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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission File Number 33-83382
FIRST MERCURY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 38-3164336
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
29621 Northwestern Highway, P.O. Box 5096 Southfield, Michigan 48086
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (810) 358-4010
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the registrant's Common Stock, par
value $.01, as of November 13, 1996 was 6,164.07.
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FIRST MERCURY FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets;
September 30, 1996 (Unaudited) and
December 31, 1995 2
Condensed Consolidated Statements of
Operations (Unaudited); Three
Months and Nine Months Ended September 30,
1996 and 1995 3
Condensed Consolidated Statements of
Stockholders' Equity (Unaudited); Nine
Months Ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of
Cash Flows (Unaudited); Nine Months
Ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 7
Part II. OTHER INFORMATION 13
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FIRST MERCURY FINANCIAL CORPORATION
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Investments:
Debt securities available for sale, at market value $ 72,010,821 77,626,804
Preferred stocks, at market 3,182,487 3,694,910
Short-term investments 4,859,658 4,413,700
------------- -------------
Total investments 80,052,966 85,735,414
Cash and cash equivalents 4,202,583 2,336,140
Premiums and reinsurance balances receivable 2,223,538 3,095,948
Accrued investment income receivable 799,469 905,699
Other receivables 856,217 300,000
Reinsurance recoverable on unpaid losses 6,359,926 3,556,940
Prepaid reinsurance premiums 2,615,729 705,870
Deferred acquisition costs 997,509 1,673,291
Deferred federal income taxes 2,180,193 1,813,631
Federal income taxes recoverable 863,336 1,199,775
Fixed assets, net of accumulated depreciation 2,008,966 1,654,401
Other assets 1,204,076 1,068,272
------------- -------------
Total assets $ 104,364,508 104,045,381
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Loss and loss adjustment expense reserves $ 56,827,202 56,570,332
Unearned premium reserves 7,272,668 8,800,175
Long-term debt 10,000,000 10,000,000
Ceded reinsurance payable 128,838 254,657
Accounts payable and accrued expenses 4,147,496 2,015,347
------------- -------------
Total liabilities 78,376,204 77,640,511
Minority interest 2,921 3,634
Stockholders' equity:
Cumulative preferred stock, issued and outstanding
20,850 shares 209 209
Common stock, issued and outstanding 6,164.07 shares 62 62
Gross paid-in and contributed capital 3,474,872 3,474,872
Unrealized gains (losses) on marketable securities,
net of federal income taxes (110,888) 1,270,614
Retained earnings 22,621,128 21,655,479
------------- -------------
Total stockholders' equity 25,985,383 26,401,236
------------- -------------
Total liabilities and stockholders' equity $ 104,364,508 104,045,381
------------- -------------
------------- -------------
</TABLE>
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FIRST MERCURY FINANCIAL CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earned premiums $ 3,639,467 7,336,732 18,116,994 21,532,907
Net investment income 1,294,354 1,932,035 4,004,187 4,610,643
Realized gains (losses) on the sale of investments 63,070 (34,268) 293,328 (251,170)
Gain (loss) on assignment of non-standard
automobile agency contracts (634,814) - 476,478 -
Miscellaneous income 716,677 84,948 1,049,366 150,614
------------ ------------ ------------ ------------
Total revenues and other income 5,078,754 9,319,447 23,940,353 26,042,994
------------ ------------ ------------ ------------
Losses and loss adjustment expenses, net 2,198,670 6,040,692 14,613,139 16,736,252
Amortization of deferred acquisition expenses 675,238 1,358,130 3,692,607 4,203,602
Other underwriting expenses 722,652 1,283,099 2,834,674 3,687,070
Interest expense 298,809 275,000 904,700 822,029
------------ ------------ ------------ ------------
Total expenses 3,895,369 8,956,921 22,045,120 25,448,953
------------ ------------ ------------ ------------
Income before federal income taxes 1,183,385 362,526 1,895,233 594,041
Federal income taxes 329,774 (130,000) 585,559 (100,000)
------------ ------------ ------------ ------------
Net income $ 853,611 492,526 1,309,674 694,041
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Per-share earnings $ 138.48 79.90 212.47 112.59
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
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FIRST MERCURY FINANCIAL CORPORATION
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Net Unrealized
Gross Paid-in Gains (Losses),
Preferred Common and Contributed Net of Federal Retained
Stock Stock Capital Income Taxes Earnings Total
----- ----- ------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 209 62 3,437,372 (1,752,247) 22,051,234 23,736,630
Net income - - - - 694,041 694,041
Dividends paid to preferred stockholders - - - - (344,025) (344,025)
Change in market values of
marketable investment securities - - - 2,506,557 - 2,506,557
------ ------ ------------ ------------ ------------ ------------
Balance at September 30, 1995 $ 209 62 3,437,372 754,310 22,401,250 26,593,203
------ ------ ------------ ------------ ------------ ------------
------ ------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 $ 209 62 3,474,872 1,270,614 21,655,479 26,401,236
Net income - - - - 1,309,674 1,309,674
Dividends paid to preferred stockholders - - - - (344,025) (344,025)
Change in market values of - -
marketable investment securities - - - (1,381,502) - (1,381,502)
------ ------ ------------ ------------ ------------ ------------
Balance at September 30, 1996 $ 209 62 3,474,872 (110,888) 22,621,128 25,985,383
------ ------ ------------ ------------ ------------ ------------
------ ------ ------------ ------------ ------------ ------------
</TABLE>
4
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FIRST MERCURY FINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------
1996 1995
---- ----
<S> <C> <C>
Net cash provided by (used in) operating activities $ (578,786) 917,701
Cash flows from investing activities:
Cost of short-term investments acquired (24,609,445) (33,984,088)
Proceeds from disposals of short-term investments 24,163,486 46,174,428
Cost of debt securities acquired (12,588,095) (39,689,955)
Proceeds from maturities of debt securities 6,398,360 5,698,793
Proceeds from debt securities sold 10,299,246 19,281,339
Cost of equity securities acquired (868,078) (199,162)
Proceeds from equity securities sold 1,288,984 -
Proceeds from repayment of mortgage loan - 2,750,000
Other, net (470,204) (60,172)
-------------- --------------
Net cash provided by (used in) investing activities 3,614,254 (28,817)
-------------- --------------
Cash flows used in financing activities:
Interest payments on senior subordinated notes (825,000) (736,389)
Dividends paid to preferred stockholders (344,025) (344,025)
-------------- --------------
Net cash used in financing activities (1,169,025) (1,080,414)
-------------- --------------
Net increase (decrease) in cash and cash equivalents 1,866,443 (191,530)
Cash and cash equivalents at beginning of period 2,336,140 2,290,376
-------------- --------------
Cash and cash equivalents at end of period $ 4,202,583 2,098,846
-------------- --------------
-------------- --------------
</TABLE>
5
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FIRST MERCURY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited condensed consolidated financial statements
of First Mercury Financial Corporation and subsidiaries (the "Company")
have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and note
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. In management's opinion, all adjustments,
consisting of normal recurring adjustments, which are necessary for a
fair presentation of financial position and results of operations, have
been made. It is recommended that these condensed consolidated financial
statements be read in conjunction with the consolidated financial
statements and notes related thereto included in the Company's
December 31, 1995 annual report on Form 10-K.
The results of operations for the nine month period ended September 30,
1996, are not necessarily indicative of the results to be expected for
the full year.
2. Per share earnings are computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
First Mercury Financial Corporation ("Mercury") is an insurance holding
company incorporated in Delaware in December 1993 and engaged, through its
subsidiaries, in the underwriting of specialty commercial lines and non-standard
automobile insurance for individuals. Mercury's subsidiaries are First Mercury
Syndicate, Inc. (the "Syndicate"), an Illinois business corporation and
insurance syndicate member of the Illinois Insurance Exchange ("IIE"), First
Mercury Insurance Company ("FMIC"), a newly formed Illinois property and
casualty insurance company wholly owned by the Syndicate, and All Nation
Insurance Company ("All Nation") and its wholly owned subsidiary, National
Family Insurance Corporation ("National Family"), both Minnesota property and
casualty insurance companies. Mercury and its subsidiaries are referred to
herein as the "Company."
National Family has been in rehabilitation under the supervision of the
Minnesota Commissioner of Commerce and the Ramsey County District Court in
Minnesota since 1966. Under generally accepted accounting principles, because
All Nation currently lacks voting control over National Family, the financial
statements of National Family are not consolidated with the financial statements
of the Company.
