<PAGE>
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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 June 30, 1997
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: (248) 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 August 14, 1997 was 6,164.07.
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<PAGE>
FIRST MERCURY FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets;
June 30, 1997 (Unaudited) and
December 31, 1996 2
Condensed Consolidated Statements of
Operations (Unaudited); Three
Months and Six Months Ended June 30,
1997 and 1996 3
Condensed Consolidated Statements of
Stockholders' Equity (Unaudited); Six
Months Ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of
Cash Flows (Unaudited); Six Months
Ended June 30, 1997 and 1996 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 12
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
FIRST MERCURY FINANCIAL CORPORATION
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
------ ---- ----
(Unaudited)
<S> <C> <C>
Investments:
Debt securities available for sale, at market value $ 69,215,296 71,871,818
Preferred stocks, at market 1,344,385 2,691,194
Common stocks, at market 53,108 52,200
Short-term investments 2,688,210 1,810,340
------------- ------------
Total investments 73,300,999 76,425,552
Cash and cash equivalents 3,979,454 3,945,289
Premiums and reinsurance balances receivable 2,301,876 2,584,644
Accrued investment income receivable 1,017,768 1,078,346
Other receivables 300,000 300,000
Reinsurance recoverable on unpaid losses 9,843,066 8,484,364
Prepaid reinsurance premiums 1,020,417 1,799,876
Deferred acquisition costs 701,646 691,319
Deferred federal income taxes 2,252,842 2,288,715
Federal income taxes recoverable 417,964 571,541
Fixed assets, net of accumulated depreciation 1,639,010 1,667,317
Other assets 1,268,383 2,274,410
------------- ------------
Total assets $ 98,043,425 102,111,373
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Loss and loss adjustment expense reserves $ 53,044,881 55,519,174
Unearned premium reserves 4,871,042 5,656,660
Long-term debt 9,159,000 9,225,000
Ceded reinsurance payable 95,783 87,373
Deferred revenue 1,694,315 2,181,975
Accounts payable and accrued expenses 2,105,839 2,922,516
------------- ------------
Total liabilities 70,970,860 75,592,698
Minority interest 2,959 3,278
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 3,437,372 3,437,372
Unrealized gains on marketable securities, net of
federal income taxes 154,415 183,780
Retained earnings 23,477,548 22,893,974
------------- ------------
Total stockholders' equity 27,069,606 26,515,397
------------- ------------
Total liabilities and stockholders' equity $ 98,043,425 102,111,373
------------- ------------
------------- ------------
</TABLE>
2
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FIRST MERCURY FINANCIAL CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earned premiums $ 2,235,859 6,581,880 4,541,551 14,477,527
Net investment income 1,261,308 1,314,120 2,414,965 2,709,833
Realized gains (losses) on the sale of investments 124,249 77,567 248,543 230,258
Gain on assignment of non-standard automobile
agency contracts - 1,111,292 - 1,111,292
Miscellaneous income 313,188 316,434 582,907 332,689
------------ --------- --------- ----------
Total revenues and other income 3,934,604 9,401,293 7,787,966 18,861,599
------------ --------- --------- ----------
Losses and loss adjustment expenses, net 1,603,796 4,906,835 3,337,299 12,414,469
Amortization of deferred acquisition expenses 486,944 1,200,096 944,797 3,017,369
Other underwriting expenses 1,050,847 1,152,951 2,037,166 2,112,022
Interest expense 276,470 307,284 554,590 605,891
------------ --------- --------- ----------
Total expenses 3,418,057 7,567,166 6,873,852 18,149,751
------------ --------- --------- ----------
Income before federal income taxes 516,547 1,834,127 914,114 711,848
Federal income taxes 188,962 501,510 330,540 255,785
------------ --------- --------- ----------
Net income $ 327,585 1,332,617 583,574 456,063
------------ --------- --------- ----------
------------ --------- --------- ----------
Per-share earnings $ 53.14 216.19 94.67 73.99
------------ --------- --------- ----------
------------ --------- --------- ----------
</TABLE>
3
<PAGE>
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, 1995 $ 209 62 3,474,872 1,270,614 21,655,479 26,401,236
Net income - - - - 456,063 456,063
Dividends paid to preferred stockholders - - - - (344,025) (344,025)
Change in market values of
marketable investment securities - - - (1,356,758) - (1,356,758)
------ ------ --------- ---------- ---------- ----------
Balance at June 30, 1996 $ 209 62 3,474,872 (86,144) 21,767,517 25,156,516
------ ------ --------- ---------- ---------- ----------
------ ------ --------- ---------- ---------- ----------
Balance at December 31, 1996 $ 209 62 3,437,372 183,780 22,893,974 26,515,397
Net income - - - - 583,574 583,574
Dividends paid to preferred stockholders - - - - - -
Change in market values of - -
marketable investment securities - - - (29,365) - (29,365)
------ ------ --------- ---------- ---------- ----------
Balance at June 30, 1997 $ 209 62 3,437,372 154,415 23,477,548 27,069,606
------ ------ --------- ---------- ---------- ----------
------ ------ --------- ---------- ---------- ----------
</TABLE>
4
<PAGE>
FIRST MERCURY FINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Net cash used in operating activities $ (2,636,440) (746,700)
Cash flows from investing activities:
Cost of short-term investments acquired (15,307,900) (19,973,655)
Proceeds from disposals of short-term investments 14,430,030 20,373,270
Cost of debt securities acquired (11,521,354) (10,373,212)
Proceeds from maturities of debt securities 7,555,554 4,620,066
Proceeds from debt securities sold 6,656,971 7,122,117
Cost of equity securities acquired (658,930) (575,411)
Proceeds from equity securities sold 2,188,420 1,090,212
Other, net (122,186) (232,398)
------------- -----------
Net cash provided by investing activities 3,220,605 2,050,989
------------- -----------
Cash flows used in financing activities:
Interest payments on senior subordinated notes (550,000) (550,000)
Dividends paid to preferred stockholders - (344,025)
------------- -----------
Net cash used in financing activities (550,000) (894,025)
------------- -----------
Net increase (decrease) in cash and cash equivalents 34,165 410,264
Cash and cash equivalents at beginning of period 3,945,289 2,336,140
------------- -----------
Cash and cash equivalents at end of period $ 3,979,454 2,746,404
------------- -----------
------------- -----------
</TABLE>
5
<PAGE>
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 December 31, 1996 annual report on Form 10-K.
