated Rate applicable
Advance thereto.
(b) Default Rate. To the extent permitted by law, upon the occurrence
and during the continuance of any Event of Default, the aggregate outstanding
principal
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balance of the Loans shall bear interest at a rate per annum equal to the rate
otherwise applicable pursuant to subsection 3.4(a) plus 2.0%.
(c) Highest Lawful Rate. Notwithstanding anything to the contrary
contained in this Agreement, at no time shall the interest rates payable on the
Loans, together with the Commitment Fee and other amounts payable hereunder, to
the extent the same constitute or are deemed to constitute interest, exceed the
Highest Lawful Rate. If in respect of any period during the term of this
Agreement, any amount paid hereunder, to the extent the same shall (but for the
provisions of this Section 3.4) constitute or be deemed to constitute interest,
would exceed the maximum amount of interest permitted by the Highest Lawful Rate
during such period (such amount being hereinafter referred to as an "Unqualified
Amount"), then (i) such Unqualified Amount shall be applied or shall be deemed
to have been applied as a prepayment of the Loans, and (ii) if in any subsequent
period during the term of this Agreement, all amounts payable hereunder in
respect of such period which constitute or shall be deemed to constitute
interest shall be less than the maximum amount of interest permitted by the
Highest Lawful Rate during such period, then the Borrower shall pay to the
Lenders in respect of such period an amount (each a "Compensatory Interest
Payment") equal to the lesser of (x) a sum which, when added to all such
amounts, would equal the maximum amount of interest permitted by the Highest
Lawful Rate during such period, and (y) an amount equal to the aggregate sum of
all Unqualified Amounts less all other Compensatory Interest Payments.
(d) General. Interest shall be payable in arrears on each Interest
Payment Date and, to the extent provided in Section 2.6(c), upon each payment
(including each prepayment) of the Loans. Any change in the interest rate on the
Loans resulting from a change in the Alternate Base Rate, any reserve
requirement, or any deposit insurance assessment shall become effective as of
the opening of business on the day on which such change shall become effective.
The Agent shall, as soon as practicable, notify the Borrower and the Lenders of
the effective date and the amount of each such change in the BNY Rate, but any
failure to so notify shall not in any manner affect the obligation of the
Borrower to pay interest on the Loans in the amounts and on the dates set forth
herein. Each determination by the Agent of the Alternate Base Rate, the CD Rate,
and the Eurodollar Rate pursuant to this Agreement shall be conclusive and
binding on the
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Borrower absent manifest error. The Borrower acknowledges that to the extent
interest payable on the Loans is based on the Alternate Base Rate, such rate is
only one of the bases for computing interest on loans made by the Lenders, and
by basing interest payable on the ABR Advances on the Alternate Base Rate, the
Lenders have not committed to charge, and the Borrower has not in any way
bargained for, interest based on a lower or the lowest rate at which the Lenders
may now or in the future make extensions of credit to other Persons. All
interest (other than interest calculated with reference to the BNY Rate) shall
be calculated on the basis of a 360-day year for the actual number of days
elapsed, and all interest calculated with reference to the BNY Rate shall be
made on the basis of a 365/366 day year for the actual number of days elapsed.
3.5 Indemnification for Loss
Notwithstanding anything contained herein to the contrary, if the Borrower
shall fail to borrow or Convert an Advance after it shall have given notice to
do so in which it shall have requested a Fixed Rate Advance pursuant to Section
2.3 or 3.3, as the case may be, or if the Borrower shall fail to borrow any
Negotiated Rate Advance after it shall have requested the same and shall have
agreed with the Agent, in writing, as to the applicable interest rate in
accordance with Section 2.3(b), or if a Fixed Rate Advance or a Negotiated Rate
Advance shall be terminated for any reason prior to the last day of the Interest
Period applicable thereto, or if any repayment or prepayment of the principal
amount of a Fixed Rate Advance or a Negotiated Rate Advance is made for any
reason on a date which is prior to the last day of the Interest Period
applicable thereto, the Borrower agrees to indemnify each Lender against, and to
pay on demand directly to such Lender the amount (calculated by such Lender
using any method chosen by such Lender which is customarily used by such Lender
for such purpose) equal to any loss or expense suffered by such Lender as a
result of such failure to borrow or Convert, or such termination, repayment or
prepayment, including any loss, cost or expense suffered by such Lender in
liquidating or employing deposits acquired to fund or maintain the funding of
such Fixed Rate Advance or such Negotiated Rate Advance, as the case may be, or
redeploying funds prepaid or repaid, in amounts which correspond to such Fixed
Rate Advance or such Negotiated Rate Advance, as the case may be.
3.6 Reimbursement for Costs, Etc.
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(a) If at any time or from time to time there shall occur a Regulatory
Change and any Lender shall have reasonably determined that such Regulatory
Change (i) shall have had or will thereafter have the effect of reducing (A) the
rate of return on such Lender's capital or the capital of any Person directly or
indirectly owning or controlling such Lender (each a "Control Person"), or (B)
the asset value (for capital purposes) to such Lender or such Control Person of
the Loans made or maintained by such Lender, in either case to a level below
that which such Lender or such Control Person could have achieved or would
thereafter be able to achieve but for such Regulatory Change (after taking into
account such Lender's or such Control Person's policies regarding capital), (ii)
will impose, modify or deem applicable any reserve, asset, special deposit or
special assessment requirements on deposits obtained in the interbank eurodollar
market or the domestic certificate of deposit market in connection with this
Agreement and the Notes (excluding, with respect to any Fixed Rate Advance, any
such requirement which is included in the determination of the rate applicable
thereto), (iii) will subject such Lender to any tax (documentary, stamp or
otherwise) with respect to this Agreement or any Note, or (iv) change the basis
of taxation of payments to such Lender of principal, interest or fees payable
under this Agreement or any Note (except for any tax, or changes in the rate of
tax on such Lender's net income) then, in each such case, but subject to Section
3.6(b), within ten days after demand by such Lender, the Borrower shall pay to
such Lender or such Control Person, as the case may be, such additional amount
or amounts, as shall be sufficient to compensate such Lender or such Control
Person, as the case may be, for (1) any such reduction referred to in clause
(a)(i) of this Section 3.6, and (2) any taxes, losses, costs or expenses
(excluding general administrative and overhead costs) attributable to such
Lender's compliance during the term hereof with such Regulatory Change.
Notwithstanding the foregoing, no Lender shall be entitled to any compensation
described in this Section unless, at the time it requests such compensation, it
is the policy or general practice of such Lender to request compensation for
comparable costs in similar circumstances under comparable provisions of other
credit agreements for comparable customers unless specific facts or
circumstances applicable to the Borrower or the transactions contemplated by
this Agreement would alter such policy or general practice, provided that
nothing in this Section shall preclude a Lender from waiving the collection of
similar costs from one or more of its other customers.
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(b) Each Lender agrees (i) to provide the Borrower with notice of each
Regulatory Change which would require the Borrower to make a payment to such
Lender under this Section 3.6 promptly upon such Lender obtaining actual
knowledge thereof and determining that it intends to require the Borrower to
make such payment, and (ii) to use reasonable efforts to designate another of
its then existing offices as its Applicable Lending Office if the making of such
designation would, without any adverse effect (in the determination of such
Lender) to such Lender, avoid the need for, or reduce the amount of, future
increased costs which are likely to be incurred by such Lender, provided,
however, that if such Lender fails to provide the Borrower with notice of any
such Regulatory Change within 90 days after such Lender shall have obtained
actual knowledge thereof and determined that it intends to require the Borrower
to make a payment to it under this Section 3.6 with respect thereto, such
Lender, to the extent it provides such notice to the Borrower after such 45th
day, shall only be entitled to such payment with respect to costs incurred from
and after the date which is 45 days prior to the date on which such notice is so
provided.
(c) Each Lender may make multiple requests for compensation under this
Section 3.6. Notwithstanding the foregoing, if any Lender requests compensation
pursuant to Section 3.6(a)(i) or (ii), the Borrower may require that such Lender
transfer all of its right, title and interest under this Agreement and such
Lender's Notes to any lender identified by the Borrower (a "Proposed Lender") if
such Proposed Lender agrees to assume all of the obligations of such Lender for
consideration equal to the outstanding principal balance of such Lender's Loans,
together with interest thereon to the date of such transfer and all other
amounts payable hereunder to such Lender on or prior to the date of such
transfer (including any fees accrued hereunder and any amounts which would be
payable under Section 3.5 and Section 3.6(a) as if all of such Lender's Loans
were being prepaid in full on such date). Subject to the execution and delivery
of new Notes, an instrument of assignment and assumption, and such other
documents as such Lender may reasonably require, such Proposed Lender shall be a
"Lender" for all purposes hereunder. Without prejudice to the survival of any
other agreement of the Borrower hereunder, the agreements of the Borrower
contained in Sections 3.5, 3.6(a), 11.5 and 11.10 (without duplication of any
payments made to such Lender by the Borrower or the Proposed Lender) shall
survive for the benefit of any Lender replaced under this Section 3.6 with
respect to the time prior to such replacement. Amounts claimed by a
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Lender under this Section 3.6 shall be determined by such Lender in good faith
on a basis that allocates such amounts ratably among all borrowers having
similar agreements with such Lender, provided that the foregoing shall not
prevent such Lender from waiving any claim against a particular borrower. Each
Lender agrees, in connection with any request by it for payment or reimbursement
under Sections 3.5 and 3.6 to provide the Borrower with a certificate signed by
an officer of such Lender setting forth a description in reasonable detail of
any such payment or reimbursement. Each determination by a Lender of such
payment or reimbursement shall be conclusive absent manifest error.
3.7 Illegality of Funding
Notwithstanding any other provision hereof, if any Lender shall reasonably
determine that any law, regulation, treaty or directive, or any change therein
or in the interpretation or application thereof, shall make it unlawful for such
Lender to make or maintain any Type of Fixed Rate Advance or any Negotiated Rate
Advance as contemplated by this Agreement, such Lender shall promptly notify the
Borrower and the Agent thereof, and (a) the commitment of such Lender to make
such Type of Fixed Rate Advances or Convert ABR Advances to such Type of Fixed
Rate Advance shall forthwith be suspended, and (b) such Lender's Loans then
outstanding as such Type of Fixed Rate Advance or as a Negotiated Rate Advance,
if any, shall be Converted automatically to an ABR Advance on the last day of
the then current Interest Period applicable thereto or at such earlier time as
may be required, provided, however, that before making any such Conversion or
requiring any such suspension, each Lender agrees to use reasonable efforts to
designate another of its then existing offices as its Applicable Lending Office
if the making of such a designation would, without any adverse effect (in the
determination of such Lender) to such Lender, cause the making of such Type of
Fixed Rate Advances or such Negotiated Rate Advances, as the case may be, to not
be subject to this Section 3.7. If the commitment of any Lender with respect to
any Type of Fixed Rate Advance is suspended pursuant to this Section 3.7 and
such Lender shall have obtained actual knowledge that it is once again legal for
such Lender to make or maintain such Type of Fixed Rate Advance, such Lender
shall promptly notify the Agent and the Borrower thereof and, upon receipt of
such notice by each of the Agent and the Borrower, such
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Lender's commitment to make or maintain such Type of Fixed Rate Advance shall be
reinstated.