On April 30, 1996, an agreement was entered into between Mercury, All
Nation, Allstate Insurance Company ("Allstate") and its wholly owned subsidiary,
Deerbrook Insurance Company ("Deerbrook"), for the assignment of All Nation's
independent agent contracts to Deerbrook and the ceding of associated
prospective premium to Allstate on the agency-produced non-standard automobile
business of All Nation. Neither Allstate nor Deerbrook are affiliates of
Mercury or its subsidiaries. The agreement was effective May 1, 1996. The
stated price for the independent agent contracts and associated prospective
premium was $2.4 million with another $2.4 million paid by Allstate in exchange
for a non-compete clause and various financial guarantees.
On June 28, 1996, the Syndicate formed an Illinois property and casualty
insurance subsidiary, FMIC, with an initial capitalization of $5 million, and
several days later, contributed $15 million to the surplus of FMIC. The
formation of FMIC, a licensed Illinois insurer, provided Mercury with an
affiliated insurance company in which to place coverages previously offered by
the Syndicate and in which to reinsure certain of the Syndicate's outstanding
liabilities. Under a loss portfolio transfer effected June 28, 1996, the
Syndicate transferred approximately $35 million in loss and loss adjustment
expense reserves and corresponding assets to FMIC, resulting in net loss and
loss adjustment expense reserves remaining in the Syndicate of approximately $4
million. In conjunction with the formation of FMIC and the loss portfolio
transfer, on July 8, 1996, the Syndicate notified the IIE of its intention to
withdraw from the IIE. Effective July 18, 1996, FMIC and Empire Fire and Marine
Insurance Company ("Empire")agreed upon a quota share reinsurance arrangement
whereby Empire writes on a direct basis the coverages previously offered by the
Syndicate and cedes 50% of such business to FMIC. Empire will be performing
claims handling services for this business as part of the reinsurance
arrangement. On November
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7, 1996, the Syndicate and the IIE executed the withdrawal agreement that sets
forth the proposed terms of the Syndicate's withdrawal from the IIE. The formal
withdrawal and other transactions contemplated in the withdrawal agreement will
be consummated upon closing, which is expected to take place prior to year end.
Several of the conditions to closing are dependent upon the approval of the
Illinois Department of Insurance. In connection with the Syndicate's
withdrawal, it is anticipated that the Syndicate will merge into FMIC, with FMIC
being the surviving entity. Additionally, the withdrawal agreement provides
that FMIC will establish a trust fund for the payment of claims under insurance
policies issued and reinsurance agreements entered into by the Syndicate,
including all claim liabilities transferred to FMIC under the loss portfolio
transfer. In addition, $1 million will remain in a Guaranty Fund Account at the
IIE for a period of three years. Any amounts remaining at the end of the three-
year period will be paid to FMIC. The Syndicate is also required to pay
withdrawal fees totaling $492,000 over a three year period, with one-third due
upon closing and one-third at the annual anniversary dates. In connection with
its withdrawal from the IIE, the Syndicate has voluntarily withdrawn from
California and suspended operations in Florida, two states in which it was
independently authorized to write premium or insurance. Following the
withdrawal and merger, FMIC intends to pursue licensure or authority to write
insurance business in a number of states.
RESULTS OF OPERATIONS
The following table reflects revenues of the Company for the three month
and nine month periods ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1996 1995 1996 1995
------------------- ------------------- ------------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET PREMIUMS EARNED:
Specialty commercial lines:
Security, fire and alarm. . . . $2,158 59.3% 2,078 28.3% $6,347 35.0% 6,018 27.9%
Police. . . . . . . . . . . . . 146 4.0 482 6.6 654 3.6 1,905 8.8
Public officials. . . . . . . . 145 4.0 223 3.0 501 2.8 765 3.6
Other . . . . . . . . . . . . . 331 9.1 357 4.8 844 4.7 956 4.5
Non-standard automobile lines:
Agency auto liability . . . . . 400 11.0 2,853 38.9 6,782 37.4 8,479 39.4
Direct auto liability . . . . . 171 4.7 372 5.1 566 3.1 697 3.2
Agency auto physical damage . . 176 4.8 785 10.7 2,028 11.2 2,373 11.0
Direct auto physical damage . . 112 3.1 187 2.6 395 2.2 340 1.6
--- ---- ------ ----- ----- --- --- ----
Total net premiums earned. . . . . . $3,639 100.0% $7,337 100.0% $18,117 100.0% $21,533 100.0%
------ ------- ------ ------ ------- ------ ------- ------
------ ------- ------ ------ ------- ------ ------- ------
</TABLE>
NET PREMIUMS EARNED
Net premiums earned for the three and nine months ended September 30, 1996
declined 50.4% and 15.9%, respectively, in comparison to the year earlier
periods. The Company's specialty commercial lines, which are comprised of
security, fire and alarm, police, public officials and miscellaneous commercial
coverages, decreased 11.5% and 13.5%, respectively, for the three months and
nine months ended September 30, 1996 versus the three months and nine months
ended
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September 30, 1995. Net premiums earned for security, fire and alarm
coverages, however, increased 3.9% and 5.5%, respectively, in the third
quarter of 1996 and in the first nine months of 1996, when compared to the
same periods in the prior year. The Company has experienced a 42.7% increase
in policy counts for the nine months ended September 30, 1996 in comparison
to the year earlier period for security, fire and alarm coverages. This
increase has been offset by declining premium rates in the first three
quarters of 1996. The Company is writing these coverages under a quota share
reinsurance agreement with Empire effective July 18, 1996. The Company
believes that Empire's A+ (Superior) A.M. Best rating will allow it to write
security, fire and alarm coverages at more profitable rates in the future.
During the first quarter of 1996, the Company decided to non-renew a
substantial amount of the police business, resulting in a 58.7% and 56.7%
decrease in net premiums earned for police and public official coverages
(often provided in tandem) for the three months and the nine months ended
September 30, 1996 in comparison to the three months and nine months ended
September 30, 1995. The Company has been actively pursuing a workers'
compensation program as a complementary product to the security, fire and
alarm coverages it provides.
Net premiums earned for private passenger non-standard automobile coverages
decreased 17.8% for the nine months ended September 30, 1996 in comparison to
the year earlier period. For the three months ended September 30, 1996, net
premiums earned for private passenger non-standard automobile coverages
decreased 79.5% from the comparable period of the preceding year. The decrease
in non-standard automobile net premiums earned resulted from the 100%
reinsurance of all of the Company's agency-produced non-standard automobile
premium with Allstate effective May 1, 1996. Net premiums earned for direct
response non-standard automobile coverages have decreased slightly for the first
nine months of 1996 versus the first nine months of 1995, however, the Company
has refocused its efforts toward direct response coverages in the third quarter
of 1996.
NET INVESTMENT INCOME AND REALIZED INVESTMENT GAINS (LOSSES)
Net investment income decreased approximately $638,000 for the three months
ended September 30, 1996 as compared to the three months ended September 30,
1995. For the nine months ended September 30, 1996, net investment income
decreased $606,000 in comparison to the same period of the preceding year. The
primary reason for the decrease was the Company's recognition of a $500,000
yield maintenance fee on the early repayment of a mortgage loan in the third
quarter of 1995.
For the three months ended September 30, 1996, the Company realized a net
gain on the sale of investments of $63,000 versus a net loss of $34,000 for the
same period in the prior year. The Company recognized a net gain on the sale of
investments of $293,000 for the nine months ended September 30, 1996 as compared
to a $251,000 net loss for the nine months ended September 30, 1995. The net
loss in 1995 primarily resulted from the Company's decision to reduce its
investments in tax-exempt securities in the first quarter of 1995.
At September 30, 1996, the unrealized loss on investments available for
sale, net of tax, was
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$111,000 in comparison to a $1.3 million unrealized gain as of December 31,
1995. The market value of the Company's portfolio has been adversely affected
by the increase in interest rates over the first three quarters of 1996.