The results of operations for the six month period ended June 30, 1997, 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.
6
<PAGE>
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 Insurance Company ("FMIC"), an Illinois property and
casualty insurance company and successor to First Mercury Syndicate, Inc.
(the "Syndicate"), 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 liquidation under the oversight of the Ramsey
County District Court in Minnesota since December 1996. Prior to the
liquidation order, National Family was in rehabilitation for over 30 years.
The Company became affiliated with National Family upon its purchase of All
Nation in 1992. Because All Nation lacks voting control over National Family
and is not liable for National Family's debts, the financial statements of
National Family are not consolidated with the financial statements of the
Company.
Prior to its withdrawal from the Illinois Insurance Exchange ("IIE") in
December 1996, the Syndicate operated as an underwriting member of the IIE.
Under the eligibility of the IIE, the Syndicate wrote general liability
insurance, allied property and auto physical damage coverage in 44 states,
the District of Columbia, and the U.S. Virgin Islands. On June 28, 1996, the
Syndicate formed FMIC as an Illinois property and casualty insurance
subsidiary with an initial capitalization of $5 million and a subsequent $15
million contribution to surplus. The formation of FMIC, a licensed Illinois
insurer, provided the Syndicate with an affiliated company in which to
potentially place coverages offered by the Syndicate and in which to reinsure
certain of the Syndicate's outstanding liabilities. Under a loss portfolio
transfer, on June 28, 1996, the Syndicate transferred approximately $35
million in loss and loss adjustment expense reserves and corresponding assets
to FMIC. 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. On November 7, 1996, the Syndicate and the IIE
executed a withdrawal agreement. Subsequent to the Syndicate's withdrawal,
the Syndicate was merged into FMIC on December 16, 1996. Due to its
withdrawal from the IIE, the Syndicate lost its ability to write direct
premium under the eligibility of the IIE. As a result, FMIC has aggressively
applied for eligibility to write premiums in many states. As of June 30,
1997, FMIC is eligible to write direct premium in seventeen states. In the
interim, FMIC and Empire Fire and Marine Insurance Company and Empire
Indemnity Company ("Empire") entered into a quota share reinsurance agreement
effective July 18, 1996 whereby Empire writes on a direct basis the coverages
previously offered by the Syndicate and cedes 50 percent of such business to
FMIC.
On May 1, 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. The agreement also included
a three year non-compete clause and various financial guarantees by Mercury.
Under the agreement, All Nation continues to write agency non-standard
automobile coverages and cedes 100 percent of the written business to
Allstate under a quota share reinsurance agreement for a period of up to two
years, as Deerbrook is taking over the direct writing and servicing
responsibility from All Nation on a state-by-state basis over the two-year
period. In addition, All Nation provided underwriting and administrative
services for the
7
<PAGE>
ceded business on a percentage of premiums basis until May
1997. The agreements do not include All Nation's agency-produced non-standard
automobile business written prior to May 1, 1996 or its direct response
non-standard automobile business.
RESULTS OF OPERATIONS
The following table reflects revenues of the Company for the three month
and six month periods ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
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 . . . . $1,492 66.7% 2,091 31.8% $3,109 68.5% 4.189 28.9%
Police . . . . . . . . . . . . . 0 0.0 216 3.3 19 0.4 508 3.5
Public officials . . . . . . . . 71 3.2 170 2.6 164 3.6 356 2.5
Other. . . . . . . . . . . . . . 361 16.2 206 3.1 730 16.1 513 3.5
Non-standard automobile lines:
Agency auto liability. . . . . . 1 0.0 2,815 42.8 1 0.0 6,382 44.1
Direct auto liability. . . . . . 189 8.5 183 2.8 323 7.1 395 2.7
Agency auto physical damage. . . 10 0.4 769 11.6 10 0.2 1,852 12.8
Direct auto physical damage. . . 112 5.0 132 2.0 186 4.1 283 2.0
------ ----- ------ ----- ------ ----- ------- -----
Total net premiums earned. . . . . $2,236 100.0% $6,582 100.0% $4,542 100.0% $14,478 100.0%
------ ----- ------ ----- ------ ----- ------- -----
------ ----- ------ ----- ------ ----- ------- -----
</TABLE>
NET PREMIUMS EARNED
Net premiums earned for the three months and six months ended June 30,
1997 declined 66.0% and 68.6%, respectively, in comparison to the year
earlier periods. The Company's specialty commercial lines, security, fire,
alarm, police, public official and miscellaneous commercial coverages,
decreased 28.3% and 27.7%, respectively, for the three months and six months
ended June 30, 1997 versus the three months and six months ended June 30,
1996. This decrease occurred principally due to the quota share reinsurance
arrangement entered into with Empire and the Company's decision to non-renew
a substantial amount of the police business beginning in the first quarter of
1996. Although net premiums earned for the Company's specialty commercial
lines have been declining, the Company has experienced average rate increases
in excess of 10% on this book of business in the first half of 1997.
Effective July 1, 1997, the Company has entered into a 100 percent quota
share reinsurance arrangement with Reliance Insurance Company of Illinois
("Reliance") to offer liability coverage to non-profit entities and day care
facilities. In addition, the Company has been actively pursuing a workers'
compensation program as a complementary product to the security, fire and
alarm coverages currently provided.
Due to the sale of All Nation's independent agent contracts to Deerbrook
effective May 1, 1996, net premiums earned for private passenger non-standard
automobile coverages decreased 92.0% and 94.2% in the three and six months
ended June 30, 1997, respectively. Net premiums earned for direct response
non-standard automobile coverages have declined for the first six months of
1997 versus the first six months of 1996 due to a moratorium on advertising,
however, the Company has implemented rating changes for the direct response
business effective July 1, 1997 and has begun actively marketing this program
late in the second quarter.