3.8 Option to Fund; Substituted Interest Rate
(a) Each Lender has indicated that, if the Borrower requests a Fixed
Rate Advance or a Negotiated Rate Advance, such Lender may wish to purchase one
or more deposits in order to fund or maintain its funding of its Commitment
Percentage of such Fixed Rate Advance or such Negotiated Rate Advance during the
Interest Period with respect thereto; it being understood that the provisions of
this Agreement relating to such funding, if any, are included only for the
purpose of determining the rate of interest to be paid in respect of such Fixed
Rate Advance or such Negotiated Rate Advance and any amounts owing under
Sections 3.5 and 3.6. Each Lender shall be entitled to fund and maintain its
funding of all or any part of each Fixed Rate Advance and each Negotiated Rate
Advance in any manner it sees fit, but all such determinations hereunder shall
be made as if each Lender had actually funded and maintained its Commitment
Percentage of each Fixed Rate Advance and each Negotiated Rate Advance during
the applicable Interest Period through the purchase of deposits in an amount
equal to the amount of its Fixed Rate Advance or its Negotiated Rate Advance,
and having a maturity corresponding to such Interest Period. Any Lender may fund
its Commitment Percentage of each Fixed Rate Advance and each Negotiated Rate
Advance from or for the account of any branch or office of such Lender as such
Lender may choose from time to time.
(b) In the event that (i) the Agent shall have reasonably determined
(which determination shall be conclusive and binding upon the Borrower) that by
reason of circumstances affecting the interbank eurodollar market or the
domestic certificate of deposit market either adequate and reasonable means do
not exist for ascertaining the Eurodollar Rate or the CD Rate applicable
pursuant to Section 2.3 or Section 3.3, or (ii) the Required Lenders shall have
notified the Agent that they have reasonably determined (which determination
shall be conclusive and binding on the Borrower) that the applicable Eurodollar
Rate or CD Rate, as the case may be, will not adequately and fairly reflect the
cost to such Lenders of maintaining or funding Loans bearing interest based on
such Eurodollar Rate or CD Rate, as the case may be, with respect to any portion
of the Loans that the Borrower has requested be made as a Fixed Rate Advance or
any Fixed Rate Advance that will result from the requested Conversion of any
portion of the
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Loans into a Fixed Rate Advance (each, an "Affected Advance"), the Agent
shall promptly notify the Borrower and the Lenders (by telephone or otherwise,
to be promptly confirmed in writing) of such determination on or, to the extent
practicable, prior to the requested Borrowing Date or conversion date for such
Affected Advance. If the Agent shall give such notice, (A) any Affected Advances
shall be made as ABR Advances, (B) the Loans (or any portion thereof) that were
to have been Converted to Affected Advances shall be Converted to or continued
as ABR Advances, and (C) any outstanding Affected Advances shall be Converted,
on the last day of the then current Interest Period with respect thereto, to ABR
Advances. Until any notice under clauses (i) or (ii), as the case may be, of
this Section 3.8(b) has been withdrawn by the Agent (by notice to the Borrower)
promptly upon either (x) the Agent having determined that such circumstances
affecting the relevant market no longer exist and that adequate and reasonable
means do exist for determining the Eurodollar Rate or the CD Rate, as the case
may be, pursuant to Section 2.3 or Section 3.3, or (y) the Agent having been
notified by such Required Lenders that circumstances no longer render the Loans
(or any portion thereof) Affected Advances, no further Fixed Rate Advances of
the affected Type shall be required to be made by the Lenders nor shall the
Borrower have the right to Convert all or any portion of the Loans to such Type
of Fixed Rate Advances.
3.9 Certificates of Payment and Reimbursement
Each Lender agrees, in connection with any request by it for payment or
reimbursement pursuant to Section 3.5 or 3.6, to provide the Borrower with a
certificate, signed by an officer of such Lender, setting forth a description in
reasonable detail of any such payment or reimbursement. Each Lender's
determination of such payment or reimbursement shall be conclusive absent
manifest error, provided that such determination is made on a reasonable basis.
3.10 Taxes; Net Payments
(a) All payments made by the Borrower under the Loan Documents shall
be made free and clear of, and without reduction for or on account of, any taxes
required by law to be withheld from any amounts payable under the Loan
Documents. In the event that the Borrower is prohibited by law from making
payments hereunder free of
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deductions or withholdings, then the Borrower shall pay such additional amounts
to the Agent, for the benefit of the Lenders, as may be necessary in order that
the actual amounts received by each Lender in respect of interest and any other
amounts payable hereunder or under the Notes after deduction or withholding (and
after payment of any additional taxes or other charges due as a consequence of
the payment of such additional amounts) shall equal the amount that would have
been received if such deduction or withholding were not required. In the event
that any such deduction or withholding can be reduced or nullified as a result
of the application of any relevant double taxation convention, the Agent and
each Lender will, at the expense of the Borrower, cooperate with the Borrower in
making application to the relevant taxing authorities seeking to obtain such
reduction or nullification, unless the Agent or such Lender shall have
determined that any such application would otherwise have an adverse effect on
the Agent or such Lender, as the case may be, provided, however, that the Agent
and the Lenders shall have no obligation to engage in litigation with respect
thereto. If the Borrower shall make any payments under this Section 3.10 or
shall make any deductions or withholdings from amounts paid hereunder, the
Borrower shall forthwith forward to the Agent original or certified copies of
official receipts or other evidence acceptable to the Agent establishing such
payment and the Agent in turn shall distribute copies of such receipts to each
Lender. If payments to a Lender hereunder are or become subject to any
withholding, such Lender shall (unless otherwise required by a Governmental
Authority or as a result of any law, rule, regulation, order or similar
directive applicable to such Lender) designate a different Applicable Lending
Office to which payments are to be made under the Loan Documents from that
initially selected by such Lender, if such designation would avoid such
withholding and would not be otherwise disadvantageous to such Lender, in the
opinion of such Lender, in any respect. In the event that a Lender receives a
refund or credit for taxes paid by the Borrower under this Section 3.10, such
Lender shall promptly notify the Agent and the Borrower of such fact and shall
remit to the Borrower the amount of such refund or credit applicable to the
payments made by the Borrower in respect of such Lender under this Section 3.10.
(b) Each Lender not incorporated under the laws of the United States
or any State thereof shall deliver to the Borrower and the Agent such
certificates, documents, or other evidence as the Borrower may reasonably
require from time to time as are necessary to establish that such Lender is not
subject to withholding under Section
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1441, 1442 or 3406 of the Code or as may be necessary to establish, under any
law imposing upon the Borrower, hereafter, an obligation to withhold any portion
of the payments made by the Borrower under the Loan Documents, that payments to
the Agent on behalf of such Lender are not subject to withholding.
Notwithstanding any provision herein to the contrary, the Borrower shall have no
obligation to pay to any Lender any amount which the Borrower is liable to
withhold due to the failure of such Lender to file any statement of exemption
required by the Code, or to provide such information as the Borrower shall
reasonably require to establish that such Lender is not subject to withholding.
3.11 Commitment Fee
The Borrower agrees to pay to the Agent for the account of each Lender,
during the Commitment Period, a fee (the "Commitment Fee"). The Commitment Fee
shall be payable quarterly in arrears on the last day of each March, June,
September and December of each year, commencing on the last day of the calendar
quarter in which the Effective Date shall have occurred, and on the Commitment
Termination Date, at a rate per annum equal to 0.25% of the aggregate unused
Commitment Amount of all Lenders. In addition, upon each reduction of the
Aggregate Commitment Amount, the Borrower shall pay the Commitment Fee accrued
on the amount of such reduction through the date of such reduction. The
Commitment Fee shall be computed on the basis of a 360 day year for the actual
number of days elapsed.
4. REPRESENTATIONS AND WARRANTIES
In order to induce the Lenders to enter into this Agreement and to make the
Loans, the Borrower hereby makes the following representations and warranties to
the Agent and the Lenders:
4.1 Existence and Power
Each of the Borrower and the Subsidiaries is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or formation,
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has all requisite corporate power and authority to own its Property and to carry
on its business as now conducted, and is in good standing and authorized to do
business as a domestic or foreign corporation in each jurisdiction in which the
failure so to qualify could reasonably be expected to have a Material Adverse
effect.
4.2 Authority
The Borrower has full corporate power and authority to enter into, execute,
deliver and perform the terms of the Loan Documents, all of which have been duly
authorized by all proper and necessary corporate action and are in compliance in
all material respects with its Certificate of Incorporation and By-Laws. No
consent or approval of, or other action by, shareholders of the Borrower, any
Governmental Authority, or any other Person (which has not already been
obtained) is required to authorize in respect of the Borrower, or is required in
connection with the execution, delivery, and performance by the Borrower of the
Loan Documents, or is required as a condition to the enforceability of the Loan
Documents against the Borrower.
4.3 Binding Agreement
The Loan Documents constitute the valid and legally binding obligations of
the Borrower, enforceable in accordance with their respective terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by equitable principles relating to the
availability of specific performance as a remedy.
4.4 Litigation
Except as set forth on Schedule 4.4, there are no actions, suits,
arbitration proceedings or claims (whether purportedly on behalf of the
Borrower, any Subsidiary or otherwise) pending or, to the knowledge of any
Senior Officer, threatened against the Borrower or any Subsidiary or any of
their respective Properties, or maintained by the Borrower or any Subsidiary, at
law or in equity, before any Governmental Authority which could reasonably be
expected to have a Material Adverse effect. There are no proceedings pending or,
to the knowledge of any Senior Officer, threatened against the Bor-
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rower or any Subsidiary (a) which call into question the validity or
enforceability of, or otherwise seek to invalidate any Loan Document, or (b)
which might, individually or in the aggregate, materially and adversely affect
any of the transactions contemplated by any Loan Document.
4.5 No Conflicting Agreements
(a) Neither the Borrower nor any Subsidiary is in default under any
agreement to which it is a party or by which it or any of its Property is bound
the effect of which could reasonably be expected to have a Material Adverse
effect. No notice to, or filing with, any Governmental Authority is required for
the due execution, delivery and performance by the Borrower of the Loan
Documents.
(b) No provision of any existing mortgage, indenture, contract,
agreement, statute, rule, regulation, judgment, decree or order binding on the
Borrower or any Subsidiary or affecting the Property of the Borrower or any
Subsidiary conflicts with, or requires any consent which has not already been
obtained under, or would in any way prevent the execution, delivery or
performance by the Borrower of the terms of, any Loan Document. The execution,
delivery or performance by the Borrower of the terms of each Loan Document will
not constitute a default under, or result in the creation or imposition of, or
obligation to create, any Lien upon the Property of the Borrower or any
Subsidiary pursuant to the terms of any such mortgage, indenture, contract or
agreement.
