SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1996
Commission file number 0-16090
Hallmark Financial Services, Inc.
(Exact name of small business issuer as specified in its charter)
Nevada 87-0447375
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14651 Dallas Parkway, Suite 900
Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (214) 404-1637
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common Stock, par value $.03 per
share - 10,662,277 shares outstanding as of August 13, 1996.
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
1996 1995
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Debt securities, held-to-maturity $ 6,459,456 $ 6,409,544
Equity securities, available-for-sale 170,338 171,727
Short-term investments,
at cost which approximates market
value 4,935,927 3,615,327
Total investments 11,565,721 10,196,598
Cash and cash equivalents 5,632,165 4,257,755
Prepaid reinsurance premiums 9,995,368 11,726,968
Premium notes receivable 2,728,580 5,342,507
Reinsurance recoverable 22,541,812 19,335,746
Deferred policy acquisition costs 2,869,163 2,999,541
Excess of cost over net assets
acquired, net of accumulated
amortization 5,295,352 5,373,983
Deferred federal income taxes 539,193 567,969
Accrued investment income 63,818 55,765
Other assets 827,652 798,216
Total assets $ 62,058,824 $ 60,655,048
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 615,625 $ 639,162
Unpaid losses and loss adjustment
expenses 25,391,329 22,323,090
Unearned premiums 13,333,085 15,659,897
Reinsurance balances payable 3,734,342 3,489,357
Deferred ceding commissions 3,244,348 3,518,227
Drafts outstanding 891,322 684,430
Accounts payable and other
accrued expenses 3,887,971 3,969,288
Total liabilities 51,098,022 50,283,451
Stockholders' equity:
Common stock, $.03 par value,
authorized 100,000,000 shares;
(issued 10,962,277 shares in 1996
and 10,917,277 in 1995) 328,868 328,868
Capital in excess of par value 10,349,665 10,349,665
Retained earnings 882,269 293,064
Treasury stock (600,000) (600,000)
Total stockholders' equity 10,960,802 10,371,597
$ 62,058,824 $ 60,655,048
</TABLE>
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE> Unaudited
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Gross premiums written $11,796,531 $12,085,517 $22,254,930 $22,958,235
Ceded premiums written (8,842,954) (9,045,263) (16,688,519) (17,192,099)
Net premiums written $ 2,953,577 $ 3,040,254 $ 5,566,411 $ 5,766,136
Revenues:
Premiums earned $12,504,832 $10,376,827 $24,581,742 $19,288,290
Premiums ceded (9,371,690) (7,738,837) (18,420,120) (14,363,709)
Net premiums earned 3,133,142 2,637,990 6,161,622 4,924,581
Investment income,
net of expenses 232,595 113,518 447,084 214,884
Finance service
charges 2,223 208,953 24,314 424,929
Processing fees 558,256 160,306 1,054,250 215,433
Service fees 15,792 53,805 45,295 62,170
Other income 16,880 23,354 25,234 50,780
Total revenues 3,958,888 3,197,926 7,757,799 5,892,777
Benefits, losses and expenses:
Losses and loss
adjustment expenses 8,334,514 9,469,979 16,416,618 16,452,575
Reinsurance recoveries (6,292,650) (7,316,100) (12,366,288) (12,432,929)
Net losses and loss
adjustment expenses 2,041,864 2,153,879 4,050,330 4,019,646
Amortization of
acquisition costs (38,180) 165,883 (143,501) 228,602
Other acquisition,
underwriting
and operating expenses 1,449,724 705,439 2,841,766 1,203,116
Interest expense 10,783 10,548 21,859 22,611
Amortization expense 41,399 46,328 82,798 98,055
Total benefits,losses
and expenses 3,505,590 3,082,077 6,853,252 5,572,030
Income from operations
before federal
income taxes 453,298 115,849 904,547 320,747
Federal income tax
(benefit) (Note 3) 166,682 (44,509) 315,342 (76,144)
Net income $ 286,616 $ 160,358 $ 589,205 $ 396,891
Net income per share
of common stock $ .02 $ .02 $ .05 $ .04
Weighted average
shares outstanding 12,103,411 10,662,277 12,103,411 10,662,277
</TABLE>
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE> (Unaudited)
<CAPTION>
Six Months Ended
June 30
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $589,205 $396,891
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization expense 138,949 147,816
Change in deferred federal income taxes 28,776 (349,029)
Change in prepaid reinsurance premiums 1,731,600 (2,828,390)
Change in premium notes receivable 2,613,927 (3,625,802)
Change in installment premiums receivable - 2,716,095
Change in deferred policy acquisition costs 130,378 (619,488)
Change in ceding income (273,879) 848,090
Change in unpaid losses and loss
adjustment expenses 3,068,239 4,791,513
Change in unearned premiums (2,326,812) 3,669,945
Change in reinsurance recoverable (3,206,066) (5,833,123)
Change in reinsurance balances payable 244,985 1,197,090
Change in all other liabilities 125,573 1,240,901
Change in all other assets 169,886 ( 89,489)
Net cash provided by operating activities 3,034,761 1,663,020
Cash flows from investing activities:
Purchases of property and equipment (264,723) (83,808)
Loss on sale of assets (2,970) -
Purchases of debt securities (520,182) (1,698,507)
Maturities and redemptions of debt securities 470,270 731,881
Maturities and redemptions of common stock 1,389 1,657
Purchase of short-term investments (4,460,155) -
Maturities of short-term investments 3,139,555 -
Net cash used in investing activities (1,636,816) (1,048,777)
Cash flows from financing activities:
Repayment of short-term borrowings (23,535) (121,306)
Cash used in financing activities (23,535) (121,306)
Increase (decrease) in cash and cash equivalents 1,374,410 492,937
Cash and cash equivalents at beginning of period 4,257,755 1,800,762
Cash and cash equivalents at end of period $5,632,165 $2,293,699
Supplemental cash flow information:
Cash paid during the period for interest $ 21,859 $ 22,611
</TABLE>
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Item 1. Notes to Consolidated Financial Statements (Unaudited).
Note 1 - Summary of Accounting Policies
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of Hallmark
Financial Services, Inc. and subsidiaries (the "Company") as of June 30, 1996
and the consolidated results of operations and cash flows for all periods
presented. The accompanying financial statements have been prepared by the
Company without audit.
Certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Reference is made to the Company's annual
consolidated financial statements for the year ended December 31, 1995 for a
description of all other accounting policies. Certain items in the 1995 interim
financial statements have been reclassified to conform to the 1996 presentation.
The results of operations for the period ended June 30, 1996 are not
necessarily indicative of the operating results to be expected for the full
year.
Note 2 - Investments
Debt securities, held-to-maturity, for the reporting period include
investments in U.S. Government securities totaling $6,459,456, which includes
special revenue bonds of $327,841. Short-term investments include certificates
of deposits and federal discount notes of $4,935,927. Short-term investments
mature within one year.
Realized investment gains and losses are recognized in operations on the
specific identification method. The Company has the ability and intent to hold
all investments to maturity. Provisions for possible losses are recorded only
on other-than-temporary declines in the value of an investment.
Note 3 - Federal Income Taxes
The composition of deferred tax assets and liabilities and the related tax
effects as of June 30, 1996 and 1995 is as follows:
<TABLE>
Deferred Tax Assets: 1996 1995
<S> <C> <C>
Property and equipment basis $ 22,762 $ 2,395
Unearned premiums 226,965 256,168
Loss reserve discounting 137,440 122,146
Deferred ceding commissions,
non-deductible for tax 127,740 104,223
Net operating loss carryforward 33,171 55,622
Accrued expenses 27,130 11,531
Allowance for doubtful accounts 8,201 -
Other 26,519 27,769
Total gross deferred tax assets $ 609,928 $ 579,854
Valuation allowance 70,735 230,825
Net deferred tax asset $539,193 $349,029
</TABLE>
<PAGE>
A reconciliation of the income tax provisions based on the prevailing
corporate tax rate of 34 percent to the provision reflected in the consolidated
financial statements for the respective six month periods ended June 30, 1996
and 1995 is as follows:
<TABLE>
1996 1995
<S> <C> <C>
Computed expected income tax expense
at statutory regulatory tax rate $ 307,546 $ 109,054
Amortization of excess cost 26,841 29,025
Tax-exempt interest ( 985) (5,034)
Change in valuation allowance (26,827) (234,439)
Other 8,767 25,250
Federal income tax expense
(deferred tax benefit) $ 315,342 ($ 76,144)
</TABLE>
The Company has available, for federal income tax purposes, unused net
operating losses of $ 97,562 at June 30, 1996, which may be used to offset
future taxable income. The net operating losses will expire, if unused, as
follows:
Year
2002 1,325
2003 96,237
$ 97,562
Note 4 - Warrants Outstanding
In October 1992, the Company issued warrants to purchase 981,333 shares of
its Common Stock ("Guaranty Warrants") to executive officers and directors in
consideration for the recipients' agreement to pledge outstanding shares of the
Company's common stock they owned as security for a working capital line of
credit the Company proposed to obtain from a commercial bank. The Company
subsequently abandoned its efforts to obtain the working capital line of credit.
Each Guaranty Warrant covered the same number of shares the recipient agreed to
pledge. No value has been assigned to these warrants. The Guaranty Warrants
were originally exercisable between October 2, 1992 and October 1, 1994. In
March 1994, the Board of Directors extended the exercisability of the Guaranty
Warrants through October 1, 1996. In March 1996, the Board of Directors again
extended the exercisability of the Guaranty Warrants through October 1, 1998, at
which time they will expire to the extent not exercised. The exercise price of
each Guaranty Warrant is $0.50 per share, an amount equal to the last reported
sale price of the Common Stock on the American Stock Exchange Emerging Company
Marketplace prior to October 2, 1992. The Guaranty Warrants are not
transferrable, except to the estate of a deceased recipient.
<PAGE>
Note 5 - Reinsurance
American Hallmark Insurance Company of Texas ("Hallmark") is involved in the
cession of reinsurance to other companies. The Company remains obligated to its
policyholders in the event that reinsurers do not meet their obligations under
the reinsurance agreements.
Effective March 1, 1992, Hallmark entered into a reinsurance arrangement with
State and County Mutual Fire Insurance Company ("State & County"), an
unaffiliated company, to assume 100% of the nonstandard auto business produced
by American Hallmark General Agency ("AHGA") and written on State & County
policies. The arrangement is supplemented by a separate retrocession agreement
between Hallmark and Vesta Fire Insurance Corporation ("Vesta"). Hallmark and
Vesta share the risk on the State & County policies with Hallmark retaining 25%.
This retrocession agreement with Vesta was terminated on a run-off basis
effective June 30, 1996.
Effective July 1, 1996, Hallmark renewed its reinsurance arrangement with State
& County and entered into new retrocession agreements with Kemper Reinsurance
Company ("Kemper"), Dorinco Reinsurance Company ("Dorinco") and Skandia America
Reinsurance Corporation ("Skandia"). Under the new retrocession agreements,
Hallmark continues to retain 25%.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Introduction. Hallmark Financial Services, Inc. (HFS) engages in the sale
of consumer products and services on credit terms, primarily to lower and middle
income customers. Its target market encompasses the substantial number of
Americans who either are denied credit from banks, credit card companies and
other conventional credit sources, or have never established a bank account or
credit history. Currently, the Company's business primarily involves marketing,
underwriting and premium financing of non-standard automobile insurance.
Secondarily, the Company provides fee-based claims adjusting and related
services for affiliates and third parties. (HFS and its wholly owned
subsidiaries are collectively referred to herein as the "Company").
The Company conducts these activities through an integrated insurance
group, the dominant members of which are a property and casualty insurance
company, American Hallmark Insurance Company of Texas ("Hallmark"); a managing
general agent, American Hallmark General Agency, Inc. ("AHGA"); a network of
affiliated insurance agencies known as the American Hallmark Agencies ("Hallmark
Agencies"); a commercial excess and surplus lines affiliated managing general
agency, Hallmark Underwriters, Inc. ("HUI"); a premium finance company, Hallmark
Finance Corporation ("HFC"); and a claims handling and adjustment firm, Hallmark
Claims Service, Inc., ("HCS"). The Company operates only in Texas.
Hallmark provides non-standard automobile liability and physical damage
insurance through reinsurance arrangements with several unaffiliated companies.
Through arrangements with State & County Mutual Fire Insurance Company ("State &
County"), Hallmark provides insurance primarily for high risk drivers who do not
qualify for standard-rate insurance. Under supplementary quota-share
reinsurance agreements, Hallmark cedes a substantial portion of its risks and
retains the balance. From March 1,1992 through June 30, 1996 Hallmark ceded a
portion of its risk to Vesta Fire Insurance Corporation ("Vesta") (60% between
March 1, 1992 and July 31, 1993 and 75% between August 1, 1993 and June 30,
1996). Effective July 1, 1996, Hallmark entered into new reinsurance treaties
with Kemper Reinsurance Company ("Kemper"), Dorinco Reinsurance Company
("Dorinco") and Skandia America Reinsurance Corporation ("Skandia"), ceding a
<PAGE>
total of 75% of its risk. HFC, through a financing and servicing arrangement
with an unaffiliated premium finance company, offers premium financing to
Hallmark policyholders. AHGA manages the marketing of Hallmark policies through
a network of retail insurance agencies which operates under the American
Hallmark Agencies name, and through independent agents operating under their own
respective names.
HUI, formed to market and produce commercial excess and surplus lines
("E&S") insurance on behalf of unaffiliated E&S insurers, began operations in
late April 1996. HUI is expected to generate commission income by producing E&S
insurance business through the network of the Company's thirteen retail
agencies, certain agents from the Company's current independent agent group, and
other selected independent agents not currently representing the Company.
Financial Condition and Liquidity
The Company's sources of funds are principally derived from insurance
related operations. Major sources of funds are from premiums collected (net of
policy cancellations and premiums ceded), external funding of premium notes,
ceding commissions, processing fees, premium finance service charges and
investment activities. On a consolidated basis, the Company reported an increase
of $1,371,741, or approximately 82%, in net cash from operations for the first
six months of 1996 as compared to the similar period in 1995, resulting in a
steady improvement in liquidity during the first six months of 1996. At June 30,
1996, bonds, equities, short-term investments and cash totaled $17,197,886,
compared to $14,454,353 at December 31, 1995. The approximate 19% increase in
investments and cash during the first six months of 1996 is primarily due to
more timely funding of annual policy premiums under HFC's premium finance
program initiated in 1995, and expanded during 1996, than under Hallmark's
direct-bill program (which has been phased out). Significant increases in
premium volume and ceding commission income during 1995, which accounted for
significant increases in cash and investments throughout 1995, have moderated
during the first six months of 1996.
Under HFC's premium finance program, premiums for annual policies due
Hallmark are funded-in-full in approximately 30 days and immediately invested.
Premium notes receivable decreased at June 30, 1996 compared to December 31,
1995 principally due to an increase in monthly policy mix in 1996 and to an
increase in first quarter premium cancellations related to annual policies
written in high-volume months of 1995. As expected, balances due under the
direct bill program (which are included in premium notes receivable at December
31, 1995) have decreased from $299,182 at December 31, 1995 to $0.00 at June 30,
1996. During the first respective six months of 1996 and 1995, the Company
received external funds, net of cancellations, of $17,206,321 and $2,974,178 to
fund premiums generated by the Company.
At June 30, 1996, the Company reported $615,625 in notes payable, $404,739
of which is due before December 31, 1996. The Company expects to repay these
notes with cash from operations. However, the amount to be paid in 1996 may be
less than the $404,739 reflected in the notes payable balance. Included in this
amount is a disputed obligation of $380,000 in connection with a financing
transaction which occurred prior to the Company's acquisition of the insurance
group. Further, if any portion of the approximately $380,000 is ultimately
deemed owing, the Company believes that it has the right of offset against a
related receivable in the sum of $240,000.
A substantial portion of the Company's liquid assets are held by Hallmark
and are not available for general corporate purposes. Of the Company's
<PAGE>
consolidated liquid assets at June 30, 1996, $1,290,812 represents non-
restricted cash (compared to $2,131,582 at December 31, 1995 and $1,016,645 at
June 30, 1995). Since state insurance regulations limit financial transactions
between an insurance company and its affiliates, the Company is limited in its
ability to use Hallmark funds for its own working capital purposes.
Furthermore, dividends and loans by Hallmark to the Company are restricted and
subject to Texas Department of Insurance ("TDI") approval. However, TDI has
sanctioned the payment of management fees, commissions and claims handling fees
by Hallmark to the Company and affiliates. During the latter part of 1993, the
Company initiated measures to strengthen Hallmark's surplus in order to insure
its compliance with regulatory guidelines and to provide surplus balances
necessary to accommodate premium growth. Some of the measures taken were a
temporary abatement or reduction of the management fee and a reduction of
commissions payable by Hallmark to the Company and AHGA, respectively. These
measures have continued into subsequent years. During the first six months of
1996, Hallmark paid or accrued $475,000 in management fees as compared to
$200,000 during the first six months of 1995. For the year ended December 31,
1995, Hallmark paid or accrued only $600,000 in management fees. While
management fees for 1996 are anticipated to be higher than the fees paid or
accrued in 1995, they should be less than the amounts authorized by TDI.
Management fees from Hallmark should continue to be a moderate source of
unrestricted liquidity. However, management intends to continue to restrict
payment of management fees, as necessary, to insure the surplus strength of
Hallmark.
Commissions from annual policy production by independent agents represent a
source of unrestricted liquidity. Under this program, AHGA offers independent
agents the ability to write annual policies, but pays commissions to independent
agents monthly on an "earned" basis. However, consistent with customary
industry practice, Hallmark pays total commissions up-front to AHGA based on the
entire annual premiums written. Independent agent production of annual policies
was approximately $6.7 million for the six months ended June 30, 1996. During
the first six months of 1996, AHGA received $3.2 million in commissions related
to this program from Hallmark, and will pay $1.3 million to independent agents.
During 1995, AHGA received $7.6 million in commissions related to this annual
policy program from Hallmark, of which approximately $1.5 million is being paid
to independent agents during 1996 as earned.
Ceding commission income represents a significant source of funds to the
Company. During the first six months of 1996, and during 1995, ceding
commission income exceeded agent commissions and other direct expenses
associated with the cost of producing new business (i.e., policy acquisition
costs). Ceding commission income for the six months ended June 30, 1996 showed
a nominal decrease of $152,451 to $5,005,179 as compared to the first six months
of 1995. In accordance with GAAP, a portion of ceding commission income and
policy acquisition costs is deferred and recognized as income and expense,
respectively, as related net premiums are earned. Deferred ceding commission
income also decreased to $3,244,348 at June 30, 1996 from $3,518,227 at December
31, 1995. This decrease is principally due to lower annual premiums written
during the first six months of 1996 compared to 1995. Similarly, deferred
policy acquisition costs of $2,869,163 as of June 30, 1996 were $130,378 less
than at December 31, 1995. Deferred policy acquisition costs were $375,185 less
than deferred ceding commission income at June 30, 1996. Under the reinsurance
treaty with Vesta in effect through June 30, 1996, the Company earned more in
ceding commission income than it incurred in policy acquisition costs primarily
due to the practice of dealing directly with its independent agents, thus
eliminating additional commission expense associated with using managing general
agents as intermediaries.
<PAGE>
At June 30, 1996, Hallmark reported statutory capital and surplus of
$4,971,776, which shows an increase of $197,332 over the $4,774,444 reported at
December 31, 1995. On an annualized-premiums basis, Hallmark's premium-to-
surplus ratio at June 30, 1996 was 2.24 to 1 as compared to 2.58 to 1 at
December 31, 1995. It is management's opinion that Hallmark should not require
additional capital during 1996. Management anticipates that Hallmark is
positioned to maintain and strengthen statutory surplus through increased
earnings from insurance operations. Management believes that loss ratios for
the first six months of 1996 are beginning to reflect results of steps taken to
address an unfavorable loss trend reported during 1995. For the six months
ended June 30, 1996, the statutory loss ratio was approximately 72.5% compared
to 81.8% and 87.1% for the twelve and six months ended December 31, 1995, and
June 30, 1995, respectively. Hallmark implemented rate increases for business
written in certain territories effective September 15, 1995 and January 1, 1996,
respectively, and is rolling out another rate adjustment effective August 15,
1996. These rate changes are designed to further reduce loss ratios while
maintaining the Company's competitive status.
As previously mentioned, effective July 1, 1996, Hallmark entered into
new reinsurance treaties (the "New Treaties") with Kemper, Dorinco and Skandia.
Certain provisions of the New Treaties could impact the Company's liquidity.