NET INVESTMENT INCOME AND REALIZED INVESTMENT GAINS (LOSSES)
Net investment income decreased approximately $53,000 for the three
months ended June 30,
8
<PAGE>
1997 as compared to the three months ended June 30, 1996. For the six months
ended June 30, 1997, net investment income decreased $295,000 or 10.8% in
comparison to the same period of the preceding year. The decrease resulted
from a decline in the Company's average invested assets due to the reduction
in premium revenues at both All Nation and FMIC under the quota share
reinsurance agreements with Allstate and Empire, respectively.
For the three months ended June 30, 1997, the Company realized a net gain
on the sale of investments of $124,000 versus a net gain of $78,000 for the
same period in the prior year. The Company recognized a net gain on the sale
of investments of $249,000 for the six months ended June 30, 1997 as compared
to a $230,000 net gain for the six months ended June 30, 1996.
At June 30, 1997, the unrealized gain on investments available for sale,
net of deferred taxes, was $154,000 in comparison to a $184,000 unrealized
gain as of December 31, 1996. The decline in interest rates in the second
quarter of 1997 resulted in a recovery of the Company's portfolio from the
unrealized losses experienced in the first quarter.
GAIN ON ASSIGNMENT OF AGENCY CONTRACTS
The gain on the assignment of the All Nation agency contracts of $1.1
million was recognized in the second quarter of 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.
LOSS AND LOSS ADJUSTMENT EXPENSES
Loss and loss adjustment expenses incurred decreased 67.3% to $1.6
million for the three months ended June 30, 1997 from $4.9 million for the
three months ended June 30, 1996. For the six months ended June 30, 1997,
loss and loss adjustment expenses incurred decreased 73.1% versus the
comparable period in the preceding year, principally due to the decline in
premiums written under the quota share reinsurance agreements with Allstate
and Empire. The loss and loss adjustment expense ratio for private passenger
automobile coverages increased marginally to 91.6% for the six months ended
June 30, 1997 as compared to 90.3% for the six months ended June 30, 1996.
Within the specialty commercial lines, the loss and loss adjustment expense
ratio decreased to 71.1% for the six months ended June 30, 1997 versus 75.8%
for the comparable period in the preceding year. The 1997 loss ratio
reflects a release of reserve redundancies approximating $350,000. There
were no reserve redundancy releases in the first six 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
second quarter of 1997, acquisition costs and other underwriting expenses
declined approximately 34.6% to $ 1.5 million for the three months ended June
30, 1997 as compared to $2.4 million for the same period in the preceding
year. The Company's underwriting expense ratio increased to 52.9% for the
six months ended June 30, 1997 in comparison to 38.9% for the two quarters
ended June 30, 1996. The increase in the expense ratio principally occurred
due to the decline in net premiums written in the first six months of 1997 in
comparison to the Company's fixed costs of its insurance operations. In
addition, the Company incurred approximately $200,000 of expenses during the
second quarter of 1997 for the implementation of new rate filings for its
direct response private passenger auto program.
9
<PAGE>
The Company realized $583,000 of miscellaneous income in the first six
months of 1997 as compared to $333,000 in the first two quarters of 1996
primarily due to the recognition of approximately $381,000 of revenue under
the non-compete agreement with Allstate. No revenue was recognized under this
agreement in the six months ended June 30, 1996.
The Company incurred $555,000 and $606,000 of interest expense related to
the $10 million senior subordinated notes during the six months ended June
30, 1997 and 1996, respectively. The decrease in interest expense resulted
from the Company's repurchase of $841,000 of its own senior subordinated
notes during 1996 and 1997.
FEDERAL INCOME TAXES
The effective tax rate for the six months ended June 30, 1997 of 36.2%
has increased slightly from the effective tax rate for the first two quarters
of 1996 of 35.9%. The Company has eliminated all tax-exempt interest since
the first quarter of 1997.
NET INCOME
Pre-tax net income for the three months ended June 30, 1997 was $517,000
compared to $1.8 million for the same period in the preceding year, primarily
due to the recognition of the gain on the assignment of the non-standard
automobile agency contracts to Deerbrook of $1.1 million in 1996. For the
first six months of 1997, pre-tax net income was $914,000 versus $712,000 for
the six months ended June 30, 1996. Net income for the first two quarters of
1997 includes $350,000 related to the release of reserve redundancies,
$381,000 in revenue under the non-compete clause and $200,000 in rate filing
costs, while the results for the six months ended June 30, 1996 includes the
gain on the assignment of $1.1 million.
LIQUIDITY AND CAPITAL RESOURCES
Mercury is a holding company whose principal assets are its investment in
the capital stock of FMIC and All Nation. Generally, Mercury is dependent
upon the receipt of dividends from FMIC and All Nation to fund any necessary
cash requirements, including debt service requirements. FMIC and All Nation
are restricted by regulation as to the amount of dividends they may pay
without regulatory approval. No dividends were paid by FMIC or All Nation to
Mercury in the first six months of 1997. Mercury anticipates cash payments
from Deerbrook of $1.2 million in 1997 for the non-compete agreement. In
addition, Mercury receives annual payments from its subsidiaries when
appropriate pursuant to a tax allocation agreement between Mercury and its
subsidiaries. The Company believes these amounts are sufficient to meet
Mercury's current cash flow requirements.
The Company's subsidiaries' primary sources of cash 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, other
operating expenses and interest expense. The Company's insurance operations
utilized cash in operations of $2,636,000 during the six months ended June
30, 1997 as compared to $747,000 in the first two quarters of 1996. The
decreased cash flow resulted primarily from a decline in premium revenues at
both All Nation and FMIC under the quota share reinsurance agreements with
Allstate and Empire.
At June 30, 1997, the insurance subsidiaries maintained cash and cash
equivalents and short-term investments of $2.7 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
10
<PAGE>
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 June 30, 1997 was approximately three years.