4.6 Taxes
The Borrower and each Subsidiary has filed or caused to be filed all tax
returns, and has paid, or has made adequate provision for the payment of, all
taxes shown to be due and payable on said returns or in any assessments made
against them, the failure of which to file or pay could reasonably be expected
to have a Material Adverse effect, and no tax Liens (other than Liens permitted
under Section 8.1) have been filed against the Borrower or any Subsidiary and no
claims are being asserted with respect to such taxes which are required by GAAP
(as in effect on the Effective Date) to be reflected in the Financial Statements
and are not so reflected therein. The charges,
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accruals and reserves on the books of the Borrower and each Subsidiary with
respect to all federal, state, local and other taxes are considered by the
management of the Borrower to be adequate, and the Borrower knows of no unpaid
assessment which (a) could reasonably be expected to have a Material Adverse
effect, or (b) is or might be due and payable against it or any Subsidiary or
any Property of the Borrower or any Subsidiary, except such thereof as are being
contested in good faith and by appropriate proceedings diligently conducted, and
for which adequate reserves have been set aside in accordance with GAAP.
4.7 Compliance with Applicable Laws; Filings
Neither the Borrower nor any Subsidiary is in default with respect to any
judgment, order, writ, injunction, decree or decision of any Governmental
Authority which default could reasonably be expected to have a Material Adverse
effect. The Borrower and each Subsidiary is complying with all applicable
statutes, rules and regulations of all Governmental Authorities, a violation of
which could reasonably be expected to have a Material Adverse effect. The
Borrower and each Subsidiary has filed or caused to be filed with all
Governmental Authorities all reports, applications, documents, instruments and
information required to be filed pursuant to all applicable laws, rules,
regulations and requests which, if not so filed, could reasonably be expected to
have a Material Adverse effect.
4.8 Governmental Regulations
Neither the Borrower nor any Subsidiary nor any corporation controlling the
Borrower or any Subsidiary or under common control with the Borrower or any
Subsidiary is subject to regulation under the Investment Company Act of 1940, as
amended, the Public Utility Holding Company Act of 1935, as amended, or the
Federal Power Act, or is subject to any statute or regulation, including any
insurance statute or regulation governing the Borrower and the Insurance
Subsidiaries, which regulates the incurrence of Indebtedness, a violation of
which would, in any way, affect the validity or enforceability of the Loan
Documents.
4.9 Federal Reserve Regulations; Use of Loan Proceeds
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The Borrower is not engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing or
carrying any margin stock within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System, as amended. No part of the proceeds of
the Loans will be used, directly or indirectly, (a) for a purpose which violates
any law, rule or regulation of any Governmental Authority, including, without
limitation, Regulations G, T, U or X of the Board of Governors of the Federal
Reserve System, as amended, (b) to purchase or carry Margin Stock or (c) to
extend credit to others for the purpose of purchasing or carrying Margin stock.
4.10 No Misrepresentation
No representation or warranty contained in any Loan Document and no
certificate or written report furnished or to be furnished by the Borrower or
any Subsidiary in connection with the transactions contemplated hereby and
thereby, contains or will contain a misstatement of material fact, or omits or
will omit to state, as of its date, a material fact required to be stated in
order to make the statements therein contained not misleading in the light of
the circumstances under which made.
4.11 Plans
Neither the Borrower nor any Subsidiary has a Pension Plan.
4.12 Environmental Matters
Neither the Borrower nor any Subsidiary (a) has received written notice nor
has any Senior Officer otherwise learned of any claim, demand, action, event,
condition, report or investigation indicating or concerning any potential or
actual liability which individually or in the aggregate could reasonably be
expected to have a Material Adverse effect, arising in connection with (i) any
non-compliance with or violation of the requirements of any applicable federal,
state or local environmental, health or safety statute or regulation, or (ii)
the release or threatened release of any toxic or hazardous waste, substance or
constituent, or other substance into the environment, (b) to the best knowledge
of any Senior Officer, has any threatened or actual liability in connection
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with the release or threatened release of any toxic or hazardous waste,
substance or constituent, or other substance into the environment which
individually or in the aggregate could reasonably be expected to have a Material
Adverse effect, (c) has received notice of any federal or state investigation
evaluating whether any remedial action is needed to respond to a release or
threatened release of any toxic or hazardous waste, substance or constituent or
other substance into the environment for which the Borrower or any Subsidiary is
or would be liable, which liability would reasonably be expected to have a
Material Adverse effect, or (d) has received notice that the Borrower or any
Subsidiary is or may be liable to any Person under the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
Section 9601 et seq., or any analogous state law, which liability would
reasonably be expected to have a Material Adverse effect. The Borrower and each
Subsidiary is in compliance with the financial responsibility requirements of
federal and state environmental laws to the extent applicable, including those
contained in 40 C.F.R., parts 264 and 265, subpart H, and any analogous state
law, except in those cases in which the failure so to comply would not
reasonably be expected to have a Material Adverse effect. Notwithstanding
anything to the contrary contained herein, the representations and warranties
contained in clauses (a), (b) and (c) of this Section 4.12 shall not be deemed
made with respect to any such potential or actual liability arising solely under
any policy of insurance underwritten or issued, in whole or in part, by the
Borrower or any Subsidiary to, or in favor of, any Person other than the
Borrower or any Subsidiary.
4.13 Financial and Annual Statutory Statements
(a) The Borrower has heretofore delivered to the Lenders copies of its
(i) audited Consolidated Balance Sheet as of December 31, 1994, and the related
Consolidated Statements of Income, Capital and Cash Flows, for the fiscal year
then ended, and (ii) unaudited Consolidated Balance Sheet as of March 31, 1995,
and the related Consolidated Statement of Income, Capital and Cash Flows, for
the fiscal quarter then ended (collectively, together with the related notes and
schedules, the "Financial Statements"). The Financial Statements fairly present
the Consolidated financial condition and results of the operations of the
Borrower and the Subsidiaries as of the dates and for the periods indicated
therein and have been prepared in conformity with GAAP as then in effect.
Neither the Borrower nor any Subsidiary has any obligation or liability of any
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kind (whether fixed, accrued, contingent, unmatured or otherwise) which, in
accordance with GAAP as then in effect, should have been disclosed in the
Financial Statements and was not. Since December 31, 1994, there has been no
Material Adverse change, including as a result of any change in law, and the
Borrower and the Subsidiaries have conducted their businesses only in the
ordinary course, including Acquisitions of or investments in insurance related
businesses.
(b) The Borrower has also delivered to the Lenders a copy of the
Annual Statutory Statement, as of December 31, 1994, of FIC (the "1994 Annual
Statutory Statement"). The 1994 Annual Statutory Statement fairly presents, in
accordance with SAP, the financial condition and results of the operations of
FIC as of the dates and for the periods indicated therein and has been prepared
in conformity with SAP. FIC has no obligation or liability of any kind (whether
fixed, accrued, contingent, unmatured or otherwise) which, in accordance with
SAP, should have been disclosed in the 1994 Annual Statutory Statement and was
not, except that the Borrower intends to file an amended 1994 Annual Statutory
Statement with the New York Department of Insurance reflecting the status of its
owned real Property, which amendment will not result in a Material Adverse
change.
5. CONDITIONS OF LENDING - LOANS ON THE FIRST BORROWING DATE
In addition to the requirements set forth in Section 6, the obligation of
each Lender to make one or more Loans on the first Borrowing Date is subject to
the fulfillment of the following conditions prior to or simultaneously with the
Effective Date:
5.1 Evidence of Corporate Action
The Agent shall have received a certificate, dated the Effective Date, of
the Secretary of the Borrower (i) attaching a true and complete copy of the
resolutions of its Board of Directors and of all documents evidencing all
necessary corporate action (in form and substance reasonably satisfactory to the
Agent) taken by it to authorize the Loan Documents and the transactions
contemplated thereby, (ii) attaching a true
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and complete copy of its Certificate of Incorporation and By-Laws, (iii) setting
forth the incumbency of the corporate officer or officers who may sign the Loan
Documents, including therein a signature specimen of each such corporate
officer, and (iv) attaching a certificate of good standing of the Secretary of
State of the State of Delaware.
5.2 Notes
The Borrower shall have delivered to the Agent (for delivery to the
Lenders) the Note for each such Lender, executed by the Borrower.
5.3 Litigation
There shall be no injunction, writ, preliminary restraining order or other
order of any nature issued by any Governmental Authority in any respect
affecting any Loan Document or any transaction contemplated by the Loan
Documents, and no action or proceeding by or before any Governmental Authority
shall have been commenced and be pending seeking to prevent or delay any of the
foregoing or challenging any term or provision thereof or seeking any damages in
connection therewith, and the Agent shall have received a certificate, in all
respects reasonably satisfactory to the Agent, of a Senior Officer to the
foregoing effect.
5.4 Opinion of Special Counsel
The Agent shall have received from Special Counsel an opinion, dated the
Effective Date, in the form of Exhibit E.
5.5 Opinions of Counsel to the Borrower
The Agent shall have received the opinions of Epstein Becker & Green, P.C.,
counsel to the Borrower, and Marvin L. Tepper, General Counsel of the Borrower,
each dated the Effective Date, substantially to the effect of the matters set
forth in Exhibit D.
5.6 Payment of Fees
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The Borrower shall have paid to the Agent and the Lenders all fees and
expenses which it shall have agreed to pay, to the extent such fees and expenses
shall have become payable on or prior to the Effective Date, and shall have paid
the reasonable fees and disbursements of Special Counsel which the Borrower is
obligated to pay in accordance with Section 11.5 and which shall have accrued up
to the Effective Date.
6. CONDITIONS OF LENDING - ALL LOANS
The obligation of each Lender to make each Loan is subject to the receipt
by the Agent of a Borrowing Request executed by the Borrower and the fulfillment
of the following conditions precedent:
6.1 Compliance
On each Borrowing Date, and after giving effect to the Loans to be made on
such Borrowing Date, (a) the Borrower shall be in compliance with all of the
terms, covenants and conditions of each Loan Document in all material respects,
(b) there shall exist no Default or Event of Default, and (c) the
representations and warranties contained in this Agreement shall be true and
correct with the same effect as though such representations and warranties had
been made on such Borrowing Date, except those which are expressly specified to
be made as of an earlier date.
6.2 Loan Closings
All documents required by the provisions of this Agreement to have been
executed or delivered by the Borrower to the Agent or any Lender on or before
the applicable Borrowing Date shall have been so executed or delivered on or
before such Borrowing Date.
7. AFFIRMATIVE AND FINANCIAL COVENANTS
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The Borrower covenants and agrees that on and after the Effective Date and
until the later to occur of (a) the Commitment Termination Date and (b) the
payment in full of the Notes, the Commitment Fee and all other sums which are
then due and payable under the Loan Documents, the Borrower will:
7.1 Legal Existence
Except as may otherwise be permitted by Section 8.3, maintain, and cause
each Subsidiary to maintain, its corporate existence in good standing in the
jurisdiction of its incorporation or formation and in each other jurisdiction in
which the failure so to do could reasonably be expected to have a Material
Adverse effect.
7.2 Taxes
Pay and discharge when due, and cause each Subsidiary so to do, all taxes,
assessments, governmental charges, license fees and levies upon or with respect
to the Borrower and such Subsidiary, and upon the income, profits and Property
thereof unless, and only to the extent, that (i)(a) such taxes, assessments,
governmental charges, license fees and levies shall be contested in good faith
and by appropriate proceedings diligently conducted by the Borrower or such
Subsidiary, and (b) such reserve or other appropriate provision as shall be
required by GAAP shall have been made therefor, or (ii) the failure to pay or
discharge such taxes, assessments, governmental changes, license fees and levies
could not reasonably be expected to have a Material Adverse effect.