Under the New Treaties, Hallmark will retain 50% and cede only 50% of the policy
origination fees (vs. ceding 100% of the policy origination fees under the Vesta
treaty), pay premium taxes and front fees on 100% of the business produced (vs.
premium taxes and front fees on only its retained business under the Vesta
treaty), and receive a 30% provisional ceding commission (vs. a guaranteed 30%
ceding commission under the Vesta treaty). Policy origination fees are up-
front, fully earned fees that the Company is permitted by law to charge in
addition to premiums to cover or defray certain costs associated with producing
policies. The provisional commission paid under the New Treaties will be
adjusted annually over a three year rating period on a sliding scale based upon
annual loss ratios. Based upon its loss experience, Hallmark can earn a maximum
commission of 33.5% and is guaranteed a minimum commission of 26% regardless of
loss experience. Management has focused on premium rate-setting and enhanced
claims handling procedures designed to strengthen the performance of the
Company's core State & County business. If loss ratios improve and ceding
commissions increase accordingly, there could be a positive impact on liquidity.
However, if loss ratios do not improve, related ceding commissions will
decrease, as will liquidity.
Unearned premiums decreased approximately 15% as of June 30, 1996 compared
to December 31, 1995. This decrease was principally due to higher first quarter
cancellations associated with annual premiums written during high-volume months
of 1995, a decrease at June 30, 1996 in the remaining unearned portion of annual
premiums written during high-volume months of 1995, and to an increase in
monthly policy production. As expected, prepaid reinsurance premiums decreased
proportionately.
Unpaid losses and loss adjustment expenses at June 30, 1996, increased
approximately 14% as compared to December 31, 1995, primarily due to
implementation of a more conservative case reserving methodology. Accordingly,
reinsurance recoverable at June 30, 1996, increased approximately 17% as
compared to December 31, 1995.
Effective January 1, 1995, the Company began financing annual policy
premiums produced by the Hallmark Agencies through a premium finance program
offered by its formerly dormant premium finance subsidiary, HFC, and independent
agents began financing premiums through HFC's premium finance program in May of
<PAGE>
1995. Financing of the premium notes is provided by an unaffiliated premium
finance company, Peregrine Premium Finance L.C. ("Peregrine"), on a secured
basis. Peregrine has obtained an external credit facility of $13,500,000 for
the purpose of financing State & County policies produced by AHGA (the "Notes").
At June 30, 1996, $2,358,406 was available under Peregrine's credit facility to
fund the Notes which should be sufficient to fund projected State & County
activity of this premium finance program during 1996. HFC's premium financing
program is expected to continue to positively impact liquidity during 1996.
During 1996, management expects that Company liquidity will continue to be
favorably impacted by a continued focus on strengthening the performance of the
Company's core State & County business with particular emphasis on enhancement
of HCS's procedures and staffing. The Company has increased its claims staff
and hired additional, experienced claims adjusters and supervisory personnel
that, in turn, should lower loss and LAE payments. This focus, along with the
Company's ongoing ability to identify and retain quality independent agents and
to respond on a timely basis to rate-change indications arising from both loss
experience and competitive market considerations, is expected to enhance
earnings and liquidity during 1996. Management further anticipates that an
integrated cash management system implemented in late-1995 will positively
impact 1996 liquidity.
The Company continues to pursue third party claims handling and
administrative contracts. HCS entered into a small claims-handling and
consulting contract with an unaffiliated independent agent in 1995. The
unaffiliated agent is revising and expanding its program during 1996, which will
favorably impact fees. However, it is still not anticipated that fees from this
contract will have a significant impact on 1996 earnings. The Company continues
to earn fees for handling claims-related litigation of an unaffiliated agency
under a 1993 contract with Vesta. Although the Company is actively pursuing
additional third party claims handling business, it does not have any other
definitive agreements at this time.
Beginning late-April 1996, the Company began marketing E&S insurance
produced by HUI through the Company's marketing arm, AHGA. This business will
be produced by the Hallmark Agencies and a select group of independent agents,
and some portion of the premiums will be financed by HFC. No entity within the
Company will bear any underwriting risk. The E&S policies will be written on
behalf of A-rated (A.M. Best rating) unaffiliated insurance companies.
Management anticipates that the growth of this business will be gradual, and
does not expect a significant liquidity contribution in 1996. HFC will offer
premium financing for E&S business produced by HUI. Management is currently in
discussions with a bank regarding a secured line of credit to fund HFC's E&S
premium notes. The Company intends to provide the funding until such time that
bank financing is in place, and anticipates that internal funding could be used
to sustain the E&S program during its first year.
Management intends to continue to investigate opportunities for future
growth and expansion. However, the Company currently has no growth plans which
would require significant external funding during 1996.
Results of Operations
As expected, gross premiums written (prior to reinsurance) for the three
and six months ended June 30, 1996 remained relatively constant with an
approximate decrease of 2% and 3%, respectively, in relation to gross premiums
written over the same period in 1995. Net written premiums (after reinsurance)
for the three and six months ended June 30, 1996 reflects approximate decreases
<PAGE>
of 2% and 3%, respectively, over the same period in 1995. These decreases in
gross premiums written and net written premiums were primarily due to first
quarter cancellations of premiums associated with higher premium volume in
previous months.
Premiums earned (prior to reinsurance) for the three and six months ended
June 30, 1996 were $2,128,005 and $5,293,452, respectively, higher than for the
comparable periods in 1995 representing increases of 21% and 27%, respectively.
For the three and six months ended June 30, 1996, net earned premiums increased
$495,152 (19%) and $1,237,041 (25%), respectively, in relation to the same
respective periods of 1995. The slightly disproportionate increases in premiums
earned before and after reinsurance is primarily the result of reduced Texas
Automobile Insurance Plan Association ("TAIPA") premium allocations by TDI over
the past twelve months. Thus, 1995 earned premiums reflect a higher proportion
of TAIPA business which is retained 100% by the Company and is not subject to
reinsurance.
Net incurred loss ratios (computed on net premiums earned after
reinsurance) for both the three and six months ended June 30, 1996 were
approximately 65% and 67%, respectively, as compared to approximately 82% for
both the same 1995 periods. The decrease in the loss ratios between 1996 and
1995 is the combined result of improved loss experience on the Company's core
State & County business, and lower TAIPA premium allocations during 1996, as
well as to more favorable loss development in 1996 of the TAIPA business written
in prior years. It should be noted that the impact of any change in TAIPA loss
experience is intensified because TAIPA losses are 100% retained by Hallmark and
are not included in Hallmark's quota-share reinsurance agreement.
Other acquisition, underwriting and operating expenses for the three and
six months ended June 30, 1996, increased $744,285 and $1,638,650, respectively,
as compared to the prior year. This increase is principally due to an almost 3%
decrease in ceding commission income (as discussed in the Financial Condition
and Liquidity section), as well as higher operating costs related to expanded
premium finance operations in 1996 (which was a start-up operation beginning
January 1995), start-up costs of E&S operations, higher operating costs related
to increased staffing and professional development of claims personnel along
with increases in corporate rent, employee benefits, consulting and professional
fees and telephone expense related to a new telephone system.
Investment income for the three and six months ended June 30, 1996
increased by approximately 105% and 108%, respectively, over the comparable
period in 1995 as a result of an increase in funds available for investment and
an increase in the percentage of funds invested. Invested funds have increased
principally due to increased premium volumes during 1995, more timely funding of
premiums under HFC's premium finance program and enhanced utilization of funds
due to an improved cash management system implemented late-1995.
Processing fees for the three and six months ended June 30, 1996 increased
$397,950 and $838,817, respectively, in relation to the same periods of 1995.
These fees represent income earned by HFC pursuant to its premium finance
program commenced January 1, 1995. The increase in 1996 is due to the program
currently including financing of independent agency business, as well as
Hallmark agency premiums.
For the first three and six months of 1996, service fees and other income
is 58% and 38%, respectively, lower than for the same periods in 1995, primarily
as a result of decreased fees from third party claims services.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Except for routine litigation incidental to the business of the Company,
neither the Company, nor any of the properties of the Company was subject to any
material pending or threatened legal proceedings as of the date of this report.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Security Securities.
None
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) The Company's Annual Meeting of Shareholders was held on May 21, 1996.
Of the 10,662,277 shares of common stock of the Company entitled to
vote at the meeting, 5,146,510 shares were present in person or by
proxy.
(b) The following individuals were elected to serve as directors for the
Company: Ramon D. Phillips, Linda H. Sleeper, Raymond A. Kilgore,
Jack R. Daugherty, Kenneth H. Jones, Jr., Samuel W. Rizzo, A.R. Dike,
James H. Graves, George R. Manser and C. Jeffrey Rogers. Nominees
Sleeper, Daugherty, Rizzo, Dike, Graves, Manser and Rogers each
received 5,144,510 votes in favor of their election as directors of
the Company. Nominee Jones received 5,145,510 votes and nominees
Phillips and Kilgore received 5,146,510 votes each in favor of their
election as directors of the Company.
(c) The two additional items on the ballot were a proposal to adopt an
amendment to the 1994 Key Employee Long Term Incentive Plan and a
proposal to adopt an amendment to the 1994 Non-Employee Director Stock
Option Plan. The proposal to amend the 1994 Key Employee Long Term
Incentive Plan passed with 5,061,460 shares voted in favor. The
proposal to amend the 1994 Non-Employee Director Stock Option Plan
passed with 4,893,060 shares voted in favor.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits listed in the Exhibit Index which appears on sequential
page 14 are filed herewith.
(b) The Company did not file a Current Report on Form 8-K to report any
events which occurred during the quarter ended June 30, 1996.
<PAGE>
Exhibit Description NOTES
(See Below)
10(a) Form of 100% Quota Share Reinsurance *
Agreement between State & County Mutual
Fire Insurance Company and American
Hallmark Insurance Company of Texas
effective July 1, 1996.
10(b) Form of Quota Share Retrocession Agreement *
between American Hallmark Insurance Company
of Texas and the Reinsurer (specifically
identified as follows: Dorinco, Kemper and
Skandia), effective July 1, 1996.
10(c) Guaranty Agreement effective July 1, 1996 *
provided by Dorinco Reinsurance Company in
favor of State & County Mutual Fire
Insurance Company.
10(d) Guaranty Agreement effective July 1, 1996 *
provided by Kemper Reinsurance Company in
favor of State & County Mutual Fire
Insurance Company.
10(e) Guaranty Agreement effective July 1, 1996 *
provided by Skandia America Reinsurance
Corporation in favor of State & County
Mutual Fire Insurance Company.
10(f) Form of Guaranty of Performance and *
Hold Harmless Agreement effective
July 1, 1996 between Hallmark Financial
Services, Inc. and Dorinco America
Reinsurance Corporation.
10(g) Form of Guaranty of Performance and *
Hold Harmless Agreement effective
July 1, 1996 between Hallmark Financial
Services, Inc. and Kemper Reinsurance
Company.
10(h) Form of Guaranty of Performance and *
Hold Harmless Agreement effective
July 1, 1996 between Hallmark Financial
Services, Inc. and Skandia America
Reinsurance Corporation.
10(i) Form of Addendum No. 4 - Termination *
to Quota Share Retrocession Agreement
between American Hallmark Insurance
Company of Texas and Vesta Fire
Insurance Company.
10(j) Form of Addendum No. 3 - Termination *
to 100% Quota Share Reinsurance Agreement
between American Hallmark Insurance
Company and State & County Mutual Fire
Insurance Company.
<PAGE>
EXHIBIT NOTES:
* = FILED HERE WITH
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HALLMARK FINANCIAL SERVICES, INC.
(Registrant)
Date: August 14, 1996 /s/ Ramon D. Phillips
Ramon D. Phillips, President
(Chief Executive Officer)
Date: August 14, 1996 /s/ John J. DePuma
John J. DePuma, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Due to format constraints of this Financial Data Schedule (FDS) certain
Balance Sheet items were omitted: i.e., prepaid reinsurance premiums, premium
notes receivable, installment premiums receivable, excess of cost over net
assets acquired and other assets. Refer to actual 10-KSB submission.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 11,395,383
<DEBT-MARKET-VALUE> 11,568,146
<EQUITIES> 170,338
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 11,565,721
<CASH> 5,632,165
<RECOVER-REINSURE> 22,541,812
<DEFERRED-ACQUISITION> (375,185)
<TOTAL-ASSETS> 61,852,764
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 13,333,085
<POLICY-OTHER> 3,734,342
<POLICY-HOLDER-FUNDS> 4,779,293
<NOTES-PAYABLE> 615,625
0
0
<COMMON> 328,868
<OTHER-SE> 9,749,665
<TOTAL-LIABILITY-AND-EQUITY> 61,852,764
22,254,930
<INVESTMENT-INCOME> 447,084
<INVESTMENT-GAINS> 10,273
<OTHER-INCOME> 1,138,820
<BENEFITS> 4,050,330
<UNDERWRITING-AMORTIZATION> (143,501)
<UNDERWRITING-OTHER> 2,946,423
<INCOME-PRETAX> 904,547
<INCOME-TAX> 315,342
<INCOME-CONTINUING> 589,205
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 589,205
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
<RESERVE-OPEN> 22,323,090
<PROVISION-CURRENT> 17,333,574
<PROVISION-PRIOR> (972,970)
<PAYMENTS-CURRENT> 6,064,909
<PAYMENTS-PRIOR> 7,227,456
<RESERVE-CLOSE> 25,391,329
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
100% QUOTA SHARE REINSURANCE AGREEMENT
BETWEEN STATE AND COUNTY MUTUAL FIRE INSURANCE COMPANY
AND AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
EFFECTIVE DATE: JULY 1, 1996
PREAMBLE
ARTICLE I CLASSES OF BUSINESS REINSURED
ARTICLE II EXCLUSIONS
ARTICLE III COMMENCEMENT OF LIABILITY
ARTICLE IV REINSURANCE FOLLOWS PRIMARY POLICIES
ARTICLE V COMMENCEMENT AND TERMINATION
ARTICLE VI RIGHTS OF THIRD PARTIES
ARTICLE VII RETENTION AND LIMIT
ARTICLE VIII PREMIUMS, CEDING FEE AND PREMIUM TAXES
ARTICLE IX ACQUISITION AND ADMINISTRATIVE COSTS
ARTICLE X ASSIGNMENTS, ASSESSMENTS, PREMIUM TAXES,
FINES AND PENALTIES
ARTICLE XI ACCOUNTS AND REPORTS AND SETTLEMENTS
ARTICLE XII LOSS AND LOSS ADJUSTMENT EXPENSE
ARTICLE XIII LOSS IN EXCESS OF POLICY LIMITS/ECO
ARTICLE XIV ERRORS AND OMISSIONS
ARTICLE XV ACCESS TO RECORDS
ARTICLE XVI REINSURER OR GENERAL AGENT SALE
OF TRANSFER
ARTICLE XVII INSOLVENCY
ARTICLE XVIII THE GENERAL AGENT
ARTICLE XIX HOLD HARMLESS PROVISIONS
ARTICLE XX REGULATORY MATTERS
ARTICLE XXI TBA INSURANCE INC. ("TBA")
ARTICLE XXII ARBITRATION CLAUSE
ARTICLE XXIII INTERMEDIARY
ARTICLE XXIV CURRENCY
ARTICLE XXV SAVINGS CLAUSE
ARTICLE XXVI MISCELLANEOUS
<PAGE>
100% QUOTA SHARE REINSURANCE AGREEMENT, ("AGREEMENT")
BETWEEN AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
("REINSURER") AND STATE AND COUNTY MUTUAL FIRE
INSURANCE COMPANY ("COMPANY")
WITNESSETH
That in consideration of the mutual covenants hereinafter contained and upon the
terms and conditions herein below set forth, the Parties hereto agree as
follows:
PREAMBLE
It is understood that the COMPANY, and the REINSURER hereto wish to enter into a
reinsurance arrangement through which the COMPANY is to bear no business, or
insurance risk whatsoever. The credit risk and the risk of the insolvency of
the REINSURER is subject to the Guaranty Agreements of the RETROCESSIONAIRES of
the REINSURER (each such Agreement being referred to herein as a Guaranty
Agreement) which guarantees to the COMPANY the obligations, duties and payments
of the REINSURER, American Hallmark Insurance Company of Texas, under the
AGREEMENT. The COMPANY would not enter into this Agreement without such
Guaranty Agreement. The REINSURER shall hold the COMPANY harmless and indemnify
it for these and all risks and shall perform all administrative functions for
the business subject hereto as provided in the ADMINISTRATIVE SERVICES AGREEMENT
("ADMINISTRATIVE SERVICES AGREEMENT") between COMPANY and REINSURER. The sole
obligation of the COMPANY, in exchange for the fees provided herein, is to
permit the Policies (as hereinafter defined) subject to this AGREEMENT to be
issued in the name of the COMPANY. All provisions of this AGREEMENT shall be
interpreted so as to be in accord with this Preamble.
ARTICLE I - CLASSES OF BUSINESS REINSURED
A. As of the effective date of the AGREEMENT, the COMPANY obligates itself to
cede to the REINSURER, and the REINSURER obligates itself to accept 100% of
the COMPANY'S gross liability under policies, certificates, contracts,
binders, agreements or other proposals or evidences of insurance, new and
renewal policies, binders, and contracts of insurance (hereinafter called
"Policies") issued by and on behalf of the COMPANY, classified by the
COMPANY, in its discretion, as Private Passenger Automobile in accordance
with the Texas Automobile Manual, including physical damage, liability,
Personal Injury Protection, uninsured/underinsured motorist, and
miscellaneous coverages as allowed by endorsement in Texas during the term
of this AGREEMENT, produced by or through AMERICAN HALLMARK GENERAL AGENCY,
INC. ("GENERAL AGENT") pursuant to its GENERAL AGENCY AGREEMENT with
COMPANY ("GENERAL AGENCY AGREEMENT"), or by producing agents or brokers
appointed by the COMPANY at the request of the REINSURER as provided in
Article XVIII(B) of the AGREEMENT.
B. This AGREEMENT shall apply to and the REINSURER shall reinsure 100%
coverage for Personal Injury Protection as required under Tex. Ins. Code
Ch. 5, Art. 5.06-3 or any successor statute thereto, for the Classes of
Business specified under paragraphs (A) and (B) of this Article I.
<PAGE>
C. Subject to Article XIX(E), the Maximum Policy Limits for Policies are as
follows:
Bodily Injury per person: $20,014
Bodily Injury per accident: $40,014
Property Damage per accident: $15,014
Physical Damage: Actual Cash Value (ACV),
not to exceed $40,014
per vehicle
Personal Injury Protection
per person, per accident: $ 2,514
Uninsured/Underinsured/B.I.: $20,014
$40,014
Uninsured/Underinsured/P.D.: $15,014
In the event of a statutory increase in limits by the State of Texas, or travel
by an insured to a state with greater statutory requirements, the maximum policy
limits shall be increased to statutory limits in effect.
D. Business ceded hereunder shall include every original policy, rewrite,
renewal or extension (whether before or after termination of this
AGREEMENT) required by statute or by rule or regulation of the State Board
of Insurance of Texas, or other authority having competent jurisdiction, of
any policy of insurance ceded hereunder.
ARTICLE II - EXCLUSIONS
A. With respect to the classes of business which the GENERAL AGENT or other
agent may be authorized to produce for reinsurance under this AGREEMENT,
there shall be no solicitation or acceptance of, nor shall the COMPANY be
bound for insurance coverage on, the following risks:
1. All business not specifically described as BUSINESS COVERED under
Article I(A) of the AGREEMENT.
2. Garagekeepers legal liability.
3. Vendors single interest.
4. Vehicles principally used as ambulances, fire and police units.
5. Commercial vehicles rated as such, and all automobile fleets.
6. Mobile homes.
7. Automobile dealers.
8. Loss or damage caused by or resulting from war, invasion, hostilities,
acts of foreign enemies, civil war, insurrection, military or usurped
power, martial law or confiscation by order of any Government or
Public Authority, but not excluding loss or damage which would be
covered under a policy or standard form containing a Standard War
Exclusion Clause.
9. Business excluded by the attached Nuclear Exclusion Clauses -
Liability - Reinsurance - U.S.A., No. 08-31.1 and Canada, No. 08-32.1
and Physical Damage - Reinsurance - U.S.A., 08-33 and Canada, No. 08-
34.2.
10. Reinsurance issued for the account of other insurance companies.
11. Vehicles used in racing or speed events.
12. Taxis, limos, buses, livery.
13. Pools, Associations, Syndicates and Insolvency Funds per the attached
Pools, Associations, Syndicates and Insolvency Funds Exclusion Clause
08-04.3.
14. Seepage and Pollution Exclusion Clause.
<PAGE>
ARTICLE III - COMMENCEMENT OF LIABILITY
The liability of the REINSURER shall commence obligatorily and simultaneously
with that of the COMPANY as soon as the COMPANY becomes liable, and the premium
on account of such liability shall be credited to the REINSURER from the
original date of the COMPANY'S liability.