Under IIE regulations, the Syndicate maintained a $1,000,000 deposit in a
Guaranty Fund Trust Account prior to its withdrawal from the IIE which
required at least 50 percent of the deposit to be in cash and/or marketable
securities. Under the terms of the Syndicate's withdrawal agreement with the
IIE, a $1,000,000 deposit must be maintained in the Guaranty Fund Trust
Account of the IIE for a period of three years from November 7, 1996.
The Syndicate's withdrawal agreement also required FMIC to establish a
trust fund for the payment of claims under insurance policies issued and
reinsurance agreements entered into by the Syndicate. Investments held in
trust for payment of Syndicate claims approximated $31.9 million at June 30,
1997.
11
<PAGE>
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.
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 second
quarter of 1997.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
10.24 Reinsurance Agreement effective July 18, 1996 between Empire and
FMIC.
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 June 30, 1997.
12
<PAGE>
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: August 14, 1997 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
<PAGE>
EXHIBIT 10.24
REINSURANCE
AGREEMENT NO. 60-2110-0
QUOTA SHARE REINSURANCE AGREEMENT
(hereinafter referred to as the "AGREEMENT")
between
EMPIRE FIRE AND MARINE INSURANCE COMPANY
Omaha, Nebraska
EMPIRE INDEMNITY COMPANY
Oklahoma City, Oklahoma
(herein collectively referred to as the "COMPANY")
and
FIRST MERCURY INSURANCE COMPANY
(hereinafter referred to as the "REINSURER")
Effective: 12:01 a.m., July 1, 1996
Term: Continuous
<PAGE>
TABLE OF CONTENTS
Page
Article 1 Scope of Agreement ................................. 1
Article 2 Reinsuring Clause ................................. 1
Article 3 Term ................................................ 2
Article 4 Retention and Limits ................................ 2
Article 5 Exclusion ........................................... 2
Article 6 Premium ............................................. 4
Article 7 Commission ...................................... 4
Article 8 Reports and Remittances ............................. 5
Article 9 Losses and Allocated Loss Adjustment Expense......... 5
Article 10 Offset ........................................... 7
Article 11 Definitions ......................................... 7
Article 12 Territory .......................................... 8
Article 13 Taxes .............................................. 9
Article 14 Currency............................................. 9
Article 15 Errors and Omissions ............................... 9
Article 16 Access to Records ................................... 9
Article 17 Insolvency .......................................... 9
Article 18 Arbitration ......................................... 10
<PAGE>
Article 19 Other Reinsurance ................................... 11
Article 20 Termination ........................................ 12
Article 21 Funding of Reserves; Unearned Premium, Outstanding
Losses and IBNR .................................... 13
Signing Page ........................................ 14
<PAGE>
In consideration of payment of the premium and upon the terms,
conditions, and limitations set forth in this AGREEMENT, the parties
agree as follows:
ARTICLE 1 SCOPE OF AGREEMENT
By this AGREEMENT, the COMPANY obligates itself to cede to the
REINSURER and the REINSURER obligates itself to accept the liability
business described in this AGREEMENT. The liability of the REINSURER
with respect to each cession hereunder shall commence obligatory and
simultaneously with that of the COMPANY, subject to the terms,
conditions and limitations set forth herein. The terms of this
AGREEMENT shall determine the rights and obligations of the parties.
This AGREEMENT is solely between the COMPANY and the REINSURER. When
more than one COMPANY is named as a party to this AGREEMENT, the first
COMPANY named shall be the agent of the other companies as to all
matters pertaining to this AGREEMENT. Performance of the obligations
of each party under this AGREEMENT shall be rendered solely to the
other party. However, if the COMPANY becomes insolvent, the liability
of the REINSURER shall be modified to the extent set forth in the
Article entitled "Insolvency." In no instance shall any insured of
the COMPANY have any rights under this AGREEMENT.
ARTICLE 2 REINSURING CLAUSE
The REINSURER agrees to indemnify the COMPANY for that amount of net
loss reinsured hereunder after deduction of all other reinsurance,
whether collectable or not, which the COMPANY has become obligated to
pay or has agreed to pay arising out of any and all policies, binders
and contracts of insurance (hereinafter referred to as "policies") for
in force, new and renewal business underwritten on behalf of the
COMPANY by CoverX Corporation of Southfield, Michigan, on risks
domiciled in all those states in which the COMPANY is licensed or
otherwise authorized to do business.
<PAGE>
ARTICLE 3 TERM
This AGREEMENT shall become effective at 12:01 a.m., Central Daylight
Time on July 1, 1996, and shall continue in force for an unlimited
period subject to Article 20, Termination. The REINSURER shall be
subject to the same conditions as the original policies and shall
follow, subject to the terms of this AGREEMENT, the fortunes of the
COMPANY in respect of all business ceded hereunder.
ARTICLE 4 RETENTION AND LIMITS
The REINSURER shall indemnify the COMPANY for 50% of the amount of net
loss allocable to the first $1,000,000 of insurance for each
occurrence/$10,000,000 annual aggregate, under policies of the COMPANY
covered by this AGREEMENT plus a proportionate share of the allocated
loss adjustment expenses. The COMPANY shall retain for its own
account the remaining 50% of the first $1,000,000 each
occurrence/$10,000,000 annual aggregate; however, this requirement
shall be satisfied if such amount is retained by the COMPANY or, if
applicable, its affiliated COMPANIES under the common management or
ownership or both in accordance with Article 1 of this AGREEMENT. It
is warranted that the maximum policy limits covered by this AGREEMENT
are $1,000,000 each occurrence/$10,000,000 annual aggregate. However,
the COMPANY is permitted to obtain facultative or other reinsurance
for limits in excess of $1,000,000.
ARTICLE 5 EXCLUSIONS
1. All assumed reinsurance.
2. All liability arising out of nuclear risks, including, without
limitation, that described in the attached Nuclear Incident
Exclusion Clause.