GAIN ON ASSIGNMENT OF AGENCY CONTRACTS AND MISCELLANEOUS INCOME
The Company recognized a gain on the assignment of the All Nation agency
contracts of $476,000 for the nine months ended September 30, 1996. The gain
recognized represents the net present value of the related payments from
Deerbrook reduced by All Nation's estimated liability for losses under the quota
share reinsurance contract and costs attendant with the sale of a line of
business. The Company reevaluated its exposure under the risk-sharing clause of
the quota share reinsurance agreement based on additional loss information and
reduced the gain recognized by $635,000 in the third quarter of 1996. Revenue
related to the non-compete clause of $134,000 has been recognized as of
September 30, 1996 under a straight-line amortization over the 36 month term of
the non-compete agreement. In the nine months ended September 30, 1996, All
Nation also recognized approximately $464,000 of ceding fees under its quota
share reinsurance arrangement with Allstate.
LOSS AND LOSS ADJUSTMENT EXPENSES
Loss and loss adjustment expenses incurred decreased 63.6% to $2.2 million
for the three months ended September 30, 1996 from $6.0 million for the three
months ended September 30, 1995. For the nine months ended September 30, 1996,
loss and loss adjustment expenses incurred decreased 12.7% versus the comparable
period in the preceding year. The loss and loss adjustment expense ratio for
private passenger automobile coverages increased to 83.1% for the nine months
ended September 30, 1996 as compared to 80.4% for the nine months ended
September 30, 1995. The increase resulted primarily from declining rates during
1995 due to competitive pressures in the non-standard automobile business placed
through independent agents. The Company implemented rate increases in all
states during 1996 in an effort to recognize pricing inadequacies and results
have improved from the 103% loss ratio experienced in the first quarter of 1996.
Within the specialty commercial lines, the loss and loss adjustment expense
ratio increased to 74.7% for the nine months ended September 30, 1996 versus
74.4% for the comparable period in the preceding year. The 1995 loss ratio
reflects a release of reserve redundancies approximating $200,000. There were
no reserve redundancy releases in the first nine months of 1996.
AMORTIZATION OF DEFERRED ACQUISITION COSTS, OTHER UNDERWRITING EXPENSES AND
INTEREST EXPENSE
Amortization of deferred acquisition costs and other underwriting expenses
represent the Company's costs to generate premium volume. For the third quarter
of 1996, acquisition costs and other underwriting expenses decreased
approximately $1.2 million to $1.4 million as compared to $2.6 million for the
same period in the preceding year. For the nine months ended September 30,
1996, amortization of deferred acquisition costs and other underwriting expenses
decreased $1.4 million to $6.5 million versus $7.9 million for the same period
in the preceding year. The Company's underwriting expense ratio declined
slightly in the first nine months of 1996 to 34.6% in comparison to 35.4% for
the nine months ended September 30, 1995. The decrease in the
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expense ratio occurred primarily due to reimbursed expenses under the Deerbrook
service contract effective May 1, 1996.
FEDERAL INCOME TAXES
The effective tax rate for the nine months ended September 30, 1996 of
30.9% has increased from the effective tax rate for the first three quarters of
1995 of (16.8%). The Company has substantially eliminated tax-exempt securities
in its portfolio since the first quarter of 1995, resulting in an effective tax
rate closer to the federal tax rate of 34%.
NET INCOME
Net income for the three months ended September 30, 1996 was $854,000
compared to $493,000 for the same period in the preceding year, primarily due to
improvement in All Nation's loss and loss adjustment expense ratio under the
increased rates implemented in 1996 and revenue recognized under the non-compete
agreement with Deerbrook and the quota share reinsurance contract with Allstate.
For the first nine months of 1996, net income was $1,310,000 versus $694,000
for the nine months ended September 30, 1995. Net income for the first three
quarters of 1996 includes the gain on the assignment of the agency contracts of
$476,000, realized gains on investment sales of $293,000 and tax expense of
$586,000 while the results for the nine months ended September 30, 1995 include
realized losses on investment sales of $251,000 and a tax benefit of $100,000.
Excluding these items, the Company recognized net income of $1,125,000 for the
nine months ended September 30, 1996 as compared to net income of $845,000 for
the nine months ended September 30, 1995, primarily due to the effects of the
non-compete and quota share reinsurance agreements, as previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
Mercury is a holding company whose principal assets are its investment in
the capital stock of the Syndicate, FMIC and All Nation. Generally, Mercury is
dependent upon the receipt of dividends from the Syndicate and All Nation to
fund any necessary cash requirements, including debt service expenses. The
insurance companies are restricted by regulation as to the amount of dividends
they may pay without regulatory approval. The Syndicate's board of directors
had authorized dividend payments from the Syndicate to Mercury of up to $2.0
million during 1996. No dividends were paid from the Syndicate to Mercury in
the first nine months of 1996. In connection with the merger of the Syndicate
into FMIC, the board has approved dividend payments from the Syndicate to
Mercury of up to $2.4 million. In addition, Mercury anticipates cash payments
from Deerbrook of $1.2 million each in 1996 and 1997, respectively, for the non-
compete agreement. The Company believes these amounts are sufficient to meet
Mercury's current cash flow requirements.
The Company's subsidiaries' primary sources of cash flow are from premiums
collected and amounts earned from the investment of this cash flow. The
principal uses of funds are the payment of claims and related expenses and other
operating expenses. The Company's insurance operations utilized cash of
$579,000 during the nine months ended September 30, 1996 as compared to cash
generated of $918,000 in the first three quarters of 1995. The decreased cash
flow primarily
10
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resulted from a decline in premium revenues at All Nation under the quota share
reinsurance agreement with Allstate.
At September 30, 1996, the insurance subsidiaries maintained cash and cash
equivalents and short-term investments of $4.9 million to meet short-term
payment obligations. In addition, the Company's investment portfolio is heavily
weighted toward short-term fixed maturities and a portion of the portfolio could
be liquidated without material adverse financial impact should further liquidity
be necessary.
As part of its investment strategy, and as required by debt covenants, the
Company establishes a level of cash and highly liquid short- and intermediate-
term securities which, combined with expected cash flow, is believed adequate to
meet foreseeable payment obligations. As part of this strategy, the Company
attempts to maintain an appropriate relationship between the average duration of
the investment portfolio and the approximate duration of its liabilities. The
weighted average maturity of the Company's fixed income portfolio as of
September 30, 1996 was approximately three years.
11
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FIRST MERCURY FINANCIAL CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's subsidiaries are subject to routine legal proceedings in
connection with their property and casualty insurance business. Neither Mercury
nor any of its subsidiaries are involved in any pending or threatened legal
proceedings which reasonably could be expected to have a material adverse impact
on the Company's financial condition or results of operations.
On November 6, 1996, an affiliate of the Company filed suit in the Circuit
Court of Oakland County, Michigan, against several parties relating to such
parties' roles in interfering with the July 1996 letter of intent to purchase a
Michigan insurance agency.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the third
quarter of 1996.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
10.21 Withdrawal Agreement effective November 7, 1996 between the
Syndicate and the IIE.
27 Financial Data Schedule.
B. REPORTS ON FORM 8-K
No report on Form 8-K was filed by the Registrant during the quarter ended
September 30, 1996.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST MERCURY FINANCIAL CORPORATION
Date: November 13, 1996 By: /s/ William S. Weaver
------------------------------
William S. Weaver
Chief Financial Officer
(Principal Financial Officer
and duly authorized to sign on
behalf of the Registrant)
13
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WITHDRAWAL AGREEMENT Exhibit 10.21
THIS WITHDRAWAL AGREEMENT (this "Agreement") is made and entered into this
7th day of November, 1996, by and between the ILLINOIS INSURANCE EXCHANGE (the
"IIE"), the ILLINOIS INSURANCE EXCHANGE IMMEDIATE ACCESS SECURITY ASSOCIATION
(the "IASA"), the ILLINOIS INSURANCE EXCHANGE GUARANTY FUND, INC. (the "Guaranty
Fund"), FIRST MERCURY SYNDICATE, INC. (the "Syndicate") and FIRST MERCURY
INSURANCE COMPANY ("FMIC").