7.3 Insurance
Keep, and cause each Subsidiary to keep, insurance with responsible
insurance companies in such amounts and against such risks as is usually carried
by owners of similar businesses and properties in the same general areas in
which the Borrower or such Subsidiary operates, provided that the Borrower and
its Subsidiaries may act as self-insurers in accordance with such self-insurance
retentions and policy deductibles as are usual for such similar owners or are
otherwise in accordance with its own insurance practices as of the date hereof.
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7.4 Performance of Obligations
Pay and discharge promptly when due, and cause each Subsidiary so to do,
all lawful Indebtedness, obligations and claims for labor, materials and
supplies or otherwise which, if unpaid, could reasonably be expected to (a) have
a Material Adverse effect, or (b) become a Lien on the Property of the Borrower
or any Subsidiary, except those Liens permitted under Section 8.1, provided that
neither the Borrower nor such Subsidiary shall be required to pay or discharge
or cause to be paid or discharged any such Indebtedness, obligation or claim so
long as (i) the validity thereof shall be contested in good faith and by
appropriate proceedings diligently conducted by the Borrower or such Subsidiary,
and (ii) such reserve or other appropriate provision as shall be required by
GAAP shall have been made therefor.
7.5 Condition of Property
Except for ordinary wear and tear, at all times, maintain, protect and keep
in good repair, working order and condition, all material Property necessary for
the operation of its business (other than Property which is replaced with
similar Property), and cause each Subsidiary so to do.
7.6 Observance of Legal Requirements
Observe and comply in all material respects, and cause each Subsidiary so
to do, with all laws, ordinances, orders, judgments, rules, regulations,
certifications, franchises, permits, licenses, directions and requirements of
all Governmental Authorities, which now or at any time hereafter may be
applicable to it or to such Subsidiary, a violation of which could reasonably be
expected to have a Material Adverse effect.
7.7 Financial Statements and Other Information
Maintain, and cause each Subsidiary to maintain, a standard system of
accounting in accordance with GAAP, and furnish to each Lender:
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(a) As soon as available and, in any event, within 90 days after the
close of each fiscal year, a copy of the Borrower's 10-K in respect of such
fiscal year, including (i) the Borrower's Consolidated Balance Sheet as of the
end of such fiscal year, and (ii) the related Consolidated Statements of Income,
Capital and Cash Flows, as of and through the end of such fiscal year, setting
forth in each case in comparative form the corresponding figures in respect of
the previous fiscal year, all in reasonable detail, and accompanied by a report
of the Borrower's auditors, which report shall state that (A) such auditors
audited such financial statements, (B) such audit was made in accordance with
generally accepted auditing standards in effect at the time and provides a
reasonable basis for such opinion, and (C) said financial statements have been
prepared in accordance with GAAP;
(b) As soon as available, and in any event within 45 days after the
end of each of the first three fiscal quarters of each fiscal year, a copy of
the Borrower's 10-Q in respect of such fiscal quarter, including (i) the
Borrower's Consolidated Balance Sheet as of the end of such quarter, and (ii)
the related Consolidated Statements of Income, Capital and Cash Flows for (A)
such quarter, and (B) the period from the beginning of the then current fiscal
year to the end of such quarter, in each case in comparable form with the prior
fiscal year, all in reasonable detail and prepared in accordance with GAAP
(without footnotes and subject to year-end adjustments);
(c) Simultaneously with the delivery of the financial statements
required by clauses (a) and (b) above, a Compliance Certificate of the Chief
Financial Officer of the Borrower;
(d) As soon as practicable after the filing thereof, but in any case
no later than 10 days after such filing, (i) each Annual Statutory Statement of
each Insurance Subsidiary, and (ii) each Quarterly Statement of each Insurance
Subsidiary;
(e) Promptly upon receipt thereof by the Borrower from the NAIC, a
copy of the IRIS Ratio results for each year;
(f) Promptly upon becoming available, copies of all regular or
periodic reports (including, without limitation, current reports on Form 8-K)
which the Borrower
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or any Subsidiary may now or hereafter be required to file with or deliver to
the Securities and Exchange Commission, or any other Governmental Authority
succeeding to the functions thereof, and copies of all material news releases
sent to all stockholders;
(g) Prompt written notice of: (i) any citation, summons, subpoena,
order to show cause or other order naming the Borrower or any Subsidiary a party
to any proceeding before any Governmental Authority which could reasonably be
expected to have a Material Adverse effect, and include with such notice a copy
of such citation, summons, subpoena, order to show cause or other order, (ii)
any lapse or other termination of any license, permit, franchise or other
authorization issued to the Borrower or any Subsidiary by any Governmental
Authority, (iii) any refusal by any Governmental Authority to renew or extend
any license, permit, franchise or other authorization, and (iv) any dispute
between the Borrower or any Subsidiary and any Governmental Authority, which
lapse, termination, refusal or dispute, referred to in clause (ii), (iii) or
(iv) above, could reasonably be expected to have a Material Adverse effect;
(h) Upon any Senior Officer becoming aware thereof, prompt written
notice of the occurrence of (i) each Default, (ii) each Event of Default, and
(iii) each Material Adverse change; and
(i) From time to time, such other information regarding the financial
position or business of the Borrower and the Subsidiaries, as the Agent, at the
request of any Lender, may reasonably request.
7.8 Records
Permit representatives of the Agent and such Lender to visit the offices of
the Borrower and each Subsidiary on reasonable notice during reasonable business
hours, to examine the books and records thereof and auditors' reports relating
thereto, to make copies or extracts therefrom, to discuss the affairs of the
Borrower and each Subsidiary with the respective officers thereof, and to meet
and discuss the affairs of the Borrower and each Subsidiary with the Borrower's
auditors.
7.9 Authorizations
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Maintain and cause each Subsidiary to maintain, in full force and effect,
all licenses, copyrights, patents, trademarks, trade names, franchises, permits,
applications, reports, and other authorizations and rights, which, if not so
maintained, would individually or in the aggregate have a Material Adverse
effect.
7.10 Interest Coverage Ratio
Maintain at the end of each fiscal quarter of the Borrower an Interest
Coverage Ratio of not less than 2.0:1.0.
7.11 Debt Service Ratio
Maintain at the end of each fiscal quarter of the Borrower a Debt Service
Ratio of not less than 1.5:1.0, calculated on a year-to-date basis as provided
in Exhibit H.
7.12 FIC Statutory Capital and Surplus
Cause FIC to maintain at all times a Statutory Capital and Surplus of not
less than $140,000,000.
7.13 FIC Total Adjusted Capital
Cause FIC to maintain at all times a Total Adjusted Capital of not less
than 300% of the Authorized Control Level Risk-Based Capital.
7.14 FIC Compliance with IRIS Ratios
Cause FIC to be in compliance at all times with all IRIS Ratios, provided
that with respect to the fiscal year ending December 31, 1995, the calculation
of the "surplus ratio" included in the IRIS Ratios for FIC shall exclude
therefrom the effect of the FIC Contribution.
7.15 Participation in IRIS
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Cause each Insurance Subsidiary to continue to participate in IRIS.
7.16 Concerning the Tax Sharing Agreement
Promptly submit the Tax Sharing Agreement for all necessary regulatory
approvals and, thereafter, provide the Agent with a copy thereof.
8. NEGATIVE COVENANTS
The Borrower covenants and agrees that on and after the Effective Date and
until the later to occur of (a) the Commitment Termination Date, and (b) the
payment in full of the Notes, the Commitment Fee and all other sums which are
then due and payable under the Loan Documents, the Borrower will not:
8.1 Liens
Create, incur, assume or suffer to exist any Lien against or on any
Property now owned or hereafter acquired by the Borrower or any Subsidiary, or
permit any Subsidiary so to do, except any one or more of the following types of
Liens: (a) Liens in connection with workers' compensation, unemployment
insurance or other social security obligations (which phrase shall not be
construed to refer to ERISA or the minimum funding obligations under Section 412
of the Code), (b) Liens to secure the performance of bids, tenders, letters of
credit, contracts, including conditional sales contracts (other than contracts
for the payment of Indebtedness), leases, statutory obligations, surety,
customs, appeal, performance and payment bonds and other obligations of like
nature, in each such case arising in the ordinary course of business, (c)
mechanics', workmen's, carriers', warehousemen's, materialmen's, landlords', or
other like Liens arising in the ordinary course of business with respect to
obligations which are not due or which are being contested in good faith and by
appropriate proceedings diligently conducted, (d) Liens for taxes, assessments,
fees or governmental charges or levies which are not delinquent or are being
contested in good faith and by appropriate proceedings diligently conducted, and
in respect of which adequate reserves shall have been established in accordance
with GAAP on the books of the Borrower or such Subsidiary, (e) Liens of
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tachments, judgments or awards against the Borrower or any Subsidiary (i) which
could not reasonably be expected to have a Material Adverse effect, or (ii) with
respect to which an appeal or proceeding for review shall be pending or a stay
of execution shall have been obtained, or which are otherwise being contested in
good faith and by appropriate proceedings diligently conducted, and in respect
of which adequate reserves shall have been established in accordance with GAAP
on the books of the Borrower or such Subsidiary, (f) easements, rights of way,
restrictions, leases of Property to others, easements for installations of
public utilities, title imperfections and restrictions, zoning ordinances and
other similar encumbrances affecting Property which in the aggregate do not
materially adversely affect the value of such Property or materially impair its
use for the operation of the business of the Borrower or such Subsidiary, (g)
Liens existing on the Effective Date and set forth on Schedule 8.1, (h)
statutory Liens in favor of lessors arising in connection with Property leased
to the Borrower or any Subsidiary, (i) Liens on Property hereafter acquired by
the Borrower or any Subsidiary in connection with Acquisitions permitted
hereunder, and (j) any Lien which is an extension, renewal or replacement of any
other Lien otherwise permitted under this Section 8.1, provided, however, that
the Liens permitted under this Section 8.1(j) shall not spread to cover any
additional Indebtedness or Property (other than a substitution of like
Property).
8.2 Dispositions
Make any Disposition, or permit any Subsidiary so to do, other than
Dispositions of Property in the ordinary course of business.
8.3 Acquisitions
Effect any Acquisition, or permit any Subsidiary so to do, provided that
(i) the Borrower may effect an Acquisition as long as, after giving effect
thereto, (x) the Borrower is the surviving entity of such Acquisition, (y) the
total cash consideration, if any, paid by the Borrower with respect to all
Acquisitions in any fiscal year does not exceed $10,000,000 and (z) no Default
or Event of Default shall or would exist immediately before and after giving
effect thereto, and (ii) any Subsidiary may effect an Acquisition as long as
immediately before and after giving effect thereto (y) no Default or Event of
Default shall or would exist and (z) such Acquisition would not cause any
Applicable
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Insurance Regulatory Authority to restrict the ability of such Insurance
Subsidiary to pay dividends or otherwise make distributions to the Borrower or
any Subsidiary in any manner.
8.4 Line of Business
Engage, or permit any Subsidiary to engage, in any business other than any
business in which the Borrower or any Subsidiary is engaged in on the date of
this Agreement or any other insurance- related businesses.