3. Losses directly or indirectly caused by:
a. War, invasion, act of foreign enemy, hostilities, or war-
like operations (whether war be declared or not), civil war;
b. Mutiny, civil commotion assuming the proportions of or
amounting to a popular rising, military rising,
insurrections, rebellion, revolution, military or usurped
power, or any act of any person acting on behalf or in
connection with any organization with activity directed
toward the overthrow by force of its Government.
<PAGE>
4. Liability arising from Insurance Loss Portfolio Transfers of any
kind.
5. Retroactive liability except for Prior Acts Coverage under a
claims-made policy.
6. Liability underwritten or accepted by any third party other than
CoverX Corporation.
7. Liability assumed by the COMPANY as a member of a syndicate,
pool, or underwriting association; however, this exclusion does
not apply to participation in assigned risk plans.
8. Insurance Guarantee Associations as provided by the Insolvency
Fund Exclusion Clause which is attached.
9. Liability of the COMPANY classified by the COMPANY as arising out
of ERISA.
10. Fidelity, Surety, Libel and Slander, Credit, Financial Guarantee,
Bankers Blanket Bond Risks and contingency risks such as
personal injury insurances when written as such.
11. Liability arising out of the ownership, maintenance, operation or
use of aircraft, air cushioned vehicles and airports or the
installation of equipment therein.
12. Kidnap and Ransom and/or Extortion Coverage.
13. Insurance coverage for punitive or exemplary damages.
14. Security Exchange Commission Liability.
15. Business classified by the COMPANY as Ocean Marine or arising out
of the operation or navigation of ships or vessels other than
yachts or small pleasure craft.
16. Liability of the COMPANY classified by the COMPANY as arising
from risks having an exposure to asbestos resulting from the
existence, mining, handling, processing, manufacture, sale,
distribution, storage or use of asbestos, asbestos products,
and/or products containing asbestos.
17. Environmental impairment of Pollution Liability.
<PAGE>
18. Workers' Compensation and Employers' Liability.
19. Automobile Liability.
Notwithstanding the exclusions set forth in Items 15 through 19 above,
any reinsurance that is specifically accepted by the REINSURER from
the COMPANY shall be covered under this AGREEMENT and subject to the
terms hereof, except as such terms shall be modified by such
Special Acceptance.
In the event that the COMPANY insures such an excluded risk under its
Policies, either because an existing insured has expanded its
operations or because CoverX has placed such an excluded risk with the
COMPANY, the COMPANY shall be protected by and afforded reinsurance
under this AGREEMENT to the extent as if there were no exclusion, but
only until the COMPANY is able to effect cancellation of such coverage
and then not for more than forty-five (45) days from the date of
discovery of such excluded risk by the underwriters of the COMPANY's
home office.
ARTICLE 6 PREMIUM
A. The COMPANY shall pay to the REINSURER its pro rata share, being
50% of the gross net written premiums and the REINSURER shall refund
to the COMPANY its pro rata share of any return premiums, on
business which is the subject matter of this AGREEMENT, less gross
premium ceded for other reinsurance inuring to the benefit of this
AGREEMENT as specified in Article 19, Other Reinsurance, and less the
applicable ceding commission if any, as specified in Article 7, Ceding
Commission.
B. When the reinsurance of in-force policies is specified in Article
2, Reinsurance Clause, the REINSURER shall receive its pro rata share
of the unearned premium on such business subject to the conditions
specified in Paragraph A above. In the event of a change in the
reinsurance cession quota or a change in the REINSURER's share, this
procedure shall be applied accordingly.
ARTICLE 7 CEDING COMMISSION
A. The REINSURER shall allow the COMPANY a ceding commission in
accordance with the attached Schedule A on all premiums ceded to the
REINSURER hereunder. The COMPANY shall allow the REINSURER return
commission on return premiums at the same rate.
<PAGE>
B. It is expressly agreed that the ceding commission allowed the
COMPANY includes provision for all dividends, commissions, taxes,
assessments, and all other expenses of whatever nature, except
allocated loss adjustment expense.
ARTICLE 8 REPORTS AND REMITTANCES
A. Reinsurance Premium - within 45 days after the close of each
month, the COMPANY shall render to the REINSURER a report of the gross
net written premium and unearned premiums for the month with respect
to business covered hereunder summarizing the reinsurance premiums and
commissions applicable.
B. Within 15 days after the close of each month the COMPANY shall
render to the REINSURER a claims summary, on a form acceptable to the
REINSURER, giving details of any losses paid and outstanding,
allocated loss adjustment expenses, salvage and recoveries.
The COMPANY shall include a summary sheet with "A" and "B" above,
reflecting the net balance. The net balance due shall be payable by
the debtor party within 75 days after the close of the month involved.
The net balance will be adjusted by inclusion of the REINSURER's part
of losses settled, allocated loss adjustment expenses, salvage and
other recoveries, through the most current month at the time of
payment.
ARTICLE 9 LOSSES AND ALLOCATED LOSS ADJUSTMENT EXPENSE
A. The COMPANY shall promptly notify the REINSURER of all claims
which:
1. Originate from fatal injuries,
2. Originate from bodily injuries as specified below:
a. Serious brain damage,
b. Spinal injuries resulting in partial or total
paralysis,
c. Amputations or permanent loss of use of upper or lower
extremities,
d. All other injuries likely to result in a serious
permanent disability,
e. Severe burn injuries involving 25% or more of the body,
f. Loss of sight of one or both eyes,
g. Multiple fractures,
h. Sexual abuse or molestation,
<PAGE>
and will also promptly notify the REINSURER of other applicable
reinsurance that would affect the REINSURER's liability.
B. The COMPANY, as its sole discretion, may commence, continue,
defend, compromise, settle, or withdraw from any action, suit or
prosecution and generally do such matters relating to any loss, claim
or damage which, in its judgement, may be beneficial. The COMPANY
agrees to investigate and conduct diligently the defense of all claims
arising under its policies with respect to which this AGREEMENT
applies. The COMPANY shall have original and primary responsibility
for all claim settlements. However, the REINSURER shall have the
right and opportunity to be associated at its own expense with the
COMPANY in the defense of any claim, suit, or proceeding which might
involve the REINSURER's obligations under this AGREEMENT and the
COMPANY and the REINSURER shall cooperate in every respect in the
defense of any such claim, suit or proceeding, but the REINSURER shall
not have any obligation to assume the defense of any claim.