WHEREAS, the IIE operates as an insurance exchange pursuant to Article V
1/2 (215 ILCS 5/107.01 et seq.) of the Illinois Insurance Code (the "Code");
WHEREAS, the IASA is an Illinois not-for-profit corporation created
pursuant to Section 107.26 of the Code;
WHEREAS, the Guaranty Fund is an Illinois not-for-profit corporation
created pursuant to Section 15.A.1. of the IIE Regulations (the "Regulations");
WHEREAS, the Syndicate, an Illinois business corporation, is a syndicate on
the IIE;
WHEREAS, FMIC, an Illinois stock property and casualty insurance
corporation, is a wholly owned subsidiary and reinsurer of the Syndicate;
WHEREAS, the Syndicate wishes to voluntarily withdraw from the IIE and
cease operating as a syndicate on the IIE; and
WHEREAS, this Agreement sets forth the terms of the Syndicate's voluntary
withdrawal and plan for securing its claims and obligations, pursuant to Section
23 of the Regulations.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, and other good and valuable consideration, the receipt and
sufficiency of which hereby are acknowledged, the parties hereto hereby agree as
follows:
ARTICLE 1
WITHDRAWAL OF THE SYNDICATE FROM THE IIE
1.1 WITHDRAWAL. Subject to the Syndicate being in compliance with and not
in breach of any provisions of this Agreement, the IIE grants the Syndicate
petition to withdraw as a syndicate on the IIE effective as of the Closing Date
(as defined in Section 2.1 below), but the Syndicate or FMIC, as its successor,
shall continue to be subject to the provisions of Sections 13, 15 and 22 of the
Regulations. In this regard, the IIE, the IASA or the Guaranty Fund, as
applicable, shall promptly notify FMIC of the receipt of any claim in connection
with a policy issued by the Syndicate. FMIC shall have the right and duty to
defend or settle, as it deems appropriate, any such claim against the IIE, the
IASA or the Guaranty Fund. On and after the Closing Date, the IIE shall
promptly report to FMIC all claims made
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under policies issued by the Syndicate with respect to which the IIE receives
notice. Also effective as of the Closing Date, the Syndicate shall be merged
out of existence (as further described in Section 3.1 below) and thus shall
conduct no further activity (I) as a syndicate on the IIE, nor (ii) as an
independent entity.
1.2 WITHDRAWAL OF THE SYNDICATE. The Syndicate, as an independent entity,
shall not engage in the underwriting of new or renewal insurance or reinsurance
business on or after the date of this Agreement so long as this Agreement
remains in effect. Subject to the terms and conditions of this Agreement and in
accordance with the provisions of Section 23 of the Regulations, the Syndicate
shall withdraw as an active syndicate of the IIE effective as of the Closing
Date. Upon such withdrawal, the Syndicate and FMIC will not engage in any
further activity as an insurance syndicate or member of the IIE.
Notwithstanding the above, the Syndicate shall continue to be obligated for all
claims, loss adjustment expenses, return premiums or any other matters arising
from policies written or reinsurance agreements entered into while a member of
the IIE.
1.3 NAME AND PURPOSE. As soon as practicable following the execution of
this Agreement, the Syndicate shall be merged and dissolved out of existence,
and the surviving corporation, FMIC, shall not include in its name or purpose
any reference to "Syndicate," "Exchange" or "Illinois Insurance Exchange."
ARTICLE 2
CLOSING
2.1 CLOSING. Subject to the terms and conditions hereof, the closing (the
"Closing") of the transaction contemplated by this Agreement shall be held at
the offices of the Illinois Insurance Exchange, 311 South Wacker Drive, Suite
400, Chicago, Illinois 60606, on such day and at such time as the parties hereto
mutually shall agree, but in no event later than ten (10) days after the
satisfaction or waiver of all of the conditions set forth in Articles 9 and 10
below. The date and time of the Closing is hereinafter referred to as the
"Closing Date."
ARTICLE 3
INSURANCE LIABILITIES
3.1 MERGER. As soon as practicable following the execution of this
Agreement, subject to the approval of the Illinois Department of Insurance (the
"Department"), the Illinois Secretary of State and any other applicable
governmental or regulatory body, the Syndicate shall merge with and into FMIC,
pursuant to Article X of the Illinois Insurance Code (the "Merger") with FMIC
being the surviving entity, and simultaneously dissolve its corporate existence
pursuant to the Illinois Business Corporation Act of 1983, as amended.
Consequently, FMIC, as the surviving corporation, thereafter shall possess all
of the assets, and assume all of the liabilities and obligations of the
Syndicate, including those relating to the Syndicate's policyholders and
reinsureds. The existing reinsurance agreement between FMIC and the Syndicate,
dated June 28, 1996, will terminate by operation of law pursuant to the Merger.
Immediately prior to the Merger and the Closing, the Syndicate shall pay a cash
dividend to its shareholders in an aggregate amount not to exceed $2,400,000.
The IIE hereby waives any applicable notice requirement regarding the dividend
and any opportunity it may have to object to such
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dividend.
3.2 TRUST FUND.
(A) ESTABLISHMENT. As of the Closing Date, in order to ensure the
satisfaction of the obligations of the Syndicate to its policyholders and
reinsureds and of FMIC, as the surviving entity in the Merger, to the
Syndicate's policyholders and reinsureds, FMIC shall establish a trust fund
with the LaSalle National Trust, N.A. or such other bank as mutually agreed
to by the parties for the payment of claims under insurance policies issued
and reinsurance agreements entered into by the Syndicate (the "Trust
Fund"). The Trust Fund shall be funded and administered in accordance with
the terms of a Trust Agreement substantially in the form attached hereto as
EXHIBIT A (the "Trust Agreement"), subject to the approval of the Illinois
Department of Insurance. The Trust Fund shall be established solely for
the benefit of the Syndicate's policyholders and reinsureds. As of the
Closing Date, FMIC shall deposit into the Trust Fund cash or investments
described in Sections 125.1a through and including 125.14a, and publicly
traded investments described in Section 125.15b, of the Illinois Insurance
Code, with an aggregate value equal to (1) 100% of the Syndicate's net loss
and allocated loss adjustment expense reserves as reflected on the
Syndicate's September 30, 1996 statutory financial statements, PLUS (2)
100% of FMIC's net loss and allocated loss adjustment expense reserves with
respect to insurance business ceded to FMIC from the Syndicate, as
reflected on FMIC's September 30, 1996 statutory financial statements,
PLUS, (3) 100% of Syndicate's net loss and allocated loss adjustment
expense reserves on all policies written and liabilities incurred by the
Syndicate subsequent to September 30, 1996, PLUS, (4) 100% of FMIC's net
loss and allocated loss adjustment expense reserves on business assumed
from the Syndicate subsequent to September 30, 1996, PLUS, (5) 100% of the
Syndicate's unearned premium reserves. The Syndicate shall provide to the
IIE an original copy of the bank records verifying such deposits.
(B) OPERATION. Subsequent to the Closing Date, FMIC shall collect
and remit to the trustee of the Trust Fund, promptly upon receipt, cash or
other admitted assets in an amount equal to the sum of the following: (1)
65% of all premiums, audit premiums or other consideration with respect to
insurance policies issued and reinsurance assumed by the Syndicate; (2) any
monies, credits, setoffs, allowances or commutation settlements, other than
profit-sharing payments, received by FMIC from reinsurers with respect to
reinsurance ceded by the Syndicate or FMIC with respect to Syndicate
insurance business; and (3) all salvage and subrogation or any other
recoveries arising from any policies issued and reinsurance agreements
entered into by the Syndicate; LESS an amount equal to all reinsurance
premiums paid on remaining reinsurance treaties with respect to reinsurance
ceded by FMIC relating to Syndicate insurance business. Except for the
payment of losses and allocated loss adjustment expenses under policies
issued and reinsurance agreements entered into by the Syndicate, and except
for the withdrawals expressly permitted hereunder, FMIC shall make no
withdrawals from the Trust Fund. In the event FMIC enters into a
commutation agreement with respect to Syndicate insurance business, FMIC
promptly shall provide to the IIE either a copy of such commutation
agreement or a summary providing pertinent information with respect to the
commutation, at FMIC's option.
(C) REPORTS. No later than on March 1, 1997, and periodically
thereafter, FMIC shall provide to the IIE the following reports:
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(1) a monthly report prepared by the trustee with respect to the
Trust Fund in the form that typically is prepared by the trustee with
respect to trusts of this type which, to FMIC's knowledge, will show
remittances and disbursements from the Trust Fund together with a list
of all assets in the Trust Fund and the market value of each asset;
(2) an annual actuarial valuation as of December 31 of the prior
year, conducted by an actuary who is either a member or fellow of the
Casualty Actuarial Society or the American Academy of Actuaries
("Qualified Actuary"), that confirms that the Trust Fund contains
assets equal to 100% of the undiscounted value of unpaid losses and
allocated loss adjustment expenses with respect to policies issued and
reinsurance assumed by the Syndicate LESS the amount of reinsurance
ceded by FMIC (with respect to Syndicate insurance business) to
unaffiliated reinsurers rated B+ (Very Good) or better by A.M. Best
(the "Reserve Value"); and
(3) an annual certification by an officer of FMIC that all
disbursements and remittances have been made from and to the Trust
Fund during the year ending the preceding December 31, only in
accordance with the terms of this Agreement.