8.5 Transactions with Affiliates
Become, or permit any Subsidiary to become, a party to any transaction with
any Affiliate of the Borrower on a basis less favorable to the Borrower or such
Subsidiary in any material respect than if such transaction were not with an
Affiliate of the Borrower.
8.6 Adoption of Pension Plans
Adopt a Pension Plan, or permit any Subsidiary so to do, unless this
Agreement is amended, in form and substance satisfactory to the Required
Lenders, to insert the customary provisions with respect thereto.
9. DEFAULT
9.1 Events of Default
The following shall each constitute an "Event of Default" hereunder:
(a) The failure of the Borrower to make any payment of principal on
any Note when due and payable; or
(b) The failure of the Borrower to make any payment of interest on any
Loan, or to make any payment in respect of the Commitment Fee, in any case on
any
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date when due and payable and such default shall continue unremedied for a
period of 5 Domestic Business Days after the same shall have become due; or
(c) The failure of the Borrower to observe or perform any covenant or
agreement contained in Sections 2.4, 7.1, 7.10, 7.11, 7.12, 7.13 or in Section
8; or
(d) More than two Primary IRIS Ratios of FIC shall fail to be within
the usual range or value, within the meaning of IRIS, and such failure shall
continue unremedied for a period of 30 days after any Senior Officer shall have
become aware of such failure, or more than two of the Secondary IRIS Ratios of
FIC shall fail to be within the usual range or value, within the meaning of
IRIS, and such failure on more than two of such failed Secondary IRIS Ratios
shall have occurred for two consecutive years.
(e) The failure of the Borrower to observe or perform any other
covenant or agreement contained in this Agreement, and such failure shall have
continued unremedied for a period of 30 days after any Senior Officer shall have
become aware of such failure; or
(f) Any representation or warranty of the Borrower (or of any of its
officers on its behalf) made in any Loan Document, or made in any certificate,
report, opinion (other than an opinion of counsel) or other document delivered
on or after the date hereof, shall in any such case prove to have been incorrect
or misleading (whether because of misstatement or omission) in any material
respect when made; or
(g) (i) Obligations in an aggregate amount in excess of $1,000,000 of
the Borrower (other than its obligations hereunder and under the Notes) and the
Subsidiaries, whether as principal, guarantor, surety or other obligor, for the
payment of any Indebtedness (other than Indebtedness arising solely under any
policy of insurance underwritten or issued, in whole or in part, by the Borrower
or any Insurance Subsidiary to, or in favor of, any Person other than the
Borrower or any Subsidiary or Affiliate of the Borrower) or any net liability
under interest rate swap, collar, exchange or cap agreements, (A) shall become
or shall be declared to be due and payable prior to the expressed maturity
thereof, or (B) shall not be paid when due or within any grace period
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for the payment thereof, or (ii) any holder of any such obligations shall have
the right to declare the Indebtedness evidenced thereby due and payable prior to
its stated maturity; or
(h) The Borrower or any Subsidiary shall (i) suspend or discontinue
its business (except as may otherwise be expressly permitted herein), or (ii)
make an assignment for the benefit of creditors, or (iii) generally not be
paying its debts as such debts become due, or (iv) admit in writing its
inability to pay its debts as they become due, or (v) file a voluntary petition
in bankruptcy, or (vi) become insolvent (however such insolvency shall be
evidenced), or (vii) file any petition or answer seeking for itself any
reorganization, arrangement, composition, readjustment of debt, liquidation or
dissolution or similar relief under any present or future statute, law or
regulation of any jurisdiction (including under any law applicable to insurance
companies), or (viii) petition or apply to any tribunal, any Department or
Commissioner of Insurance of any State, or any other Governmental Authority, for
any receiver, custodian or any trustee for any substantial part of its Property,
or (ix) be the subject of any such proceeding filed against it which remains
undismissed for a period of 60 days, or (x) file any answer admitting or not
contesting the material allegations of any such petition filed against it, or of
any order, judgment or decree approving such petition in any such proceeding, or
(xi) seek, approve, consent to, or acquiesce in any such proceeding, or in the
appointment of any trustee, receiver, custodian, liquidator, or fiscal agent
(including any Department or Commissioner of Insurance of any State) for it, or
any substantial part of its Property, or an order is entered appointing any such
trustee, receiver, custodian, liquidator or fiscal agent and such order remains
unstayed and in effect for 60 days, or (xii) take any formal action for the
purpose of effecting any of the foregoing (except as may otherwise be expressly
permitted herein); or
(i) An order for relief is entered under the United States bankruptcy
laws or any other decree or order is entered by a court or other Governmental
Authority having jurisdiction and continues unstayed and in effect for a period
of 60 days (i) adjudging the Borrower or any Subsidiary bankrupt or insolvent,
or (ii) approving as properly filed a petition seeking reorganization,
liquidation, arrangement, adjustment or composition of, or in respect of the
Borrower or any Subsidiary under the United States bankruptcy laws or any other
applicable Federal or state law (including under any law
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applicable to insurance companies), or (iii) appointing a receiver, liquidator,
assignee, trustee, custodian, sequestrator (or other similar official) of the
Borrower or any Subsidiary or of substantially all of the Property of any
thereof, or (iv) ordering the winding up or liquidation of the affairs of the
Borrower or any Subsidiary; or
(j) Judgments or decrees in an aggregate amount in excess of
$1,000,000 against the Borrower and the Subsidiaries shall remain unpaid,
unstayed on appeal, undischarged, unbonded or undismissed for a period of 60
days; or
(k) A Level Event shall occur and be continuing with respect to FIC
for a period in excess of 30 days.
(l) Any license, authorization, franchise, permit, right, approval or
agreement of the Borrower or any Subsidiary to own or operate any business of
the Borrower or such Subsidiary is not renewed, or is suspended or revoked, and
the non-renewal, suspension or revocation thereof would have a Material Adverse
effect.
9.2 Contract Remedies
(a) Upon the occurrence or at any time during the continuance of an
Event of Default, the Agent, at the written request of the Required Lenders,
shall notify the Borrower that the Commitments have been terminated and that the
Loans and the Notes have been declared immediately due and payable, provided
that upon the occurrence of an Event of Default under Section 9.1(h) or (i), the
Commitments shall automatically terminate and the Notes shall become immediately
due and payable without declaration or notice to the Borrower. To the fullest
extent not prohibited by law, except for the notice provided for in the
preceding sentence, the Borrower hereby expressly waives any presentment,
demand, protest, notice of protest or other notice of any kind in connection
with the Loan Documents and its obligations thereunder. To the fullest extent
not prohibited by law, the Borrower hereby further expressly waives and
covenants not to assert any appraisement, valuation, stay, extension, redemption
or similar law, now or at any time hereafter in force which might delay, prevent
or otherwise impede the performance or enforcement of this Agreement and the
other Loan Documents.
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(b) In the event that the Commitments shall have been terminated or
the Loans and the Notes shall have been declared due and payable pursuant to the
provisions of this Section 9.2, the Lenders agree, among themselves, that any
funds received from or on behalf of the Borrower under any Loan Document by any
of the Lenders (except funds received by any Lender as a result of a purchase
from such Lender pursuant to the provisions of Section 11.9) shall be remitted
to the Agent, and shall be applied by the Agent in payment of the Loans and the
obligations of the Borrower hereunder in the following manner and order: (i)
first, to reimburse the Agent and, thereafter, the Lenders for any expenses due
from the Borrower pursuant to the provisions of Section 11.5, (ii) second, to
the payment of the Commitment Fee, (iii) third, to the payment of any other
fees, expenses or amounts (other than the principal of and interest on the
Notes) payable by the Borrower to the Agent or any of the Lenders under the Loan
Documents, (iv) fourth, to the payment of accrued interest due on the Loans and
the Notes, (v) fifth, to the payment of principal outstanding on the Loans and
the Notes, and (vi) sixth, any remaining funds shall be paid to whomsoever shall
be entitled thereto or as a court of competent jurisdiction shall direct.
(c) In the event that the Loans and the Notes shall have been declared
due and payable pursuant to the provisions of this Section 9.2, the Agent, upon
the written request of the Required Lenders, shall proceed to enforce the rights
of the holders of the Notes by suit in equity, action at law and/or other
appropriate proceedings, whether for payment or the specific performance of any
covenant or agreement contained in the Loan Documents. In the event that the
Agent shall fail or refuse so to proceed, each Lender shall be entitled to take
such action as the Required Lenders shall deem appropriate to enforce its rights
under the Loan Documents.
10. THE AGENT
10.1 Appointment
Each Lender hereby irrevocably designates and appoints BNY as the
Agent of such Lender under the Loan Documents and each Lender hereby irrevocably
authorizes the Agent to take such action on its behalf under the provisions of
the Loan Documents
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and to exercise such powers and perform such duties as are expressly delegated
to the Agent by the terms of the Loan Documents, together with such other powers
as are reasonably incidental thereto. Notwithstanding any provision to the
contrary contained elsewhere in this Agreement or in any other Loan Document,
the Agent shall not have any duties or responsibilities except those expressly
set forth herein or therein, or any fiduciary relationship with any Lender, and
no implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into the Loan Documents or otherwise exist against the
Agent.
10.2 Delegation of Duties
The Agent may execute any of its duties under the Loan Documents by or
through agents or attorneys-in-fact and shall be entitled to rely upon the
advice of counsel concerning all matters pertaining to such duties, and shall
not be held liable for any action taken or omitted to be taken in good faith
upon the advice of such counsel.
10.3 Exculpatory Provisions
Neither the Agent nor any of its respective officers, directors, employees,
agents, attorneys-in-fact or affiliates shall be (i) liable for any action
lawfully taken or omitted to be taken by it or such Person under or in
connection with the Loan Documents (except the Agent for its own gross
negligence or willful misconduct), or (ii) responsible in any manner to any of
the Lenders for any recitals, statements, representations or warranties made by
any party contained in the Loan Documents or in any certificate, report,
statement or other document referred to or provided for in, or received by the
Agent under or in connection with, the Loan Documents or for the value,
validity, effectiveness, genuineness, enforceability or sufficiency of any of
the Loan Documents or for any failure of the Borrower, any Subsidiary, or any
other Person to perform its obligations hereunder or thereunder. The Agent shall
not be under any obligation to any Lender to ascertain or to inquire as to the
observance or performance of any of the agreements contained in, or conditions
of, the Loan Documents, or to inspect the properties, books or records of the
Borrower or any Subsidiary. The Agent, in its capacity as such, shall not be
under any liability or responsibility to the Borrower or any other Person as a
consequence of any failure or delay in performance, or any breach, by
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any Lender of any of its obligations under any of the Loan Documents. The
Lenders acknowledge that the Agent shall not be under any duty to take any
discretionary action permitted hereunder unless the Agent shall be requested in
writing to do so by the Required Lenders.