ARTICLE IV - REINSURANCE FOLLOWS PRIMARY POLICIES
All reinsurance for which the REINSURER shall be liable under this AGREEMENT
shall be subject, in all respects, to the same rates, terms, conditions,
interpretations, waivers, the exact proportion of premiums paid to the COMPANY
without any deduction for brokerage, and to the same modifications, alterations,
and cancellations, as the respective insurance of the COMPANY to which such
reinsurance relates, the true intent of this AGREEMENT being that the REINSURER
shall in every case to which this AGREEMENT applies follow the fortunes of the
COMPANY.
ARTICLE V - COMMENCEMENT AND TERMINATION
A. The effective date of this AGREEMENT is at 12:01 A.M. Central Standard Time
on July 1, 1996. This AGREEMENT shall remain continuously in force until
terminated according to the provisions set forth herein.
B. This AGREEMENT may be terminated as follows:
1. By either Party hereto, by providing at least (ninety) 90 days written
notice prior to the close of any calendar quarter to the other
parties. Written notice shall be by Certified Mail, return receipt
requested, postage prepaid;
2. By mutual consent;
3. Immediately upon written notice by the REINSURER or the COMPANY in the
event of the cancellation or non-renewal of the GENERAL AGENT'S
license by the Texas Department of Insurance.
4. Immediately, upon written notice by the COMPANY, if the REINSURER is
found to be insolvent by a State Insurance Department or court of
competent jurisdiction, or is placed in supervision, conservation,
rehabilitation or liquidation, or has a receiver or supervisor
appointed.
5. By the REINSURER, upon (thirty) 30 days written notice, if the COMPANY
is found to be insolvent by a State Insurance Department or court of
competent jurisdiction, or is placed in supervision, conservation,
rehabilitation or liquidation, or has a receiver or supervisor
appointed.
6. After thirty (30) days written notice by either party in the event
that the COMPANY, or the REINSURER amalgamates with or passes under
the control of any other company or corporation or change a majority
of its officers or board of directors.
7. By the COMPANY, immediately and automatically without prior written
notice, should the Texas Department of Insurance request orally and/or
in writing the cancellation or disallow credit for this reinsurance.
8. Immediately and automatically upon termination of any Retrocession
Agreement (as such term is defined in any Guaranty Agreement).
<PAGE>
C. When the AGREEMENT terminates for any reason, reinsurance hereunder shall
continue to apply to the business in force at the time of such termination
until expiration or cancellation of such business. It is understood that
any Policies with effective dates prior to the termination date but issued
after the termination date are covered under the AGREEMENT. Additionally,
the reinsurance hereunder shall continue to apply as to Policies which must
be issued or renewed as a matter of state law or regulation, or because a
producing agent or broker has not been timely canceled, until the
expiration dates on said Policies.
D. Upon termination of this AGREEMENT, the PARTIES shall not be relieved of or
released from any obligation created by or under this AGREEMENT as to
payments, expenses, reports, accounting or handling, which relate to
insurance business reinsured under this AGREEMENT. The PARTIES hereto
expressly covenant and agree that they will cooperate with each other in
the handling of all such run-off insurance business until all Policies have
expired either by cancellation or by terms of such Policies and all
outstanding losses and loss adjustment expenses have been settled. While
by law and regulation, the COMPANY recognizes its primary obligations to
its policyholders, the REINSURER recognizes that to the extent possible
there shall be no cost to or involvement by the COMPANY in servicing this
run-off. The REINSURER shall be ultimately responsible for the run-off and
for the costs and expenses of the run-off and shall pay, or caused to be
paid, any such costs and/or expenses not paid by the GENERAL AGENT for any
reason. If for any reason the GENERAL AGENT fails or is unable to service
any such run-off business (or any business while the AGREEMENT is still in
effect), including handling payment of claims, then consistent with this
AGREEMENT, the REINSURER'S obligation with respect to such run-off business
shall continue and the REINSURER shall appoint a successor, subject to the
approval of the COMPANY, to administer and otherwise handle the run-off as
provided herein. Such successor shall perform all of the duties and
obligations of the GENERAL AGENT with respect to servicing such run-off
business, including the handling of claims. In addition, the COMPANY in
its sole discretion may terminate the authority of the GENERAL AGENT or a
successor to thereto handle such run-off business and the REINSURER shall
then appoint a successor to handle the run-off, subject to the COMPANY'S
approval, at no cost to the COMPANY.
E. In the event this AGREEMENT is terminated, the REINSURER shall remain
liable to and shall, immediately upon request, reimburse the COMPANY for
any assessment made upon the COMPANY by the Texas Department of Insurance
under Article 21.28C (Texas Property and Casualty Insurance Guaranty Act)
of the Texas Insurance Code, which applies to the risks reinsured hereunder
through and after the effective date of termination. The COMPANY shall
likewise remain liable, and account to the REINSURER for any recovery of
any such assessment under Section 7 or 9 of said Article, or any credit
allowed to it against its premium tax pursuant to Section 15 thereof,
applicable to the risks reinsured hereunder.
F. The title and ownership of all undelivered Policies, books, supplies, or
other property related to the reinsured business is in the COMPANY, and
upon termination these shall be delivered immediately to the COMPANY,
without compelling the COMPANY to resort to any legal proceedings to secure
the aforesaid described property of the COMPANY. REINSURER shall cause the
GENERAL AGENT to also comply with this provision.
G. This AGREEMENT provides for termination on a run-off basis. The relevant
provisions of the AGREEMENT shall apply to the business being run off. It
is also expressly agreed that the terms, conditions and obligations of the
Preamble and Articles: IV; V(C), (D), (E), (F) and (G); IX; X; XII; XIII;
XIV; XV; XVI; XVIII; XIX; XX; XXI; and XXII, shall survive the termination
of this AGREEMENT.
<PAGE>
ARTICLE VI - RIGHTS OF THIRD PARTIES
Nothing herein shall in any manner create any obligations, establish any rights
or create any direct right of action against the REINSURER in favor of any third
party, or other person not party to this AGREEMENT; or create any privity of
contract between the policyholders and the REINSURER.
ARTICLE VII - RETENTION AND LIMIT
The COMPANY shall cede and the REINSURER shall accept 100% of the COMPANY'S
gross liability on each risk.
ARTICLE VIII - PREMIUMS, CEDING FEE AND PREMIUM TAXES
A. In consideration of the acceptance by the REINSURER of one hundred percent
(100%) of the COMPANY'S liability on insurance business reinsured
hereunder, the REINSURER is entitled to one hundred percent (100%) of the
Net Premiums received by or on behalf of the COMPANY on Policies reinsured,
less the ceding fee allowed the COMPANY; less premium taxes on Policies
subject to reinsurance hereunder and less fees for acquisition costs
allowed under Article IX. "Net Premiums" shall mean the gross premiums
(including policy fees) charged on all original and renewal Policies
written on behalf of the COMPANY less return premiums. Subject to its
rights hereunder, COMPANY assigns all its right, title, and interest to the
REINSURER in all premium receivables and policyholder obligations to pay
premiums to REINSURER under policies issued pursuant hereto.
B. It is understood that the REINSURER shall pay the COMPANY directly a fee
within (sixty) 60 days following the end of each month (to the COMPANY'S
designated agent, T.B.A. Insurance, Inc. ("TBA"), as a ceding fee), (i)
3.0% of the first $10 million per annum of Net Premium; (ii) 2.50% for the
next $10 million per annum in Net Premium; and (iii) 2.0% for all Net
Premium in excess of $20 million per annum; plus the amount of assessments
and state premium taxes as provided in this Article VIII of this AGREEMENT.
(These ceding fee amounts shall be computed on a calendar year basis based
on policies written in each annual period ending June 30th, except for the
first calendar year period which shall be from June 1, 1996 - June 30,
1997) Notwithstanding anything else contained herein to the contrary,
regardless of the amount of Net Premiums, the minimum ceding fee due the
COMPANY shall be $6,000 per month during the term of this AGREEMENT. (This
is a monthly minimum and is not reduced by reason of payments in excess of
$6,000 in other months).
C. The REINSURER shall allow and pay within (sixty) 60 days of the end of each
month to the COMPANY an amount equal to the state premium tax on the net
written premiums reinsured hereunder for the past month. Should any
additional premium tax be assessed at any time on written premium reinsured
hereunder, the REINSURER shall pay the COMPANY such additional premium tax
within (fifteen) 15 days of being informed by the COMPANY of such
additional premium tax and should any refund or credit be due COMPANY on
account of premium taxes paid on premiums removed hereunder, COMPANY shall
refund or credit the premiums proportionately. The parties acknowledge
that when the Texas Department of Insurance (or other state agency
responsible for collecting premium taxes) requires the payment of estimated
premium taxes in advance, the Reinsurer shall pay to the Company, within
five (5) days prior to the due date of any such estimated premium tax
payment, the amount that would be due subject to the business produced
under this Agreement.
<PAGE>
D. The REINSURER hereby guarantees that the COMPANY will receive the ceding
fee provided hereunder irrespective of any events, losses or developments
for the term of this AGREEMENT. Such payment is not dependent upon the
performance of the GENERAL AGENT, underwriting experience, loss experience,
whether premium is collected or not, or any other event foreseen or
unforeseen by the parties at the inception of this AGREEMENT.
ARTICLE IX - ACQUISITION AND ADMINISTRATIVE COSTS
The parties agree that up to 25% of Net Premium, in addition to the
COMPANY'S ceding fee and premium taxes due the COMPANY by the REINSURER (as
provided in Article VIII of this AGREEMENT), shall be allocated to cover all
acquisition costs for the business subject hereto being the commissions due
agents. The COMPANY shall have no obligation whatsoever for the payment of
acquisition costs, nor shall the COMPANY have any obligation to pay any costs of
administration of this business since REINSURER has agreed to perform at its
costs all such functions under the ADMINISTRATIVE SERVICES AGREEMENT. It is
expressly understood that nothing in this ARTICLE changes the REINSURER'S
obligations to pay the COMPANY directly its ceding fee and premium taxes as
provided in ARTICLE VIII of this AGREEMENT or the REINSURER'S obligation to pay
all commissions to the GENERAL AGENT due under the GENERAL AGENCY AGREEMENT.
REINSURER shall not seek to recover from the COMPANY any return commissions due
in the acquisition of this business, but shall recover any such return
commissions directly from the GENERAL AGENT.
ARTICLE X - ASSIGNMENTS, ASSESSMENTS, PREMIUM TAX CREDITS, FINES, AND PENALTIES
A. This AGREEMENT shall apply to risks assigned to the COMPANY under any
Assigned Risk Plan if, in the reasonable judgment of the COMPANY, such
risks were assigned to the COMPANY because of the business written and
reinsured hereunder.
B. This AGREEMENT shall apply to and the REINSURER shall immediately reimburse
the COMPANY 100% for any assessments made against the COMPANY pursuant to
those laws and regulations creating obligatory funds (including insurance
guaranty and insolvency funds), pools, joint underwriting associations,
FAIR plans and similar plans, or any assessments made pursuant to the
provisions of Article 21.28C (Texas Property and Insurance Guaranty Act) of
the Texas Insurance Code, or successor statute thereto. Amounts owed by
the REINSURER under this Article shall be payable directly by the REINSURER
to the COMPANY. The REINSURER shall be entitled to receive from the
COMPANY on or prior to the 31st day of March of each year thereafter a sum
equal to the premium tax credit that is allowed to the COMPANY with respect
to such assessments. The premium tax credit allowed the REINSURER
hereunder is to be on a pro-rata and first-in, first-out basis. The
COMPANY shall promptly return to the REINSURER any amount of assessment
refunded to or credited to the COMPANY pursuant to the provisions of
Article 21.28C of the Texas Insurance Code.
C. The REINSURER, on the COMPANY'S behalf, shall also pay promptly and
directly to the Texas Department of Insurance or other regulatory body any
fines, penalties, and/or any other charge incurred by the COMPANY as
respects the business reinsured hereunder unless caused by the COMPANY'S
intentional or negligent act of omission. If the COMPANY is required to
pay directly any such fine, penalty or charge, the REINSURER shall promptly
reimburse the COMPANY for such amount.
<PAGE>
ARTICLE XI - ACCOUNTS, REPORTS AND SETTLEMENTS
A. REINSURER, pursuant to its Administrative Services Agreement with COMPANY,
shall furnish the COMPANY with bordereaux showing the particulars of all
reinsurances ceded hereunder, within forty-five (45) days after the close
of each of the respective periods indicated below (on forms agreeable to
the PARTIES), with monthly, quarterly, and annual reports showing the
following statistical data in respect to the business reinsured hereunder:
Monthly, with the data segregated by major coverages,
(a)Ceded premiums written;
(b)Ceded unearned premium;
(c)Ceded losses paid;
(d)Ceded adjustment expenses paid during the month;
(e)Losses outstanding;
(f)Ceding commission or brokerage fee due the COMPANY;
(g)Fees for acquisition or administrative costs; and
Annually, with the data segregated by major classes.
(i) Annual summaries of net premiums written, net losses paid, net
adjusting expenses paid during the year in such form so as to
enable the COMPANY to record such data in its annual convention
statement, to be furnished not later than February 15th of the
following year, with in-force and unearned premium segregated as
to advance premiums, premiums running twelve (12) months or less
from inception date of policy, and premiums running more than
twelve (12) months from inception date of policy in such form as
to enable COMPANY to record such data in its annual convention
statement;
(ii) Annual summaries of net premiums written by geographical location
within Texas in such form as to enable the COMPANY to record such
premiums in its annual report to the Texas Catastrophe Property
Insurance Association; and
PERIODIC, WITH DATA SEGREGATED BY MAJOR LINES.
(iii) Statistical or other data as may be requested from time to time by
Regulatory Authorities.
B. In order to facilitate the handling of the business reinsured under this
AGREEMENT, REINSURER agrees to furnish the COMPANY with any additional
reports necessary to provide the information needed by the COMPANY to
prepare its monthly, quarterly, and annual statements to regulatory
authorities.
C. Cash settlements shall be made between the parties in accordance with the
monthly accounts within 60 days from the end of each such month, unless
otherwise provided herein.
<PAGE>
ARTICLE XII - LOSS AND LOSS ADJUSTMENT EXPENSE
A. The REINSURER shall assume 100% of the risks covered by this AGREEMENT and
shall be liable to the COMPANY for 100% of all losses, judgments, interest
on judgments, settlements whether under strict policy conditions or because
of compromise, and expenses incurred by the COMPANY and/or GENERAL AGENT
(this shall include but, of course, is not limited to any costs, expenses,
and fees, including but not limited to attorneys' fees resulting from a
declaratory judgment or injunctive action brought by an insured or other
person), but not including offices, expenses or salaries of the COMPANY'S
or REINSURER in its capacity as administrative service provider, or the
GENERAL AGENT'S regular employees in connection with the investigation or
settlement or contesting the validity of claims or losses covered under
this AGREEMENT; the REINSURER shall, on the other hand, be credited with
100% of any amount received by the COMPANY as salvage or recovery.
B. The COMPANY hereby empowers the REINSURER, and the REINSURER may, in its
discretion and under its supervision, appoint the GENERAL AGENT to accept
notice of and investigate any claim arising under any of the policies and
to pay, adjust, settle, resist or compromise any such claim, unless the
COMPANY specifically directs to the contrary with respect to any individual
claim. In the latter event, the REINSURER and/or GENERAL AGENT shall
follow the instructions of the COMPANY as respects such claim. All such
loss settlements, whether under strict policy conditions or by way of
compromise, shall be unconditionally binding upon the REINSURER. However,
should the COMPANY be ordered or instructed by the Department of Insurance
of Texas or any other regulatory agency of competent jurisdiction to take
any action or refrain from taking any action with regard to any claim, the
REINSURER and/or GENERAL AGENT shall be bound by and shall follow the order
or instructions of such regulatory agency as though REINSURER and/or
GENERAL AGENT were the object of such order or instruction. The REINSURER
and/or GENERAL AGENT will exercise the authority granted hereunder in good
faith and toward the end of paying any and all valid claims.
C. The COMPANY will promptly notify the REINSURER or the GENERAL AGENT of any
claim, suit, or action against the COMPANY under any of the Policies when
actually notified of a claim, suit, or action against the COMPANY, and will
promptly furnish to the REINSURER or GENERAL AGENT all summons, citations,
complaints, petitions, counterclaims and other pleadings and legal
instruments served upon the COMPANY in connection therewith. The COMPANY
hereby further empowers the REINSURER to dispose of any salvage received as
the result of any loss settlement hereunder, and to enforce any right of
the COMPANY against any person or organization for damages or equitable
relief for any loss under any of the Policies, employing legal counsel
where necessary, and all sums received as a result thereof will be treated
as current loss recoveries by the COMPANY and REINSURER. The COMPANY
further agrees to furnish the REINSURER, on request, any and all legal
instruments necessary to implement the foregoing authorizations. Upon
request, the REINSURER shall furnish to the COMPANY any or all documents
and correspondence relating to the subject matter hereof.
D. All records pertaining to claims arising under the policies, shall be
deemed to be jointly owned records of the COMPANY and the REINSURER, and
shall be made available to the COMPANY or the REINSURER or its
representatives or any duly appointed examiner for any State within the
United States. The COMPANY and the REINSURER agree that they will not
destroy any such records in their possession without the prior written
approval of the others, except that the COMPANY shall not be required to
retain files longer than required by the guidelines set by the Texas
Department of Insurance.
<PAGE>
E. The REINSURER shall, or shall cause the GENERAL AGENT to establish a
separate claim register or method of registering claims arising under the
policies covered by this AGREEMENT so that all claims may be segregated and
identified separate and apart from other records of the REINSURER or
GENERAL AGENT with such claim register to identify each claim on an
individual case basis both as to the insured(s) and the claimant and the
reserve for loss and adjusting expense. Such claim register shall be kept
in a form whereby the COMPANY can, at any time, determine the status of any
claim arising under Policies covered by this AGREEMENT. Such records shall
reflect the amount of reserves established for the individual claim and the
date when such reserve was established, and if closed, whether such claim
was closed with or without payment, and if with payment, the amount paid
thereon.
ARTICLE XIII - LOSS IN EXCESS OF POLICY LIMITS/ECO
A. In the event the COMPANY pays or is held liable to pay an amount of loss in
excess of its policy limit, but otherwise within the terms of its policy
(hereinafter called "loss in excess of policy limits") or any punitive,
exemplary, compensatory or consequential damages, other than loss in excess
of policy limits (hereinafter called "extra contractual obligations") in
relation to handling a claim reinsured hereunder or anything else related
to the business reinsured hereunder, 100% of the loss in excess of policy
limits and/or 100% of the extra contractual obligations shall be added to
the COMPANY'S loss, if any, under the policy involved, and the sum thereof
shall be subject to this AGREEMENT.
B. An extra contractual obligation shall be deemed to have occurred on the
same date as the loss covered or alleged to be covered under the policy.
C. Notwithstanding anything stated herein, this AGREEMENT shall not apply to
any loss incurred by the COMPANY as a result of (i) any intentional act of
gross negligence or actual fraud which has been finally determined by a
court of competent jurisdiction after the exhaustion of any appeals, or
(ii) violation of a criminal law which has been finally determined by a
court of competent jurisdiction after the exhaustion of any appeals, by an
employee, officer or director of the COMPANY acting individually or
collectively or in collusion with any individual or corporation or any
other organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.
ARTICLE XIV - ERRORS AND OMISSIONS
The COMPANY shall not be prejudiced, in any way, by any omission through
clerical error, accident, or oversight to cede to the REINSURER any reinsurance
rightly falling under the terms of this AGREEMENT, or by erroneous cancellation,
either partial or total, of any cession, or by omission to report, or by
erroneously reporting any losses, or by any other error or omission, but any
such error or omission shall be corrected immediately upon discovery.
<PAGE>
ARTICLE XV - ACCESS TO RECORDS
The REINSURER or its duly appointed representatives shall have free access at
any and all reasonable times to such books and records of the COMPANY, its
departmental or branch offices, as shall reflect premium and loss transactions
of the COMPANY and/or the business produced hereunder, for the purpose of
obtaining any and all information concerning this AGREEMENT or the subject
matter thereof. Likewise, the COMPANY or its duly appointed representatives
shall have free access at any and all reasonable times to such books and records
of the REINSURER, its departmental or branch offices as shall reflect premium
and loss transactions of the COMPANY and/or the business produced hereunder, for
the purpose of obtaining any and all information concerning this AGREEMENT or
the subject matter hereof.
ARTICLE XVI - REINSURER OR GENERAL AGENT SALE OR TRANSFER
The REINSURER agrees to give the COMPANY or its designated agent, TBA, (ninety)
90 days advance written notice of any sale or transfer of such party's business,
or such party's consolidation with a successor firm, in order that the COMPANY
or TBA may, at in its sole discretion:
A. Assign this AGREEMENT to the successor; or
B. Enter into a new reinsurance agreement with the successor; or
C. Terminate this AGREEMENT as provided in Article V(B)(6) of this
AGREEMENT.