C. The REINSURER shall proportionally share with the COMPANY all
allocated loss adjustment expense. The term "allocated loss
adjustment expense" shall mean sums actually disbursed by the COMPANY
in payment of allocated expenses to investigate, appraise, adjust,
settle, arbitrate, defend or resist claims for losses, whether valid
or not, including court costs (when such costs are not included in the
judgment) and interest accrued after judgement. Such expenses shall
not include sums paid to attorneys as retainer nor salaries of
officials and employees of the COMPANY, and shall exclude office or
overhead expenses of the COMPANY. In the event of salvage,
subrogation, a verdict, award, or judgement is reduced or reversed by
an appeal taken by the COMPANY or other recovery, the REINSURER shall
share in such recovery in the same proportion as the Quota Share
amount.
D. Where a judgement has been entered against the COMPANY which
results in the liability of the REINSURER under this AGREEMENT, and
the COMPANY does not wish to appeal such judgement, or the possibility
of subrogation exists and the COMPANY elects not to subrogate, the
COMPANY will nevertheless prosecute such appeal or subrogation at the
request of the REINSURER and the REINSURER shall pay all the expenses
thereof. If the appeal or subrogation is successful, the COMPANY
shall share proportionately in the recovery and, the COMPANY shall
bear its proportion of the expenses, such proportion being determined
by the relationship of the COMPANY's net retention to the total
gross amount of the judgement.
<PAGE>
ARTICLE 10 OFFSET
The COMPANY or the REINSURER may offset any balance due the other
party under this AGREEMENT or any others previously or
subsequently entered into between them.
ARTICLE 11 DEFINITIONS
A. NET LOSS
The term "net loss" shall mean all amounts which the COMPANY has
paid or has become liable to pay in the settlement of claims or
losses, payment of benefits or satisfaction of verdicts, awards,
or judgements for which it is liable, including prejudgement
interest or delay damages, and excess of original policy limits
and extra contractual obligations (as specified in their
respective articles) after deduction of all net recoveries,
salvages and amounts due from other reinsurance which inures to
the benefit of the REINSURER under this AGREEMENT, whether
collectible or not. However, in the event of the insolvency of
the COMPANY, "net loss" shall mean the amount of loss which the
COMPANY has incurred or for which it is liable, including
prejudgement interest or delay damages, and excess of original
policy limits and extra contractual obligation (as specified in
their respective articles) after deduction of all net recoveries,
salvages and amounts due from other reinsurance which inures to
the benefit of the REINSURER under this AGREEMENT, whether
collectible or not, and payment by the REINSURER shall be made to
the liquidator, receiver or statutory successor of the COMPANY in
accordance with the provisions of the article entitled
"Insolvency."
Net Loss shall exclude Allocated Loss Adjustment Expense unless
Allocated Loss Adjustment Expense is included as part of the
policy limit under the COMPANY's original policy. If Allocated
Loss Adjustment Expense is included within the policy limit,
Allocated Loss Adjustment Expense will be included in the
definition of Net Loss.
B. PREJUDGEMENT INTEREST OR DELAY DAMAGES
This term shall mean interest or damages added to a settlement,
verdict, award or judgement based on the amount of time prior to
the settlement, verdict, award or judgement that the claim or
loss occurred, whether or not made a part of the settlement,
verdict, award or judgement.
C. OCCURRENCE
<PAGE>
The term "Occurrence" means the happening of one or a series of
related or consequential accidents, acts, errors, omissions or
mistakes arising out of one event regardless of the number of
persons, claimants, insureds, policies or coverage involved,
which results in loss payable by the COMPANY, under its policy or
policies. All loss or series of losses having a common origin or
traceable to the same accident, omission, error, mistake,
injurious condition or occurrence, shall be construed to be the
result of one occurrence. The COMPANY shall be the sole judge of
what constitutes one occurrence under this definition.
D. SALVAGE
This term shall mean any recovery made by the COMPANY in
connection with a claim or loss less all expenses paid by the
COMPANY other than payments to any salaried employee of the
COMPANY making such recovery. Salvage recoveries shall be
apportioned between the COMPANY and the REINSURER in the same
ratio as the payment of loss.
E. GROSS NET WRITTEN PREMIUMS
This term shall mean the COMPANY's gross original premiums on
policies which are the subject matter of this AGREEMENT, prior to
any deductions except applicable return premiums and premiums
ceded for reinsurance which inures to the benefit of this
AGREEMENT as specified in the Article entitled "Other
Reinsurance."
F. POLICIES
The term "Policies" shall mean policies, contracts, and binders
of insurance issued by the COMPANY, including endorsements
thereto.
ARTICLE 12 TERRITORY
The REINSURER shall be liable only in respect to policies written
and providing coverage within the United States of America,
except for such incidental foreign exposure as may be covered
under the territorial provisions of these policies.
<PAGE>
ARTICLE 13 TAXES
The COMPANY shall pay taxes on premium ceded under this
AGREEMENT. If the REINSURER is obligated to pay any taxes on
such premiums, the COMPANY shall reimburse the REINSURER;
however, the COMPANY shall not be required to pay the same
tax twice.
ARTICLE 14 CURRENCY
All payments under this AGREEMENT shall be made in United States
currency.
ARTICLE 15 ERRORS AND OMISSIONS
A. Inadvertent delays, errors or omissions made in connection
with this AGREEMENT or any transaction hereunder shall not
relieve either party from any liability which would have attached
had such delay, error or omission not occurred, provided always
that the error or omission is rectified as soon as possible after
discovery.
B. The liability of the REINSURER under this AGREEMENT or any
exhibits or endorsements attached thereto shall in no event
exceed the limits specified therein, nor be extended to cover any
risks, perils, or classes of insurance generally or specifically
excluded therein.