The IIE shall not have the right to challenge the results or
procedures used to generate such reports, or the individuals or entities
which generate such reports. Nevertheless, the IIE shall have the right to
ask questions of the trustee and the Qualified Actuary, each of whom shall
be instructed by FMIC to respond as appropriate. Additionally, the IIE
shall have the right to audit the Trust Fund, following reasonable notice
to FMIC, at the IIE's sole expense. Notwithstanding the foregoing, in the
event such an audit by the IIE reveals material deviations from FMIC's
obligations pursuant to this Agreement, following FMIC's unsuccessful
challenge of such audit results, FMIC shall reimburse the IIE for all of
its audit expenses and the IIE shall retain all rights and remedies
otherwise granted to the IIE under this Agreement.
(D) WITHDRAWAL OF ASSETS. So long as the Trust Fund maintains assets
equal to 100% of the most recently determined Reserve Value pursuant to
Subsection (C)(2) hereof, FMIC shall have the right, at any time, to
withdraw from the Trust Fund an amount less than or equal to all cumulative
interest, dividends and earnings (including net realized capital gains)
received with respect to the assets held in the Trust Fund (the "Investment
Income") LESS trustee fees and Trust Fund expenses. Unless withdrawn
pursuant to the terms of this Section, the remaining Investment Income and
all monies received from the maturity, sale, redemption or other
disposition of the assets shall be reinvested in the Trust Fund in a manner
designated by FMIC, but only in cash or investments qualifying as admitted
assets under the Illinois Insurance Code. In addition to the annual
actuarial valuation described in Subsection (C)(2) above, FMIC may, at any
time in its sole discretion, cause an actuarial valuation to be conducted
by a Qualified Actuary to determine the Reserve Value. If, as a result of
an actuarial valuation by a Qualified Actuary, it is determined that the
balance of the Trust Fund exceeds the Reserve Value, FMIC also may withdraw
from the Trust Fund the amount by which the balance of the Trust Fund
exceeds the Reserve Value. Subsequent to such a withdrawal and so long as
the Trust Fund maintains assets equal to 100% of the most recently
determined Reserve Value pursuant to Subsection (C)(2) hereof, FMIC may
withdraw all cumulative Investment Income subsequently received with
respect to the assets in the Trust Fund. If the Reserve Value is
determined to be greater than the balance of the Trust Fund by any amount,
FMIC shall deposit assets into the Trust Account in an amount necessary
such that the total assets in the Trust Fund equal 100% of the most
recently determined Reserve Value, and FMIC may not
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withdraw any further Investment Income from the Trust Fund until a
subsequent actuarial valuation results in a determination that the balance
of the Trust Fund exceeds the Reserve Value.
(E) TERMINATION OF TRUST FUND. In the event that (I) an actuarial
valuation by a Qualified Actuary results in a determination that the
Reserve Value under policies issued or reinsurance assumed by the Syndicate
is equal to or less than the lesser of $5,000,000 or 10% of the amount of
the Trust Fund as of the Closing Date, and (ii) the policyholders' surplus
of FMIC as of FMIC's most recent certified audit on file with the Illinois
Department of Insurance is greater than $10,000,000, then the Trust Fund
shall terminate and all remaining assets held in the Trust Fund shall
immediately be paid to FMIC. The termination of the Trust Fund shall not
extinguish any other obligation of the parties hereunder except for the
reporting obligations set forth in Subsection (C)hereof and shall not
terminate the obligation of FMIC to pay any and all claims under the
policies issued or reinsurance assumed by the Syndicate.
3.3 CLAIMS HANDLING. During the period of runoff of the Syndicate's
insurance liabilities, and until all such claims and liabilities have been
settled and paid, FMIC shall assume all responsibility for the handling of
insurance claims relating to the Syndicate's policyholders or reinsureds,
including, but not limited to, salvage, subrogation, reinsurance notification
and premium and reinsurance collections.
ARTICLE 4
FUNDS HELD BY THE IIE, IASA AND GUARANTY FUND
4.1 LETTERS OF CREDIT. Upon the execution hereof and compliance with
Section 9.1-C- of this Agreement, the IIE, IASA or Guaranty Fund shall cause the
physical return to the Syndicate of the letters of credit listed on SCHEDULE
4.1. The return of such letters of credit shall constitute a partial release of
the Syndicate's IASA Custodial Account. The parties agree that the letters of
credit listed on SCHEDULE 4.1 constitute all letters of credit held by the IIE,
IASA and Guaranty Fund with respect to the Syndicate. The IIE, IASA and
Guaranty Fund each hereby represents, warrants and covenants that upon Closing
it has, and in the future will have, no claim against or rights to the letters
of credit referenced herein.
4.2 IASA ACCOUNT. At or prior to the Closing, the IIE and IASA shall take
any and all necessary actions to cause the closure of the Syndicate's IASA
Custodial Account and the release to the Syndicate or FMIC of all funds and
assets deposited in or otherwise held in connection with the Syndicate's IASA
Custodial Account. Subsequent to the Closing Date, neither the Syndicate nor
FMIC shall have any further obligation to or with respect to the IASA.
4.3 GUARANTY FUND.
(A) GUARANTY FUND ACCOUNT. Upon the execution hereof, the Syndicate
shall fund its Guaranty Fund Custodial Account with cash or marketable
securities having market value of not less than $1,000,000. All interest
or other income accrued or paid with respect to the Guaranty Fund Custodial
Account shall inure to the benefit of FMIC. So long as the Guaranty Fund
Custodial Account remains at or above a market value of $1,000,000 LESS any
amounts previously withdrawn by the Guaranty Fund, FMIC shall be permitted
to withdraw at any time and from time to time all
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interest or other income earned with respect to assets in its Guaranty Fund
Custodial Account. FMIC agrees to maintain this Account with assets with a
market value of no less than $1,000,000 LESS any amounts previously
withdrawn by the Guaranty Fund, for the period of time required under this
Agreement and the Regulations. The Syndicate's Guaranty Fund Custodial
Account will continue to be available to the Guaranty Fund for a period of
three (3) years from the date hereof (unless sooner released by resolution
of the IIE Board of Trustees), to the extent provided in the Regulations.
The Syndicate's Guaranty Fund Custodial Account shall be available for
insolvencies determined prior to the date hereof or insolvencies dated
within the three (3) year period following the date hereof, but only for
losses arising on or before the date hereof. The Syndicate's Guaranty Fund
Custodial Account shall be available for multiple insolvencies, but for any
one insolvency only to the extent of no more than the lesser of (I)
$500,000 or (ii) a proportional share of the Guaranty Fund's obligations
determined by dividing the estimated Guaranty Fund's aggregate obligations
by the number of syndicates whose custodial accounts are available as of
the date hereof. Except as set forth herein, subsequent to the Closing
Date, neither the Syndicate nor FMIC shall have any further obligation to
or with respect to the Guaranty Fund.
(B) RELEASE OF GUARANTY FUND CUSTODIAL ACCOUNT. At the next meeting
of the IIE Board of Trustees following the execution of this Agreement, the
Board shall adopt a standing resolution (a copy of which will be provided
to FMIC promptly following adoption) authorizing the release to FMIC, on
the third annual anniversary of the Closing Date, of all amounts remaining
in the Syndicate's Guaranty Fund Custodial Account and not already finally
determined to be available for insolvencies pursuant to the provisions of
Section 4.3(A) hereof. In the event that a court of competent jurisdiction
shall determine that any of the amounts released under this Section 4.3(B)
should not have been released, FMIC shall indemnify the IIE, IASA or
Guaranty Fund (as applicable) in the amount of the lesser of (I) the amount
determined to have been improperly released, or (ii) the amounts released
pursuant to this Section 4.3(B). In the event of any judicial proceeding
seeking such determination, the IIE, IASA or Guaranty Fund (as applicable)
promptly shall provide notice thereof to FMIC, and FMIC shall have the duty
and right to defend the IIE, IASA and Guaranty Fund (as applicable) or to
agree to any settlement thereof in FMIC's sole discretion.