ARTICLE XVII - INSOLVENCY
A. In the event of the insolvency of the reinsured COMPANY, this reinsurance
shall be payable directly to the COMPANY or to its liquidator, receiver,
conservator or statutory successor on the basis of the liability of the
COMPANY without diminution because of the insolvency of the COMPANY or
because the liquidator, receiver, conservator or statutory successor of the
COMPANY has failed to pay all or a portion of any claims.
B. It is agreed, however, that the liquidator, receiver, conservator or
statutory successor of the COMPANY shall give written notice to the
REINSURER of the pendency of a claim against the COMPANY indicating the
policy or bond reinsured which claim would involve a possible liability on
the part of the REINSURER within thirty (30) days after such claim is filed
in the insolvency, conservation or liquidated proceeding or in the
receivership, and that during the pendency of such claim, the REINSURER may
investigate such claims and interpose, at its own expense, in the
proceeding where such claim is to be adjudicated, any defense or defenses
that it may deem available to the COMPANY or its liquidator, receiver,
conservator or statutory successor. The expense thus incurred by the
REINSURER shall be chargeable, subject to the approval of the Court,
against the COMPANY as part of the expense of conservation or liquidation
to the extent of a pro rata share of the benefit which may accrue to the
COMPANY solely as a result of the defense undertaken by the REINSURER.
<PAGE>
C. It is further understood and agreed that, in the event of the insolvency of
the COMPANY, the reinsurance under this AGREEMENT shall be payable directly
by the REINSURER to the COMPANY or to its liquidator, receiver or statutory
successor, except as provided by Section 4118 (A) of the New York Insurance
Law (or any substitute therefor) or except (a) where the AGREEMENT
specifically provides another payee of such reinsurance in the event of the
insolvency of the COMPANY; and (b) where the REINSURER with the consent of
the direct insured or insureds has assumed such policy obligations of the
COMPANY as direct obligations of the REINSURER to the payees under such
policies and in substitution for the obligations of the COMPANY to such
payees.
ARTICLE XVIII - THE GENERAL AGENT
A. The COMPANY and AMERICAN HALLMARK GENERAL AGENCY, INC. (the "GENERAL
AGENT") have entered into a General Agency Agreement effective March 1,
1992, at 12:01 A.M. Central Standard Time, a true and complete copy of
which is attached hereto as Exhibit A and fully incorporated herein by
reference (the "General Agency Agreement"). The REINSURER has selected the
GENERAL AGENT to provide the business reinsured hereunder. While for
regulatory purposes, the GENERAL AGENT will need to be appointed as the
COMPANY'S agent, it is recognized that the COMPANY is making no evaluation
of the GENERAL AGENT'S qualifications and has no obligation to furnish
reports or statistics to the REINSURER. The COMPANY shall file with the
State all reports requested by the State based upon the information
received from the GENERAL AGENT.
B. The COMPANY will, at the request of the GENERAL AGENT and REINSURER,
appoint producing agents to produce business through the GENERAL AGENT.
The COMPANY in its sole discretion may refuse to appoint any such agent,
provided, however, such appointment shall not be unreasonably withheld.
The REINSURER shall hold the COMPANY harmless from and indemnify it for any
damage, liability, claim, expense, cost or fees including attorneys' fees
of whatever kind or character caused directly or indirectly by any action
of or failure to act, by GENERAL AGENT or any such producing agent.
C. The REINSURER shall be responsible for the control of the producing agents
appointed by the COMPANY at the request of and on behalf of the REINSURER,
including the financial condition of such agents. The REINSURER shall also
be responsible to ensure the compliance by all producing agents, under the
GENERAL AGENT, of the terms of this AGREEMENT and all other written rules
and regulations of the COMPANY. And REINSURER shall be responsible for
commissions due such producing agents and shall hold COMPANY harmless for
any liability to such producing agents for any such commissions due.
D. The REINSURER shall guarantee payment to the COMPANY of any amounts due the
COMPANY (or the COMPANY'S designated agent, TBA) from business produced by
and/or policies issued by or through the producing agents appointed by the
COMPANY at the request of and on behalf of the REINSURER. While the
GENERAL AGENT is solely responsible for notifying such agents of the
AGREEMENT and of any termination hereof, the REINSURER shall be responsible
for the consequences of any failure to provide such notification.
E. The COMPANY shall conduct or have conducted the examinations of the GENERAL
AGENT as provided in Article V(J) of the General Agency Agreement between
the COMPANY and GENERAL AGENT. The examinations provided for herein shall
be at no cost to the COMPANY and the REINSURER shall indemnify and hold the
COMPANY completely harmless as respects any liability, damage, charge,
cost, fine or penalty, the COMPANY may incur as a result of such
examinations.
F. REINSURER shall be responsible to assure GENERAL AGENT'S compliance with
all terms of the General Agency Agreement.
<PAGE>
ARTICLE XIX - HOLD HARMLESS PROVISIONS
A. Notwithstanding anything to the contrary, as respects all matters related
to this AGREEMENT, in addition to those specific provisions insulating the
COMPANY from specific risks hereunder, the REINSURER hereby covenants and
agrees to reimburse and hold the COMPANY harmless from and against every
claim, demand, liability, loss, damage, cost, charge, attorneys' fees,
expense, suit, order, judgment and adjudication of whatever kind or
character regarding (i) the AGREEMENT, (ii) the GENERAL AGENCY AGREEMENT,
(iii) the Administrative Services Agreement entered into between REINSURER
and COMPANY, and/or (iv) the business reinsured hereunder (including, but
not limited to underwriting loss, credit loss, and/or run-off expense
and/or all legal fees and expenses incurred by the COMPANY in asserting its
rights under this AGREEMENT) whether or not such claim, demand, loss,
damage, cost, charge, attorneys' fees, expense, suit, order judgment or
liability is within the terms of Policies written and reinsured hereunder.
The REINSURER'S obligation hereto relate to, but is not limited to the
following: all liability for agents' balances; return premiums and
commissions; deceptive trade practice liability; premiums, policy fees or
other charges (whether collected or not); all actions or inactions by the
Intermediary, GENERAL AGENT and/or its producing agents relating to this
AGREEMENT, the General Agency Agreement among and between the Parties, any
agreement with a premium finance company; and/or all fees and/or
commissions owing to the GENERAL AGENT under this and the aforementioned
related agreements.
B. The COMPANY shall not be liable to the REINSURER for premiums unless the
COMPANY itself has actually received those premiums and wrongfully not
remitted them to the REINSURER. The REINSURER may not offset any balances
on account of losses, loss adjustment expenses or any other amounts due,
except as to premiums actually received by the COMPANY itself and which the
COMPANY has wrongfully not transmitted to the REINSURER.
C. If for any reason the GENERAL AGENT fails or is unable to administer the
policies reinsured hereunder (whether the AGREEMENT is still in effect or
the business is being run-off), the REINSURER shall appoint a party to
administer the business and the REINSURER shall be responsible for 100% of
the cost of said administration. If return premiums or other funds need to
be returned to premium finance companies, policyholders or sub-agents, the
REINSURER shall pay these amounts if the successor administrator does not.
D. The REINSURER shall not sue, or seek arbitration, against the COMPANY for
any acts of the GENERAL AGENT and/or any producing agent or broker or for
any monies which the GENERAL AGENT, or any producing agent or broker owes
(including but not limited to return commissions) unless the COMPANY has
actually received those monies and has wrongfully not remitted them to the
REINSURER; and the REINSURER shall indemnify the COMPANY for any damages,
liabilities and expenses incurred by reason of any acts or failure to act
by the GENERAL AGENT and/or any producing agent or broker. The COMPANY is
not responsible for any commissions or other monies payable to the GENERAL
AGENT, the Intermediary, any producing agent or broker in connection with
this AGREEMENT. The REINSURER shall not seek to recover from, or offset
against the COMPANY any sums, whether premiums or other monies, which the
GENERAL AGENT and/or any producing agent or broker was unable or unwilling
to remit to the COMPANY or the REINSURER.
<PAGE>
E. In the event the REINSURER, or an agent or broker appointed pursuant to
this AGREEMENT, binds the COMPANY for insurance coverage on insurance risks
which are in excess of the policy limits set forth in Article I, and/or are
not within the terms of business specified in Article I, and/or are not
within the territory specified in Article I, and/or are excluded under
Article II, whether intentional or not, the REINSURER will do such things
and take such actions as may be necessary to reduce the COMPANY'S exposure
to such risks and to hold the COMPANY harmless against any liability or
loss which may be incurred by the COMPANY in excess hereof. Any insurance
coverage on insurance risks bound contrary to the limitations, which are in
excess of the policy limits set forth in Article I, and/or are not within
the classes of business or geographic locations specified in Article I,
and/or are not within the territory specified in Article I, and/or are
excluded under the Article II, shall be 100% reinsured and subject to this
AGREEMENT.
ARTICLE XX - REGULATORY MATTERS
A. It is the PARTIES' understanding that the Texas Department of Insurance
views premiums which are over (ninety) 90 days due (aged by item and
effective date) to the COMPANY as non-admitted assets. In confirmation of
the liabilities assumed by the REINSURER under this AGREEMENT, the
REINSURER hereby assumes 100% of all liability and responsibility for all
premiums in the course of collection. It is expressly agreed and
understood that the COMPANY'S liability to the REINSURER shall be only for
premium actually collected by the COMPANY and wrongfully not transmitted to
the REINSURER.
B. The REINSURER shall agree, at no cost to the COMPANY, to take those actions
(including but not limited to modifications in how funds are handled and
how accounts are cleared and settled) and agrees to those arrangements
necessary to ensure that the COMPANY suffers no adverse impact because of
this reinsurance program and is in compliance with the laws of the State of
Texas and regulations promulgated by any governmental entity thereof,
including the Texas Department of Insurance, in so far as this reinsurance
program is concerned.
ARTICLE XXI - TBA INSURANCE INC. ("TBA")
The COMPANY has contracted with TBA as its designated intermediate agent to
perform certain duties on the COMPANY'S behalf and to issue certain checks on
behalf of the COMPANY in exchange for certain fees. The REINSURER agrees that
TBA is to bear no business, credit, or insurance risk and can bear no liability
whatsoever to the REINSURER save liability for any intentional torts it commits.
TBA shall receive all the protections from liability which are contained herein
for the benefit of the COMPANY.
ARTICLE XXII - ARBITRATION CLAUSE
A. As a condition precedent to any right of action hereunder, in the event of
any dispute or difference of opinion hereafter arising between the COMPANY
and the REINSURER with respect to this AGREEMENT, or with respect to these
parties' obligations hereunder, it is hereby mutually agreed that such
dispute or difference of opinion shall be submitted to arbitration.
B. One Arbiter shall be chosen by the Company and one Arbiter shall be chosen
by the REINSURER, as provided in paragraph E of this Article XXII, and an
Umpire shall be chosen by the Arbiters, all of whom shall be active or
retired disinterested executive officers of property or casualty insurance
or reinsurance companies.
<PAGE>
C. In the event that a party should fail to choose an Arbiter within (thirty)
30 days following a written request by either party to the other to name an
Arbiter, the party who has chosen its Arbiter may choose the unchosen
Arbiter.
D. If the Arbiters fail to agree upon the selection for the Umpire within
(thirty) 30 days following their appointment, each Arbiter shall name three
nominees, of whom the other shall decline two, and the decision shall be
made by drawing lots.
E. Each party shall present its case to the Arbiters and Umpire within a
reasonable amount of time after selection of the Umpire, unless the period
is extended by the Arbiters and Umpire in writing and/or at a hearing in
Dallas, Texas. The Arbiters and Umpire shall consider this AGREEMENT as an
honorable engagement as well as a legal obligation and they are relieved of
all judicial formalities and may abstain from following the strict rules of
law regarding entering of evidence. The decision in writing by a majority
of the Arbiters and Umpire when filed with the PARTIES, shall be final and
binding on the PARTIES. Judgment upon the final decision of the Arbiters
and Umpire may be entered in any court of competent jurisdiction.
F. The costs of the arbitration, including the fees of the Arbiters and the
Umpire, shall be borne equally unless the Arbiters and Umpire shall decide
otherwise.
G. The AGREEMENT shall be interpreted under the laws of Texas and the
arbitration shall be covered and conducted according to the Texas General
Arbitration Act.
ARTICLE XXIII - INTERMEDIARY
Sedgwick Re, Inc. is hereby recognized as the Intermediary negotiating this
Agreement for all business hereunder. All communications, including notices,
premiums, return premiums, commissions, taxes, losses, loss adjustment expenses,
salvages and loss settlements relating thereto shall be transmitted to the
REINSURER or the COMPANY through Sedgwick Re, Inc., 1501 Fourth Avenue, Suite
1400, Seattle, Washington 98101. Payments by the COMPANY to the Intermediary
shall be deemed to constitute payment to the REINSURER. Payments by the
REINSURER to the Intermediary shall be deemed to constitute payment to the
COMPANY only to the extent that such payments are actually received by the
COMPANY.
ARTICLE XXIV - CURRENCY
Whenever the word "dollars" or the sign "$" appears in this AGREEMENT, they
shall be construed to mean United States dollars and all transactions under this
AGREEMENT shall be in United States dollars. Amounts paid or received by the
COMPANY in any other currency shall be converted to United States dollars at the
rate of exchange at the date such transaction is entered on the books of the
COMPANY.
<PAGE>
ARTICLE XXV - SAVINGS CLAUSE
If any law or regulation of any Federal, State or local Government of the United
States of America, or the ruling of officials having supervision over insurance
companies, should prohibit or render illegal this AGREEMENT, or any portion
thereof, as to risks or properties located in the jurisdiction of such
authority, either the COMPANY or the REINSURER may upon written notice to other
suspend or abrogate this AGREEMENT insofar as it relates to risks or properties
located within such jurisdiction to such extent as may be necessary to comply
with such law, regulations or ruling. Such illegality, shall in no way affect
any other portion thereof, provided however, that the REINSURER or COMPANY may
terminate or suspend this AGREEMENT insofar as it relates to the business to
which such law or regulation may apply.
ARTICLE XXVI - MISCELLANEOUS
A. This AGREEMENT has been made and entered into in the State of Texas and the
AGREEMENT shall be subject to an construed under the laws of the State of
Texas. This AGREEMENT shall be performed in Dallas County, Texas.
B. All notices required to be given hereunder shall be deemed to have been
duly given by personally delivering such notice in writing or by mailing
it, Certified Mail, return receipt requested, with postage prepaid. Any
Party may change the address to which notices and other communications
hereunder are to be sent to such Party by giving the other PARTY written
notice thereof in accordance with this provision.
C. All acts and payments under this AGREEMENT are performable and payable at
the offices of the COMPANY in Dallas, Texas. The address of the COMPANY,
for the purpose of this AGREEMENT, is 8200 Anderson Boulevard, Fort Worth,
Texas 76120. The address of the REINSURER for the purpose of this
AGREEMENT is 14651 Dallas Parkway, Suite 900, Dallas, Texas 75240.
D. This AGREEMENT shall be binding upon the PARTIES hereto, together with
their respective executors, administrators, personal representatives, heirs
and assigns. REINSURER shall not assign any of its rights or obligations
under this AGREEMENT without the prior written consent of the COMPANY.
E. This AGREEMENT may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same instrument.
F. This AGREEMENT may be amended, modified or supplemented only by a written
instrument executed by all PARTIES hereto.
G. This AGREEMENT is the entire AGREEMENT between the PARTIES and supersedes
any and all previous agreements, written or oral, and amendments thereto.
H. A waiver by the COMPANY of any breach or default by the REINSURER under
this AGREEMENT shall not constitute a continuing waiver or a waiver by the
COMPANY of any subsequent act in breach or of default hereunder.
I. Headings used in this AGREEMENT are for reference purposes only and shall
not be deemed a part of this AGREEMENT.
J. The PARTIES hereto intend all provisions of this AGREEMENT to be enforced
to the fullest extent permitted. Accordingly, should a court of competent
jurisdiction or arbitration panel determine that the scope of any
provisions is too broad to be enforced as written, the PARTIES intend that
the court or arbitration panel should reform the provision to such narrower
scope as it determines to be enforceable under present or future law; such
provision shall be fully severable; this AGREEMENT shall be construed and
enforced as if such illegal, invalid, or unenforceable provision were never
a part hereof; and the remaining provisions of this AGREEMENT shall remain
in full force and effect and shall not be affected by the illegal, invalid,
or unenforceable provision or by its severance.
<PAGE>
K. This AGREEMENT is not exclusive and the COMPANY reserves the right to
appoint or contract with other reinsurers, agents and/or managing agents in
the territory covered by this AGREEMENT.
L. The REINSURER shall not insert any advertisement respecting the COMPANY or
the business to be written under this AGREEMENT in any publication or issue
any circular or paper referring to the COMPANY or such business without
first obtaining the written consent of the COMPANY.
M. Policy cancellations at the COMPANY'S request will be made strictly subject
to requirements imposed by the COMPANY'S underwriting rules and practices,
as approved by the COMPANY, and in compliance with the applicable
provisions contained in this AGREEMENT and the pertinent policy. Such
cancellation authority shall be exercised only for causes inherent in the
particular risk and shall not be construed as authority to make general or
indiscriminate cancellations or replacement of the Policies with those of
another COMPANY, except upon specific written instructions from the
COMPANY. When directed by the COMPANY, the REINSURER will cause the
cancellation of any and all Policies produced by it for any reason the
COMPANY deems necessary.
N. This AGREEMENT shall be interpreted in conformance with applicable Texas
law and regulation. If it is found or ordered by a court or regulatory
body that a term or provision of this AGREEMENT does not conform to such
law or regulation then this AGREEMENT shall be deemed to be amended and
modified in accordance with such law. However, where this AGREEMENT is
found not to comply with applicable law or regulation, the COMPANY may in
its sole discretion terminate this AGREEMENT immediately and without prior
notice.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
officers have executed this AGREEMENT in duplicate as of the date
undermentioned at:
Fort Worth, Texas, as of this 28th day of June, 1996
STATE AND COUNTY MUTUAL FIRE
INSURANCE COMPANY
By:_____________________________________
Its: _____________________________________
Dallas, Texas, as of this 28th day of June, 1996
AMERICAN HALLMARK INSURANCE
COMPANY OF TEXAS
By:_____________________________________
Its: _____________________________________
QUOTA SHARE RETROCESSION AGREEMENT
This Agreement is made and entered into by and between AMERICAN HALLMARK
INSURANCE COMPANY OF TEXAS, Dallas, Texas (hereinafter called the "Company") and
the Reinsurer specifically identified on the signature page of this Agreement
(hereinafter called the "Reinsurer").
ARTICLE 1
BUSINESS REINSURED
This Agreement is to share with the Reinsurer the interests and liabilities of
the Company under all Policies classified by the Company as Private Passenger
Automobile Business (including Motorist Bodily Injury and Property Damage,
Physical Damage, Uninsured/Underinsured Motorist Bodily Injury and Property
Damage and Personal Injury Protection) written or renewed by or through American
Hallmark General Agency, Inc., Dallas, Texas for and on behalf of State and
County Mutual Insurance Company, Ft. Worth, Texas (hereinafter called the
"Issuing Carrier") and assumed by the Company as reinsurance from the Issuing
Carrier, during the term of this Agreement, subject to the terms and conditions
herein contained.
It is understood that the business reinsured under this Agreement is deemed to
include coverages extended for non-resident drivers under the Motor Vehicle
Financial Responsibility Law or the Motor Vehicle Compulsory Insurance Law, or
any similar law of any state or province, following the provisions of the
Issuing Carrier's Policies when they include or are deemed to include so called
"out of state insurance" provisions.
ARTICLE 2
COVER
The Company will cede, and the Reinsurer will accept as reinsurance, a 75% share
of all business reinsured hereunder.
ARTICLE 3
COMMENCEMENT AND TERMINATION
This Agreement shall become effective at 12:01 a.m., Central Standard Time, July
1, 1996, and shall remain in full force and effect until terminated as provided
in the following paragraph.
Either the Company or the Reinsurer shall have the right to terminate this
Agreement as of 12:01 a.m., Central Standard Time, any January 1 or July 1, by
giving 90 days' prior notice in writing via either Certified or Registered Mail,
return receipt requested.
In the event of termination of this Agreement, the Reinsurer will continue to
cover all Policies coming within the scope of this Agreement, including those
written or renewed during the period of notice, until the natural expiration or
anniversary of such Policies, whichever occurs first, but in no event longer
than 12 months from the date of termination.
However, in the event that any Policy is required by law or regulation to be
continued in force, the Reinsurer will continue to remain liable with respect to
each such Policy until the Issuing Carrier may legally cancel, non-renew or
otherwise eliminate liability under such Policy or Policies. This provision
will include but is not limited to Policies which must be issued or renewed
because a producing agent, broker or managing general agent cannot be canceled
or has not been timely canceled, until the expiration date of such Policies.