10.4 Reliance by Agent
The Agent shall be entitled to rely, and shall be fully protected in
relying, upon any writing, resolution, notice, consent, certificate, affidavit,
opinion, letter, cablegram, telegram, facsimile, telex or teletype message,
statement, order or other document or conversation reasonably believed by it to
be genuine and correct and to have been signed, sent or made by the proper
Person or Persons and upon advice and statements of legal counsel (including
counsel to the Borrower), independent accountants and other experts selected by
the Agent. The Agent may treat each Lender, or the Person designated in the last
notice filed under Section 11.7, as the holder of all of the interests of such
Lender in its Loans and in its Notes until written notice of transfer, signed by
such Lender (or the Person designated in the last notice filed with the Agent)
and by the Person designated in such written notice of transfer, in form and
substance satisfactory to the Agent, shall have been filed with the Agent and
all requirements of Section 11.7 have been satisfied. The Agent shall not be
under any duty to examine or pass upon the validity, effectiveness or
genuineness of the Loan Documents or any instrument, document or communication
furnished pursuant thereto or in connection therewith, and the Agent shall be
entitled to assume that the same are valid, effective and genuine, have been
signed or sent by the proper parties and are what they purport to be. The Agent
shall be fully justified in failing or refusing to take any action under the
Loan Documents unless it shall first receive such advice or concurrence of the
Required Lenders as it deems appropriate. The Agent shall in all cases be fully
protected form the Lenders in acting, or in refraining from acting, under the
Loan Documents in accordance with a request of the Required Lenders, and such
request and any action taken or failure to act pursuant thereto shall be binding
upon all the Lenders and all future holders of the Notes.
10.5 Notice of Default
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The Agent shall not be deemed to have knowledge or notice of the occurrence
of any Default or Event of Default unless the Agent shall have received written
notice thereof from a Lender or the Borrower referring to this Agreement,
describing such Default or Event of Default and stating such notice is a "Notice
of Default." In the event that the Agent receives such a notice, the Agent shall
promptly give notice thereof to the Lenders. The Agent shall take such action
with respect to such Default or Event of Default as shall be reasonably directed
by the Required Lenders, provided that unless and until the Agent shall have
received such directions, the Agent may (but shall not be obligated to) take
such action or give such directions, or refrain from taking such action or
giving such directions, with respect to such Default or Event of Default as it
shall deem to be in the best interests of the Lenders.
10.6 Non-Reliance
Each Lender expressly acknowledges that neither the Agent nor any of its
officers, directors, employees, agents, attorneys-in- fact or affiliates has
made any representations or warranties to it and that no act by the Agent
hereinafter, including any review of the affairs of the Borrower or the
Subsidiaries, shall be deemed to constitute any representation or warranty by
the Agent to any Lender. Each Lender represents to the Agent that it has,
independently and without reliance upon the Agent or any other Lender, and based
on such documents and information as it has deemed appropriate, made its own
evaluation of and investigation into the business, operations, Property,
financial and other condition and creditworthiness of the Borrower and the
Subsidiaries and made its own decision to enter into this Agreement. Each Lender
also represents that it will, independently and without reliance upon the Agent
or any other Lender, and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit analysis,
evaluations and decisions in taking or not taking action under the Loan
Documents, and to make such investigation as it deems necessary to inform itself
as to the business, operations, Property, financial and other condition and
creditworthiness of the Borrower and the Subsidiaries. Except for notices,
reports and other documents expressly required to be furnished to the Lenders by
the Agent hereunder, the Agent shall not have any duty or responsibility to
provide any Lender with any credit or other information concerning the business,
operations, Property, financial and other condition or creditworthiness of the
Borrower or the Subsidiaries which may come
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into the possession of the Agent or any of its respective officers, directors,
employees, agents, attorneys-in-fact or affiliates.
10.7 Indemnification
Each Lender agrees to indemnify the Agent in its capacity as such (to the
extent not promptly reimbursed by the Borrower and without limiting the
obligation of the Borrower to do so), ratably according to its Commitment
Percentage, from and against any and all liabilities, obligations, claims,
losses, damages, penalties, actions, judgments, suits, costs, expenses and
disbursements of any kind whatsoever, including any amounts paid to the Lenders
by or for the account of the Borrower pursuant to the terms hereof, that are
subsequently rescinded or avoided (or must otherwise be restored or returned),
which may at any time (including at any time following the payment of the Notes)
be imposed on, incurred by or asserted against the Agent in any way relating to
or arising out of this Agreement, any other Loan Document or any other document
contemplated by or referred to herein or the transactions contemplated hereby or
any action taken or omitted to be taken by the Agent under or in connection with
any of the foregoing; provided, however, that no Lender shall be liable for the
payment of any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements to the
extent resulting solely from the gross negligence or willful misconduct of the
Agent. The agreements in this Section 10.7 shall survive the payment of the
Notes and all other amounts payable under the Loan Documents.
10.8 Agent in its Individual Capacity
BNY, and each of its affiliates, may make loans to, accept deposits from,
issue letters of credit for the account of and generally engage in any kind of
business with, the Borrower and the Subsidiaries as though BNY was not the Agent
hereunder. With respect to the Commitment made or renewed by BNY and the Note
issued to BNY, BNY shall have the same rights and powers under this Agreement as
any Lender and may exercise the same as though it was not the Agent and the term
"Lender" shall include BNY.
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10.9 Successor Agent
If at any time the Agent deems it advisable, in its sole discretion, it may
submit to each of the Lenders a written notification of its resignation as the
Agent under this Agreement, such resignation to be effective on the earlier to
occur of (a) the thirtieth day after the date of such notice, and (b) the date
upon which any successor to the Agent, in accordance with the provisions of this
Section 10.9, shall have accepted in writing its appointment as such successor
Agent. Upon any such resignation, the Required Lenders shall have the right to
appoint from among the Lenders a successor Agent therefor reasonably acceptable
to the Borrower. If no such successor Agent shall have been so appointed by the
Required Lenders and accepted such appointment within 30 days after the retiring
Agent's giving of notice of resignation, then the retiring Agent may, on behalf
of the Lenders, appoint a successor Agent therefor, which successor Agent shall
be a commercial bank organized under the laws of the United States of America or
of any State thereof and having a combined capital and surplus of at least
$500,000,000. Upon the written acceptance of any appointment as the Agent
hereunder by a successor Agent, such successor Agent shall automatically become
a party to this Agreement and shall thereupon succeed to and become vested with
all the rights, powers, privileges and duties of the retiring Agent, and the
retiring Agent's rights, powers, privileges and duties as the Agent under this
Agreement shall be terminated. The Borrower and the Lenders shall execute such
documents as shall be necessary to effect such appointment. After any retiring
Agent's resignation as the Agent, the provisions of this Section 10 shall inure
to its benefit as to any actions taken or omitted to be taken by it while it was
the Agent under this Agreement. If at any time there shall not be a duly
appointed and acting Agent, upon notice duly given, the Borrower agrees to make
each payment when due hereunder and under the Notes and the other Loan Documents
directly to the Lenders entitled thereto during such time.
11. OTHER PROVISIONS
11.1 Amendments, Waivers, Etc.
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With the written consent of the Required Lenders, the Agent and the
appropriate parties to the Loan Documents (other than the Lenders) may, from
time to time, enter into written amendments, supplements or modifications
thereof and, with the consent of the Required Lenders, the Agent on behalf of
the Lenders may execute and deliver to any such parties a written instrument
waiving or consenting to the departure from, on such terms and conditions as the
Agent may specify in such instrument, any of the requirements of the Loan
Documents or any Default or Event of Default and its consequences, provided that
no such amendment, supplement, modification, waiver or consent shall, without
the consent of all of the Lenders (i) increase the Commitment Amount of any
Lender (provided that no waiver of a Default or Event of Default shall be deemed
to constitute such an increase), (ii) extend the Commitment Period (other than
as provided in Section 2.7(b)), (iii) reduce the amount, or extend the time of
payment, of the Commitment Fee, (iv) reduce the rate, or extend the time of
payment of, interest on any Loan or any Note (other than the applicability of
any post-default increase in such rate of interest), (v) reduce the amount, or
extend the time of payment of any installment or other payment of principal on
any Loan or any Note, (vi) decrease or forgive the principal amount of any Loan
or any Note, (vii) consent to any assignment or delegation by the Borrower or
any Subsidiary of any of its rights or obligations under any Loan Document,
(viii) change the provisions of this Section 11.1, or (ix) change the definition
of Required Lenders, and provided further that no such amendment, supplement,
modification, waiver or consent shall amend, modify or waive any provision of
Section 10 or otherwise change any of the rights or obligations of the Agent
under any Loan Document without the written consent of the Agent. Any such
amendment, supplement, modification, waiver or consent shall apply equally to
each of the Lenders and shall be binding upon the parties to the applicable
agreement, the Lenders, the Agent and all future holders of the Notes. In the
case of any waiver, the parties to the applicable agreement, the Lenders and the
Agent shall be restored to their former position and rights hereunder and under
the other Loan Documents, and any Default or Event of Default waived shall not
extend to any subsequent or other Default or Event of Default, or impair any
right consequent thereon.
11.2 Notices
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Except as otherwise expressly provided herein, all notices, requests and
demands to or upon the respective parties hereto to be effective shall be in
writing and, if in writing, shall be deemed to have been duly given or made (a)
when delivered by hand, (b) one Domestic Business Day after having been sent by
overnight courier service, (c) five Domestic Business Days after having been
deposited in the mail, first-class postage prepaid, or (d) in the case of
facsimile notice, when sent, addressed as follows in the case of the Borrower
and the Agent, and as set forth in Exhibit A in the case of each of the Lenders,
or to such other addresses as to which the Agent may be hereafter notified by
the respective parties hereto or any future holders of the Notes (but not by
giving or leaving a message on an answering or recording device, and E-mail
messages shall not constitute notice hereunder):
The Borrower:
Frontier Insurance Group, Inc.
195 Lake Louise Marie Road
Rock Hill, New York 12775-8000
Attention: Dennis F. Plante,
Chief Financial Officer
Facsimile: (914) 796-1904
Telephone: (914) 796-2100 (ext. 197)
The Agent:
The Bank of New York
One Wall Street
New York, New York 10286
Attention: Nicole M. Negrea,
Assistant Vice President
Facsimile: (212) 809-9520
Telephone: (212) 635-6482,
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except that any notice, request or demand by the Borrower to or upon the Agent
or the Lenders pursuant to Sections 2.3, 2.7 or 3.3 shall not be effective until
received. Any party to a Loan Document may rely on signatures of the parties
thereto which are transmitted by facsimile or other electronic means as fully as
if originally signed.
11.3 No Waiver; Cumulative Remedies
No failure to exercise and no delay in exercising, on the part of the Agent
or any Lender, any right, remedy, power or privilege under any Loan Document
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, remedy, power or privilege under any Loan Document preclude any other
or further exercise thereof or the exercise of any other right, remedy, power or
privilege. The rights, remedies, powers and privileges under the Loan Documents
are cumulative and not exclusive of any rights, remedies, powers and privileges
provided by law.
11.4 Survival of Representations and Warranties
All representations and warranties made in the Loan Documents and in any
document, certificate or statement delivered pursuant thereto or in connection
therewith shall survive the execution and delivery of this Agreement, the Notes
and the other Loan Documents.