4.4 OTHER FUNDS, ASSETS, ASSESSMENTS AND FEES. The IIE, IASA and Guaranty
Fund waive any right to recover from the Syndicate or FMIC any special
assessments or fees (other than regular premium assessments incurred by the
Syndicate prior to the Closing Date) incurred by the Syndicate prior to, on or
subsequent to the Closing Date.
ARTICLE 5
WITHDRAWAL FEE
5.1 WITHDRAWAL FEE. The amount of the withdrawal fee pursuant to Section
23.B. of the Regulations is $492,151.50, and such withdrawal fee shall be
payable, by corporate check, by the Syndicate or FMIC to the IIE as follows:
(A) $164,050.50 shall be paid at the Closing;
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(B) $164,050.50 shall be paid on the first annual anniversary date of
the Closing Date; and
(C) $164,050.50 shall be paid on the second annual anniversary date
of the Closing Date.
Such amounts payable by the Syndicate or FMIC shall be used by the IIE only as
provided in Section 23.B. of the Regulations and not as part of a capitalization
of or investment in any other entity. Additionally, if the IIE should declare a
refund or distribution of assessments with respect to the 1996 year, the
Syndicate shall be entitled to receive the fraction of the aggregate of such
refund or distribution that the amounts paid by the Syndicate as assessments and
withdrawal fees in 1996 bear to all assessments received by the IIE in 1996.
Any such refund or distribution shall be made to the Syndicate simultaneously
with that made to the other receiving parties.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF THE SYNDICATE AND FMIC
6.1 REPRESENTATIONS AND WARRANTIES. In order to induce the IIE, IASA and
Guaranty Fund to enter into this Agreement and to perform their respective
obligations hereunder, and acknowledging that the IIE, IASA and Guaranty Fund
will have relied on the representations and warranties made by the Syndicate and
FMIC in entering into this Agreement, the Syndicate and FMIC represent and
warrant as follows:
(A) ORGANIZATION. The Syndicate is a corporation duly organized,
existing and in good standing under the laws of the State of Illinois.
FMIC is an insurance corporation duly organized and existing under the laws
of the State of Illinois.
(B) DUE AUTHORIZATION; EXECUTION AND DELIVERY. The Syndicate and
FMIC have the corporate power and authority to enter into and perform their
obligations under this Agreement. The Syndicate and FMIC have taken all
requisite corporate action to authorize the execution, delivery and
performance of this Agreement. This Agreement is enforceable against the
Syndicate and FMIC in accordance with its terms.
(C) NO CONFLICTS. Except as provided elsewhere in this Agreement,
the execution and delivery of this Agreement and the performance by the
Syndicate and FMIC of their respective obligations hereunder will not
conflict with, or result in a breach of, or constitute a default under, or
result in the creation or imposition of any lien or charge under, any
agreement or instrument to which the Syndicate or FMIC is a party or by
which the Syndicate or FMIC may be bound, nor will any such action violate
any statute, law, rule or regulation or any order, judgment, injunction or
decree of any court or governmental authority binding upon or affecting the
Syndicate or FMIC.
(D) APPROVALS AND FILINGS. Except as provided elsewhere in this
Agreement, to the Syndicate's or FMIC's knowledge, no approval,
certification, authorization, consent, license, clearance or order of,
declaration or notification to, or filing or registration with, any
governmental, regulatory or other authority, body or entity, or court, is
required to be obtained or made by either party hereto for the consummation
of the transaction contemplated by this Agreement.
(E) MISCELLANEOUS. To the Syndicate's knowledge: (I) all policies
written by the Syndicate
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have been reported to the IIE and all policies bound at the IIE actually
have been issued; (ii) all known reported losses have been disclosed to the
IIE, and all such losses and the current reserves for those losses as of
September 30, 1996 are shown in SCHEDULE 6.1(E)(ii) attached hereto; (iii)
the Syndicate has not entered into any agreements whereby it has assumed
liabilities by reinsurance or otherwise that have not been disclosed in
writing to the IIE; (iv) the Syndicate has not facultatively ceded any
insurance liabilities other than those that have been disclosed in writing
to the IIE; (v) none of the executive officers of the Syndicate nor its
claims manager has actual knowledge of any circumstances that are likely to
result in liability against the Syndicate or the IIE for bad faith claims
handling or punitive damages; (vi) the Syndicate has no actual or potential
material insurance claims that would not be reinsured by one or more of its
reinsurance agreements because of late notice or any breach of condition;
and (vii) the data, statistics, information and records provided to the IIE
by the Syndicate were true, correct and complete in all material respects
at the time provided.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF THE IIE,
IASA AND GUARANTY FUND
7.1 REPRESENTATIONS AND WARRANTIES. In order to induce the Syndicate and
FMIC to enter into this Agreement and to perform their obligations hereunder,
and acknowledging that the Syndicate and FMIC will have relied on the
representations and warranties made by the IIE, IASA and Guaranty Fund in
entering into this Agreement, the IIE, IASA and Guaranty Fund represent and
warrant to the Syndicate and FMIC as follows:
(A) ORGANIZATION. The IIE is a not-for-profit corporation duly
organized, validly existing and in good standing pursuant to the laws of
the State of Illinois. The IASA and the Guaranty Fund are not-for-profit
corporations duly organized, existing and in good standing under the laws
of the State of Illinois.
(B) DUE AUTHORIZATION; EXECUTION AND DELIVERY. Each of the IIE,
IASA and Guaranty Fund has the power and authority to enter into and
perform its obligations under this Agreement. Each of the IIE, IASA and
Guaranty Fund has taken all requisite corporate action to authorize the
execution, delivery and performance of this Agreement. This Agreement is
enforceable against the IIE, IASA and Guaranty Fund in accordance with its
terms.
(C) NO CONFLICTS. Except as provided elsewhere in this Agreement,
the execution and delivery of this Agreement and the performance by the
IIE, IASA and Guaranty Fund of their obligations hereunder will not
conflict with, or result in a breach of, or constitute a default under, or
result in the creation or imposition of any lien or charge under, any
agreement or instrument to which the IIE, IASA or Guaranty Fund is a party
or by which the IIE, IASA or Guaranty Fund may be bound, nor will any such
action violate any statute, law, rule or regulation or any order, judgment,
injunction or decree of any court or governmental authority binding upon or
affecting the IIE, IASA or Guaranty Fund.
(D) APPROVALS AND FILINGS. Except as provided elsewhere in this
Agreement, to the IIE's, IASA's and Guaranty Fund's knowledge, no approval,
certification, authorization, consent, license,
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clearance or order of, declaration or notification to, or filing or
registration with, any governmental, regulatory or other authority, body or
entity, or court, is required to be obtained or made by any party hereto
for the consummation of the transaction contemplated by this Agreement.
(E) OTHER FUNDS. None of the IIE, IASA or Guaranty Fund holds any
funds of the Syndicate pursuant to Article V 1/2 of the Illinois Insurance
Code or the Regulations, other than those specified herein.
ARTICLE 8
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
8.1 SURVIVAL. The foregoing representations and warranties of the
Syndicate and FMIC and the IIE in Articles 6 and 7 of this Agreement, in other
Articles or Sections of this Agreement, and in any document delivered to the
other parties pursuant to the terms and conditions of this Agreement shall be
deemed made upon the signing of this Agreement and again at the Closing and
shall be fully effective and enforceable without time limit.
ARTICLE 9
CONDITIONS TO THE IIE'S, IASA'S AND GUARANTY FUND'S
OBLIGATIONS TO CLOSE
9.1 CONDITIONS TO CLOSING. The obligations of the IIE, IASA and Guaranty
Fund to consummate the transaction contemplated by this Agreement shall be
subject to the satisfaction, on or before the Closing Date, of each of the
following conditions, unless otherwise waived in writing by the IIE, IASA and
Guaranty Fund, as applicable:
(A) MERGER. As of the Closing Date, the Department shall have
approved the Trust Agreement, and the Syndicate and FMIC shall have
received confirmation that the Articles of Dissolution of the Syndicate
were filed with the Illinois Secretary of State and that the Agreement of
Merger of the Syndicate and FMIC was filed with and approved by the
Department, as described in Section 3.1 above. Copies of all documents
mentioned in this paragraph and any amendments thereto, shall be provided
to the IIE.
(B) TRUST FUND. As of the Closing Date, the IIE shall have received
a fully executed copy of the Trust Agreement, and evidence that FMIC shall
have funded the Trust Fund in accordance with the provisions of Section
3.2(A) above.