<PAGE>
Upon termination, the Company, at its option, may elect to terminate the
Reinsurer's liability for all losses occurring subsequent to termination.
The Reinsurer will return to the Company a portfolio representing the unearned
premium reserve under this Agreement appropriate to the mode of termination.
ARTICLE 4
TERRITORY
This Agreement will cover wherever the Issuing Carrier's Policies cover.
ARTICLE 5
WARRANTY
It is warranted for purposes of this Agreement that the maximum Policy limits
for which American Hallmark General Agency, Inc. shall have the authorization to
bind the Issuing Carrier for business ceded hereunder shall be as follows or so
deemed:
A. Bodily Injury, per person/per accident $20,014/$40,014
B. Property Damage, per accident $15,014
C. Physical Damage Actual Cash Value
(ACV) not to exceed
$40,014 per vehicle
D. Personal Injury Protection, per person/per accident $2,514
E. Uninsured/Underinsured Motorist Bodily Injury,
per person/per accident $20,014/$40,014
F. Uninsured/Underinsured Motorist Property Damage,
per accident $15,014
In the event of a statutory increase in limits by the State of Texas, or travel
by an insured to a state with greater statutory requirements, the maximum Policy
limits shall be increased to statutory limits in effect.
ARTICLE 6
EXCLUSIONS
This Agreement does not cover:
A. All business not specifically described in the BUSINESS REINSURED ARTICLE
of this Agreement.
B. Garagekeepers legal liability.
C. Vendors single interest.
D. Vehicles principally used as ambulances, fire and police units.
E. Commercial vehicles rated as such, and all automobile fleets.
F. Mobile homes.
G. Automobile dealers.
H. War risks as excluded in the attached North American War Exclusion Clause
(Reinsurance) No. 08-45.
<PAGE>
I. Business excluded by the attached Nuclear Incident Exclusion Clauses -
Liability - Reinsurance - U.S.A., No. 08-31.1 and Canada, No. 08-32.1.
J. Business excluded by the attached Nuclear Incident Exclusion Clauses -
Physical Damage - Reinsurance - U.S.A., No. 08-33 and Canada No. 08-34.2.
K. Assumed reinsurance, except for reinsurance assumed by the Company from
State and County Mutual Insurance Company.
L. Vehicles used in racing or speed events.
M. Taxis, limos, buses and livery.
N. Pools, Associations and Syndicates, except losses from Assigned Risk Plans
or similar styled plans/pools are not excluded.
O. Loss or damage or costs or expenses arising from seepage and/or pollution
and/or contamination, other than contamination from smoke damage.
Nevertheless, this exclusion does not preclude any payment of the cost of
the removal of debris of property damaged by a loss otherwise covered
hereunder, but subject always to a limit of 25% of the Company's Property
Business loss under the original Policy.
Should the Issuing Carrier be assigned a risk under an Assigned Risk Plan, or
similar mandatory plan, which is otherwise excluded by the foregoing exclusions
list, the Reinsurer will waive such exclusions (other than exclusions H., I. and
J.) in respect of such assigned risks.
Errors and omissions notwithstanding, if without the knowledge and contrary to
the instructions of its supervisory personnel, the Issuing Carrier is bound on a
risk specifically excluded hereunder, other than exclusions H., I., and J., or
by an existing insured extending its operations, such reinsurance as would have
been afforded but for the exclusion shall apply for a period of 30 days
following receipt of said underwriting personnel of knowledge thereof.
ARTICLE 7
ACCOUNTS AND REMITTANCES
A. Within 60 days following the end of each month, the Company will render a
net account to the Reinsurer for the current Agreement Year. Prior
Agreement Years having activity during the month will be accounted for
separately in a similar manner. Such account will contain the following:
1. Net written premium accounted for during the period, being the gross
written premium (including 75% of 50% of the Company's Policy fees)
less returns and cancellations; less
2. The ceding commission as provided for in this Agreement; less
3. Loss and loss expense paid on losses occurring during the current
Agreement Year; plus
4. Subrogation, salvage, or other recoveries on losses occurring during
the current Agreement Year.
Within 60 days following the end of the month the debtor party will remit
to the creditor party any balance due.
<PAGE>
This account will also bear a notation advising of the following
information, separately for each Agreement Year:
1. Outstanding loss and loss expense reserve at the end of the period.
2. The unearned premium reserve at the end of the month.
3. Should loss attributable to an ISO catastrophe(s) be involved, the
account should bear a notation showing the ISO number(s) and the paid
loss and loss expense and the outstanding loss and loss expenses
applicable.
B. Within 60 days following the end of each Agreement Year, the Company shall
furnish to the Reinsurer for the Agreement Year any other information which
the Reinsurer may require for its Annual Convention Statement which may be
reasonably available to the Company.
ARTICLE 8
CEDING COMMISSION
The Reinsurer will allow the Company a provisional ceding commission of 30.0% of
the written premiums ceded (including 75% of 50% of the Company's Policy fees)
hereunder. Return commission shall be allowed on return premiums at the same
rate.
ARTICLE 9
COMMISSION ADJUSTMENT
A. 1. The final ceding commission shall be determined by the loss experience
under this Agreement for each period comprising three consecutive
Agreement Years or lesser period should the Agreement be terminated
prior to the end of a three Agreement Year period. There shall be
provisional adjustments and a final adjustment for each period, all in
accordance with the other paragraphs of this Article.
2. Within 60 days following the end of each Agreement Year within each
three Agreement Year period, the Company will calculate an adjusted
ceding commission for the portion of the three Agreement Year period
then expired based on premiums earned and losses incurred. The ceding
commission paid to that date, whether provisional or prior adjustment,
shall be adjusted between the parties as appropriate. At the end of
each three Agreement Year period, adjustments will continue to be made
annually until all losses have been paid or closed, at which time the
ceding commission will become final.
3. Premium earned for the period shall mean all written premium ceded to
this Agreement during the period, including 75% of 50% of the
Company's Policy fees, (less cancellations and returns) plus the
unearned premium reserve at the beginning of the period and less the
unearned premium reserve at the end of the period.
4. Losses incurred for the period shall mean the loss and loss expense
paid by the Reinsurer (less salvages and recoveries received) on
losses occurring during the period, plus loss and loss expense
reserves outstanding on losses occurring during the period and plus an
amount for incurred but not reported losses (IBNR) as provided by the
Company.
B. 1. Should the ratio of losses incurred to premium earned be 69.0% or
higher, then the adjusted ceding commission shall be 26.0%.
<PAGE>
2. Should the ratio of losses incurred to premium earned be less than
69.0%, then the adjusted commission shall be determined by adding one
percent (1.0%) to the ceding commission for each one percent reduction
of loss ratio subject to a ceding commission of 30.0% at a loss ratio
of 65.0%. Should the loss ratio be less than 65.0%, then the
commission shall be further adjusted by adding seven-tenths of one
percent (.70%) to the ceding commission for each one percent reduction
in the loss ratio below 65.0%, subject to a maximum ceding commission
of 33.5% at a loss ratio of 60.0% or less.
C. 1. Upon termination, any period of less than 12 months from inception
shall be considered as an Agreement Year for purposes of this Article;
any period of less than 12 months from anniversary will be considered
as part of the preceding Agreement Year.
2. Should this Agreement be terminated on a runoff basis wherein the
Reinsurer is liable for losses occurring after the date of
termination, then such runoff period shall be considered as part of
the last Agreement Year.
D. Should the Reinsurer's participation in this Agreement increase or decrease
within a multi-year adjustment period, the incremental participation
percentage increase or decrease shall be treated as a separate new or
terminated participation, respectively, for purposes of calculating amounts
due hereunder.
ARTICLE 10
DEFINITIONS
A. The term "Policy" as used in this Agreement shall mean any binder, policy,
or contract of insurance or reinsurance issued, accepted or held covered
provisionally or otherwise, by or through American Hallmark General Agency,
Inc., Dallas, Texas for and on behalf of the Issuing Carrier.
B. The term "Agreement Year" as used in this Agreement shall mean the 12
consecutive months commencing with each July 1. In the event of
termination of this Agreement at other than the anniversary date, the
period from the anniversary date to the termination date will be considered
as part of the last full Agreement Year. Any period following termination
of this Agreement in which the Reinsurer remains liable for losses arising
out of Policies in force at the date of termination will be considered as
part of the concluding Agreement Year.
ARTICLE 11
ORIGINAL CONDITIONS
All insurances falling under this Agreement shall be subject to the same terms,
rates, conditions and waivers, and to the same modifications, alterations and
cancellations as the respective Policies of the Issuing Carrier (except that in
the event of the insolvency of the Company the provisions of the INSOLVENCY
ARTICLE of this Agreement shall apply) and the Reinsurer shall be credited with
its exact proportion of the original gross premiums received by the Company.
ARTICLE 12
CURRENCY
The currency to be used for all purposes of this Agreement shall be United
States of America currency.
<PAGE>
ARTICLE 13
LOSS AND UNEARNED PREMIUM RESERVE FUNDING
With respect to loss and unearned premium reserves, funding will be in
accordance with the attached Loss Funding Clause No. 13-04.
ARTICLE 14
TAXES
The Company will be liable for taxes (except Federal Excise Tax) on premiums
reported to the Reinsurer hereunder.
Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at
Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are
domiciled outside the United States of America.
The Reinsurer has agreed to allow for the purpose of paying the Federal Excise
Tax 1% of the premium payable hereon to the extent such premium is subject to
Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurer will
deduct 1% from the amount of the return, and the Company or its agent should
take steps to recover the Tax from the U.S. Government.
ARTICLE 15
LOSS AND LOSS EXPENSE
Any loss settlement made by the Company, whether under strict Policy conditions
or by way of compromise, shall be unconditionally binding upon the Reinsurer in
proportion to its participation, and the Reinsurer shall benefit proportionally
in all salvages and recoveries.
The Reinsurer shall bear its proportionate share of all expenses incurred by the
Company in the investigation, adjustment, appraisal or defense of all claims
under Policies reinsured hereunder (excluding, however, office expenses and
salaries of officials of the Company) and shall receive its proportionate share
of any recoveries of such expenses.
The Company will advise the Reinsurer by separate report, regardless of any
question on liability or coverage, any claim involving the following:
1. Fatalities.
2. Bodily injuries involving:
a. Brain stem, quadriplegia, paraplegia or severe paralysis,
b. Serious burns,
c. Amputations of major limbs,
d. Serious impairment of vision.
3. Potential coverage disputes or bad faith situations which may give rise to
a payment for Excess of Policy Limits or Extra Contractual Obligations.
<PAGE>
4. Any claims that do not fall within these categories, but have a potential
of significant liability to the Reinsurer.
ARTICLE 16
EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS OF POLICY LIMITS
This Agreement shall protect the Company, where the loss includes any Extra
Contractual Obligations for 100% of such Extra Contractual Obligations. "Extra
Contractual Obligations" are defined as those liabilities not covered under any
other provision of this Agreement and which arise from handling of any claim on
business covered hereunder, such liabilities arising because of, but not limited
to, the following: failure by the Issuing Carrier or Company to settle within
the Policy limit, or by reason of alleged or actual negligence, fraud or bad
faith in rejecting an offer of settlement or in the preparation of the defense
or in the trial of any action against its insured or in the preparation or
prosecution of an appeal consequent upon such action.
The date on which any Extra Contractual Obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original loss.
In the event a loss includes an amount in excess of the Issuing Carrier's Policy
limit, 100% of such amount, in excess of the Issuing Carrier's Policy limit
shall be added to the amount of the Issuing Carrier's Policy limit, and the sum
thereof shall be covered.
For the purpose of this Article, the word "loss" shall mean any amounts for
which the Issuing Carrier would have been contractually liable to pay had it not
been for the limit of the original Policy.
Notwithstanding the above, as respects any loss which includes either Extra
Contractual Obligations or Excess of Policy Limits or both, the Reinsurer's
limit of liability for Extra Contractual Obligations and/or Excess of Policy
Limits shall be limited to $2,000,000 each loss in addition to the indemnity
loss.
However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Issuing Carrier or Company acting individually or collectively or in collusion
with any individual or corporation or any other organization or party involved
in the presentation, defense or settlement of any claim covered hereunder.
ARTICLE 17
ASSESSMENTS AND ASSIGNMENTS
The Reinsurer hereby assumes liability for any and all assessments and
assignments imposed as a result of Policies reinsured hereunder (whether before
or after the termination of the Agreement) levied or made by a guaranty fund,
insolvency fund, plan, pool, association or other arrangement created by statute
or regulation including, but not limited to, fees associated with the Auto Theft
Prevention Pool. The Company shall account to the Reinsurer for any recovery of
such assessments, or any credit allowed to and realized by the Company from the
Issuing Carrier, and return to the Reinsurer its share of any recovery or
credit.
<PAGE>
ARTICLE 18
DELAY, OMISSION OR ERROR
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made, providing such delay, omission or
error is rectified upon discovery.
ARTICLE 19
INSPECTION
The Company shall place at the disposal of the Reinsurer at all reasonable
times, and the Reinsurer shall have the right to inspect, through its authorized
representatives, all books, records and papers of the Company in connection with
any reinsurance hereunder or claims in connection herewith.
ARTICLE 20
ARBITRATION
Any irreconcilable dispute between the parties to this Agreement will be
arbitrated in Dallas, Texas in accordance with the attached Arbitration Clause
No. 22-01.1.
ARTICLE 21
SERVICE OF SUIT
The attached Service of Suit Clause No. 20-01.5 - U.S.A. will apply to this
Agreement.
ARTICLE 22
INSOLVENCY
In the event of the insolvency of the Company, the attached Insolvency Clause
No. 21-01 - 1/1/86 will apply.
ARTICLE 23
ENTIRE AGREEMENT
This Agreement sets forth all of the duties and obligations between the Company
and the Reinsurer and supersedes any and all prior or contemporaneous or written
agreements with respect to matters referred to in this Agreement. The Agreement
may not be modified, amended or changed except by an agreement in writing signed
by both parties.
ARTICLE 24
INTERMEDIARY
Sedgwick Re, Inc. is hereby recognized as the Intermediary negotiating this
Agreement for all business hereunder. All communications, including notices,
premiums, return premiums, commissions, taxes, losses, loss adjustment expenses,
salvages and loss settlements relating thereto shall be transmitted to the
Reinsurer or the Company through Sedgwick Re, Inc., 1501 Fourth Avenue, Suite
1400, Seattle, Washington 98101. Payments by the Company to the Intermediary
shall be deemed to constitute payment to the Reinsurer. Payments by the
Reinsurer to the Intermediary shall be deemed only to constitute payment to the
Company to the extent that such payments are actually received by the Company.
<PAGE>
ARTICLE 25
PARTICIPATION:QUOTA SHARE RETROCESSION AGREEMENT
EFFECTIVE: July 1, 1996
This Agreement obligates the Reinsurer for _______% of the interests and
liabilities set forth under this Agreement.
The participation of the Reinsurer in the interests and liabilities of this
Agreement shall be separate and apart from the participations of other
reinsurers and shall not be joint with those of other reinsurers, and the
Reinsurer shall in no event participate in the interests and liabilities of
other reinsurers.
IN WITNESS WHEREOF, the parties hereto, by their authorized representatives,
have executed this Agreement as of the following dates:
Dorinco Reinsurance Company 25.00%
Kemper Reinsurance Company 50.00%
Skandia America Reinsurance Corporation 25.00%
100.00%
Upon completion of Reinsurers' signing, fully executed signature pages will be
forwarded to you for the completion of your file.
and in Dallas, Texas, this 28th day of June, 1996.
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
By_________________________________________
(signature)
___________________________________________
(name)
___________________________________________
(title)
QUOTA SHARE RETROCESSION AGREEMENT
issued to
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
GUARANTY AGREEMENT
This Guaranty Agreement ("GUARANTY"), effective July 1, 1996, is provided by
DORINCO REINSURANCE COMPANY ("DORINCO") in favor of STATE AND COUNTY MUTUAL FIRE
INSURANCE COMPANY ("STATE AND COUNTY MUTUAL").
PREAMBLE
STATE AND COUNTY MUTUAL has entered into an agreement with American Hallmark
Insurance Company of Texas ("AMERICAN HALLMARK") to act as a policy issuing
company for certain insurance business ("subject business") produced and managed
by AMERICAN HALLMARK, or its subsidiary, American Hallmark General Agency, Inc.
("GENERAL AGENCY") for which AMERICAN HALLMARK has assumed full responsibility
under certain agreements ("subject agreements") more specifically described
below. While STATE AND COUNTY MUTUAL acknowledges that it has legal obligations
to the holders of its policies and furthermore has non-delegable obligations
under the Texas Insurance Code and the rules and regulations of the Texas
Department of Insurance, AMERICAN HALLMARK, under the subject agreements, has
assumed all such obligations, risks and duties under its agreements with STATE
AND COUNTY MUTUAL and has agreed to hold STATE AND COUNTY MUTUAL harmless for
any liability, obligation, cost or expense with respect to the subject insurance
business (except for the internal cost of accounting, report preparation and
communications with the Texas Department of Insurance or insureds incurred by
STATE AND COUNTY MUTUAL in the regular course of business), as more specifically
described in the subject agreements.
In order to convey and cede all underwriting risks as well as any other business
or credit risks or obligation whatsoever arising from the subject business,
AMERICAN HALLMARK has entered into a 100% Quota Share Reinsurance Agreement,
("REINSURANCE AGREEMENT") effective July 1, 1996 a copy of which is attached
hereto as Exhibit "A".
GENERAL AGENCY will act as a general agent in the production of business and
supervision of sub-agents with respect to the subject business. While GENERAL
AGENCY has been appointed by STATE AND COUNTY MUTUAL and has entered into an
agreement ("GENERAL AGENCY AGREEMENT") effective March 1, 1992, to act as a
general agent for STATE AND COUNTY MUTUAL, the parties recognize that GENERAL
AGENCY is acting on behalf of AMERICAN HALLMARK at all times, and that AMERICAN
HALLMARK has assumed all financial, supervision and examination responsibilities
with respect to GENERAL AGENCY, as if it were acting as its agent in name as
well as in truth. A copy of the GENERAL AGENCY AGREEMENT is attached hereto as
Exhibit "B".
AMERICAN HALLMARK has entered into an agreement to administer the subject
business ("ADMINISTRATIVE SERVICES AGREEMENT") with STATE AND COUNTY MUTUAL,
effective March 1, 1992, a copy of which is attached hereto as Exhibit "C".
While STATE AND COUNTY MUTUAL does not desire to delegate ultimate control, the
parties intend for AMERICAN HALLMARK to perform, at its cost, all company
functions on behalf of STATE AND COUNTY MUTUAL with respect to the subject
business.
DORINCO has entered into a Quota Share Retrocession Agreement, effective July 1,
1996, with AMERICAN HALLMARK ("Retrocession Agreement"), pursuant to which
AMERICAN HALLMARK has retroceded to DORINCO a 25% share of the Interest and
Liabilities under the Reinsurance Agreement.
<PAGE>
As a condition precedent to the agreements with AMERICAN HALLMARK, STATE AND
COUNTY MUTUAL has required and relied upon this GUARANTY. DORINCO acknowledges
that STATE AND COUNTY MUTUAL would not have entered into the agreements with
AMERICAN HALLMARK without this GUARANTY and that the terms of the subject
agreements should be construed in accordance with the recitations hereinabove.
NOW, THEREFORE, DORINCO hereby agrees, as respects subject business of the
REINSURANCE AGREEMENT written or renewed on or after July 1, 1996, to guarantee
a 25% share of the full and complete performance of all terms, conditions and
covenants by: (a) AMERICAN HALLMARK under the REINSURANCE AGREEMENT (Exhibit
"A"); (b) GENERAL AGENCY under the GENERAL AGENCY AGREEMENT (Exhibit "B"); and
(c) AMERICAN HALLMARK under the ADMINISTRATIVE SERVICES AGREEMENT (Exhibit "C").
This GUARANTY constitutes consideration by DORINCO to STATE AND COUNTY MUTUAL
for entering into the subject agreements with AMERICAN HALLMARK and GENERAL
AGENCY.
If AMERICAN HALLMARK fails to perform any of its duties or obligations, or fails
to timely pay any amounts due to STATE AND COUNTY MUTUAL under the REINSURANCE
AGREEMENT, or the ADMINISTRATIVE SERVICES AGREEMENT, then, STATE AND COUNTY
MUTUAL may proceed directly to DORINCO for performance and be paid by DORINCO
without necessity of any suit or proceeding by STATE AND COUNTY MUTUAL against
AMERICAN HALLMARK.