11.5 Payment of Expenses and Taxes
The Borrower agrees, promptly upon presentation of a statement or invoice
therefor, and whether any Loan is made, (a) to pay or reimburse the Agent for
all its reasonable costs and expenses incurred in connection with the
development, preparation and execution of, and any amendment, waiver, consent,
supplement or modification to, the Loan Documents, any documents prepared in
connection therewith and the consummation of the transactions contemplated
thereby whether such Loan Documents or any such amendment, waiver, consent,
supplement or modification to the Loan Documents or any documents prepared in
connection therewith are executed and whether the transactions contemplated
thereby are consummated, including the reasonable fees and disbursements of
Special Counsel, (b) to pay or reimburse the Agent and the Lenders for
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all of their respective costs and expenses incurred in connection with the
enforcement or preservation of any rights under the Loan Documents, including
reasonable fees and disbursements of Special Counsel and such local counsel(s)
(but not more than one in each jurisdiction) as may be reasonably required by
the Agent, but no other counsel, (c) to pay, indemnify, and hold each Lender and
the Agent harmless from any and all applicable recording and filing fees and any
and all liabilities with respect to, or resulting from any delay in paying,
stamp, excise and other taxes, if any, which may be payable or determined to be
payable in connection with the execution and delivery of, or consummation of any
of the transactions contemplated by, or any amendment, supplement or
modification of, or any waiver or consent under or in respect of, the Loan
Documents and any such other documents, and (d) to pay, indemnify and hold each
Lender, the Agent and each of their respective officers, directors and employees
harmless from and against any and all other liabilities, obligations, claims,
losses, damages, penalties, actions, judgments, suits, costs, expenses and
disbursements of any kind or nature whatsoever, including reasonable fees and
disbursements of Special Counsel and such local counsel as may be reasonably
required by the Agent, with respect to the enforcement of the Loan Documents
(all the foregoing, collectively, the "Indemnified Liabilities") and, if and to
the extent that the foregoing indemnity may be unenforceable for any reason, the
Borrower agrees to make the maximum payment permitted under applicable law;
provided, however, that the Borrower shall have no obligation hereunder to pay
Indemnified Liabilities to the Agent or any Lender arising from the gross
negligence, willful misconduct or unlawful actions of the Agent or such Lender.
The agreements in this Section 11.5 shall survive the termination of the
Commitments and the payment of the Notes and all other amounts payable
hereunder.
11.6 Lending Offices
Each Lender shall have the right at any time and from time to time to
transfer any Loan to a different office of such Lender.
11.7 Successors and Assigns
(a) This Agreement, the Notes and the other Loan Documents to which
the Borrower is a party shall be binding upon and inure to the benefit of the
Borrower,
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<PAGE>
<PAGE>
the Lenders, the Agent, all future holders of the Notes and their respective
successors and assigns.
(b) Subject to Section 11.7(e), each Lender may at any time assign all
or any portion of its rights under any Loan Document to any Federal Reserve
Bank.
(c) In addition to its rights under Section 11.7(b), each Lender shall
have the right to sell, assign, transfer or negotiate (each an "Assignment") all
or any portion of all of its Loans, its Commitment and its Notes to any
subsidiary or Affiliate of such Lender or to any other Lender, and, with the
Borrower's prior written consent (which consent shall not be unreasonably
withheld and shall not be required of the Borrower if, at the time of such
Assignment, an Event of Default shall exist) at any time, upon written notice to
the Agent of its intent to do so, to make an Assignment of all or any portion of
its Loans, its Commitment and its Notes to any bank, financial institution,
pension fund, mutual fund or other similar fund, provided that the parties to
each such Assignment shall execute and deliver to the Agent an Assignment and
Acceptance Agreement along with a fee (the "Assignment Fee"), for the account of
the Agent, of $2,500. Upon receipt of each such executed Assignment and
Acceptance Agreement together with the Assignment Fee therefor, the Agent shall
execute the same and, in the event that either the assignee thereunder is a
Lender (or a subsidiary or Affiliate thereof) or the Borrower shall have
consented to such assignment (to the extent that such consent was not
unreasonably withheld and is required as aforesaid), (i) record the same and
execute two copies of such Assignment and Acceptance Agreement in the
appropriate place, deliver one copy to the assignor and one copy to the
assignee, and (ii) request the Borrower to execute and deliver (1) to such
assignee, a Note in an aggregate principal amount equal to the Loans assigned
to, and Commitment assumed by, such assignee, and (2) to such assignor, in the
event that such assignor shall retain any Loans and Commitment, a Note in an
aggregate principal amount equal to the balance of such assignor Lender's Loans
and Commitment. The Borrower agrees that it shall, upon each such request of the
Agent, execute and deliver such new Notes at its own cost and expense. Upon such
delivery, acceptance and recording by the Agent, from and after the effective
date specified in such Assignment and Acceptance Agreement, the assignee
thereunder shall be a party hereto and shall for all purposes of this Agreement
and the other Loan Documents be deemed a "Lender" and, to the extent provided in
such Assignment and
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<PAGE>
<PAGE>
Acceptance Agreement, the assignor Lender thereunder shall be released from its
obligations under this Agreement and the other Loan Documents.
(d) In addition to the participations provided for in Section 11.9(b),
each Lender may grant participations in all or any part of its Loans, its Notes
and its Commitment to one or more banks, pension funds, mutual funds or other
financial institutions, provided that (i) such Lender's obligations under this
Agreement and the other Loan Documents shall remain unchanged, (ii) such Lender
shall remain solely responsible to the other parties to this Agreement and the
other Loan Documents for the performance of such obligations, (iii) 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 and the other Loan Documents, (iv) no
sub-participations shall be permitted, (v) the granting of such participation
does not require that any immediate out-of-pocket cost or expense be borne by
the Borrower, and (vi) the voting rights of any holder of any participation
shall be limited to the right to consent to any action taken or omitted to be
taken by such Lender under the Loan Documents which would (A) increase the
Commitment Amount of any Lender (provided that no waiver of a Default or Event
of Default or of any mandatory reduction of any of the foregoing shall be deemed
to constitute such a change), (B) extend the Commitment Period, (C) reduce the
amount or extend the time of payment of the Commitment Fee, (D) reduce the rate
or extend the time of payment of interest on any Loan or any Note (other than
the applicability of any post-default increase in such rate of interest), (E)
reduce the amount or extend the time of payment of any installment or other
payment of principal on any Loan or any Note, (F) decrease or forgive the
principal amount of any Loan or any Note, or (G) consent to any assignment or
delegation by the Borrower of all of its rights or obligations under all of the
Loan Documents.
(e) No Lender shall, as between and among the Borrower, the Agent, and
such Lender, be relieved of any of its obligations under the Loan Documents as a
result of any assignment of or granting of participations in, all or any part of
its Loans, its Commitment and its Notes, except that a Lender shall be relieved
of its obligations to the extent of any such Assignment of all or any part of
its Loans, its Commitment or its Notes pursuant to Section 11.7(c).
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<PAGE>
<PAGE>
11.8 Counterparts
The Loan Documents (other than the Notes) may be executed on any number of
separate counterparts and all of said counterparts taken together shall be
deemed to constitute one and the same agreement. It shall not be necessary in
making proof of any Loan Document to produce or account for more than one
counterpart signed by the party to be charged. A set of the copies of this
Agreement and each of the other Loan Documents signed by all of the parties
thereto shall be lodged with each of the Borrower and the Agent. Any party to a
Loan Document may rely upon the signatures of any other party thereto which are
transmitted by facsimile or other electronic means to the same extent as if
originally signed.
11.9 Set-off and Sharing of Payments
(a) In addition to any rights and remedies of the Lenders provided by
law, upon the occurrence of an Event of Default and acceleration of the
obligations owing in connection with this Agreement, or at any time upon the
occurrence and during the continuance of an Event of Default under Sections
9.1(a) or 9.1(b), each Lender shall have the right, without prior notice to the
Borrower, any such notice being expressly waived by the Borrower to the extent
permitted by applicable law, to set-off and apply against any indebtedness or
other liability, whether matured or unmatured, of the Borrower to such Lender
arising under the Loan Documents, any amount owing from such Lender to the
Borrower. To the extent permitted by applicable law, the aforesaid right of
set-off may be exercised by such Lender against the Borrower or against any
trustee in bankruptcy, custodian, debtor in possession, assignee for the benefit
of creditors, receiver, or execution, judgment or attachment creditor of the
Borrower, or against anyone else claiming through or against the Borrower or
such trustee in bankruptcy, custodian, debtor in possession, assignee for the
benefit of creditors, receivers, or execution, judgment or attachment creditor,
notwithstanding the fact that such right of set-off shall not have been
exercised by such Lender prior to the making, filing or issuance of, service
upon such Lender of, or notice to such Lender of, any petition, assignment for
the benefit of creditors, appointment or application for the appointment of a
receiver, or issuance of execution, subpoena, order or warrant. Each Lender
agrees promptly to notify the Borrower and the Agent after each such set-off and
application made by such
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<PAGE>
<PAGE>
Lender, provided that the failure to give such notice shall not affect the
validity of such set-off and application.
(b) If any Lender (each a "Benefited Lender") shall obtain any payment
(whether voluntary, involuntary, through the exercise of any right of set-off,
or otherwise) on account of its Loans or its Notes in excess of its Commitment
Percentage of payments then due and payable on account of the Loans and Notes
received by all the Lenders, such Lender shall forthwith purchase, without
recourse, for cash, from the other Lenders such participations in their Loans
and Notes as shall be necessary to cause such purchasing Lender to share the
excess payment with each of them according to their Commitment Percentages,
provided, however, that if all or any portion of such excess payment is
thereafter recovered from such purchasing Lender, such purchase from each Lender
shall be rescinded and each such Lender shall repay to the purchasing Lender the
purchase price to the extent of such recovery, together with an amount equal to
such Lender's pro rata share (according to the proportion of (i) the amount of
such 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 this Section 11.9(b) may exercise such rights to payment (including
the right of set-off) with respect to such participation as fully as if such
Lender were the direct creditor of the Borrower in the amount of such
participation.
11.10 Indemnity
The Borrower agrees to indemnify and hold harmless the Agent and each
Lender from and against any loss, cost, liability, damage or expense, including
the reasonable fees and disbursements of Special Counsel and such local counsel
as may be reasonably required by the Agent or such Lender, incurred by the Agent
or such Lender in investigating, preparing for, defending against, or providing
evidence, producing documents or taking any other action in respect of, any
commenced or threatened litigation, administrative proceeding or investigation
under any federal securities law or any other statute of any jurisdiction, or
any regulation, or at common law or otherwise, which is alleged to arise out of
or is based upon (a) any untrue statement or alleged untrue statement of any
material fact, in any document or schedule executed or filed with any
Gov-
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<PAGE>
<PAGE>
ernmental Authority by or on behalf of the Borrower or any Subsidiary which
relates to the transactions contemplated by the Loan Documents, (b) any omission
or alleged omission to state any material fact required to be stated in such
document or schedule, or necessary to make the statements made therein, in light
of the circumstances under which made, not misleading, or (c) any acts,
practices or omissions or alleged acts, practices or omissions of the Borrower
or its agents relating to the use of the proceeds of any Loan which is alleged
to be in violation of Section 2.4, or in violation of any federal securities law
or of any other statute, regulation or other law of any jurisdiction applicable
thereto. The indemnity set forth herein shall be in addition to any other
obligations or liabilities of the Borrower to the Agent and the Lenders
hereunder or at common law or otherwise, shall include the fees and
disbursements of Special Counsel and such local counsel as may be reasonably
required by the Agent, incurred in connection with establishing liability under
this Section 11.10 or collecting amounts payable under this Section 11.10 and
shall survive any termination of this Agreement, the expiration of the
Commitments and the payment of all indebtedness of the Borrower under the Loan
Documents, provided that the Borrower shall not have any liability under this
Section 11.10 to any indemnified person with respect to indemnified liabilities
which are determined by a final and nonappealable judgment of a court of
competent jurisdiction to have arisen primarily from the gross negligence,
willful misconduct or unlawful actions of such indemnified person or which arise
solely out of any litigation between or among the Agent and the Lenders.