(C) GUARANTY FUND CUSTODIAL ACCOUNT FUNDING. As of the date of
execution hereof:
(1) the IIE shall have received evidence that the Syndicate has
funded its Guaranty Fund Custodial Account with assets that qualify
under Section 15.B. of the Regulations, which assets shall not include
letters of credit; and
(2) the Syndicate shall have sent a letter by certified U.S.
mail to the custodian bank (and provided a copy to the IIE) stating
that unless the custodian bank receives a certified
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resolution from the IIE with different instructions, the custodian
shall not distribute to the Syndicate, for a period of three (3) years
from the Closing Date, assets or investment income if immediately
thereafter the Guaranty Fund Custodial Account number 05-71600 would
have assets with an aggregate fair market value of less than
$1,000,000 LESS any amounts previously withdrawn by the Guaranty Fund
pursuant to Section 4.3 hereof. The minimum required balance (except
in the case of a reduced required balance resulting from the
withdrawal of funds by the Guaranty Fund) can only be reduced pursuant
to a certified resolution from the IIE Board of Trustees.
(D) WITHDRAWAL FEE. At the Closing, the IIE shall have received from
the Syndicate the first installment of the withdrawal fee, as described in
Section 5.1 above.
(E) REPRESENTATIONS AND WARRANTIES CERTIFICATE. The representations
and warranties of the Syndicate and FMIC set forth in Article 6 of this
Agreement shall be true and complete in all material respects as of the
Closing Date, and the Syndicate and FMIC shall have materially performed
and complied with all of their obligations, covenants, conditions and
agreements under this Agreement to be performed or complied with by it on
or prior to the Closing Date. At the Closing, the Syndicate and FMIC each
shall deliver to the IIE a certificate duly executed by its President,
dated as of the Closing Date, certifying that, to his knowledge: (I) the
representations and warranties of each of the Syndicate and FMIC set forth
in Article 6 of this Agreement are true and complete in all material
respects as of the Closing Date; and (ii) each of the Syndicate and FMIC,
respectively, has fully performed and complied with, in all material
respects, all obligations, covenants, conditions and agreements required by
this Agreement to be performed or complied with by it at or prior to the
Closing.
(F) RESOLUTIONS. At the Closing, each of the Syndicate and FMIC
shall deliver to the IIE copies of each resolution adopted by the
Syndicate's and FMIC's respective directors approving and adopting this
Agreement, and approving and authorizing the consummation of the
transaction contemplated hereby, accompanied by a certificate of the
respective Secretaries of the Syndicate and FMIC, dated as of the Closing
Date and certifying: (I) the date and manner of adoption of each such
resolution; and (ii) that each such resolution is then in full force and
effect, without amendment.
(G) RESIGNATION. Upon the execution hereof, Jerome M. Shaw shall
tender his resignation from his position as trustee on the IIE Board of
Trustees.
ARTICLE 10
CONDITIONS TO THE SYNDICATE'S AND FMIC'S OBLIGATION TO CLOSE
10.1 CONDITIONS TO CLOSING. The obligation of the Syndicate and FMIC to
consummate the transaction contemplated by this Agreement shall be subject to
the satisfaction, on or before the Closing Date, of each of the following
conditions, unless otherwise waived in writing by the Syndicate:
(A) MERGER. As of the Closing Date, the Department shall have
approved the Trust Agreement, and the Syndicate and FMIC shall have
received confirmation that the Articles of Dissolution of the Syndicate
were filed with the Illinois Secretary of State and that the Agreement
23
<PAGE>
of Merger of the Syndicate and FMIC was filed with and approved by the
Department, as described in Section 3.1 above.
(B) TRUST FUND. As of the Closing Date, the Syndicate or FMIC shall
have received an executed acknowledgment of the IIE with respect to the
Trust Agreement, as described in Section 3.2 above.
(C) LETTERS OF CREDIT. Upon the execution hereof, the Syndicate
shall receive physical possession of the letters of credit from the IIE,
IASA or Guaranty Fund, as shown on SCHEDULE 4.1.
(D) IASA ACCOUNT. At or prior to the Closing, the Syndicate or FMIC
shall have received (I) evidence of the closure of the Syndicate's IASA
Custodial Account, and (ii) all related funds and assets, as described in
Section 4.2 above.
(E) REPRESENTATIONS AND WARRANTIES CERTIFICATE. The representations
and warranties of the IIE, IASA and Guaranty Fund set forth in Article 7 of
this Agreement shall be true and complete in all material respects as of
the Closing Date, and the IIE, IASA and Guaranty Fund shall have materially
performed or complied with all of their respective obligations, covenants,
agreements and conditions under this Agreement to be performed or complied
with by them on or prior to the Closing Date. At the Closing, the IIE, IASA
and Guaranty Fund each shall deliver to the Syndicate or FMIC a certificate
duly executed by its Chief Executive Officer, dated as of the Closing Date,
certifying that, to his knowledge: (I) the representations and warranties
of each of the IIE, IASA and Guaranty Fund, respectively, set forth in
Article 7 of this Agreement are true and complete in all material respects
as of the Closing Date; and (ii) each of the IIE, IASA and Guaranty Fund,
respectively, has fully performed and complied with, in all material
respects, all obligations, covenants, agreements and conditions required by
this Agreement to be performed or complied with by it at or prior to the
Closing.
(F) RESOLUTIONS. At the Closing, each of the IIE, IASA and Guaranty
Fund shall deliver to the Syndicate and FMIC copies of each resolution
adopted by the IIE's, IASA's and Guaranty Fund's respective directors
approving and adopting this Agreement, and approving and authorizing the
consummation of the transaction contemplated hereby, accompanied by a
certificate of the respective Secretaries of the IIE, IASA and Guaranty
Fund, dated as of the Closing Date and certifying: (I) the date and manner
of adoption of each such resolution; and (ii) that each such resolution is
then in full force and effect, without amendment.
ARTICLE 11
RELEASES
11.1 SYNDICATE RELEASE. The Syndicate, for itself and its affiliates,
officers, directors, employees, shareholders, attorneys, agents, predecessors,
successors, heirs, executors, administrators, parents and subsidiaries, past and
present, and assigns (collectively, the "Syndicate Releasing Parties"), fully
and forever remise, release and discharge the IIE, IASA and Guaranty Fund, and
all of their respective affiliates, officers, trustees, directors, employees,
shareholders, attorneys, agents, predecessors, successors, heirs, executors,
administrators, parents and subsidiaries, past and present, and assigns
(collectively, the "IIE Released Parties"), of and from any and all manner of
action or
24
<PAGE>
actions, cause or causes of actions, suits, dues, sums of money, accounts,
reckonings, bonds, bills, specialties, covenants, contracts, agreements,
understandings, promises, claims, debts, proceedings, causes in action,
controversies, costs, expenses, damages, and demands whatsoever (including, but
not limited to, any claims that the Syndicate may have against the IIE, IASA or
Guaranty Fund), of any kind or nature, in law, equity or otherwise, whether
known or unknown, matured or unmatured, suspected or unsuspected (collectively,
"Claims"), which any of the Syndicate Releasing Parties has had, now has or
hereafter can, shall or may have against the IIE Released Parties or any of
them, for or by reason of or arising out of or in any way related to the
activities of the IIE Released Parties while the Syndicate was a syndicate on
the IIE. Notwithstanding the foregoing, the Syndicate Releasing Parties
expressly do not remise, release or discharge, and expressly retain, all Claims
they now have or hereafter can, shall or may have against the IIE or the
Guaranty Fund, for or by reason of or arising out of or in any way related to
(1) a breach of obligations arising from this Agreement, or (2) any and all
continuing obligations of the IIE or the Guaranty Fund with respect to all
contracts of insurance or reinsurance entered into by the Syndicate while it was
a syndicate on the IIE.