Any time, with or without consideration or notice, STATE AND COUNTY MUTUAL may
waive enforcement of the terms, conditions and provisions of the subject
agreements with respect to any breach or default by AMERICAN HALLMARK or GENERAL
AGENCY, and such waiver will not diminish or otherwise affect DORINCO's
obligations to STATE AND COUNTY MUTUAL under this GUARANTY; provided,. however,
STATE AND COUNTY MUTUAL will not, with actual knowledge, waive any material
breach or material default by AMERICAN HALLMARK or GENERAL AGENCY under the
subject agreements without giving advance written notice to DORINCO. The
validity of this GUARANTY and DORINCO's obligations hereunder shall in no way be
terminated, affected, diminished or impaired by reason of STATE AND COUNTY
MUTUAL's assertion or nonassertion of its rights against AMERICAN HALLMARK or
GENERAL AGENCY under any of the subject agreements, or by reason of STATE AND
COUNTY MUTUAL's failure to monitor, supervise, examine or otherwise act in an
overseeing capacity with respect to AMERICAN HALLMARK or GENERAL AGENCY.
Although there are recitations regarding such activities in the subject
agreements, STATE AND COUNTY MUTUAL has no such obligations insofar as DORINCO's
obligations under this GUARANTY are concerned.
If any payment by DORINCO to STATE AND COUNTY MUTUAL is held to constitute a
preference or a voidable transfer under applicable state or federal laws, STATE
AND COUNTY MUTUAL is required to remit such payment to the payor or any other
person, such payment by DORINCO to STATE AND COUNTY MUTUAL shall not release
DORINCO from any liability hereunder, and DORINCO agrees promptly to pay such
amount to STATE AND COUNTY MUTUAL.
If, by action of a state insurance regulatory agency or court of competent
jurisdiction, AMERICAN HALLMARK is found to be insolvent or is placed in
supervision, conservation, receivership, rehabilitation or liquidation, or has a
receiver, supervisor or conservator appointed, then DORINCO shall fully assume
25% of AMERICAN HALLMARK's obligations owed to STATE AND COUNTY MUTUAL under the
subject agreements, including but not limited to making all payments that were
required of AMERICAN HALLMARK under the subject agreements. STATE AND COUNTY
MUTUAL shall assign to DORINCO its right to recover from AMERICAN HALLMARK any
claims payments or other payments made by DORINCO to STATE AND COUNTY MUTUAL by
reason of AMERICAN HALLMARK being found to be insolvent or placed in
<PAGE>
supervision, conservation, receivership, rehabilitation or liquidation.
Notwithstanding DORINCO's agreement to fully assume AMERICAN HALLMARK's
obligations, if AMERICAN HALLMARK is found to be insolvent or is placed in
supervision, conservation, receivership, rehabilitation or liquidation, STATE
AND COUNTY MUTUAL shall not be required to pay to DORINCO any amounts paid by
STATE AND COUNTY MUTUAL to AMERICAN HALLMARK as of that date and/or which STATE
AND COUNTY MUTUAL is required to pay in the future to AMERICAN HALLMARK and /or
its supervisor, conservator, rehabilitator or liquidator.
This GUARANTY shall be irrevocable and continuing. DORINCO's liability
hereunder shall in no way be affected, modified or diminished by reason of any
assignment permitted under the subject agreements or by any renewal, extension
or modification of or any supplement or amendment to the subject agreements.
STATE AND COUNTY MUTUAL's rights and remedies under the subject agreements and
under this GUARANTY are distinct, separate and cumulative and no such right or
remedy therein or herein, whether exercised by STATE AND COUNTY MUTUAL or not,
is intended to excluded or waive any of the other rights and remedies therein or
herein.
This Guaranty shall remain in full force and effect as long as AMERICAN HALLMARK
has any obligation whatsoever under the subject agreements, including but not
limited to those obligations owed by AMERICAN HALLMARK after termination of the
subject agreements, unless this Guaranty is earlier terminated upon the mutual
written consent of STATE AND COUNTY MUTUAL and DORINCO. This Guaranty will
automatically end upon the complete expiration of all duties and obligations
owed by AMERICAN HALLMARK and GENERAL AGENCY to STATE AND COUNTY MUTUAL under
the subject agreements.
In any and all events, DORINCO shall have no obligations under this Guaranty for
any policies produced after the termination of the Retrocession Agreement and
which are not subject to the Retrocession Agreement.
DORINCO's liability hereunder shall not, prior to the expiration of the term
hereof, be released, reduced, diminished or impaired by the occurrence of any
event, including, without limitation (1) the insolvency, bankruptcy,
reorganization or disability of STATE AND COUNTY MUTUAL, AMERICAN HALLMARK,
DORINCO or GENERAL AGENCY or (2) the sale, encumbrance, transfer or other
modification of ownership or change in the financial condition or management of
STATE AND COUNTY MUTUAL, AMERICAN HALLMARK, DORINCO or GENERAL AGENCY.
DORINCO cannot exercise against STATE AND COUNTY MUTUAL any right of
subrogation, contribution, set off or reimbursement with respect to payments by
DORINCO pursuant to this GUARANTY (including without limitation of any right to
subrogation under Section 34.04 of the Texas Business and Commerce Code), and
DORINCO hereby waives any rights that may arise in connection with such payment
to enforce any remedy which DORINCO may have against STATE AND COUNTY MUTUAL and
any right to participate in any security.
If any dispute or difference of opinion arises between DORINCO and STATE AND
COUNTY MUTUAL with respect to this GUARANTY or with respects to the obligations
of DORINCO and STATE AND COUNTY MUTUAL hereunder, such dispute or difference of
opinion shall be submitted to arbitration, and the arbitration shall be
conducted according to the terms and conditions set forth in Article XXIII of
the REINSURANCE AGREEMENT.
<PAGE>
With respect to the Retrocession Agreement between DORINCO and AMERICAN HALLMARK
regarding the subject business, DORINCO acknowledges that this GUARANTY is
superior in all respects and this GUARANTY is not diminished or limited in any
way by the Retrocession Agreement.
In the event that either (i) the Texas Department of Insurance requires
cancellation or disallows credit for reinsurance under the REINSURANCE AGREEMENT
or (ii) DORINCO's A.M. Best rating at any time is lower that A-, DORINCO will
immediately secure 25% of AMERICAN HALLMARK's obligations under the REINSURANCE
AGREEMENT via a security fund agreement to be executed by DORINCO and STATE AND
COUNTY MUTUAL, which security fund agreement shall be in form and content
acceptable to STATE AND COUNTY MUTUAL.
This GUARANTY, as well all accounts and transactions and rights and obligations
of the parties hereto, shall be construed and interpreted according to the laws
of the State of Texas.
AMERICAN HALLMARK and GENERAL AGENCY join herein through their duly authorized
officers for the purpose of acknowledging the accuracy of the PREAMBLE and other
recitations herein. This GUARANTY is hereby made by DORINCO and executed by its
duly authorized officer.
DORINCO REINSURANCE COMPANY
Attest: By: ____________________________
Title: ___________________________
Date: ___________________________
AMERICAN HALLMARK INSURANCE
COMPANY OF TEXAS
Attest: By: ____________________________
Title: ___________________________
Date: ___________________________
AMERICAN HALLMARK GENERAL AGENCY, INC.
Attest: By: ____________________________
Title: ___________________________
Date: ___________________________
GUARANTY AGREEMENT
This Guaranty Agreement ("GUARANTY"), effective July 1, 1996, is provided by
KEMPER REINSURANCE COMPANY ("KEMPER") in favor of STATE AND COUNTY MUTUAL FIRE
INSURANCE COMPANY ("STATE AND COUNTY MUTUAL").
PREAMBLE
STATE AND COUNTY MUTUAL has entered into an agreement with American Hallmark
Insurance Company of Texas ("AMERICAN HALLMARK") to act as a policy issuing
company for certain insurance business ("subject business") produced and managed
by AMERICAN HALLMARK, or its subsidiary, American Hallmark General Agency, Inc.
("GENERAL AGENCY") for which AMERICAN HALLMARK has assumed full responsibility
under certain agreements ("subject agreements") more specifically described
below. While STATE AND COUNTY MUTUAL acknowledges that it has legal obligations
to the holders of its policies and furthermore has non-delegable obligations
under the Texas Insurance Code and the rules and regulations of the Texas
Department of Insurance, AMERICAN HALLMARK, under the subject agreements, has
assumed all such obligations, risks and duties under its agreements with STATE
AND COUNTY MUTUAL and has agreed to hold STATE AND COUNTY MUTUAL harmless for
any liability, obligation, cost or expense with respect to the subject insurance
business (except for the internal cost of accounting, report preparation and
communications with the Texas Department of Insurance or insureds incurred by
STATE AND COUNTY MUTUAL in the regular course of business), as more specifically
described in the subject agreements.
In order to convey and cede all underwriting risks as well as any other business
or credit risks or obligation whatsoever arising from the subject business,
AMERICAN HALLMARK has entered into a 100% Quota Share Reinsurance Agreement,
("REINSURANCE AGREEMENT") effective July 1, 1996 a copy of which is attached
hereto as Exhibit "A".
GENERAL AGENCY will act as a general agent in the production of business and
supervision of sub-agents with respect to the subject business. While GENERAL
AGENCY has been appointed by STATE AND COUNTY MUTUAL and has entered into an
agreement ("GENERAL AGENCY AGREEMENT") effective March 1, 1992, to act as a
general agent for STATE AND COUNTY MUTUAL, the parties recognize that GENERAL
AGENCY is acting on behalf of AMERICAN HALLMARK at all times, and that AMERICAN
HALLMARK has assumed all financial, supervision and examination responsibilities
with respect to GENERAL AGENCY, as if it were acting as its agent in name as
well as in truth. A copy of the GENERAL AGENCY AGREEMENT is attached hereto as
Exhibit "B".
AMERICAN HALLMARK has entered into an agreement to administer the subject
business ("ADMINISTRATIVE SERVICES AGREEMENT") with STATE AND COUNTY MUTUAL,
effective March 1, 1992, a copy of which is attached hereto as Exhibit "C".
While STATE AND COUNTY MUTUAL does not desire to delegate ultimate control, the
parties intend for AMERICAN HALLMARK to perform, at its cost, all company
functions on behalf of STATE AND COUNTY MUTUAL with respect to the subject
business.
KEMPER has entered into a Quota Share Retrocession Agreement, effective July 1,
1996, with AMERICAN HALLMARK ("Retrocession Agreement"), pursuant to which
AMERICAN HALLMARK has retroceded to KEMPER a 50% share of the Interest and
Liabilities under the Reinsurance Agreement.
<PAGE>
As a condition precedent to the agreements with AMERICAN HALLMARK, STATE AND
COUNTY MUTUAL has required and relied upon this GUARANTY. KEMPER acknowledges
that STATE AND COUNTY MUTUAL would not have entered into the agreements with
AMERICAN HALLMARK without this GUARANTY and that the terms of the subject
agreements should be construed in accordance with the recitations hereinabove.
NOW, THEREFORE, KEMPER hereby agrees, as respects subject business of the
REINSURANCE AGREEMENT written or renewed on or after July 1, 1996, to guarantee
a 50% share of the full and complete performance of all terms, conditions and
covenants by: (a) AMERICAN HALLMARK under the REINSURANCE AGREEMENT (Exhibit
"A"); (b) GENERAL AGENCY under the GENERAL AGENCY AGREEMENT (Exhibit "B"); and
(c) AMERICAN HALLMARK under the ADMINISTRATIVE SERVICES AGREEMENT (Exhibit "C").
This GUARANTY constitutes consideration by KEMPER to STATE AND COUNTY MUTUAL for
entering into the subject agreements with AMERICAN HALLMARK and GENERAL AGENCY.
If AMERICAN HALLMARK fails to perform any of its duties or obligations, or fails
to timely pay any amounts due to STATE AND COUNTY MUTUAL under the REINSURANCE
AGREEMENT, or the ADMINISTRATIVE SERVICES AGREEMENT, then, STATE AND COUNTY
MUTUAL may proceed directly to KEMPER for performance and be paid by KEMPER
without necessity of any suit or proceeding by STATE AND COUNTY MUTUAL against
AMERICAN HALLMARK.
Any time, with or without consideration or notice, STATE AND COUNTY MUTUAL may
waive enforcement of the terms, conditions and provisions of the subject
agreements with respect to any breach or default by AMERICAN HALLMARK or GENERAL
AGENCY, and such waiver will not diminish or otherwise affect KEMPER's
obligations to STATE AND COUNTY MUTUAL under this GUARANTY; provided,. however,
STATE AND COUNTY MUTUAL will not, with actual knowledge, waive any material
breach or material default by AMERICAN HALLMARK or GENERAL AGENCY under the
subject agreements without giving advance written notice to KEMPER. The
validity of this GUARANTY and KEMPER's obligations hereunder shall in no way be
terminated, affected, diminished or impaired by reason of STATE AND COUNTY
MUTUAL's assertion or nonassertion of its rights against AMERICAN HALLMARK or
GENERAL AGENCY under any of the subject agreements, or by reason of STATE AND
COUNTY MUTUAL's failure to monitor, supervise, examine or otherwise act in an
overseeing capacity with respect to AMERICAN HALLMARK or GENERAL AGENCY.
Although there are recitations regarding such activities in the subject
agreements, STATE AND COUNTY MUTUAL has no such obligations insofar as KEMPER's
obligations under this GUARANTY are concerned.
If any payment by KEMPER to STATE AND COUNTY MUTUAL is held to constitute a
preference or a voidable transfer under applicable state or federal laws, STATE
AND COUNTY MUTUAL is required to remit such payment to the payor or any other
person, such payment by KEMPER to STATE AND COUNTY MUTUAL shall not release
KEMPER from any liability hereunder, and KEMPER agrees promptly to pay such
amount to STATE AND COUNTY MUTUAL.
If, by action of a state insurance regulatory agency or court of competent
jurisdiction, AMERICAN HALLMARK is found to be insolvent or is placed in
supervision, conservation, receivership, rehabilitation or liquidation, or has a
receiver, supervisor or conservator appointed, then KEMPER shall fully assume
50% of AMERICAN HALLMARK's obligations owed to STATE AND COUNTY MUTUAL under the
subject agreements, including but not limited to making all payments that were
required of AMERICAN HALLMARK under the subject agreements. STATE AND COUNTY
MUTUAL shall assign to KEMPER its right to recover from AMERICAN HALLMARK any
claims payments or other payments made by KEMPER to STATE AND COUNTY MUTUAL by
reason of AMERICAN HALLMARK being found to be insolvent or placed in
supervision, conservation, receivership, rehabilitation or liquidation.
<PAGE>
Notwithstanding KEMPER's agreement to fully assume AMERICAN HALLMARK's
obligations, if AMERICAN HALLMARK is found to be insolvent or is placed in
supervision, conservation, receivership, rehabilitation or liquidation, STATE
AND COUNTY MUTUAL shall not be required to pay to KEMPER any amounts paid by
STATE AND COUNTY MUTUAL to AMERICAN HALLMARK as of that date and/or which STATE
AND COUNTY MUTUAL is required to pay in the future to AMERICAN HALLMARK and /or
its supervisor, conservator, rehabilitator or liquidator.
This GUARANTY shall be irrevocable and continuing. KEMPER's liability hereunder
shall in no way be affected, modified or diminished by reason of any assignment
permitted under the subject agreements or by any renewal, extension or
modification of or any supplement or amendment to the subject agreements. STATE
AND COUNTY MUTUAL's rights and remedies under the subject agreements and under
this GUARANTY are distinct, separate and cumulative and no such right or remedy
therein or herein, whether exercised by STATE AND COUNTY MUTUAL or not, is
intended to excluded or waive any of the other rights and remedies therein or
herein.
This Guaranty shall remain in full force and effect as long as AMERICAN HALLMARK
has any obligation whatsoever under the subject agreements, including but not
limited to those obligations owed by AMERICAN HALLMARK after termination of the
subject agreements, unless this Guaranty is earlier terminated upon the mutual
written consent of STATE AND COUNTY MUTUAL and KEMPER. This Guaranty will
automatically end upon the complete expiration of all duties and obligations
owed by AMERICAN HALLMARK and GENERAL AGENCY to STATE AND COUNTY MUTUAL under
the subject agreements.
In any and all events, KEMPER shall have no obligations under this Guaranty for
any policies produced after the termination of the Retrocession Agreement and
which are not subject to the Retrocession Agreement.
KEMPER's liability hereunder shall not, prior to the expiration of the term
hereof, be released, reduced, diminished or impaired by the occurrence of any
event, including, without limitation (1) the insolvency, bankruptcy,
reorganization or disability of STATE AND COUNTY MUTUAL, AMERICAN HALLMARK,
KEMPER or GENERAL AGENCY or (2) the sale, encumbrance, transfer or other
modification of ownership or change in the financial condition or management of
STATE AND COUNTY MUTUAL, AMERICAN HALLMARK, KEMPER or GENERAL AGENCY.
KEMPER cannot exercise against STATE AND COUNTY MUTUAL any right of subrogation,
contribution, set off or reimbursement with respect to payments by KEMPER
pursuant to this GUARANTY (including without limitation of any right to
subrogation under Section 34.04 of the Texas Business and Commerce Code), and
KEMPER hereby waives any rights that may arise in connection with such payment
to enforce any remedy which KEMPER may have against STATE AND COUNTY MUTUAL and
any right to participate in any security.
If any dispute or difference of opinion arises between KEMPER and STATE AND
COUNTY MUTUAL with respect to this GUARANTY or with respects to the obligations
of KEMPER and STATE AND COUNTY MUTUAL hereunder, such dispute or difference of
opinion shall be submitted to arbitration, and the arbitration shall be
conducted according to the terms and conditions set forth in Article XXIII of
the REINSURANCE AGREEMENT.
With respect to the Retrocession Agreement between KEMPER and AMERICAN HALLMARK
regarding the subject business, KEMPER acknowledges that this GUARANTY is
superior in all respects and this GUARANTY is not diminished or limited in any
way by the Retrocession Agreement.
<PAGE>
In the event that either (i) the Texas Department of Insurance requires
cancellation or disallows credit for reinsurance under the REINSURANCE AGREEMENT
or (ii) KEMPER's A.M. Best rating at any time is lower that A-, KEMPER will
immediately secure 50% of AMERICAN HALLMARK's obligations under the REINSURANCE
AGREEMENT via a security fund agreement to be executed by KEMPER and STATE AND
COUNTY MUTUAL, which security fund agreement shall be in form and content
acceptable to STATE AND COUNTY MUTUAL.
This GUARANTY, as well all accounts and transactions and rights and obligations
of the parties hereto, shall be construed and interpreted according to the laws
of the State of Texas.
AMERICAN HALLMARK and GENERAL AGENCY join herein through their duly authorized
officers for the purpose of acknowledging the accuracy of the PREAMBLE and other
recitations herein. This GUARANTY is hereby made by KEMPER and executed by its
duly authorized officer.
KEMPER REINSURANCE COMPANY
Attest: By: ____________________________
Title: ___________________________
Date: ___________________________
AMERICAN HALLMARK INSURANCE
COMPANY OF TEXAS
Attest: By: ____________________________
Title: ___________________________
Date: ___________________________
AMERICAN HALLMARK GENERAL AGENCY, INC.
Attest: By: ____________________________
Title: ___________________________
Date: ___________________________
GUARANTY AGREEMENT
This Guaranty Agreement ("GUARANTY"), effective July 1, 1996, is provided by
SKANDIA AMERICA REINSURANCE CORPORATION ("SKANDIA") in favor of STATE AND COUNTY
MUTUAL FIRE INSURANCE COMPANY ("STATE AND COUNTY MUTUAL").
PREAMBLE
STATE AND COUNTY MUTUAL has entered into an agreement with American Hallmark
Insurance Company of Texas ("AMERICAN HALLMARK") to act as a policy issuing
company for certain insurance business ("subject business") produced and managed
by AMERICAN HALLMARK, or its subsidiary, American Hallmark General Agency, Inc.
("GENERAL AGENCY") for which AMERICAN HALLMARK has assumed full responsibility
under certain agreements ("subject agreements") more specifically described
below. While STATE AND COUNTY MUTUAL acknowledges that it has legal obligations
to the holders of its policies and furthermore has non-delegable obligations
under the Texas Insurance Code and the rules and regulations of the Texas
Department of Insurance, AMERICAN HALLMARK, under the subject agreements, has
assumed all such obligations, risks and duties under its agreements with STATE
AND COUNTY MUTUAL and has agreed to hold STATE AND COUNTY MUTUAL harmless for
any liability, obligation, cost or expense with respect to the subject insurance
business (except for the internal cost of accounting, report preparation and
communications with the Texas Department of Insurance or insureds incurred by
STATE AND COUNTY MUTUAL in the regular course of business), as more specifically
described in the subject agreements.
In order to convey and cede all underwriting risks as well as any other business
or credit risks or obligation whatsoever arising from the subject business,
AMERICAN HALLMARK has entered into a 100% Quota Share Reinsurance Agreement,
("REINSURANCE AGREEMENT") effective July 1, 1996 a copy of which is attached
hereto as Exhibit "A".