11.11 Governing Law
The Loan Documents and the rights and obligations of the parties thereto
shall be governed by, and construed and interpreted in accordance with, the laws
of the State of New York, without regard to principles of conflict of laws.
11.12 Severability
Every provision of this Agreement and the other Loan Documents is intended
to be severable, and if any term or provision hereof or thereof shall be
invalid, illegal or unenforceable for any reason, the validity, legality and
enforceability of the remaining provisions hereof or thereof shall not be
affected or impaired thereby, and any invalidity,
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<PAGE>
<PAGE>
illegality or unenforceability in any jurisdiction shall not affect the
validity, legality or enforceability of any such term or provision in any other
jurisdiction.
11.13 Integration
All exhibits to the Loan Documents shall be deemed to be a part thereof.
Each Loan Document embodies the entire agreement and understanding between or
among the parties thereto with respect to the subject matter thereof and
supersedes all prior agreements and understandings between or among the parties
thereto with respect to the subject matter thereof.
11.14 Treatment of Certain Information
Each Lender and the Agent agrees (on behalf of itself and each of its
affiliates, directors, officers, employees and representatives) to use
reasonable precautions to keep confidential, in accordance with their customary
procedures for handling confidential information of the same nature and
non-public information supplied by the Borrower or any Subsidiary pursuant to
this Agreement (a) which is identified by such Person as being confidential at
the time the same is delivered to such Lender or the Agent, or (b) which
constitutes any financial statement, financial projections or forecasts, budget,
compliance certificate, audit report, management letter or accountants'
certification delivered hereunder, provided, however, that nothing herein shall
limit the disclosure of any such information (i) to the extent required by
statute, rule, regulation or judicial process, (ii) to counsel for any of the
Lenders or the Agent, (iii) to bank examiners, auditors or accountants, (iv) to
the Agent or the Lenders, (v) in connection with any litigation to which any one
or more of the Lenders or the Agent is a party, or (vi) to any assignee or
participant (or prospective assignee or participant) so long as such assignee or
participant (or prospective assignee or participant) first executes and delivers
a confidentiality agreement containing substantially the same restrictions as
set forth in this Section.
11.15 Acknowledgments
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<PAGE>
<PAGE>
The Borrower acknowledges that (a) it has been advised by counsel in the
negotiation, execution and delivery of the Loan Documents, (b) by virtue of the
Loan Documents, neither the Agent nor any Lender has any fiduciary relationship
to the Borrower, and the relationship between the Agent and the Lenders, on the
one hand, and the Borrower, on the other hand, is solely that of debtor and
creditor, and (c) by virtue of the Loan Documents, no joint venture exists among
the Lenders or among the Borrower and the Lenders.
11.16 Consent to Jurisdiction
The Borrower irrevocably submits to the jurisdiction of any New York State
or Federal Court sitting in the City of New York over any suit, action or
proceeding arising out of or relating to the Loan Documents. The Borrower
irrevocably waives, to the fullest extent permitted by law, any objection which
it may now or hereafter have to the laying of the venue of any such suit, action
or proceeding brought in such a court and any claim that any such suit, action
or proceeding brought in such a court has been brought in an inconvenient forum.
The Borrower agrees that a final judgment in any such suit, action or proceeding
brought in such a court, after all appropriate appeals, shall be conclusive and
binding upon it.
11.17 Service of Process
The Borrower agrees that process may be served against it in any suit,
action or proceeding referred to in Section 11.15 by sending the same by first
class mail, return receipt requested or by overnight courier service, to the
address of the Borrower set forth in Section 11.2. The Borrower agrees that any
such service (i) shall be deemed in every respect effective service of process
upon it in any such suit, action, or proceeding, and (ii) shall to the fullest
extent enforceable by law, be taken and held to be valid personal service upon
and personal delivery to it.
11.18 No Limitation on Service or Suit
Nothing in the Loan Documents or any modification, waiver, or amendment
thereto shall affect the right of the Agent or any Lender to serve process in
any manner
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<PAGE>
<PAGE>
permitted by law or limit the right of the Agent or any Lender to bring
proceedings against the Borrower in the courts of any jurisdiction or
jurisdictions.
11.19 WAIVER OF TRIAL BY JURY
EACH OF THE AGENT, THE LENDERS AND THE BORROWER KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED THEREBY. FURTHER, THE BORROWER HEREBY CERTIFIES THAT
NO REPRESENTATIVE OR AGENT OF THE AGENT OR THE LENDERS, OR COUNSEL TO THE AGENT
OR THE LENDERS, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE AGENT OR THE
LENDERS WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER
OF RIGHT TO JURY TRIAL PROVISION. THE BORROWER ACKNOWLEDGES THAT THE AGENT AND
THE LENDERS HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, INTER ALIA, THE
PROVISIONS OF THIS SECTION.
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<PAGE>
<PAGE>
AS EVIDENCE of the agreement by the parties hereto to the terms and
conditions herein contained, each such party has caused this Agreement to be
executed on its behalf.
FRONTIER INSURANCE GROUP, INC.
By: ________________________________
Name: ______________________________
Title:______________________________
THE BANK OF NEW YORK, in its capacity
as a Lender and in its capacity as
the Agent
By: ________________________________
Name: ______________________________
Title:______________________________
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<PAGE>
<PAGE>
FRONTIER INSURANCE EXHIBIT B
FORM OF NOTE
$______________. _________ __, 1995
New York, New York
FOR VALUE RECEIVED, the undersigned, FRONTIER INSURANCE GROUP,
INC., a Delaware corporation (the "Borrower"), hereby promises to pay to the
order of _________________________ (the "Lender") the lesser of
$_________________ or the outstanding principal balance of the Lender's Loans,
together with interest thereon, at the rate or rates, in the amounts and at the
time or times set forth in the Credit Agreement (as the same may be amended,
supplemented or otherwise modified from time to time, the "Credit Agreement"),
dated as of June 29, 1995, by and among the Borrower, the Lenders party thereto
and The Bank of New York, as the agent (in such capacity, the "Agent"), in each
case at the office of the Agent located at One Wall Street, New York, New York,
or at such other place as the Agent may specify from time to time, in lawful
money of the United States of America in immediately available funds.
Capitalized terms used herein that are not otherwise defined herein shall have
the respective meanings ascribed thereto in the Credit Agreement.
The Loans evidenced by this Note are prepayable in the amounts,
and on the dates, set forth in the Credit Agree ment. This Note is one of the
Notes under, and as such term is defined in, the Credit Agreement, and is
subject to, and shall be construed in accordance with, the provisions thereof,
and is entitled to the benefits set forth in the Loan Documents.
The Lender is hereby authorized to record on the schedule annexed
hereto, and any continuation sheets which the Lender may attach thereto (a) the
date and amount of each Loan made by the Lender, (b) the character of each Loan
as one or more ABR Advances, one or more Eurodollar Advances, one or more
Negotiated Rate Advances or a combination thereof, (c) the Interest Period and
Eurodollar Rate or Negotiated Rate applicable to each Eurodollar Advance or
Negoti-
<PAGE>
<PAGE>
ated Rate Advance, as the case may be, and (d) the date and amount of each
Conversion of, and each payment or prepayment of principal of, each Loan. The
failure to so record or any error in so recording shall not affect the
obligation of the Borrower to repay the Loans, together with interest thereon,
as provided in the Credit Agreement.
Except as specifically otherwise provided in the Credit
Agreement, the Borrower hereby waives presentment, demand, notice of dishonor,
protest, notice of protest and all other demands, protests and notices in
connection with the execution, delivery, performance, collection and enforcement
of this Note.
This Note is being delivered in, is intended to be performed in,
shall be construed and interpreted in accordance with, and be governed by the
internal laws of, the State of New York, without regard to principles of
conflict of laws.
This Note may only be amended by an instrument in writing
executed pursuant to the provisions of Section 11.1 of the Credit Agreement.
FRONTIER INSURANCE GROUP, INC.
By: ___________________________
Name: _________________________
Title: ________________________
- 2 -
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. 1995 FORM 10-K EXHIBIT 11
Computation of Per Share Earnings
(in thousands, except per share dollar amounts)
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
Net Income $31,211 $16,980 $23,871
======= ======= =======
Weighted average shares of
common stock outstanding (1) 13,011 12,992 11,419
======= ======= =======
Net income per share of
common stock outstanding (1) $2.40 $1.31 $2.09
======= ======= =======
</TABLE>
- --------------
(1) Weighted average shares of common stock outstanding have been adjusted to
give effect to the Company's common stock dividends and a 3-for-2 stock
split. Accordingly, net income per share of common stock has been
adjusted.
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. 1995 FORM 10-K EXHIBIT 21(a)
LIST OF REGISTRANTS SUBSIDIARIES
The following is a list of Registrant's subsidiaries, all of which are wholly
owned.
<TABLE>
<CAPTION>
State of Jurisdiction
Name and Incorporation
- ------------------------------------------- --------------------------
<S> <C>
Frontier Insurance Company New York
Medical Professional Liability Agency, Ltd. New York
Pioneer Claim Management, Inc. New York
Frontier Pacific Insurance Company California
Spencer Douglass Insurance Associates California
</TABLE>
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. 1995 FORM 10-K EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 33-30217, No. 33-39638, and No. 33-77332) pertaining to the
Incentive and Non-Incentive Stock Option Plans of Frontier Insurance Group, Inc.
of our report dated March 15, 1996, with respect to the consolidated financial
statements and schedules of Frontier Insurance Group, Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 1995.
/S/ Ernst & Young LLP
-------------------------------
New York, New York
March 26, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 521,402
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 21,024
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 552,714
<CASH> 5,115
<RECOVER-REINSURE> 2,639
<DEFERRED-ACQUISITION> 18,797
<TOTAL-ASSETS> 773,348
<POLICY-LOSSES> 367,438
<UNEARNED-PREMIUMS> 107,282
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 130
0
0
<OTHER-SE> 229,603
<TOTAL-LIABILITY-AND-EQUITY> 773,348
196,220
<INVESTMENT-INCOME> 30,035
<INVESTMENT-GAINS> 20
<OTHER-INCOME> 130
<BENEFITS> 119,256
<UNDERWRITING-AMORTIZATION> 42,258
<UNDERWRITING-OTHER> 20,717
<INCOME-PRETAX> 43,280
<INCOME-TAX> 12,069
<INCOME-CONTINUING> 31,211
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,211
<EPS-PRIMARY> 2.40
<EPS-DILUTED> 2.40
<RESERVE-OPEN> 263,202
<PROVISION-CURRENT> 132,264
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 13,052
<PAYMENTS-PRIOR> 80,507
<RESERVE-CLOSE> 294,393
<CUMULATIVE-DEFICIENCY> 7,514
</TABLE>