11.2 IIE, IASA AND GUARANTY FUND RELEASE. The IIE, IASA and Guaranty Fund,
for themselves and their respective affiliates, officers, trustees, directors,
employees, attorneys, agents, predecessors, successors, heirs, executors,
administrators, parents and subsidiaries, past and present, and assigns
(collectively, the "IIE Releasing Parties"), fully and forever remise, release
and discharge the Syndicate and all of its affiliates, officers, directors,
employees, shareholders, attorneys, agents, predecessors, successors, heirs,
executors, administrators, parents and subsidiaries, past and present, and
assigns (collectively, the "Syndicate Released Parties"), of and from any and
all manner of action or actions, cause or causes of actions, suits, dues, sums
of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts,
agreements, understandings, promises, claims, debts, proceedings, causes in
action, controversies, costs, expenses, damages, and demands whatsoever
(including, but not limited to, any claims that the IIE, IASA or Guaranty Fund
may have against the Syndicate), of any kind or nature, in law, equity or
otherwise, whether known or unknown, matured or unmatured, suspected or
unsuspected, which any of the IIE Releasing Parties has had, now has or
hereafter can, shall or may have against the Syndicate Released Parties or any
of them, for or by reason of or arising out of or in any way related to the
business engaged in by or the activities of the Syndicate while a syndicate on
the IIE. Notwithstanding the foregoing, the IIE Releasing Parties expressly do
not remise, release or discharge, and expressly retain, all Claims they now may
have or hereafter can, shall or may have against the Syndicate or FMIC, for or
by reason of or arising out of or in any way related to (1) a breach of
obligations arising from this Agreement, or (2) any and all continuing
obligations of the Syndicate or FMIC with respect to all contracts of insurance
or reinsurance entered into by the Syndicate while it was a syndicate on the
IIE.
11.3 FULL RELEASE. Except as noted above, these releases are intended to
be effective as full and final accords, satisfactions and general releases of
all past, present and future liabilities and obligations owed by each party to
the others.
ARTICLE 12
INDEMNIFICATION
12.1 INDEMNIFICATION. Each party hereto (the "Indemnifying Party") shall
indemnify and defend the other parties and their shareholders, trustees,
officers, directors, employees, attorneys,
25
<PAGE>
agents, representatives, successors and assigns (collectively, the "Indemnified
Parties") and hold the Indemnified Parties harmless from and against any and all
loss, cost, damage, liability or expense (including, but not limited to,
reasonable attorneys' fees ) suffered or incurred by the Indemnified Parties as
a result of the Indemnifying Party's breach of any representation, warranty,
covenant or agreement contained herein. The Indemnified Parties shall promptly
notify the Indemnifying Party of any claim as to which recovery may be sought
against the Indemnifying Party under this Section 12.1. Any notice given
pursuant to this Section 12.1 shall contain a detailed statement of the nature
and basis of the claim, the identity of the claimant, the demand and relief
sought or requested by the claimant, and shall be accompanied by copies of all
materials in the possession of the Indemnified Parties which reasonably relate
to such claim. Subject to the foregoing provisions of this Section 12.1, the
right to indemnification hereunder shall not be affected by failure of the
Indemnified Parties to give such notice and related materials or delay by the
Indemnified Parties in giving such notice or related materials unless, and then
only to the extent that, the rights and remedies of the Indemnifying Party shall
have been prejudiced as a result of the failure to give, or delay in giving,
such notice or related materials.
ARTICLE 13
TERMINATION
13.1 TERMINATION. This Agreement shall automatically terminate in the
event that the Closing has not occurred within sixty (60) days after the date of
this Agreement (unless the parties hereto agree in writing to extend such date).
In such event, none of the parties hereto shall have any further rights or
obligations hereunder.
ARTICLE 14
MISCELLANEOUS
14.1 FURTHER ASSURANCES. From time to time on and after the Closing, each
of the parties hereto shall use its reasonable efforts to take, or cause to be
taken, all action and to do, or cause to be done, all things necessary, proper
and advisable to consummate and make effective as promptly as practicable the
transaction contemplated by this Agreement, in accordance with the terms and
conditions hereof, including, but not limited to: (a) using reasonable efforts
to remove any legal impediment to the consummation or effectiveness of such
transaction; and (b) the execution and delivery of all such agreements,
assignments and further instruments of transfer and conveyance necessary, proper
and advisable to consummate and make effective the transaction contemplated by
this Agreement in accordance with the terms and conditions hereof.
14.2 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, and such counterparts together shall constitute one instrument.
14.3 REMEDIES. In the event of any breach of the obligations imposed by
this Agreement, the parties hereto shall have all rights and remedies available
to them at law or in equity. In the event of any litigation among the parties
hereto concerning the construction, breach or enforcement of any of the
obligations of the parties hereunder, the prevailing party shall be entitled to
recover attorneys' fees and other out-of-pocket costs incurred in investigating
and prosecution or defending such
26
<PAGE>
litigation; provided, however, that in the event that there shall be more than
one prevailing party, such fees and costs shall be awarded in such a manner as
the court shall determine to be most consistent with the relative merits and
amount of the prevailing claims.
14.4 EXHIBITS AND SCHEDULES. Each of the exhibits and schedules referred
to in or and attached to this Agreement is incorporated herein and made a part
hereof by reference with the same effect as if set forth herein at length.
14.5 SUCCESSORS. The rights, duties and obligations set forth herein shall
inure to the benefit of and be binding upon the parties hereto and their past,
present and future officers, directors, employees, agents, representatives,
attorneys, receivers, successors and assigns.
14.6 SEVERABILITY. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provision were amended and reformed so as to make it valid and
enforceable to the maximum extent permitted under law and within the general
intent of the original provision.
14.7 HEADINGS. Section headings are included in this Agreement for
convenience only and shall not affect the meaning or interpretation of this
Agreement.
14.8 ENTIRE AGREEMENT AND AMENDMENTS. This Agreement, and the exhibits and
schedules referred to in or attached to this Agreement, constitute the entire
agreement of the parties with respect to the subject matter hereof, and unless
otherwise stated herein, supersede any previous agreements, whether oral or
written, regarding the subject matter hereof. This Agreement may be amended
only by a written instrument signed by the parties hereto.
14.9 ASSIGNMENT. This Agreement and the rights and obligations of the
parties hereunder shall not be assignable by any party hereto without the prior
written consent of all of the other parties.
14.10 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Illinois, without regard to
principles of conflicts of law.
14.11 WAIVER. No restriction, condition, obligation or provision
contained in this Agreement shall be deemed to have been abrogated or waived by
reason of any failure to enforce the same, irrespective of the number of
violations or breaches thereof that may occur.
14.12 NOTICES OR OTHER COMMUNICATIONS. Any notice or other
communication required to be sent to any party hereto pursuant to this Agreement
shall be sent by facsimile transmission to be followed by U.S. Postal Service
Express Mail, Next Day Service, overnight courier, or by personal delivery, as
follows:
(A) To the IIE, IASA or Guaranty Fund:
311 South Wacker Drive, Suite 400
Chicago, Illinois 60606
Attn: Gerald F. Murray, Esq.
(B) To the Syndicate or FMIC:
27
<PAGE>
First Mercury Insurance Company
29621 Northwestern Highway
P.O. Box 5096
Southfield, Michigan 48086
Attn: Richard H. Smith
with a copy to: Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661-3693
Attn: Richard M. Seligman, Esq.
14.13 NO THIRD PARTY BENEFICIARIES. No person or entity other than the
parties hereto and their successors shall have any right to enforce or seek
enforcement of this Agreement.
14.14 RECITALS. The recitals and prefatory phrases and paragraphs set
forth above are incorporated in full in this Agreement.
28
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized representatives as of the date
first above indicated.
ILLINOIS INSURANCE EXCHANGE
By:\s\ James E. Tait
----------------------------------------
Name: James E. Tait
--------------------------------------
Its: President
----------------------------------------
ILLINOIS INSURANCE EXCHANGE
IMMEDIATE ACCESS SECURITY ASSOCIATION
By:\s\ Gerald F. Murray
----------------------------------------
Name: Gerald F. Murray
----------------------------------------
Its: Secretary
---------------------------------------
ILLINOIS INSURANCE EXCHANGE
GUARANTY FUND, INC.
By:\s\ Gerald F. Murray
----------------------------------------
Name: Gerald F. Murray
--------------------------------------
Its: Secretary
---------------------------------------
FIRST MERCURY SYNDICATE, INC.
By:\s\ Jerome M. Shaw
----------------------------------------
Name: Jerome M. Shaw
--------------------------------------
Its: President
---------------------------------------
FIRST MERCURY INSURANCE COMPANY
By:\s\ Richard H. Smith
----------------------------------------
Name: Richard H. Smith
--------------------------------------
Its: President
---------------------------------------
<TABLE> <S> <C>
<PAGE>
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<PERIOD-START> JAN-01-1996
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0
0
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