GENERAL AGENCY will act as a general agent in the production of business and
supervision of sub-agents with respect to the subject business. While GENERAL
AGENCY has been appointed by STATE AND COUNTY MUTUAL and has entered into an
agreement ("GENERAL AGENCY AGREEMENT") effective March 1, 1992, to act as a
general agent for STATE AND COUNTY MUTUAL, the parties recognize that GENERAL
AGENCY is acting on behalf of AMERICAN HALLMARK at all times, and that AMERICAN
HALLMARK has assumed all financial, supervision and examination responsibilities
with respect to GENERAL AGENCY, as if it were acting as its agent in name as
well as in truth. A copy of the GENERAL AGENCY AGREEMENT is attached hereto as
Exhibit "B".
AMERICAN HALLMARK has entered into an agreement to administer the subject
business ("ADMINISTRATIVE SERVICES AGREEMENT") with STATE AND COUNTY MUTUAL,
effective March 1, 1992, a copy of which is attached hereto as Exhibit "C".
While STATE AND COUNTY MUTUAL does not desire to delegate ultimate control, the
parties intend for AMERICAN HALLMARK to perform, at its cost, all company
functions on behalf of STATE AND COUNTY MUTUAL with respect to the subject
business.
SKANDIA has entered into a Quota Share Retrocession Agreement, effective July 1,
1996, with AMERICAN HALLMARK ("Retrocession Agreement"), pursuant to which
AMERICAN HALLMARK has retroceded to SKANDIA a 25% share of the Interest and
Liabilities under the Reinsurance Agreement.
<PAGE>
As a condition precedent to the agreements with AMERICAN HALLMARK, STATE AND
COUNTY MUTUAL has required and relied upon this GUARANTY. SKANDIA acknowledges
that STATE AND COUNTY MUTUAL would not have entered into the agreements with
AMERICAN HALLMARK without this GUARANTY and that the terms of the subject
agreements should be construed in accordance with the recitations hereinabove.
NOW, THEREFORE, SKANDIA hereby agrees, as respects subject business of the
REINSURANCE AGREEMENT written or renewed on or after July 1, 1996, to guarantee
a 25% share of the full and complete performance of all terms, conditions and
covenants by: (a) AMERICAN HALLMARK under the REINSURANCE AGREEMENT (Exhibit
"A"); (b) GENERAL AGENCY under the GENERAL AGENCY AGREEMENT (Exhibit "B"); and
(c) AMERICAN HALLMARK under the ADMINISTRATIVE SERVICES AGREEMENT (Exhibit "C").
This GUARANTY constitutes consideration by SKANDIA to STATE AND COUNTY MUTUAL
for entering into the subject agreements with AMERICAN HALLMARK and GENERAL
AGENCY.
If AMERICAN HALLMARK fails to perform any of its duties or obligations, or fails
to timely pay any amounts due to STATE AND COUNTY MUTUAL under the REINSURANCE
AGREEMENT, or the ADMINISTRATIVE SERVICES AGREEMENT, then, STATE AND COUNTY
MUTUAL may proceed directly to SKANDIA for performance and be paid by SKANDIA
without necessity of any suit or proceeding by STATE AND COUNTY MUTUAL against
AMERICAN HALLMARK.
Any time, with or without consideration or notice, STATE AND COUNTY MUTUAL may
waive enforcement of the terms, conditions and provisions of the subject
agreements with respect to any breach or default by AMERICAN HALLMARK or GENERAL
AGENCY, and such waiver will not diminish or otherwise affect SKANDIA's
obligations to STATE AND COUNTY MUTUAL under this GUARANTY; provided, however,
STATE AND COUNTY MUTUAL will not, with actual knowledge, waive any material
breach or material default by AMERICAN HALLMARK or GENERAL AGENCY under the
subject agreements without giving advance written notice to SKANDIA. The
validity of this GUARANTY and SKANDIA's obligations hereunder shall in no way be
terminated, affected, diminished or impaired by reason of STATE AND COUNTY
MUTUAL's assertion or nonassertion of its rights against AMERICAN HALLMARK or
GENERAL AGENCY under any of the subject agreements, or by reason of STATE AND
COUNTY MUTUAL's failure to monitor, supervise, examine or otherwise act in an
overseeing capacity with respect to AMERICAN HALLMARK or GENERAL AGENCY.
Although there are recitations regarding such activities in the subject
agreements, STATE AND COUNTY MUTUAL has no such obligations insofar as SKANDIA's
obligations under this GUARANTY are concerned.
If any payment by SKANDIA to STATE AND COUNTY MUTUAL is held to constitute a
preference or a voidable transfer under applicable state or federal laws, STATE
AND COUNTY MUTUAL is required to remit such payment to the payor or any other
person, such payment by SKANDIA to STATE AND COUNTY MUTUAL shall not release
SKANDIA from any liability hereunder, and SKANDIA agrees promptly to pay such
amount to STATE AND COUNTY MUTUAL.
If, by action of a state insurance regulatory agency or court of competent
jurisdiction, AMERICAN HALLMARK is found to be insolvent or is placed in
supervision, conservation, receivership, rehabilitation or liquidation, or has a
receiver, supervisor or conservator appointed, then SKANDIA shall fully assume
25% of AMERICAN HALLMARK's obligations owed to STATE AND COUNTY MUTUAL under the
subject agreements, including but not limited to making all payments that were
required of AMERICAN HALLMARK under the subject agreements. STATE AND COUNTY
MUTUAL shall assign to SKANDIA its right to recover from AMERICAN HALLMARK any
claims payments or other payments made by SKANDIA to STATE AND COUNTY MUTUAL by
reason of AMERICAN HALLMARK being found to be insolvent or placed in
<PAGE>
supervision, conservation, receivership, rehabilitation or liquidation.
Notwithstanding SKANDIA's agreement to fully assume AMERICAN HALLMARK's
obligations, if AMERICAN HALLMARK is found to be insolvent or is placed in
supervision, conservation, receivership, rehabilitation or liquidation, STATE
AND COUNTY MUTUAL shall not be required to pay to SKANDIA any amounts paid by
STATE AND COUNTY MUTUAL to AMERICAN HALLMARK as of that date and/or which STATE
AND COUNTY MUTUAL is required to pay in the future to AMERICAN HALLMARK and /or
its supervisor, conservator, rehabilitator or liquidator.
This GUARANTY shall be irrevocable and continuing. SKANDIA's liability
hereunder shall in no way be affected, modified or diminished by reason of any
assignment permitted under the subject agreements or by any renewal, extension
or modification of or any supplement or amendment to the subject agreements.
STATE AND COUNTY MUTUAL's rights and remedies under the subject agreements and
under this GUARANTY are distinct, separate and cumulative and no such right or
remedy therein or herein, whether exercised by STATE AND COUNTY MUTUAL or not,
is intended to excluded or waive any of the other rights and remedies therein or
herein.
This Guaranty shall remain in full force and effect as long as AMERICAN HALLMARK
has any obligation whatsoever under the subject agreements, including but not
limited to those obligations owed by AMERICAN HALLMARK after termination of the
subject agreements, unless this Guaranty is earlier terminated upon the mutual
written consent of STATE AND COUNTY MUTUAL and SKANDIA. This Guaranty will
automatically end upon the complete expiration of all duties and obligations
owed by AMERICAN HALLMARK and GENERAL AGENCY to STATE AND COUNTY MUTUAL under
the subject agreements.
In any and all events, SKANDIA shall have no obligations under this Guaranty for
any policies produced after the termination of the Retrocession Agreement and
which are not subject to the Retrocession Agreement.
SKANDIA's liability hereunder shall not, prior to the expiration of the term
hereof, be released, reduced, diminished or impaired by the occurrence of any
event, including, without limitation (1) the insolvency, bankruptcy,
reorganization or disability of STATE AND COUNTY MUTUAL, AMERICAN HALLMARK,
SKANDIA or GENERAL AGENCY or (2) the sale, encumbrance, transfer or other
modification of ownership or change in the financial condition or management of
STATE AND COUNTY MUTUAL, AMERICAN HALLMARK, SKANDIA or GENERAL AGENCY.
SKANDIA cannot exercise against STATE AND COUNTY MUTUAL any right of
subrogation, contribution, set off or reimbursement with respect to payments by
SKANDIA pursuant to this GUARANTY (including without limitation of any right to
subrogation under Section 34.04 of the Texas Business and Commerce Code), and
SKANDIA hereby waives any rights that may arise in connection with such payment
to enforce any remedy which SKANDIA may have against STATE AND COUNTY MUTUAL and
any right to participate in any security.
If any dispute or difference of opinion arises between SKANDIA and STATE AND
COUNTY MUTUAL with respect to this GUARANTY or with respects to the obligations
of SKANDIA and STATE AND COUNTY MUTUAL hereunder, such dispute or difference of
opinion shall be submitted to arbitration, and the arbitration shall be
conducted according to the terms and conditions set forth in Article XXIII of
the REINSURANCE AGREEMENT.
<PAGE>
With respect to the Retrocession Agreement between SKANDIA and AMERICAN HALLMARK
regarding the subject business, SKANDIA acknowledges that this GUARANTY is
superior in all respects and this GUARANTY is not diminished or limited in any
way by the Retrocession Agreement.
In the event that either (i) the Texas Department of Insurance requires
cancellation or disallows credit for reinsurance under the REINSURANCE AGREEMENT
or (ii) SKANDIA's A.M. Best rating at any time is lower that A-, SKANDIA will
immediately secure 25% of AMERICAN HALLMARK's obligations under the REINSURANCE
AGREEMENT via a security fund agreement to be executed by SKANDIA and STATE AND
COUNTY MUTUAL, which security fund agreement shall be in form and content
acceptable to STATE AND COUNTY MUTUAL.
This GUARANTY, as well all accounts and transactions and rights and obligations
of the parties hereto, shall be construed and interpreted according to the laws
of the State of Texas.
AMERICAN HALLMARK and GENERAL AGENCY join herein through their duly authorized
officers for the purpose of acknowledging the accuracy of the PREAMBLE and other
recitations herein. This GUARANTY is hereby made by SKANDIA and executed by its
duly authorized officer.
SKANDIA AMERICA REINSURANCE CORPORATION
Attest: By: ____________________________
Title: ___________________________
Date: ___________________________
AMERICAN HALLMARK INSURANCE
COMPANY OF TEXAS
Attest: By: ____________________________
Title: ___________________________
Date: ___________________________
AMERICAN HALLMARK GENERAL AGENCY, INC.
Attest: By: ____________________________
Title: ___________________________
Date: ___________________________
GUARANTY OF PERFORMANCE AND HOLD HARMLESS AGREEMENT
This Guaranty of Performance and Hold Harmless Agreement ("Agreement") is
made this first day of July, 1996, by and between Hallmark Financial Services,
Inc., a Nevada corporation, (hereinafter referred to as "Guarantor"), and
Dorinco America Reinsurance Corporation, a Delaware corporation, (hereinafter
referred to as Dorinco).
RECITALS
WHEREAS, American Hallmark Insurance Company of Texas, a Texas Corporation,
(hereinafter referred to as "American"), a wholly owned subsidiary of Guarantor,
has entered into a 100% Quota Share Reinsurance Agreement, effective July 1,
1996, (a copy of which is attached to this Agreement and marked as Exhibit A)
with State and County Mutual Fire Insurance Company (hereinafter referred to as
"County") whereby American reinsures certain private passenger automobile
insurance written by County; and
WHEREAS, American and County have entered into an Administrative Services
Agreement, effective March 1 1992, (a copy of which is attached to this
Agreement and marked as Exhibit B), whereby American agrees to provide
administrative services necessary to manage the insurance business written
subject to the 100% Quota Share Reinsurance Agreement; and
WHEREAS, American Hallmark General Agency, Inc., a subsidiary of American
(hereinafter referred to as "AHGA"), has entered into a General Agency Agreement
with County, effective March 1, 1992, (a copy of which is attached to this
Agreement and marked as Exhibit C), whereby AHGA agrees to produce and manage
certain private passenger automobile insurance which is subject to the 100%
Quota Share Reinsurance Agreement; and
WHEREAS, American has assumed full responsibility for the duties,
responsibilities, obligations of AHGA under the aforementioned General Agency
Agreement between AHGA and County; and
WHEREAS, Dorinco has issued a Guaranty Agreement, effective July 1, 1996,
(a copy of which is attached to this Agreement and marked as Exhibit D) in favor
of County guaranteeing the performance of American under the 100% Quota Share
Reinsurance Agreement, and the Administrative Services Agreement; and
WHEREAS, Dorinco has entered into a Quota Share Retrocession Agreement (a
copy of which is attached to this Agreement and marked as Exhibit E), with
American whereby it reinsures business assumed by American under the 100% Quota
Share Reinsurance Agreement between American and County; and
WHEREAS, it is the intent of the parties to this Agreement hereto, that
Dorinco shall bear no risk pursuant to the terms of the Guaranty Agreement
issued to County; and
WHEREAS, it is the intent of the parties to this Agreement hereto, that
Dorinco shall bear no risk pursuant to the Quota Share Retrocession Agreement
between Dorinco and American, other than the contractual obligations imposed
upon Dorinco pursuant to the aforementioned Quota Share Retrocession Agreement;
and
<PAGE>
WHEREAS, American solicited and sought out Dorinco to enter into the
aforementioned Guaranty Agreement and the Quota Share Retrocession Agreement,
and as a condition thereto, Dorinco requires Guarantor to guarantee the
obligation of its subsidiary, American, under the Quota Share Retrocession
Agreement and additionally to hold Dorinco harmless and indemnify Dorinco for
any liability Dorinco may incur pursuant to the aforementioned Guaranty
Agreement; and
WHEREAS, Guarantor, as inducement to Dorinco to enter the aforementioned
Guaranty Agreement and the Quota Retrocession Agreement, wishes to guarantee the
obligation of American and AHGA and to hold Dorinco harmless and issue indemnity
to Dorinco.
1. NOW THEREFORE in consideration of both the Guaranty Agreement issued
by Dorinco to County and the Quota Share Retrocession Agreement issued by
Dorinco to American, and as inducement for Dorinco to enter these two
agreements, Guarantor hereby guarantees the faithful performance of the
obligation of American, and firmly binds itself to guarantee the performance of
American under all the terms and conditions of the Quota Share Retrocession
Agreement. Guarantor hereby agrees to hold Dorinco harmless and indemnify
Dorinco from any loss or liability under the aforementioned Guaranty Agreement
and to pay the sum or sums for which Dorinco may become liable to pay County by
virtue of the aforementioned Guaranty Agreement, in which American or AHGA shall
fail or refuse to pay or perform for any reason, and to hold Dorinco harmless
and indemnify Dorinco from any loss under the aforementioned Guaranty Agreement.
2. GUARANTOR HEREBY SPECIFICALLY FURTHER AGREES that in the event
Dorinco, for any reason, is obligated to perform under the Guaranty Agreement
issued to County, Guarantor will immediately become liable to Dorinco for any
sum or sums Dorinco has to pay County, or any other entity, under the terms of
the Guaranty Agreement issued to County. Guarantor agrees that it is the intent
of the parties to this Agreement that Dorinco shall bear no ultimate risk under
the Guaranty Agreement issued by Dorinco to County and that as inducement for
Dorinco to enter that Guaranty Agreement, Guarantor issues this Guaranty of
Performance and Hold Harmless Agreement.
3. GUARANTOR HEREBY SPECIFICALLY FURTHER AGREES to guarantee the
performance of each and every obligation of American under the terms of the
Quota Share Retrocession Agreement issued by Dorinco to American should American
fail to perform for any reason including, but not limited, to the insolvency of
American, American being placed in supervision, receivership, or liquidation by
any State Insurance Department, court, or any other regulatory, administrative
or judicial body in any state or country.
4. GUARANTOR HEREBY FURTHER AGREES it will indemnify and hold Dorinco
harmless against all actions, proceedings, claims, demands, costs, damages,
judgments, and expenses to which Dorinco may be subject resulting from the
fault, negligence, wrongful act or wrongful omission, or error of American or
any of American's servants, agents, or employees pursuant to the Quota Share
Retrocession Agreement issued by Dorinco to American. Such losses, costs, or
other expenses shall include, but not be limited to; actions by insurance
regulatory authorities, excess judgments, bad faith, punitive damages, exemplary
damages, fraud by agent, or class actions.
<PAGE>
5. If American or AHGA fails to perform any of its duties under the Quota
Share Retrocession Agreement or the agreements covered by the Guaranty Agreement
and Dorinco is called on to perform under the Guaranty Agreement issued to
County, then Dorinco may proceed directly to make a claim against Guarantor to
be paid by Guarantor without necessity of any suit or proceeding by Dorinco
against American or AHGA. Anytime, with or without consideration or notice,
Dorinco may waive enforcement of the terms, conditions and provisions of this
Agreement with respect to any breach or default by American or AHGA, and such
waiver will not diminish or otherwise effect Guarantor's obligations to Dorinco
under this Agreement.
6. IT IS FURTHER AGREED that in the event any of the foregoing provisions
are found to be unenforceable, that portion so found will in no way affect the
purpose and intent of the remaining provisions, and to that extent those
provisions will remain binding upon the parties.
7. IT IS FURTHER AGREED Guarantor cannot exercise against Dorinco any
right of subrogation, contribution, set off, or reimbursement with respect to
payments by Guarantor pursuant to this Agreement, and Guarantor hereby waives
any rights that may arise in connection with such payment to enforce any remedy
which Guarantor may have against Dorinco and any right to participate in any
security.
8. IT IS FURTHER AGREED, that American will maintain a surplus of
$2,500,000, however, in the event American's surplus falls below $2,500,000 the
Guarantor will provide within fifteen days, collateral in a form acceptable to
Dorinco in an amount equal to 25% of American's liabilities due to County on
business American assumes from County and does not retrocede to the Quota Share
Retrocession Agreement
9. IT IS FURTHER AGREED that should Guarantor fail to perform pursuant to
this Agreement, then Guarantor shall bear any and all expenses for collection
and other expenses incurred by Dorinco, including reasonable attorneys' fees
expended to enforce performance herenunder.
10. IT IS FURTHER AGREED that this Agreement, as well as all accounts and
agreements and rights and obligations of the parties hereto, shall be given,
construed and interpreted according to the laws of the State of Texas.
Guarantor hereby agrees to submit to the jurisdiction of the courts in the State
of Texas .
11. IT IS AGREED AND UNDERSTOOD by the parties hereto, that this Agreement
is executed in conjunction with the aforementioned Guaranty Agreement issued by
Dorinco to County and the Quota Share Retrocession Agreement issued by Dorinco
to American, and that the execution of this Agreement is agreed to as a
condition precedent to Dorinco to enter the aforementioned agreements at the
request of Guarantor. Guarantor acknowledges that Dorinco would not have
entered into the Guaranty Agreement with County and the Quota Share Retrocession
Agreement with American without this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by:
Hallmark Financial Services, Inc.
By: _____________________________
Its: _____________________________
Date: _____________________________
Dorinco Reinsurance Company
By: _____________________________
Its: _____________________________
Date: _____________________________
GUARANTY OF PERFORMANCE AND HOLD HARMLESS AGREEMENT
This Guaranty of Performance and Hold Harmless Agreement ("Agreement") is
made this first day of July, 1996, by and between Hallmark Financial Services,
Inc., a Nevada corporation, (hereinafter referred to as "Guarantor"), and Kemper
Reinsurance Company, an Illinois corporation, (hereinafter referred to as
Kemper).