ARTICLE 16 ACCESS TO RECORDS
The REINSURER or its designated representative shall have free
access at all reasonable times to all records of the COMPANY
which pertain to the reinsurance provided hereunder.
ARTICLE 17 INSOLVENCY
A. In the event of the insolvency of the 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 claim. 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
a reasonable time after such claim is filed in the conversation
<PAGE>
or liquidation proceeding or in the receivership, and that during
the pendency of such claim, the REINSURER may investigate such
claim and interpose, at its own expense, in the proceeding where
such claim is to be adjudicated any defense or defenses which it
may deem available to the COMPANY or its liquidator, receiver,
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.
B. Where two or more REINSURERS are involved in the same claim
and a majority in interest elect to interpose defense to such
claims, the expense shall be apportioned in accordance with the
terms of the reinsurance contract as though such expense had been
incurred by the COMPANY.
C. As to all reinsurance made, ceded, renewed or otherwise
becoming effective under this Agreement, the reinsurance shall be
payable as set forth above by the REINSURER to the COMPANY or to
its liquidator, receiver, conservator or statutory successor
(except as provided by Sections 4118(a)(I)(A) and 1114-C- of the
New York Insurance Law or) except (I) where the AGREEMENT
specifically provides another payee in the event of the
insolvency of the COMPANY, and (ii) where the REINSURER, with the
consent of the direct insured or insureds, have 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. Then, and in
that event only, the COMPANY, with the prior approval of the
certificate of assumption on New York risks by the Superintendent
of Insurance of the State of New York, is entirely released from
its obligation and the REINSURER pays any loss directly to payees
under such policy.
ARTICLE 18 ARBITRATION
A. Any dispute or other matter in question between the COMPANY
and the REINSURER arising out of or relating to the formation,
interpretation, performance or breach of this Agreement, whether
such dispute arises before or after termination of this
Agreement, shall be settled by arbitration. Arbitration shall be
initiated by the delivery of a written notice of demand for
arbitration by one party to the other within a reasonable time
after the dispute has arisen.
<PAGE>
B. Each party shall appoint an individual as arbitrator and
the two so appointed shall then appoint a third arbitrator. If
either party refuses or neglects to appoint an arbitrator within
sixty (60) days after receiving a written request to do so, the
other party may appoint the second arbitrator. If the two
arbitrators do not agree on a third arbitrator within sixty (60)
days of their appointment, each of the arbitrators shall nominate
three individuals. Each arbitrator shall then decline two of the
nominations presented by the other arbitrator. The third
arbitrator shall then be chosen from the remaining two
nominations by drawing lots. The arbitrators shall be active or
former officers of insurance or reinsurance companies or have
recognized expertise in insurance or reinsurance law or
regulation. The arbitrators shall not have a personal or
financial interest in the result of the arbitration.
C. The arbitration hearings shall be held in Omaha, Nebraska,
or such other place as may be mutually agreed. Each party shall
submit its case to the arbitrators within sixty (60) days of the
selection of the third arbitrator or within such longer period as
may be agreed upon by the arbitrators. The arbitrators shall not
be obliged to follow judicial formalities or the rules of
evidence except to the extent required by governing law, that is,
the state law of the situs of the arbitration as herein agreed;
they shall make their decisions according to the practice of the
reinsurance business. The decision rendered by a majority of the
arbitrators shall be final and binding on both parties. Such
decision shall be a condition precedent to any right of legal
action arising out of the arbitrated dispute which either party
may have against the other. Judgement upon the award rendered
may be entered in any court having jurisdiction thereof.
D. Each party shall pay the fee and expenses of its own
arbitrator and one-half of the fee and expenses of the third
arbitrator. All other expenses of the arbitration shall be
equally divided between the parties. In certain circumstances,
the arbitrators may apportion to one of the parties with all of
the costs of the arbitration.
E. Except as provided above, arbitration shall be based,
insofar as applicable, upon the procedures of the American
Arbitration Association.
ARTICLE 19 OTHER REINSURANCE
It is understood that the COMPANY shall have the right to effect
facultative or treaty reinsurance on business covered by this
AGREEMENT.
<PAGE>
The REINSURER'S pro rata share of the cost of such reinsurance
net of ceding commission shall be deducted from the REINSURER'S
premium prior to the pplication of any commission allowance.
ARTICLE 20 TERMINATION
A. This AGREEMENT may be terminated by either party, effective
at the end of any calendar year, upon giving to the other party
not less than 90 days prior to the notice of cancellation in
writing by certified mail.
Except as provided for in Paragraph B. of this article,
termination initiated by either party, (the COMPANY or the
REINSURER), shall give the other party its choice of cancellation
on either a runoff or cutoff basis as described below:
1. "Cutoff basis" - In the event of termination on a
cutoff basis the REINSURER shall have no liability with
respect to loss occurrences happening after the
effective time and date of cancellation.
2. "Runoff basis" - In the event of termination on a
runoff basis, the REINSURER shall remain liable for
occurrences arising out of covered policies in force at
the date of cancellation until expiration, cancellation
or next renewal of such policies, but in no case shall
this reinsurance be extended for a period longer than
one year after the date of cancellation of this
AGREEMENT.
B. Should at any time the REINSURER or the COMPANY:
1. Be 100% reinsured without the previous written consent
of the other party.
2. Default in payment due under the terms of this
AGREEMENT.
3. Amalgamate with or have its shares purchased by any
other company, corporation, individual or individuals
for the purpose of gaining control.
4. Agree to any arrangement which would end its separate
existence.
<PAGE>
5. Have proceedings instituted or filed against them by
any insurance regulatory authority for bankruptcy,
rehabilitation, conservation, liquidation or
dissolution.
6. Reach mutual agreement to do so.
This AGREEMENT may be terminated by either the REINSURER or the
COMPANY upon giving 30 days notice of cancellation in writing by
certified mail to the other party. In the event of termination
under the provisions of this paragraph the REINSURER shall remain
liable for loss arising from occurrences happening prior to the
effective time and date of cancellation, but shall have no
liability with respect to loss occurrences happening after that
time.
C. When all reinsurance is expired or terminated, but in case
for more than one year after the date of such expiration or
termination, the REINSURER shall return to the COMPANY the
reinsurance premium unearned, if any, calculated on the monthly
pro rata basis, less the commission previously allowed thereon.
ARTICLE 21 FUNDING OF RESERVES; UNEARNED PREMIUM OUTSTANDING LOSSES AND IBNR
If a jurisdiction of the United States will not permit the
COMPANY, in the statements required to be filed with its
regulatory authority(ies), to receive full credit as admitted
reinsurance for any of the REINSURER'S share of obligations, the
COMPANY will forward to the REINSURER a statement showing the
proportion of such reserves which is applicable to the REINSURER.
Upon receipt of such statement, the REINSURER hereby agrees to
fund such reserves in respect of unearned premium, know
outstanding losses that have been reported to the REINSURER and
allocated loss adjustment expense relating thereto, losses and
allocated loss adjustment expense paid by the COMPANY but not
recovered from the REINSURER, plus reserves for losses incurred
but not reported, as shown in the statement prepared by the
COMPANY (hereinafter referred to as "Reinsurer's Obligations") by
funds withheld, a trust fund, or a Letter of Credit. The
REINSURER shall have the option of determining the method of
funding, provided it is acceptable to the insurance regulatory
authorities having jurisdiction over the COMPANY's reserves, and
provided REINSURER give COMPANY and the regulatory authorities
sufficient notice to obtain regulatory approval of the funding
mechanism in a timely manner.
<PAGE>
When funding by a Letter of Credit, the REINSURER agrees to apply
for and secure timely delivery to the COMPANY of a clean,
irrevocable and unconditional Letter of Credit issued by a bank
and containing provisions acceptable to the insurance regulatory
authorities having jurisdiction over the COMPANY's reserves in an
amount equal to the REINSURER's proportion of said reserves.
Such Letter of Credit shall be issued for a period of not less
than one (1) year, and shall be automatically extended for one
year from its date of expiration or any future expiration date,
unless sixty (60) days prior to any expiration date, the issuing
bank shall notify the COMPANY by certified or registered mail
that the issuing bank elects not to consider the Letter of Credit
extended for any additional period.
The REINSURER and COMPANY agree that the Letters of Credit, trust
funds or funds withheld provided by the REINSURER pursuant to the
provisions of this Agreement may be drawn upon at any time,
notwithstanding any other provision of this Agreement, and be
used by the COMPANY or any successor, by operation of law, of the
COMPANY including, without limitation, any liquidator,
rehabilitator, receiver or conservator of the COMPANY for the
following purposes, unless otherwise provided for in a separate
trust agreement:
1. To reimburse the COMPANY for the REINSURER's Obligations,
the payment of which is due under the terms of this
Agreement and which has not been otherwise paid;
2. To make refund of any sum which is in excess of the actual
amount required to pay the REINSURER's Obligations under
this Agreement;
3. To fund an account with the COMPANY for the REINSURER's
Obligations. Such cash deposit shall be held in an
interest bearing account separate form the COMPANY's other
assets, and interest thereon not in excess of the prime
rate shall accrue to the benefit of the REINSURER.
4. To pay the REINSURER's share of any other amounts the
COMPANY claims are due under this Agreement.
In the event the amount drawn by the COMPANY on any Letter of
Credit is in excess of the actual amount required for (1) or (3),
or in the case of (4), the actual amount determined to be due,
the COMPANY shall promptly return to the REINSURER the excess
amount so drawn. All of the foregoing shall be applied without
diminution because of insolvency on the part of the COMPANY or
the REINSURER.
<PAGE>
The issuing bank shall have no responsibility whatsoever in
connection with the propriety of withdrawals made by the COMPANY
or the disposition of funds withdrawn, except to ensure that
withdrawals are made only upon the order of properly authorized
representatives of the COMPANY.
At annual intervals, or more frequently as agreed but never more
frequently than quarterly, the COMPANY shall prepare a specific
statement of the REINSURER's Obligations, for the sole purpose of
amending the Letter of Credit, the funds withheld or the trust
fund, in the following manner.
1. If the statement shows that the REINSURER's Obligations
exceed the balance of credit as of the statement date, the
REINSURER shall, within thirty (30) days after receipt of
notice of such excess, secure delivery to the COMPANY of an
amendment to the Letter of Credit, increasing the amount of
credit by the amount of such difference.
2. If, however, the statement shows that the REINSURER's
Obligations are less than the balance of credit as of the
statement date, the COMPANY shall, within thirty (30) days
after receipt of written request from the REINSURER,
release such excess credit by agreeing to secure an
amendment to the Letter of Credit, reducing the amount of
credit available by the amount of such excess credit.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this AGREEMENT to be executed
in duplicate by their duly authorized representatives.
In New York, New York this first day of February, 1997.
FIRST MERCURY INSURANCE COMPANY
\s\ RICHARD H. SMITH
President
\s\ THOMAS B. DULAPA
Secretary
And in Omaha, Nebraska this first day of February, 1997.
EMPIRE FIRE AND MARINE INSURANCE
COMPANY/EMPIRE INDEMNITY COMPANY
\s\ AMY S. BONES
Senior Vice President
\s\ DOMINIC A. WEBER
Vice President
<PAGE>
INSOLVENCY FUNDS EXCLUSION CLAUSE
This AGREEMENT excludes all liability of the COMPANY arising by contract,
operation of law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes
any guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, howsoever denominated, established or governed, which provides for
any assessment of or payment or assumption by the COMPANY of part or all of any
claims, debt, charge, fee, or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority to be insolvent,
or which is otherwise deemed unable to meet any claim, debt, charge, fee or
other obligation in whole or in part.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 69,215
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,397
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 73,301
<CASH> 3,979
<RECOVER-REINSURE> 3
<DEFERRED-ACQUISITION> 702
<TOTAL-ASSETS> 98,043
<POLICY-LOSSES> 0
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0
0
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4,542
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</TABLE>