RECITALS
WHEREAS, American Hallmark Insurance Company of Texas, a Texas Corporation,
(hereinafter referred to as "American"), a wholly owned subsidiary of Guarantor,
has entered into a 100% Quota Share Reinsurance Agreement, effective July 1,
1996, (a copy of which is attached to this Agreement and marked as Exhibit A)
with State and County Mutual Fire Insurance Company (hereinafter referred to as
"County") whereby American reinsures certain private passenger automobile
insurance written by County; and
WHEREAS, American and County have entered into an Administrative Services
Agreement, effective March 1 1992, (a copy of which is attached to this
Agreement and marked as Exhibit B), whereby American agrees to provide
administrative services necessary to manage the insurance business written
subject to the 100% Quota Share Reinsurance Agreement; and
WHEREAS, American Hallmark General Agency, Inc., a subsidiary of American
(hereinafter referred to as "AHGA"), has entered into a General Agency Agreement
with County, effective March 1, 1992, (a copy of which is attached to this
Agreement and marked as Exhibit C), whereby AHGA agrees to produce and manage
certain private passenger automobile insurance which is subject to the 100%
Quota Share Reinsurance Agreement; and
WHEREAS, American has assumed full responsibility for the duties,
responsibilities, obligations of AHGA under the aforementioned General Agency
Agreement between AHGA and County; and
WHEREAS, Kemper has issued a Guaranty Agreement, effective July 1, 1996, (a
copy of which is attached to this Agreement and marked as Exhibit D) in favor of
County guaranteeing the performance of American under the 100% Quota Share
Reinsurance Agreement, and the Administrative Services Agreement; and
WHEREAS, Kemper has entered into a Quota Share Retrocession Agreement (a
copy of which is attached to this Agreement and marked as Exhibit E), with
American whereby it reinsures business assumed by American under the 100% Quota
Share Reinsurance Agreement between American and County; and
WHEREAS, it is the intent of the parties to this Agreement hereto, that
Kemper shall bear no risk pursuant to the terms of the Guaranty Agreement issued
to County; and
WHEREAS, it is the intent of the parties to this Agreement hereto, that
Kemper shall bear no risk pursuant to the Quota Share Retrocession Agreement
between Kemper and American, other than the contractual obligations imposed upon
Kemper pursuant to the aforementioned Quota Share Retrocession Agreement; and
<PAGE>
WHEREAS, American solicited and sought out Kemper to enter into the
aforementioned Guaranty Agreement and the Quota Share Retrocession Agreement,
and as a condition thereto, Kemper requires Guarantor to guarantee the
obligation of its subsidiary, American, under the Quota Share Retrocession
Agreement and additionally to hold Kemper harmless and indemnify Kemper for any
liability Kemper may incur pursuant to the aforementioned Guaranty Agreement;
and
WHEREAS, Guarantor, as inducement to Kemper to enter the aforementioned
Guaranty Agreement and the Quota Retrocession Agreement, wishes to guarantee the
obligation of American and AHGA and to hold Kemper harmless and issue indemnity
to Kemper.
1. NOW THEREFORE in consideration of both the Guaranty Agreement issued
by Kemper to County and the Quota Share Retrocession Agreement issued by Kemper
to American, and as inducement for Kemper to enter these two agreements,
Guarantor hereby guarantees the faithful performance of the obligation of
American, and firmly binds itself to guarantee the performance of American under
all the terms and conditions of the Quota Share Retrocession Agreement.
Guarantor hereby agrees to hold Kemper harmless and indemnify Kemper from any
loss or liability under the aforementioned Guaranty Agreement and to pay the sum
or sums for which Kemper may become liable to pay County by virtue of the
aforementioned Guaranty Agreement, in which American or AHGA shall fail or
refuse to pay or perform for any reason, and to hold Kemper harmless and
indemnify Kemper from any loss under the aforementioned Guaranty Agreement.
2. GUARANTOR HEREBY SPECIFICALLY FURTHER AGREES that in the event Kemper,
for any reason, is obligated to perform under the Guaranty Agreement issued to
County, Guarantor will immediately become liable to Kemper for any sum or sums
Kemper has to pay County, or any other entity, under the terms of the Guaranty
Agreement issued to County. Guarantor agrees that it is the intent of the
parties to this Agreement that Kemper shall bear no ultimate risk under the
Guaranty Agreement issued by Kemper to County and that as inducement for Kemper
to enter that Guaranty Agreement, Guarantor issues this Guaranty of Performance
and Hold Harmless Agreement.
3. GUARANTOR HEREBY SPECIFICALLY FURTHER AGREES to guarantee the
performance of each and every obligation of American under the terms of the
Quota Share Retrocession Agreement issued by Kemper to American should American
fail to perform for any reason including, but not limited, to the insolvency of
American, American being placed in supervision, receivership, or liquidation by
any State Insurance Department, court, or any other regulatory, administrative
or judicial body in any state or country.
4. GUARANTOR HEREBY FURTHER AGREES it will indemnify and hold Kemper
harmless against all actions, proceedings, claims, demands, costs, damages,
judgments, and expenses to which Kemper may be subject resulting from the fault,
negligence, wrongful act or wrongful omission, or error of American or any of
American's servants, agents, or employees pursuant to the Quota Share
Retrocession Agreement issued by Kemper to American. Such losses, costs, or
other expenses shall include, but not be limited to; actions by insurance
regulatory authorities, excess judgments, bad faith, punitive damages, exemplary
damages, fraud by agent, or class actions.
5. If American or AHGA fails to perform any of its duties under the Quota
Share Retrocession Agreement or the agreements covered by the Guaranty Agreement
and Kemper is called on to perform under the Guaranty Agreement issued to
County, then Kemper may proceed directly to make a claim against Guarantor to be
paid by Guarantor without necessity of any suit or proceeding by Kemper against
<PAGE>
American or AHGA. Anytime, with or without consideration or notice, Kemper may
waive enforcement of the terms, conditions and provisions of this Agreement with
respect to any breach or default by American or AHGA, and such waiver will not
diminish or otherwise effect Guarantor's obligations to Kemper under this
Agreement.
6. IT IS FURTHER AGREED that in the event any of the foregoing provisions
are found to be unenforceable, that portion so found will in no way affect the
purpose and intent of the remaining provisions, and to that extent those
provisions will remain binding upon the parties.
7. IT IS FURTHER AGREED Guarantor cannot exercise against Kemper any
right of subrogation, contribution, set off, or reimbursement with respect to
payments by Guarantor pursuant to this Agreement, and Guarantor hereby waives
any rights that may arise in connection with such payment to enforce any remedy
which Guarantor may have against Kemper and any right to participate in any
security.
8. IT IS FURTHER AGREED, that American will maintain a surplus of
$2,500,000, however, in the event American's surplus falls below $2,500,000 the
Guarantor will provide within fifteen days, collateral in a form acceptable to
Kemper in an amount equal to 50% of American's liabilities due to County on
business American assumes from County and does not retrocede to the Quota Share
Retrocession Agreement
9. IT IS FURTHER AGREED that should Guarantor fail to perform pursuant to
this Agreement, then Guarantor shall bear any and all expenses for collection
and other expenses incurred by Kemper, including reasonable attorneys' fees
expended to enforce performance herenunder.
10. IT IS FURTHER AGREED that this Agreement, as well as all accounts and
agreements and rights and obligations of the parties hereto, shall be given,
construed and interpreted according to the laws of the State of Texas.
Guarantor hereby agrees to submit to the jurisdiction of the courts in the State
of Texas .
11. IT IS AGREED AND UNDERSTOOD by the parties hereto, that this Agreement
is executed in conjunction with the aforementioned Guaranty Agreement issued by
Kemper to County and the Quota Share Retrocession Agreement issued by Kemper to
American, and that the execution of this Agreement is agreed to as a condition
precedent to Kemper to enter the aforementioned agreements at the request of
Guarantor. Guarantor acknowledges that Kemper would not have entered into the
Guaranty Agreement with County and the Quota Share Retrocession Agreement with
American without this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by:
Hallmark Financial Services, Inc.
By: _____________________________
Its: _____________________________
Date: _____________________________
<PAGE>
Kemper Reinsurance Company
By: _____________________________
Its: _____________________________
Date: _____________________________
GUARANTY OF PERFORMANCE AND HOLD HARMLESS AGREEMENT
This Guaranty of Performance and Hold Harmless Agreement ("Agreement") is
made this first day of July, 1996, by and between Hallmark Financial Services,
Inc., a Nevada corporation, (hereinafter referred to as "Guarantor"), and
Skandia America Reinsurance Corporation, a Delaware corporation, (hereinafter
referred to as Skandia).
RECITALS
WHEREAS, American Hallmark Insurance Company of Texas, a Texas Corporation,
(hereinafter referred to as "American"), a wholly owned subsidiary of Guarantor,
has entered into a 100% Quota Share Reinsurance Agreement, effective July 1,
1996, (a copy of which is attached to this Agreement and marked as Exhibit A)
with State and County Mutual Fire Insurance Company (hereinafter referred to as
"County") whereby American reinsures certain private passenger automobile
insurance written by County; and
WHEREAS, American and County have entered into an Administrative Services
Agreement, effective March 1 1992, (a copy of which is attached to this
Agreement and marked as Exhibit B), whereby American agrees to provide
administrative services necessary to manage the insurance business written
subject to the 100% Quota Share Reinsurance Agreement; and
WHEREAS, American Hallmark General Agency, Inc., a subsidiary of American
(hereinafter referred to as "AHGA"), has entered into a General Agency Agreement
with County, effective March 1, 1992, (a copy of which is attached to this
Agreement and marked as Exhibit C), whereby AHGA agrees to produce and manage
certain private passenger automobile insurance which is subject to the 100%
Quota Share Reinsurance Agreement; and
WHEREAS, American has assumed full responsibility for the duties,
responsibilities, obligations of AHGA under the aforementioned General Agency
Agreement between AHGA and County; and
WHEREAS, Skandia has issued a Guaranty Agreement, effective July 1, 1996,
(a copy of which is attached to this Agreement and marked as Exhibit D) in favor
of County guaranteeing the performance of American under the 100% Quota Share
Reinsurance Agreement, and the Administrative Services Agreement; and
WHEREAS, Skandia has entered into a Quota Share Retrocession Agreement (a
copy of which is attached to this Agreement and marked as Exhibit E), with
American whereby it reinsures business assumed by American under the 100% Quota
Share Reinsurance Agreement between American and County; and
WHEREAS, it is the intent of the parties to this Agreement hereto, that
Skandia shall bear no risk pursuant to the terms of the Guaranty Agreement
issued to County; and
WHEREAS, it is the intent of the parties to this Agreement hereto, that
Skandia shall bear no risk pursuant to the Quota Share Retrocession Agreement
between Skandia and American, other than the contractual obligations imposed
upon Skandia pursuant to the aforementioned Quota Share Retrocession Agreement;
and
<PAGE>
WHEREAS, American solicited and sought out Skandia to enter into the
aforementioned Guaranty Agreement and the Quota Share Retrocession Agreement,
and as a condition thereto, Skandia requires Guarantor to guarantee the
obligation of its subsidiary, American, under the Quota Share Retrocession
Agreement and additionally to hold Skandia harmless and indemnify Skandia for
any liability Skandia may incur pursuant to the aforementioned Guaranty
Agreement; and
WHEREAS, Guarantor, as inducement to Skandia to enter the aforementioned
Guaranty Agreement and the Quota Retrocession Agreement, wishes to guarantee the
obligation of American and AHGA and to hold Skandia harmless and issue indemnity
to Skandia.
1. NOW THEREFORE in consideration of both the Guaranty Agreement issued
by Skandia to County and the Quota Share Retrocession Agreement issued by
Skandia to American, and as inducement for Skandia to enter these two
agreements, Guarantor hereby guarantees the faithful performance of the
obligation of American, and firmly binds itself to guarantee the performance of
American under all the terms and conditions of the Quota Share Retrocession
Agreement. Guarantor hereby agrees to hold Skandia harmless and indemnify
Skandia from any loss or liability under the aforementioned Guaranty Agreement
and to pay the sum or sums for which Skandia may become liable to pay County by
virtue of the aforementioned Guaranty Agreement, in which American or AHGA shall
fail or refuse to pay or perform for any reason, and to hold Skandia harmless
and indemnify Skandia from any loss under the aforementioned Guaranty Agreement.
2. GUARANTOR HEREBY SPECIFICALLY FURTHER AGREES that in the event
Skandia, for any reason, is obligated to perform under the Guaranty Agreement
issued to County, Guarantor will immediately become liable to Skandia for any
sum or sums Skandia has to pay County, or any other entity, under the terms of
the Guaranty Agreement issued to County. Guarantor agrees that it is the intent
of the parties to this Agreement that Skandia shall bear no ultimate risk under
the Guaranty Agreement issued by Skandia to County and that as inducement for
Skandia to enter that Guaranty Agreement, Guarantor issues this Guaranty of
Performance and Hold Harmless Agreement.
3. GUARANTOR HEREBY SPECIFICALLY FURTHER AGREES to guarantee the
performance of each and every obligation of American under the terms of the
Quota Share Retrocession Agreement issued by Skandia to American should American
fail to perform for any reason including, but not limited, to the insolvency of
American, American being placed in supervision, receivership, or liquidation by
any State Insurance Department, court, or any other regulatory, administrative
or judicial body in any state or country.
4. GUARANTOR HEREBY FURTHER AGREES it will indemnify and hold Skandia
harmless against all actions, proceedings, claims, demands, costs, damages,
judgments, and expenses to which Skandia may be subject resulting from the
fault, negligence, wrongful act or wrongful omission, or error of American or
any of American's servants, agents, or employees pursuant to the Quota Share
Retrocession Agreement issued by Skandia to American. Such losses, costs, or
other expenses shall include, but not be limited to; actions by insurance
regulatory authorities, excess judgments, bad faith, punitive damages, exemplary
damages, fraud by agent, or class actions.
5. If American or AHGA fails to perform any of its duties under the Quota
Share Retrocession Agreement or the agreements covered by the Guaranty Agreement
and Skandia is called on to perform under the Guaranty Agreement issued to
County, then Skandia may proceed directly to make a claim against Guarantor to
<PAGE>
be paid by Guarantor without necessity of any suit or proceeding by Skandia
against American or AHGA. Anytime, with or without consideration or notice,
Skandia may waive enforcement of the terms, conditions and provisions of this
Agreement with respect to any breach or default by American or AHGA, and such
waiver will not diminish or otherwise effect Guarantor's obligations to Skandia
under this Agreement.
6. IT IS FURTHER AGREED that in the event any of the foregoing provisions
are found to be unenforceable, that portion so found will in no way affect the
purpose and intent of the remaining provisions, and to that extent those
provisions will remain binding upon the parties.
7. IT IS FURTHER AGREED Guarantor cannot exercise against Skandia any
right of subrogation, contribution, set off, or reimbursement with respect to
payments by Guarantor pursuant to this Agreement, and Guarantor hereby waives
any rights that may arise in connection with such payment to enforce any remedy
which Guarantor may have against Skandia and any right to participate in any
security.
8. IT IS FURTHER AGREED, that American will maintain a surplus of
$2,500,000, however, in the event American's surplus falls below $2,500,000 the
Guarantor will provide within fifteen days, collateral in a form acceptable to
Skandia in an amount equal to 25% of American's liabilities due to County on
business American assumes from County and does not retrocede to the Quota Share
Retrocession Agreement
9. IT IS FURTHER AGREED that should Guarantor fail to perform pursuant to
this Agreement, then Guarantor shall bear any and all expenses for collection
and other expenses incurred by Skandia, including reasonable attorneys' fees
expended to enforce performance herenunder.
10. IT IS FURTHER AGREED that this Agreement, as well as all accounts and
agreements and rights and obligations of the parties hereto, shall be given,
construed and interpreted according to the laws of the State of Texas.
Guarantor hereby agrees to submit to the jurisdiction of the courts in the State
of Texas .
11. IT IS AGREED AND UNDERSTOOD by the parties hereto, that this Agreement
is executed in conjunction with the aforementioned Guaranty Agreement issued by
Skandia to County and the Quota Share Retrocession Agreement issued by Skandia
to American, and that the execution of this Agreement is agreed to as a
condition precedent to Skandia to enter the aforementioned agreements at the
request of Guarantor. Guarantor acknowledges that Skandia would not have
entered into the Guaranty Agreement with County and the Quota Share Retrocession
Agreement with American without this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by:
Hallmark Financial Services, Inc.
By: _____________________________
Its: _____________________________
Date: _____________________________
<PAGE>
Skandia America Reinsurance Corporation
By: _____________________________
Its: _____________________________
Date: _____________________________
ADDENDUM NO. 4 - TERMINATION
to
QUOTA SHARE RETROCESSION AGREEMENT
entered into by and between
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
Dallas, Texas
(hereinafter referred to as the "Retrocedant")
on the one part as reinsurer of
STATE AND COUNTY MUTUAL FIRE INSURANCE COMPANY
Ft. Worth, Texas
(hereinafter referred to as "Company")
and
LIBERTY NATIONAL FIRE INSURANCE COMPANY
Birmingham, Alabama
(hereinafter referred to as "Retrocessionaire")
WITH EFFECT FROM MARCH 1, 1994 at 12:01 a.m., Central Standard
Time, it is agreed that the Retrocessionaire identified herein as
LIBERTY NATIONAL FIRE INSURANCE COMPANY will hereinafter be known
as VESTA FIRE INSURANCE COMPANY.
WITH EFFECT FROM MARCH 28, 1996 at 12:01 a.m., Central Standard
Time, as respects inforce, new and renewal business, the above
titled Agreement shall be amended as follows:
ARTICLE XIV - INTERMEDIARY, shall read as follows as not as
heretofore:
INTERMEDIARY
Sedgwick Re, Inc. is hereby recognized as the Intermediary
negotiating this Agreement for all business hereunder. All
communications, including notices, premiums, return premiums,
commissions, taxes, losses, loss adjustment expenses, salvages
and loss settlements relating thereto shall be transmitted to the
Retrocedant or the Retrocessionaire through Sedgwick Re, Inc.,
1501 Fourth Avenue, Suite 1400, Seattle, Washington 98101.
Payments by the Retrocedant to the Intermediary shall be deemed
to constitute payment to the Retrocessionaire. Payments by the
Retrocessionaire to the Intermediary shall be deemed only to
constitute payment to the Retrocedant to the extent that such
payments are actually received by the Retrocedant.
WITH EFFECT FROM JULY 1, 1996 at 12:01 a.m., Central Standard
Time, it is hereby agreed that this Agreement is terminated and
reinsurance hereunder shall continue to apply to the business in
force until the expiration or cancellation of such business. Any
policies effective prior to the termination date, but issued
after the termination date shall be covered hereunder.
Additionally, any policies which must be issued or renewed as a
matter of state law or regulation, or because a producing agent
has not been timely canceled shall be covered until the
<PAGE>
expiration dates on said policies. The Retrocessionaire's
liability to the Retrocedant with regard to business covered
hereunder shall continue until such time as all business has run
off and all losses have been settled.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
IN WITNESS WHEREOF, the parties hereto, by their authorized
representatives, have executed this Endorsement as of the
following date:
At Dallas, Texas, this day of , 1996.
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
By:
Title:
At Birmingham, Alabama, this day of , 1996.
VESTA FIRE INSURANCE COMPANY
By:
Title:
ADDENDUM NO. 3 - TERMINATION
to the
100% QUOTA SHARE REINSURANCE AGREEMENT
between and among
STATE AND COUNTY MUTUAL FIRE INSURANCE COMPANY
and
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
THIS ADDENDUM NO. THREE TO THE 100% QUOTA SHARE REINSURANCE
AGREEMENT ("this Addendum") is made and entered into by and
between STATE AND COUNTY MUTUAL FIRE INSURANCE COMPANY, Ft.
Worth, Texas (the "Company") and AMERICAN HALLMARK INSURANCE
COMPANY OF TEXAS, Dallas, Texas (the "Reinsurer");
WITNESSETH:
WHEREAS, as the parties have previously entered into that
certain 100% Quota Share Reinsurance Agreement effective as of
March 1, 1992 and amended by Addenda No. 1 and 2 effective
November 22, 1994 and June 1, 1994, respectively (the
"Agreement"); and
WHEREAS, the parties desire to amend certain provisions of
the Agreement, as more fully set forth herein;
NOW THEREFORE, in consideration of the premises and other
good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. ARTICLE XXIII - INTERMEDIARY,will read as follows and not as
heretofore:
ARTICLE XXIII - INTERMEDIARY
Sedgwick Re, Inc. is hereby recognized as the Intermediary
negotiating this Agreement for all business hereunder. All
communications, including notices, premiums, return
premiums, commissions, taxes, losses, loss adjustment
expenses, salvages and loss settlements relating thereto
shall be transmitted to the Reinsurer or the Company through
Sedgwick Re, Inc., 1501 Fourth Avenue, Suite 1400, Seattle,
Washington 98101. Payments by the Company to the
Intermediary shall be deemed to constitute payment to the
Reinsurer. Payments by the Reinsurer to the Intermediary
shall be deemed only to constitute payment to the Company to
the extent that such payments are actually received by the
Company.
<PAGE>
2. The effective date of the aforementioned amendment is March
28, 1996.
IT IS FURTHER HEREBY AGREED, effective 12:01 a.m., Central
Standard Time, July 1, 1996, that this Agreement is terminated
and reinsurance hereunder will continue to apply to the business
in force at the time of termination until expiration or
cancellation of such business. It is understood that any
Policies with effective dates prior to the termination date but
issued after the termination date are covered under the
Agreement. Additionally, the reinsurance hereunder shall
continue to apply as to Policies which must be issued or renewed
as a matter of state law or regulation, or because a producing
agent or broker has not been timely canceled, until the
expiration dates on said Policies.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
IN WITNESS WHEREOF, the parties hereto, by their authorized
representatives, have executed this Addendum as of the following
dates:
In Ft. Worth, Texas this day of , 1996.
STATE AND COUNTY MUTUAL FIRE INSURANCE COMPANY
By:
Title:
In Dallas, Texas this day of ,1996.
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
By:
Title:
